<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-28386
CELL THERAPEUTICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Washington 91-1533912
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
201 Elliott Avenue West, Suite 400, 98119
Seattle, Washington (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(206) 282-7100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check [x] whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
CLASS OUTSTANDING AT APRIL 30, 1998
----- -----------------------------
Common Stock, no par value (including asso-
ciated Preferred Stock Purchase Rights).... 15,385,689
This report on Form 10-Q, including all exhibits, contains 79 pages.
The exhibit index is located on page 15.
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1
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CELL THERAPEUTICS, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets -- March 31, 1998 and December 31,
1997............................................................ 3
Consolidated Statements of Operations -- Three months ended
March 31, 1998 and 1997 and the period from September 4, 1991
(date of incorporation) to March 31, 1998....................... 4
Consolidated Statements of Cash Flows -- Three months ended
March 31, 1998 and 1997 and the period from September 4, 1991
(date of incorporation) to March 31, 1998....................... 5
Notes to Financial Statements................................... 7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................... 9
PART II OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K................................ 13
SIGNATURES...................................................... 14
EXHIBIT INDEX................................................... 15
2
<PAGE>
PART I
ITEM 1 FINANCIAL STATEMENTS
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ -------------
<S> <C> <C>
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents...................................................... $ 5,160,492 $ 8,876,990
Securities available-for-sale.................................................. 56,980,666 61,567,384
Collaboration agreement receivables............................................ 5,083,814 3,683,031
Prepaid expenses and other current assets...................................... 953,009 101,127
----------- ------------
Total current assets............................................................ 68,177,981 74,228,532
Property and equipment.......................................................... 14,823,855 13,716,342
Accumulated depreciation (8,218,076) (7,811,242)
----------- ------------
Property and equipment, net..................................................... 6,605,779 5,905,100
Notes receivable from officers,
less current portion........................................................... 71,812 71,812
Other assets.................................................................... 129,831 228,052
----------- ------------
Total assets.................................................................... $ 74,985,403 $ 80,433,496
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 1,679,463 $ 162,469
Accrued expenses............................................................... 4,206,679 4,712,232
Current portion of long-term obligations....................................... 1,402,828 1,660,226
----------- ------------
Total current liabilities....................................................... 7,288,970 6,534,927
Long-term obligations, less current portion..................................... 2,029,588 2,138,265
Stockholders' equity:
Common Stock, no par value:
Authorized shares--100,000,000
Issued and outstanding shares--15,385,689 and
15,378,419 at March 31, 1998 and
December 31, 1997, respectively.............................................. 168,980,066 168,893,074
Deficit accumulated during development stage................................... (103,313,221) (97,132,770)
----------- ------------
Total stockholders' equity...................................................... 65,666,845 71,760,304
----------- ------------
Total liabilities and stockholders' equity...................................... $ 74,985,403 $ 80,433,496
============ ============
</TABLE>
See accompanying notes.
3
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CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 4,
THREE MONTHS ENDED 1991 (DATE OF
MARCH 31, INCORPORATION)
--------------------------- TO MARCH 31,
1998 1997 1998
------------ ------------- --------------
<S> <C> <C> <C>
Revenues:
Collaboration agreements..... $ 3,277,935 $ 2,000,920 $ 24,330,161
Operating expenses:
Research and development..... 7,768,621 5,828,445 95,923,816
General and administrative... 2,574,910 2,076,105 37,408,442
----------- ----------- -------------
10,343,531 7,904,550 133,332,258
----------- ----------- -------------
Loss from operations........... (7,065,596) (5,903,630) (109,002,097)
Other income (expense):
Investment income............ 971,789 373,924 7,840,175
Interest expense............. (105,766) (109,062) (2,135,772)
----------- ----------- -------------
Net loss....................... $(6,199,573) $(5,638,768) $(103,297,694)
=========== =========== =============
Basic and diluted
net loss per share........... $ (0.40) $ (1.06)
=========== ===========
Shares used in computation of
basic and diluted
net loss per share........... 15,381,435 5,302,804
=========== ===========
Pro forma basic and diluted
net loss per share........... $ (0.40) $ (0.57)
=========== ===========
Shares used in computation of
pro forma basic and diluted
net loss per share........... 15,381,435 9,875,044
=========== ===========
</TABLE>
See accompanying notes.
4
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CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 4,
THREE MONTHS ENDED 1991 (DATE OF
MARCH 31, INCORPORATION)
------------------------ TO MARCH 31,
1998 1997 1998
----------- ------------ --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................. $(6,199,573) $(5,638,768) $(103,297,694)
Adjustments to reconcile net loss to
net cash used in operating activi-
ties:
Depreciation and amortization............ 406,833 404,880 8,616,712
Noncash compensation expense............. -- 51,474 100,186
Noncash research and development ex-
pense................................... -- -- 1,155,750
Noncash interest expense................. -- -- 25,918
Noncash rent expense..................... (6,643) 18,527 561,754
Investment premium (discount)
amortization............................ 31,364 (31,242) 375,478
Gain on sale of securities (5,600) -- (5,600)
Changes in assets and liabilities:
Collaboration agreement receivables (1,400,783) -- (5,083,814)
Prepaid expenses and other current
assets.................................. 98,221 (4,969) (2,906)
Notes receivable from officers........... -- (1,534) (167,036)
Other assets............................. (851,882) 357,935 (1,095,935)
Accounts payable......................... 1,516,995 64,022 1,679,464
Accrued expenses......................... (505,553) 307,858 4,206,679
Deferred revenue from collaboration
agreement............................... -- 718,573 --
---------- ----------- -------------
Total adjustments...................... (717,048) 1,885,524 10,366,650
---------- ----------- -------------
Net cash used in operating activi-
ties.................................. (6,916,621) (3,753,244) (92,931,044)
---------- ----------- -------------
INVESTING ACTIVITIES
Purchases of securities available-
for-sale................................ (33,761,372) (979,396) (195,553,158)
Proceeds from sales of securities
available for-sale...................... 8,079,211 2,449,999 24,968,968
Proceeds from maturities of securi-
ties available-for-sale................. 30,268,879 1,999,938 113,213,947
Purchase of property and equipment....... (1,107,513) (659,902) (14,983,247)
Dispositions of property and equip-
ment.................................... -- 15,148 167,300
---------- ----------- -------------
Net cash provided by investing
activities............................ 3,479,205 2,825,787 (72,186,190)
FINANCING ACTIVITIES
Sales of common stock to founders........ -- -- 80,000
Proceeds from borrowings from share-
holder.................................. -- -- 850,000
Sale of common stock via initial pub-
lic offering, net of offering costs. -- 26,807,176 26,802,250
Sale of common stock via follow-on
public offering, net of offering costs -- -- 34,262,000
Sale of Series A Preferred Stock via
private placement, net of offering
costs................................... -- -- 47,366,204
Sale of Series B Preferred Stock via
private placement, net of offering
costs................................... -- -- 4,960,000
Sale of common stock via private
placements, net of offering costs....... -- 3,000,000 52,307,084
Repurchase of common stock............... -- -- (2,522)
Proceeds from common stock options
exercised............................... 86,993 34 760,027
Proceeds from common stock warrants
exercised............................... -- -- 305,558
Repayment of long-term obligations....... (366,075) (308,927) (10,064,315)
Proceeds from the issuance of long-
term obligations........................ -- -- 12,651,440
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
---------- ----------- -------------
Net cash provided by (used in)
financing activities.................. (279,082) 29,498,283 170,277,726
---------- ----------- -------------
Net increase (decrease) in cash and
cash equivalents...................... (3,716,498) 28,570,826 5,160,492
Cash and cash equivalents at begin-
ning of period........................ 8,876,990 5,483,515 --
---------- ----------- -------------
Cash and cash equivalents at end of
period................................ $ 5,160,492 $34,054,341 $ 5,160,492
=========== =========== =============
Supplemental schedule of noncash in-
vesting and financing activities:
Acquisition of equipment pursuant to
capital lease obligations................ $ -- $ -- $ 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................................. $ 105,766 $ 109,062 $ 2,109,335
=========== =========== =============
</TABLE>
See accompanying notes.
6
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial information of Cell Therapeutics, Inc.
(the "Company") as of March 31, 1998 and for the three months ended March 31,
1998 and 1997 has been prepared in accordance with the instructions to Form 10-
Q. In the opinion of management, such financial information includes all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of the financial position at such date and the
operating results and cash flows for such periods. Operating results for the
three month period ended March 31, 1998 are not necessarily indicative of the
results that may be expected for the entire year. These financial statements and
the related notes should be read in conjunction with the Company's audited
annual financial statements for the year ended December 31, 1997 included in the
Company's Form 10-K for the year ended December 31, 1997.
Certain prior year balances have been reclassified to conform to the current
year presentation.
(2)SIGNIFICANT AGREEMENTS
In November 1996, cti entered into a Collaboration and License Agreement
(the "Collaboration Agreement") with Ortho Biotech, Inc. and the R.W. Johnson
Pharmaceutical Research Institute (a division of Ortho Pharmaceutical
Corporation) each of which are wholly-owned subsidiaries of Johnson & Johnson
(collectively, "Johnson & Johnson") for the joint development and
commercialization of Lisofylline, ("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"). Johnson &
Johnson has agreed, subject to certain termination rights, to fund up to
$12,000,000 of the Company's budgeted BMT development costs per year for each
of 1997 and 1998. In September 1997, Johnson & Johnson exercised an option
under the Collaboration Agreement to expand its participation to include the
development of LSF for 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
terms of the Collaboration Agreement, will pay 60% of all AML development
costs. The Company recorded $2,000,920 and $3,277,935 of collaboration
agreement revenues related to the reimbursement of development expenses by
Johnson & Johnson in the first quarter of 1997 and 1998, respectively.
On January 5, 1998, the Company entered into an agreement with City of Hope
National Medical Center to form a joint venture (Cell City, LLC) 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%.
(3)NET LOSS PER SHARE
In February 1997 the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share," which was adopted at December 31, 1997. The
Company restated the first quarter of 1997 in accordance with Statement No.
128. At March 31, 1998 and 1997 and December 31, 1997, there is no material
impact of the new rule on the Company's calculations of net loss per share.
The pro forma net loss per share is computed based on net loss per share
adjusted for the assumed conversion of all outstanding shares of convertible
preferred stock into common stock at the time of issuance.
Basic and diluted loss per share is calculated using the average number of
common shares outstanding. Pro forma basic and diluted net 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:
Quarter ended March 31,
-----------------------------
1998 1997
------------- -------------
Net loss (A) $ (6,199,573) $ (5,638,768)
============= =============
Weighted average outstanding:
Common Stock (B) 15,381,435 5,302,804
Convertible preferred stock -- 4,572,240
------------- -------------
Total weighted average outstanding (C) 15,381,435 9,875,044
============= =============
Loss per share:
Basic and diluted (A)/(B) $ (0.40) $ (1.06)
============= =============
Pro forma basic and diluted (A)/(C) $ (0.40) $ (0.57)
============= =============
7
<PAGE>
(4)NEW ACCOUNTING PRONOUNCEMENT
In 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income,"
which is required to be adopted for periods beginning after December 15, 1997.
The only item of comprehensive income for the Company is net unrealized gains on
Securities Available-for-Sale. This amount is $42,954 and $43,118 for the three
months March 31, 1998 and 1997, respectively. Accordingly, comprehensive loss
for the three months ended March 31, 1998 and 1997 was $6,156,619 and
$5,595,650, respectively.
8
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES.
WHEN USED IN THIS FORM 10-Q, THE WORDS "BELIEVES," "ANTICIPATES," "INTENDS,"
"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 SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE
OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED BELOW AS WELL AS THOSE DISCUSSED IN THE COMPANY'S ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 WHICH IS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE
HEREOF. THE COMPANY 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 OF THIS FORM 10-Q OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS.
OVERVIEW
Cell Therapeutics, Inc. ("cti or the "Company") focuses on the discovery,
development and commercialization of small molecule drugs which selectively
regulate the metabolism of oxidized lipids and phospholipids relevant to the
treatment of cancer and inflammatory and immune diseases. Since commencement of
operations in 1992, the Company has been engaged in research and development
activities, including conducting preclinical studies and clinical trials,
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, Inc. ("BioChem Pharma") and in the
fourth quarter of 1996 the Company began to receive revenue under a
collaboration agreement (the "Collaboration Agreement") with subsidiaries of
Johnson & Johnson ("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.
As of March 31, 1998, the Company had incurred aggregate net losses of
approximately $103.3 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 $167.7 million.
RESULTS OF OPERATIONS
Three months ended March 31, 1998 compared with three months ended March 31,
1997.
Development cost reimbursements from Johnson & Johnson increased to
approximately $3.3 million for the three months ended March 31, 1998 from
approximately $2.0 million for the three months ended March 31, 1997. This
increase in reimbursement revenue was due primarily to expanded manufacturing
activities and the recruitment of additional personnel with respect to the
development of Lisofylline ("LSF").
Research and development expenses increased to approximately $7.8 million for
the three months ended March 31, 1998 from approximately $5.8 million for the
three months ended March 31, 1997. This increase was due primarily to expanded
manufacturing development activities, including the recruitment of additional
personnel, with respect to Lisofylline and, to a lesser extent, expanded
preclinical, manufacturing, and clinical related development activities with
respect to CT-2584, the Company's novel small molecule drug under investigation
for the treatment of patients with multidrug
9
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(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 $2.6 million
for the three months ended March 31, 1998 from approximately $2.1 million for
the three months ended March 31, 1997. This increase was due primarily 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
$972,000 for the three months ended March 31, 1998 from approximately $374,000
for the three months ended March 31, 1997. This increase was associated
primarily with interest earnings on higher average cash balances on hand during
the first quarter of 1998 due to the proceeds from both the Company's initial
public offering in March 1997 (the "IPO") and the Company's follow-on offering
in October 1997 (the "Follow-On Offering"). Interest expense decreased slightly
to approximately $106,000 for the three months ended March 31, 1998 from
approximately $109,000 for the three months ended March 31, 1997. This decrease
was due primarily to lower average balances of outstanding long-term
obligations.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through the
sale of equity securities. As of March 31, 1998, the Company has raised
aggregate net proceeds of approximately $167.7 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 $2.9 million remained outstanding as of March 31, 1998.
The Company intends to use the substantial majority of the net proceeds of
the IPO, a concurrent stock purchase by Johnson & Johnson (the "Johnson &
Johnson Stock Purchase") and the Follow-On Offering to fund its research and
development activities with respect to the Company's LSF 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 Company's 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 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.
The Company's principal sources of liquidity are its cash balances, cash
equivalents and securities available-for-sale, which totaled approximately $62.1
million as of March
10
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31, 1998. 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.
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, the Johnson & Johnson Stock Purchase 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, the Company
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 though additional equity or debt
financings, research and development financings, collaborative relations, 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.
As of March 31, 1998, the Company had available for Federal income tax purposes
net operating loss carryforwards of approximately $98 million and research and
development credit carryforwards of approximately $4 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a number
of risks, some of which are outside of the Company's control. The following
discussion highlights some of these risks and others are discussed elsewhere
herein and in other documents filed by the Company with the Securities and
Exchange Commission.
The time frame for market success for any of the Company's potential products
is long and uncertain. The Company is at an early stage of development and its
technology is unproven. All of the Company's proposed products are in research
or development and will require significant additional research and development
efforts prior to any commercial use, including extensive preclinical and
clinical testing as well as lengthy regulatory approval. There can be no
assurance that the Company's research and development and clinical trial efforts
will be successful, that its lead drug candidate, LSF, or any of
11
<PAGE>
its other proposed products, will prove to be safe and efficacious in clinical
trials or meet applicable regulatory standards, that unforeseen problems will
not develop with the Company's technologies or applications, or that any
commercially successful products will ultimately be developed by the Company.
The Company faces substantial competition from a variety of sources, both direct
and indirect. There can be no assurance that research and discoveries by others
will not render some or all of the Company's programs or products noncompetitive
or obsolete or that the Company will be able to keep pace with technological
developments or other market factors.
The Company is dependent on the future payments from Johnson & Johnson under
the Collaboration Agreement to continue the development and commercialization of
LSF as presently planned. 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, that Johnson & Johnson will
devote sufficient resources to the commercialization of products under the
Collaboration Agreement or that Johnson & Johnson will not terminate the
Collaboration Agreement in accordance with its terms. The Company's products
under development have never been manufactured on a commercial scale and there
can be no assurance that such products can be manufactured at a cost or in
quantities necessary to make them commercially viable. However, the Company
initiated commercial scale manufacturing of LSF in 1997 with a third-party
contract manufacturer. There can be no assurance that Johnson & Johnson or the
contract manufacturer will meet the Company's requirements for quality, quantity
or timeliness. The Company currently has no internal manufacturing facilities
and has no experience in sales, marketing or distribution. If the Company
develops any additional products with commercial potential outside of the
Johnson & Johnson collaboration, it may seek to enter into collaborative
arrangements with other parties which have established manufacturing, sales,
marketing and distribution capabilities or may need to develop such resources on
its own.
The foregoing risks reflect the Company's early stage of development and the
nature of the Company's industry and potential products. Other risk factors that
may affect the Company's future results include competition, uncertainties
regarding protection of patents and proprietary rights, government regulation
and uncertainties regarding pharmaceutical pricing and reimbursement.
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.
12
<PAGE>
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
99.1+ Limited Liability Agreement of Cell City, LLC between the Company
and The City of Hope National Medical Center, dated as of January
5, 1998.
99.2+ Exclusive License Agreement between The City of Hope National
Medical Center, as Licensor and Cell City, LLC, as Licensee, dated
as of January 5, 1998
- ----------------------------------------
+ Confidential Treatment Requested
(b) Reports on Form 8-K
None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
CELL THERAPEUTICS, INC.
(Registrant)
Dated: May 15, 1998 By: /s/ James A. Bianco, M.D.
-----------------------------------
James A. Bianco, M.D.
President and Chief Executive
Officer
Dated: May 15, 1998 By: /s/ Louis A. Bianco
-----------------------------------
Louis A. Bianco
Executive Vice President,
Finance and Administration
(Principal Financial Officer,
Chief Accounting Officer)
14
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
27.1 Financial Data Schedule
99.1+ Limited Liability Agreement of Cell City, LLC between the Company
and The City of Hope National Medical Center, dated as of January
5, 1998.
99.2+ Exclusive License Agreement between The City of Hope National
Medical Center, as Licensor and Cell City, LLC, as Licensee, dated
as of January 5, 1998
- - --------
+ Confidential treatment requested.
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
1998 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,160,492
<SECURITIES> 56,980,666
<RECEIVABLES> 5,083,814
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 68,177,981
<PP&E> 14,823,855
<DEPRECIATION> 8,218,076
<TOTAL-ASSETS> 74,985,403
<CURRENT-LIABILITIES> 7,288,970
<BONDS> 0
0
0
<COMMON> 168,980,066
<OTHER-SE> (103,313,221)
<TOTAL-LIABILITY-AND-EQUITY> 74,985,403
<SALES> 3,277,935
<TOTAL-REVENUES> 3,277,935
<CGS> 0
<TOTAL-COSTS> 10,343,531
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105,766
<INCOME-PRETAX> (6,199,573)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,199,573)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> (.40)
</TABLE>
<PAGE>
EXHIBIT 99.1
Portions of this Exhibit have been
omitted pursuant to a request for
confidential treatment. The omitted
portions are marked ***** and have been
filed separately with the Commission.
- --------------------------------------------------------------------------------
LIMITED LIABILITY COMPANY AGREEMENT
OF
CELL CITY, LLC
- --------------------------------------------------------------------------------
(The information below marked ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)
<PAGE>
LIMITED LIABILITY COMPANY AGREEMENT
OF
CELL CITY, LLC
This Limited Liability Company Agreement (the "Operating Agreement") of
-------------------
Cell City, LLC, a limited liability company organized pursuant to the Delaware
Limited Liability Company Act, is entered into this 5th day of January, 1998 by
and among Cell Therapeutics, Inc., a Washington corporation ("CTI") and City of
---
Hope National Medical Center, a California nonprofit corporation ("COH")
---
(referred to collectively herein as "Members").
-------
W I T N E S S E T H:
-------------------
WHEREAS, CTI and COH desire to create a limited liability company pursuant
to the Delaware Limited Liability Company Act, for the purpose of employing
pharmacologic targets such as leukocyte 12 lipoxygenase, in order to identify
compounds which regulate the activities of those targets as drug candidates, and
all other activities permitted by law;
NOW THEREFORE, in consideration of the mutual agreements hereinafter set
forth, the Members agree as follows:
ARTICLE I
DEFINITIONS
The following terms, as used herein, shall have the following meanings:
"Act" means the Delaware Limited Liability Company Act, 6 Del. C. Sections
--- --- -
18-101, et seq., and all amendments to the Act, as in effect from time to time.
-- ----
"Additional Capital Contributions" shall have the meaning set forth in
---------------------------------
Section 9.2(a).
"Additional Member" means a Person who has acquired a Company Interest from
-----------------
the Company or from another Member in accordance with Section XII of this
Operating Agreement pursuant to an Admission Agreement.
"Admission Agreement" means the agreement between an Additional Member and
--------------------
the Company described in Section 9.1(b), in the form approved by the Executive
Committee from time to time.
"Affiliate" means, with respect to any Person, another Person that directly
---------
or indirectly through one or more intermediaries controls or is controlled by or
is under common control
1
<PAGE>
with such Person. For purposes of this Operating Agreement "control" means an
interest in excess of fifty percent (50%).
"Allocable Share" means, as to any Member, that percentage initially set
---------------
forth opposite each Member's respective name on Exhibit B hereto, as it may be
modified from time to time.
"Ancillary Agreements" means the License Agreement, the CTI Services
--------------------
Agreement and the COH Services Agreement.
"Arbitrators" shall have the meaning specified in Section 15.3(b)(i).
-----------
"Bankruptcy" means, with respect to a Person: (i) the commencement against
----------
such Person of proceedings for any relief under any bankruptcy or insolvency
law, or any law relating to the relief of debtors, readjustment of indebtedness,
reorganization, arrangement, composition, or extension of debts, provided such
proceeding shall not have been dismissed, nullified, stayed, or otherwise
rendered ineffective (but only so long as such ineffectiveness shall continue in
force) within ninety (90) days after the commencement of such proceedings; (ii)
the commencement by such Person of proceedings for any relief under any
bankruptcy or insolvency law, or any law relating to the relief of debtors,
readjustment of indebtedness, reorganization, arrangement, composition, or
extension of debts; (iii) a decree or order of a court having jurisdiction in
the premises for the appointment of a receiver, liquidator, or trustee or
assignee in bankruptcy or insolvency of such Person or of a substantial part of
such Person's property, or for the winding up or liquidation of its affairs,
which decree or order remains in force undischarged and unstayed for a period of
ninety (90) days; or (iv) a general assignment by such Person for the benefit of
creditors or the admission by such Person in writing of its inability to pay its
debts generally as they become due.
"Capital Account" means the account maintained for a Member determined in
---------------
accordance with Section 9.3.
"Capital Contribution" means with respect to a Member, the value of
--------------------
Property contributed, from time to time, to the Company by such Member pursuant
to Sections 9.1 or 9.2; provided that such value, in the case of Property other
than cash, shall be the fair market value of such Property as reasonably
determined by the Member contributing such Property and the Executive Committee
(excluding Representatives of the contributing Member).
"Certificate of Formation" shall have the meaning set forth in Section 2.2
------------------------
hereof.
"Code" means the Internal Revenue Code of 1986, as from time to time
----
amended, or any successor thereto, and all regulations adopted thereunder; any
reference to a section of the Code shall mean such section or any successor
thereto as in effect at the time or times in question.
2
<PAGE>
"COH" shall have the meaning set forth in the preamble hereof.
----
"COH Put Notice" shall have the meaning set forth in Section 12.8(c)
--------------
hereof.
"COH Put Right" shall have the meaning set forth in Section 12.8(c) hereof.
-------------
"COH Services Agreement" means the research and services agreement, dated
----------------------
as of January 5, 1998, between the Company and COH whereby COH agrees to conduct
the activities specified therein, as such agreement may be amended from time to
time.
"COH Unreturned Capital Contributions" shall mean the excess, if any, of
------------------------------------
COH's aggregate Capital Contributions over all distributions to COH from the
Company under this Agreement.
"Company" means Cell City, LLC, a limited liability company formed under
-------
the laws of Delaware.
"Company Intellectual Property" shall have the meaning set forth in Section
-----------------------------
6.9 hereof.
"Company Interest" means a "Limited Liability Company Interest," as defined
----------------
in the Act.
"Company Property" means all Property owned of record or beneficially by
----------------
the Company.
"Compound" means a pharmaceutical product which directly increases or
--------
decreases the activity of the 12-lipoxygenase target enzyme.
"Confidential Information" shall have the meaning specified in Section 15.8
------------------------
hereof.
"Conversion Event" shall have the meaning set forth in Section 12.8(a)
----------------
hereof.
"Corporate Partnering Arrangement" means a legally binding arrangement
--------------------------------
between the Company and a third party, regardless of how structured, whereby
such third party (exclusive of Affiliates of COH and CTI) agrees to provide to
the Company (x) during the first two years following the Effective Date,
$15,000,000 and (y) at any time thereafter $10,000,000, or more in equity,
milestone payments, license fees, research or development reimbursement or
sharing, or any combination thereof, but excluding from such $10,000,000 future
contingent royalty payments.
"CTI" shall have the meaning set forth in the preamble hereof.
---
"CTI Administrative Contributions" shall have the meaning set forth in
--------------------------------
Section 9.1(c) hereof.
3
<PAGE>
"CTI Buy-Out Notice" shall have the meaning set forth in Section 12.8(b)
------------------
hereof.
"CTI Buy-Out Option Period" shall have the meaning set forth in Section
-------------------------
12.8(b) hereof.
"CTI Buy-Out Right" shall have the meaning set forth in Section 12.8(b)
-----------------
hereof.
"CTI Common Stock" means the shares of common stock of CTI any stock into
----------------
which such common stock may hereafter be changed.
"CTI Deferred Capital Contributions" means the deferred capital
----------------------------------
contributions to be made by CTI as described in Section 9.1(a) and Exhibit C-2
attached hereto.
"CTI Ordinary Capital Contributions" shall mean the excess of CTI's
----------------------------------
aggregate Capital Contributions over the CTI Preferred Capital Contributions.
"CTI Preferred Capital Contributions" shall have the meaning set forth in
-----------------------------------
Section 9.2(b)(i).
"CTI Services Agreement" means the research and services agreement, dated
----------------------
as of January 5, 1998, between the Company and CTI whereby CTI agrees to conduct
the activities specified therein, as such agreement may be amended from time to
time.
"CTI Unmatched Additional Capital Contributions" shall have the meaning set
----------------------------------------------
forth in Section 9.2(b) hereof, provided, however, that CTI Administrative
Contributions shall in no way be included in the meaning thereof.
"CTI Unpaid Preferred Return" shall mean, as of any date, the excess, if
---------------------------
any, of the Preferred Return accrued through such date over all distributions
from the Company to CTI of such Preferred Return under this Operating Agreement.
"CTI Unreturned Ordinary Capital Contributions" shall mean the excess, if
---------------------------------------------
any, of CTI's aggregate CTI Ordinary Capital Contributions over all
distributions from the Company to CTI in return of the CTI Ordinary Capital
Contributions under this Operating Agreement.
"CTI Unreturned Preferred Capital Contributions" shall mean the excess, if
----------------------------------------------
any, of CTI's aggregate CTI Preferred Capital Contributions over all
distributions from the Company to CTI in return of the CTI Preferred Capital
Contributions under this Operating Agreement.
"Deadlock" means a situation in which the Executive Committee fails to
--------
obtain the requisite vote for or against a matter as required by Section 8.1(b)
and (c).
4
<PAGE>
"Development Plan and Budget" shall have the meaning set forth in Section
---------------------------
5.1 hereto. Schedule I hereto sets forth the initial development plan and
budget.
"Disposition (Dispose)" means any sale, assignment, transfer, exchange,
---------------------
mortgage, pledge, grant, hypothecation, or other transfer, absolute or as
security or encumbrance (including dispositions by operation of law).
"Dissolution Event" shall have the meaning set forth in Section 13.1
-----------------
hereof.
"Effective Date" shall have the meaning set forth in Section 2.5 hereof.
--------------
"Executive Committee" shall have the meaning set forth in Section 8.2(a)
-------------------
hereof.
"Fair Market Value" shall have the meaning set forth in Section 12.8(d)
-----------------
hereof.
"Field" means the use of Compounds to block, inhibit, enhance or otherwise
-----
affect the 12-lipoxygenase enzyme for the prevention and treatment of diseases
or ailments in humans or animals for which the regulation of 12-lipoxygenase may
provide therapeutic benefit, including the use of ribozymes (including chimeric
ribozymes) for any therapeutic or diagnostic purpose.
"First Commercial Sale" means the date the Company or a sublicensee of the
---------------------
Company first sells commercially a product based on Company Intellectual
Property to a third party (excluding Affiliates of Members) in an arms-length
transaction pursuant to a regulatory approval granted by the United States Food
and Drug Administration or any successor thereto.
"Fiscal Year" means the fiscal period of twelve months ending on each
-----------
December 31.
"Force Majeure" shall have the meaning specified in Section 12.3(b) hereof.
-------------
"GAAP" means U.S. generally accepted accounting principles consistently
----
applied.
"Initial Capital Contribution" means the initial capital contribution made
----------------------------
by the Members and any Additional Members, as described in Section 9.1 and
Exhibit C-1 attached hereto.
"JAMS" shall have the meaning specified in Section 15.3(b)(i) hereof.
----
"License Agreement" means the license agreement, dated the date hereof,
-----------------
between COH and the Company, attached hereto as Exhibit D.
"Liquidating Trustee" means the Member or such other Person as to whom all
-------------------
Members agree (or, in the absence of such agreement, the Executive Committee),
charged with carrying out the winding up of the Company.
5
<PAGE>
"Majority Vote" means approval by more than fifty percent (50%) of the
-------------
votes of all Representatives comprising the Executive Committee.
"Market Price" per share of CTI Common Stock at any date herein specified
------------
shall mean the average of the daily market prices for the twenty (20)
consecutive trading days ending ten (10) trading days after the date of
determination. The market price for each such trading day shall be the last
reported sales price on the principal exchange on which the Common Stock is then
listed, or, if it is not so listed, the Nasdaq National Market or, if it is not
so listed, on the over-the-counter market.
"Member" means CTI, COH and any Additional Members.
------
"Member Veto Right" shall mean the right of a Member to veto, in its sole
-----------------
discretion but subject to the remainder of this definition, a Corporate
Partnering Arrangement or the admission of an Additional Member based on its
determination that the third party has a negative reputation or standing in the
pharmaceutical industry.
"Net Profits" or "Net Losses" means, for each period taken into account
----------- ----------
under Article IV, an amount equal to the Company's taxable income or taxable
loss for such period, determined in accordance with federal income tax
principles, with the following adjustments:
(i) There shall be added to such taxable income or taxable loss an
amount equal to any income received by the Company during such period which is
wholly exempt from federal income tax (e.g., interest income which is exempt
from federal income tax under Section 103 of the Code);
(ii) Any expenditures of the Company described in Section 705(a)(2)(B)
of the Code or treated as Section 705(a)(2)(B) expenditures pursuant to Treas.
Reg. Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in
computing Net Profits or Net Losses, shall be subtracted from such taxable
income or loss;
(iii) In the event the book value of any Company asset is adjusted
pursuant to this Operating Agreement, the amount of such adjustment shall be
taken into account as gain or loss from the disposition of such asset for
purposes of computing Net Profits or Net Losses, and shall be allocated in
accordance with the provisions of Article X;
(iv) The gain or loss on disposition of Company assets and the
depreciation, amortization or other cost recovery deductions, if any, with
respect to Company assets shall be calculated by reference to their book value
rather than their adjusted tax basis; and
(v) To the extent an adjustment to the adjusted tax basis of any
Company asset pursuant to Section 734(b) or Section 743(b) of the Code is
required pursuant to Treas. Reg. Section 1.704-1(b)(2)(iv)(m)(4) to be taken
into account in determining Capital Accounts as a result of a distribution other
than in liquidation of a Member's Interest in the Company,
6
<PAGE>
the amount of such adjustment shall be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the adjustment
decreases the basis of the asset) from the disposition of the asset and shall be
taken into account for purposes of computing Net Profits or Net Losses.
"Officer" shall have the meaning set forth in Section 8.8(a) hereof.
-------
"Operating Agreement" means this Limited Liability Company Agreement,
-------------------
including all amendments adopted in accordance with this Operating Agreement and
the Act.
"Operating Policy" shall have the meaning set forth in Section 5.1 hereof.
----------------
"Person" means an individual, trust, governmental authority, estate, or any
------
incorporated or unincorporated company, corporation, limited liability company,
partnership or other organization.
(The information below marked ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)
"Preferred Return" shall mean an amount equal to the lower of (i) *****%
----------------
per annum, or (ii) *****% in excess of the rate of interest in effect under
CTI's then existing primary line of credit (if any), compounded semi-annually,
on CTI Unreturned Preferred Capital Contributions.
"Principal Office" shall have the meaning set forth in Section 2.8 hereof.
----------------
"Proceeding" means any administrative or judicial adversary proceeding or
----------
hearing, civil, criminal or investigative, the result of which may be that a
court, arbitrator, mediator or governmental agency may enter a judgment, order,
decree, or other determination which, if not appealed and reversed, would be
binding.
"Property" means any property, real or personal, tangible or intangible,
--------
including cash and any legal or equitable interest in such property, but
excluding services and promises to perform services in the future.
"Representative" shall have the meaning set forth in Section 8.2(a) hereof.
--------------
"Selling Member" shall have the meaning set forth in Section 12.4(a)
--------------
hereof.
"Services Agreements" means the CTI Services Agreement and the COH Services
-------------------
Agreement.
"Tax Matters Member" shall have the meaning set forth in Section 11.2
------------------
hereof.
"Taxable Year" shall mean the Fiscal Year.
------------
7
<PAGE>
"Unanimous Vote" means the approval by one hundred percent (100%) of the
--------------
votes of all Representatives comprising the Executive Committee.
"Withdrawing Member" has the meaning set forth in Section 12.5 hereof.
------------------
ARTICLE II
FORMATION
2.1 ORGANIZATION. The Members hereby form, and agree to jointly operate, a
------------
Delaware limited liability company pursuant to the provisions of the Act. The
Members hereby agree that, except where otherwise required by applicable law,
the Company shall be treated as a partnership for purposes of U.S. federal,
state and local income taxes or other taxes and the Members shall not take any
position or make any election inconsistent therewith.
2.2 CERTIFICATE OF FORMATION. Concurrently with or as soon as possible
------------------------
after the execution of this Operating Agreement, the Members shall cause the
Certificate of Formation, in the form attached hereto as Exhibit E (the
"Certificate of Formation"), to be filed in the office of the Secretary of the
------------------------
State of Delaware in accordance with the requirements of the Act. From time to
time, the Members shall cause to be filed, and the Members agree to execute,
such further certificates of formation, qualification to do business, or like
filings in such jurisdictions as may be necessary or appropriate in connection
with the conduct of the Company's business or to provide notification of the
limitation of liability of Members.
2.3 AGREEMENT. For and in consideration of the mutual covenants herein
---------
contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Members hereby agree to the
terms and conditions of this Operating Agreement, as it may from time to time be
amended according to its terms. It is the express intention of the Members that
as of the date hereof, this Operating Agreement, any Ancillary Agreements, the
Development Plan and Budget and the Operating Policy, as each agreement may be
amended from time to time in accordance with their terms, shall be the sole
sources of agreement of the parties with respect to the subject matter hereof,
and, except (i) to the extent a provision of this Operating Agreement expressly
incorporates federal income tax rules by reference to sections of the Code is
expressly prohibited or ineffective under the Act, this Operating Agreement
shall govern, even when inconsistent with, or different than, the provisions of
the Act or any other law or rule and (ii) to the extent the Members enter into
agreements subsequent to the date hereof. To the extent any provision of this
Operating Agreement is prohibited or ineffective under the Act, this Operating
Agreement shall be considered amended to the smallest degree possible in order
to make this Operating Agreement effective under the Act. In the event the Act
is subsequently amended or interpreted in such a way to make any provision of
this Operating Agreement that was formerly invalid valid, such provision shall
be considered to be valid from the effective date of such interpretation or
amendment.
8
<PAGE>
2.4 NAME. The name of the Company is Cell City, LLC.
----
2.5 EFFECTIVE DATE. This Operating Agreement shall become effective on the
--------------
date (the "Effective Date") the Certificate of Formation is accepted and the
--------------
Company is duly formed as certified by the Secretary of State of the State of
Delaware.
2.6 TERM. The Company shall dissolve fifteen (15) years after the
----
Effective Date unless (i) sooner dissolved as hereinafter provided; or (ii)
extended for an additional term on one or more occasions as hereinafter
provided. Not later than one hundred and twenty (120) days prior to the
expiration of the then effective term, or such other date selected by the
Executive Committee by Majority Vote, the Executive Committee shall meet for the
purpose of determining whether or not the term will be extended and the duration
of such term. Extension of the term shall require a Unanimous Vote.
2.7 REGISTERED AGENT AND OFFICE. The registered agent for the service of
---------------------------
process and the registered office shall be that Person and location reflected in
the Certificate of Formation as filed in the office of the Secretary of State of
the State of Delaware. The Executive Committee, may, from time to time, change
the registered agent or office through appropriate filings with the Secretary of
State. In the event the registered agent ceases to act as such for any reason or
the registered office shall change, the Executive Committee shall promptly
designate a replacement registered agent or file a notice of change of address
as the case may be. If the Executive Committee shall fail within thirty (30)
days to designate a replacement registered agent or change of address of the
registered office, any Member may designate a replacement registered agent or
file a notice of change of address.
2.8 PRINCIPAL OFFICE. The principal office of the Company (the "Principal
---------------- ---------
Office") shall be at such place as the Executive Committee may decide from time
- ------
to time.
2.9 GOVERNMENTAL APPLICATIONS. The Members agree to cooperate and exercise
-------------------------
due diligence in securing any necessary regulatory approvals and such other
matters as may be necessary or appropriate for purposes of effectuating the
business of the Company.
ARTICLE III
NATURE OF BUSINESS
3.1 PURPOSE. The Company is empowered to (a) exploit Compounds in the
-------
Field; (b) conduct the activities specified in the Services Agreements; and (c)
engage in any and all activities incidental to the foregoing. The Company is
empowered to engage in all other activities permitted by law to the extent
approved by a Unanimous Vote of the Executive Committee. The Company is also
empowered to take any and all action necessary, appropriate, or convenient for
the accomplishment of its purposes, and for the benefit of the Company and its
Property.
9
<PAGE>
ARTICLE IV
ACCOUNTING, RECORDS AND REPORTS
4.1 RECORDS TO BE MAINTAINED. The Company shall maintain the following
------------------------
accurate and complete records at the Principal Office:
(a) a current list of the full name and last known business address of
each Member;
(b) a copy of the Certificate of Formation and all amendments thereto;
(c) copies of each of the Company's federal, state and local tax
returns and reports, as filed, for the last three taxable periods;
(d) copies of this Operating Agreement and the Ancillary Agreements,
including all amendments thereto; and
(e) books and records of the Company, including the Development Plan
and Budget.
4.2 ACCOUNTING. Books and records of the Company shall be maintained in
----------
accordance with GAAP, and the Company's Net Profits or Net Losses shall be
determined on the basis of each Fiscal Year.
4.3 FINANCIAL REPORTS. The Executive Committee shall cause the following
-----------------
financial statements to be prepared, in each case in accordance with GAAP on a
consolidated basis, and shall cause to be delivered to each Person who was a
Member during the applicable period described below:
(a) (i) a balance sheet as of the end of each calendar quarter; (ii) a
statement of income and cash flows for such quarter and year-to-date; and (iii)
a statement of each Member's Capital Account as of the end of such applicable
period (including sufficient information to permit the Members to calculate
their tax accruals), each within sixty (60) days after the end of such
applicable period (or more frequently if agreed by the Executive Committee);
(b) (i) a balance sheet as of the end of each Fiscal Year; (ii) a
statement of income and cash flows for such Fiscal Year; (iii) a statement of
each Member's Capital Account as of the end of such Fiscal Year; and (iv) such
federal, state and local income tax returns and such other accounting tax
information and schedules as shall be necessary for the preparation by each
Member of its income tax return for such Fiscal Year; and
(c) financial statements prepared by a nationally recognized firm of
certified public accountants selected by the Executive Committee by Majority
Vote within the ten (10)
10
<PAGE>
days after such statements are furnished by such certified public accountants to
the Company but in no event later than ninety (90) days after the end of each
Fiscal Year.
4.4 ACCOUNTS. The Company shall maintain a record of each Member's Capital
--------
Account in accordance with Section 9.3.
4.5 ACCESS TO RECORDS. Subject to Section 15.8, each Member or its
-----------------
authorized representative shall have unrestricted access at the Company's
Principal Office and other appropriate locations, during ordinary business
hours, to all properties, books, records, accounts and information regarding the
Company.
ARTICLE V
CONDUCT OF BUSINESS BY THE COMPANY
5.1 OPERATING POLICY. The Executive Committee, by Majority Vote, shall
----------------
approve and adopt written Company operating procedures (the "Operating Policy")
----------------
and a development plan and budget (the "Development Plan and Budget"), which
---------------------------
Operating Policy and Development Plan and Budget shall be approved and adopted
within sixty (60) days of the execution of this Operating Agreement (the
Executive Committee may, by Majority Vote, approve and adopt interim operating
procedures and an interim development plan and budget to be effective until the
approval and adoption of the Operating Policy and the Development Plan and
Budget), addressing, among other areas, procedures for the execution and
approval of agreements binding the Company (including specific authority levels
of Members, Officers, and Company employees), procedures for the execution and
approval of agreements between the Company and Members, Affiliates, Officers,
and/or Company employees, and tax recording and accounting procedures (including
procedures for calculating Net Profits and Net Losses). The Members have
approved the initial development plan and budget attached hereto as Schedule I,
with the understanding that it will be further refined by the Executive
Committee within such sixty day period.
5.2 ANCILLARY AGREEMENTS.
--------------------
(a) CTI Services Agreement. CTI agrees to perform each of its
----------------------
obligations under the CTI Services Agreement.
(b) COH Services Agreement and License Agreement. COH agrees to
--------------------------------------------
perform each of its obligations under the COH Services Agreement and the License
Agreement.
11
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ARTICLE VI
GENERAL RIGHTS AND DUTIES OF MEMBERS
6.1 MEMBER REQUIREMENTS. A Member may not Dispose of all or any portion of
-------------------
its Company Interest except in strict accordance with the terms and conditions
of this Operating Agreement (including, without limitation, Article XII). Any
attempted Disposition of all or any portion of its Company Interest, other than
in strict accordance with this Operating Agreement, shall be, and is hereby
declared, null and void ab initio. The Members agree that breach of the
-- ------
provisions of this Section 6.1 may cause irreparable injury to the Company for
which monetary damages (or other remedy at law) are inadequate in view of (i)
the complexities and uncertainties in measuring the actual damages that would be
sustained by reason of the failure of a Member to comply with such provisions,
and (ii) the uniqueness of the Company business and the relationship among the
Members. Accordingly, the Members agree that the provisions of this Section 6.1
may be enforced by specific performance.
6.2 UNAUTHORIZED EXPENSES OR CONTRACTS.
----------------------------------
(a) Subject to Section 8.1(c), a Member may not, unless approved by
Majority Vote of the Executive Committee, cause the Company to enter into or
make any contract, security agreement, financing statement, note or similar
instrument, mortgage or guaranty, incur any obligation, or expend any money,
except and unless an expenditure is required by the terms of a contract or
instrument theretofore duly entered into by the Company and authorized in
accordance with this Operating Agreement.
(b) If a Member breaches this Section 6.2, such Member shall
indemnify, defend and hold the other Members harmless from all liabilities,
losses, damages, claims and expenses (including (i) reasonable attorneys' fees,
judgments, and fines in all cases and (ii) amounts paid in settlement) actually
and reasonably incurred in connection with such breach. The right to
indemnification conferred in this Section 6.2 shall not be exclusive of any
other right which a Member indemnified pursuant to this Section 6.2 may have or
hereafter acquire under any law, any provision of the Certificate of Formation,
this Operating Agreement, any Ancillary Agreement, any vote of Members or
otherwise.
6.3 AUTHORITY OF MEMBERS TO BIND THE COMPANY. The Members hereby agree
----------------------------------------
that no individual Member or Members can bind the Company unless such Member or
Members are acting with the express written authority of the Executive
Committee, approved by the required vote of the Executive Committee as set forth
in this Operating Agreement.
6.4 LIMITATION OF LIABILITY OF MEMBERS. Except as provided for in Section
----------------------------------
6.2 hereof, no Member shall be liable for the debts, obligations or liabilities
of the Company, including under a judgment, decree or order of court, except as
may be otherwise expressly agreed to in writing by such Member directly to the
applicable third Person.
12
<PAGE>
6.5 CONTRACT TO LIMIT MEMBERS' LIABILITIES. Unless approved by Unanimous
--------------------------------------
Vote of the Executive Committee, no contract, lease, sublease, note, deed or
other agreement or instrument shall be executed and delivered by or on behalf of
the Company if there is contained therein any provision whatsoever that states
or suggests that the claims of all parties thereto and other beneficiaries
thereunder are not limited solely to the assets of the Company, and any
contract, lease, sublease, note, deed or other agreement or instrument
containing any such provision shall be null and void and shall not constitute a
valid obligation of the Company.
6.6 LIABILITY OF MEMBERS FOR CERTAIN ACTS OR OMISSIONS. Any act or
--------------------------------------------------
omission by a Member, the effect of which may cause or result in loss or damage
to the Company, shall not subject the Member to any liability to the Company or
any other Member so long as such act or omission was not done fraudulently or in
bad faith or as a result of willful misconduct or gross negligence.
6.7 FIDUCIARY DUTIES. Any fiduciary duties that the Members may owe each
----------------
other under Delaware Law shall be limited to those that the Members would owe
each other under the General Corporation Law of the State of Delaware if the
Company were a Delaware corporation. To the extent reasonably required by
federal tax law in order to preserve the tax-exempt status of COH under Section
501(c)(3) of the Code, COH shall be relieved of any and all fiduciary duties or
similar obligations to act for the benefit of the Company or any of its Members
imposed by applicable law or this Agreement. During any period or with respect
to any action where COH is so relieved, all other Members shall be similarly
relieved of any and all such fiduciary duties or obligations.
6.8 INDEMNIFICATION.
---------------
(a) The Company shall defend, indemnify and hold harmless any Member,
Representative (or alternate), or Company Officer, employee or agent, who was or
is a party to, or is threatened to be made a party to, or is involved in, any
threatened, pending or completed Proceeding, by a third party (including any
action by or in the right of the Company) by reason of any acts, omissions or
alleged acts or omissions by such Member, Representative (or alternate), or
Company Officer, employee or agent undertaken on behalf of the Company, against
and from losses, damages, claims and expenses for which such Member,
Representative (or alternate), or Company Officer, employee or agent has not
otherwise been reimbursed (including (i) reasonable attorneys' fees, judgments,
and fines in all cases and (ii) amounts paid in settlement if agreed to by
Majority Vote of the Executive Committee) actually and reasonably incurred in
connection with such Proceeding, so long as such act or omission was not done
fraudulently or in bad faith or as a result of willful misconduct or gross
negligence or, with respect to any criminal Proceeding, such Person had no
reasonable cause to believe his/her conduct was unlawful.
(b) Subject to limitations and conditions as provided in this Article
VI, each Person who was or is a party to, or is threatened to be made a party
to, or is involved in, any
13
<PAGE>
threatened, pending or completed Proceeding, by reason of the fact that such
Person is or was serving at the request of the Company as a member, officer,
employee, or agent of another foreign or domestic limited liability company,
corporation, partnership, joint venture, sole proprietorship, or other
enterprise, shall be defended, indemnified and held harmless by the Company to
the fullest extent permitted by the Act, against and from losses, damages,
claims and expenses for which such Person has not otherwise been reimbursed
(including (i) reasonable attorneys' fees, judgments, and fines in all cases and
(ii) amounts paid in settlement if agreed to by Majority Vote of the Executive
Committee) actually and reasonably incurred in connection with such Proceeding,
so long as the acts or omissions or alleged acts or omissions forming the basis
for such Proceeding were not done fraudulently or in bad faith or as a result of
willful misconduct or gross negligence or, with respect to any criminal
Proceeding, such Person had no reasonable cause to believe his/her conduct was
unlawful.
(c) Indemnification under this Article VI shall continue as to a
Person who has ceased to serve in the capacity which initially entitled such
Person to indemnity hereunder. The rights granted pursuant to this Article VI
shall be deemed contract rights, and no amendment, modification or repeal of
this Article VI shall have the effect of limiting or denying any such rights
with respect to actions taken or Proceedings arising prior to any such
amendment, modification or repeal. It is expressly acknowledged that the
indemnification provided in this Article VI could involve indemnification for
negligence but cannot involve indemnification for any act or omission done
fraudulently or in bad faith or as a result of willful and wanton misconduct or
gross negligence or, with respect to any criminal Proceeding, if such Person had
reasonable cause to believe his/her conduct was unlawful.
(d) The right to indemnification conferred in this Article VI shall
not be exclusive of any other right which a Member or other Person indemnified
pursuant to this Section 6.8 may have or hereafter acquire under any law, any
provision of the Certificate of Formation, this Operating Agreement, any
Ancillary Agreement, any vote of Members or otherwise.
(e) Expenses (including, without limitation, attorneys' fees and
expenses) incurred by a Member, Representative or Officer of the Company in
defending a Proceeding shall be paid by the Company in advance of the final
disposition of such action, suit or Proceeding upon receipt of an undertaking by
or on behalf of the Member, Representative or Officer to repay such amount if it
shall ultimately be determined that such Member, Representative or Officer is
not entitled to be indemnified by the Company under this Section 6.8 or under
any other contract or agreement between such Member, Representative or Officer
and the Company. Such expenses (including attorneys' fees) incurred by
employees or agents of the Company or persons serving other entities at the
request of the Company may be so paid upon the receipt of the aforesaid
undertaking and such terms and conditions, if any, as the Executive Committee,
by a Majority Vote, deems appropriate.
14
<PAGE>
6.9 COMPANY INTELLECTUAL PROPERTY.
-----------------------------
(a) "Company Intellectual Property" includes trademarks, service
-----------------------------
marks, trade names, domain names, copyrights, patents, trade secrets, know-how,
and other information having value and providing a competitive advantage created
by the Company within the Field. Except as is otherwise provided in the
Ancillary Agreements, all Company Intellectual Property created by the Company
will be owned by the Company. Any goodwill associated with such Company
Intellectual Property will inure to the benefit of the Company. Except as is
otherwise provided in the Ancillary Agreements, the Company is responsible for
obtaining all federal and state registrations in the United States and all
comparable protections in those countries where the Company does business in
order to protect the Company Intellectual Property. Further, the Company is
responsible for the payment of all associated renewal fees maintenance fees and
the like.
(b) Confidential Information. Except as is otherwise provided in the
------------------------
Ancillary Agreements, Confidential Information of a Member provided by the
Member for the benefit of the Company shall remain the property of the Member,
and the Company shall keep confidential such Confidential Information and use
the same solely for the purposes of the business of the Company solely during
the period during which such Member remains a Member. If a Member sells its
Company Interest or the Company is sold to a third party, all Confidential
Information belonging to such Member, and not to the Company, will be returned
to such Member. All Confidential Information created by the Company will remain
property of the Company. The Company will take reasonable security measures to
protect the secrecy of and prevent disclosure of Confidential Information
belonging to both the Members and the Company itself. The Members agree not to
file suit against, or otherwise hold liable, the Company for the use of the
Members' Confidential Information during the time period that such Members that
contribute Confidential Information are Members.
6.10 REPRESENTATIONS AND WARRANTIES. Each Member hereby represents and
------------------------------
warrants to the Company and each other Member that: (a) if such Member is an
organization, it is duly organized, validly existing, and in good standing under
the law of its state or other jurisdiction of incorporation or organization and
that it has full organizational power to execute and agree to this Operating
Agreement and to perform its obligations hereunder; (b) such Member is acquiring
its Company Interest for such Member's own account as an investment and without
an intent to distribute the interest; (c) such Member acknowledges that such
interests have not been registered under the Securities Act of 1933, as amended,
or any state securities laws, and may not be resold or transferred by the Member
without appropriate registration or the availability of an exemption from such
requirements; (d) such Member, by itself or together with its advisors, is
experienced in making investments comparable to its investment in the Company
and is capable of judging for itself the risks inherent in such investment; (e)
such Member has the financial capacity to hold its investment in the Company for
an indefinite period of time and to meet its obligations to make Capital
Contributions hereunder, and acknowledges that the disposition of such
investment is restricted both pursuant to federal and state securities laws and
pursuant to the terms of this Operating
15
<PAGE>
Agreement; (f) such Member acknowledges that it has received access to all
information that it deems necessary in order to make its decision to invest in
the Company; (g) this Operating Agreement has been duly executed and delivered
by it and constitutes its valid and binding obligation, enforceable in
accordance with its terms; (h) neither the execution and delivery of this
Operating Agreement nor the consummation of the transactions contemplated hereby
nor compliance by it with any provisions hereof (1) conflicts with, or results
in a breach or contravention of, or in a default or the creation of any lien
under, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, license, agreement, or other instrument or obligation to which it is
a party or by which it or its properties are bound, or (2) violates any law,
order, writ, injunction or decree applicable to it or any of its properties; and
(i) no consent, approval or other action by any court, governmental authority or
third party is required in connection with its execution, delivery and
performance of this Operating Agreement.
ARTICLE VII
COMPETITION AND CONFLICTS OF INTEREST
7.1 COMPANY OPPORTUNITY.
-------------------
(a) The assets of the Company shall at all times be dedicated
exclusively to the benefit of the Company. Subject to the foregoing and except
as otherwise set forth below, any Member or Affiliate of any Member may
participate in other business activities, whether or not any such activities are
competitive with the business of the Company. Neither the Company nor any
Member shall have any right by virtue of this Operating Agreement in or to any
other interests or activities of any Member or to the income or proceeds derived
therefrom.
(b) No transaction with the Company shall be voidable solely because a
Member has a direct or indirect interest in the transaction if either (i) the
transaction is arm's-length and fair to the Company or (ii) the disinterested
Members (knowing the material facts of the transaction and the Member's
interest) or their Representatives on the Executive Committee authorize,
approve, or ratify the transaction.
(c) With respect to any clinical trials that the Company may conduct,
or have conducted on its behalf, the Company will give COH due consideration
(taking into account the scope and purpose of such trial) as a clinical trial
site; provided, however, that if COH possesses the requisite material
capabilities of other potential trial sites, the Company will utilize COH as a
clinical trial site.
7.2 COMPETITION BETWEEN MEMBERS. Except as specifically provided in this
---------------------------
Article VII, nothing shall limit or restrict the Members' ability to compete
with each other.
16
<PAGE>
ARTICLE VIII
MANAGEMENT
8.1 EXECUTIVE COMMITTEE.
-------------------
(a) Except as otherwise provided in this Operating Agreement, the
property, business and affairs of the Company shall be under the direction of
the Executive Committee. Except for matters requiring the action of the Members
under the terms of this Operating Agreement, the Executive Committee shall have
the power to take any action that the Members may take under law, subject to any
restrictions set forth in this Operating Agreement.
(b) Subject in all cases to subsections (c) and (d) hereof, the
approval by a Majority Vote shall be required before any of the following acts
involving the Company may be taken:
(i) entering into, amending, modifying, or terminating an
agreement with a term in excess of one year or involving aggregate consideration
(including assumed actual and contingent liabilities) or receipts, the
acquisition or disposition of Property or delivery or receipt of goods or
services having a fair market value, in excess of $50,000;
(ii) (A) filing any claim or lawsuit against any Person, or (B)
settling any claim or lawsuit;
(iii) except as provided in Section 8.1(c)(ii), making any
amendment or modification of any provision of the Operating Policy or
Development Plan and Budget or the taking of any actions in contravention of the
restrictions or limitations in the Operating Policy or the Development Plan and
Budget;
(iv) approving a capital budget and an operating budget for each
Fiscal Year, which shall not be exceeded without the express consent of a
Majority Vote of the Executive Committee;
(v) the indemnification of any Officer, employee, agent or any
other Person except as specifically provided herein;
(vi) executing or otherwise entering into, or amending, modifying,
or terminating, any employment agreement, the election or removal of any Officer
or the hiring or firing of other similarly compensated person with or without
cause;
(vii) setting or amending the compensation level of any Officer
or other similarly compensated person;
(viii) revaluing any property or asset;
17
<PAGE>
(ix) taking any action pertaining to the Company in its capacity
as a shareholder, partner or member of any Person;
(x) taking action that will result in any Company Property being
burdened by a lien or other encumbrance;
(xi) approving the distribution of Company Property to Members in
accordance with Section 10.4 below;
(xii) formulating the proposed development plan referred to in
Section 2.4 of the License; or
(xiii) merging or consolidating the Company with or into any other
Person or converting the Company to another Delaware entity, subject to Section
12.8 hereof.
(c) The approval by a Unanimous Vote shall be required before any of
the following acts involving the Company may be taken:
(i) the admission of an Additional Member other than in connection
with a Corporate Partnering Arrangement pursuant to Article XII hereof;
(ii) amending or modifying in any material respect the Operating
Policies, or the Development Plan or the taking of any actions in contravention
of the restrictions or limitations in the Development Plan such that the overall
scientific program agreed to in the Development Plan is materially altered;
(iii) borrowing any principal amount in excess of $100,000,
incurring any contingent liability whatsoever in excess of $100,000 (borrowings
or contingent liabilities equal to or less than $100,000 may be made or incurred
by joint decision of the Chairperson and the President), lending or guaranteeing
any third party indebtedness (including, without limitation, under any contract
or arrangement referred to in this Section 8.1), it being understood that such
limitation shall not be a limitation on the amount or type of trade payables
that may be incurred in the ordinary course of business consistent in all
respects with past practices by the Company;
(iv) transferring all or substantially all of the assets of the
Company;
(v) dissolving the Company;
(vi) the filing of a petition as debtor in a United States
Bankruptcy Court or taking any material affirmative act that would result in the
Company's Bankruptcy;
(vii) a change in the name of the Company;
18
<PAGE>
(viii) entering into any modification or amendment of this
Operating Agreement; or
(ix) extension of the term of the Company in accordance with
Section 2.6.
(d) Any other action required or permitted by the Executive Committee
under this Operating Agreement and not specifically addressed in this Section
8.1 may be taken only with the approval in advance by a Majority Vote of the
Executive Committee.
(e) The Executive Committee by a Majority Vote may from time to time
adopt such rules, not inconsistent with the provisions hereof, as it may deem
useful and appropriate to implement this Operating Agreement and to manage the
Company's business and affairs. The Executive Committee by a Majority Vote may
adopt accounting and financial control procedures and policies, not inconsistent
with this Operating Agreement, that are appropriate for the Company with respect
to such matters.
(f) Subject to the COH's Member Veto Right, CTI shall have the right
to approve a Corporate Partnering Arrangement. No later than thirty (30) days
prior to the approval of a Corporate Partnering Arrangement, the Company shall
give notice (containing a summary of the substantive terms and provisions)
thereof to all Members. COH shall have thirty (30) days following the delivery
of such notice to exercise its Member Veto Right.
(g) In the event of a Deadlock, the Company shall continue to pursue
the activities set forth in the Development Plan and Budget (or any interim
development plan and budget which may be in effect at such time pursuant to
Section 5.1 hereof). If the Executive Committee is unable to resolve such
Deadlock within thirty (30) days, any Member may, by written notice to the
other, have such Deadlock referred to their chief executive officers of the
Members for attempted resolution by good faith negotiations within fourteen (14)
days after such notice is received. In the event the chief executive officers
are not able to resolve such Deadlock, the Company shall continue to pursue the
activities set forth in the Development Plan and Budget (or any interim
development plan and budget which may be in effect at such time pursuant to
Section 5.1 hereof), without implementation of any items that lead to the
Deadlock.
8.2 COMPOSITION AND TERM.
--------------------
(a) The executive committee (the "Executive Committee") shall be the
-------------------
Members' management committee of the Company and shall initially be comprised of
three (3) individual representatives from each of CTI and COH (such Member's
"Representatives"). Upon admission of an Additional Member, the Executive
- ----------------
Committee shall thereafter be comprised of Representatives of each Member
determined on the basis of each such Member's Allocable Share (e.g., if there
----
were three Members with 33-1/3% Allocable Shares, each Member would be entitled
to one Representative, or two, if the Executive Committee were
19
<PAGE>
constituted of six members, etc.) provided, however, that each of CTI and COH
shall have no less than one (1) Representative at all times. All Representatives
shall be entitled to receive notices and agendas of upcoming Executive Committee
meetings, attend all Executive Committee meetings and participate in all
discussions, and receive minutes from previous Executive Committee meetings. A
Member may bring support staff to Executive Committee meetings. Such staff shall
be subject to confidentiality requirements deemed appropriate by the Executive
Committee. Each Representative shall be entitled to cast one (1) vote on matters
requiring the approval of the Executive Committee.
(b) Until replaced pursuant to the terms of this Operating Agreement,
CTI's Representatives shall be James A. Bianco, M.D., Robert A. Lewis, M.D. and
Jack M. Anthony. COH's Representatives shall be Charles Balch, John Kovach,
M.D. and William L. Hughes. Each Representative shall be entitled to hold
office until death, resignation or removal. A Member may replace any
Representative appointed by such Member in the event of a vacancy. Any
Representative may be removed at any time, with or without cause, by the Member
entitled to appoint such Representative, but not otherwise. Any Representative
on the Executive Committee or any Member in the event of the absence of its
Representatives may appoint a proxy (including another Representative) to attend
meetings and vote (including, without limitation, voting on any matter before
the Executive Committee). Without limiting the generality of the foregoing, in
determining if a quorum is present, all Representatives in attendance by means
of a proxy shall be included in the count of a quorum.
8.3 ANNUAL AND REGULAR MEETINGS. The Executive Committee shall hold an
---------------------------
annual meeting, and may hold regular meetings, at such time and place as the
Executive Committee determines by resolution but in any event the Executive
Committee shall, unless the Executive Committee otherwise agrees, hold regular
meetings by conference call or at the offices of the Company each calendar
quarter; provided, however, that each quarter the Representatives of the
Executive Committee shall meet at a location to be determined by a Majority Vote
of the Executive Committee.
8.4 SPECIAL MEETINGS. Special meetings of the Executive Committee may be
----------------
called by the Chairperson, Vice Chairperson, the Executive Committee or any
Member upon notice to all Representatives on the Executive Committee.
8.5 NOTICE OF MEETINGS. Notice of a special meeting shall state the
------------------
purpose of the meeting and notice of special, annual and regular meetings must
be given in writing at least ten (10) days in advance of such meeting. Notice of
such meeting may be waived in writing by Unanimous Vote.
8.6 QUORUM AND MANNER OF ACTING. The presence of a majority of the
---------------------------
Representatives shall constitute a quorum. If a quorum is present, the action of
those present, in accordance with Section 8.1 above, shall constitute the action
of the Executive Committee. No action may be taken at a meeting of the Executive
Committee in the absence of a quorum.
20
<PAGE>
Any action the Executive Committee may take may be taken without a meeting by
unanimous written consent of all Representatives. Meetings of the Executive
Committee may take place by telephone or any means where any persons attending
can hear and speak to each other.
8.7 NO COMPENSATION. No Representative on the Executive Committee shall be
---------------
entitled to compensation for his/her services, or any reimbursement of expenses
incurred, as a Representative on the Executive Committee.
8.8 OFFICERS
--------
(a) Generally. The Company shall have agents, referred to as
---------
"Officers" of the Company. These agents (whose authority is limited pursuant to
- ---------
the following sentence) shall be appointed in the manner specified below, shall
have the titles and authority specified in this Section 8.8 and shall not be
considered "managers" for purposes of the Act or the Code. Each Officer shall
have only the authority specified below, and shall not be a general agent of the
Company.
(b) Titles and Number. The Officers shall be the Chairperson,
-----------------
President, Secretary and Treasurer. There shall be appointed from time to time,
in accordance with subsection (c) below, such Vice Presidents, Assistant
Secretaries, and Assistant Treasurers as the Executive Committee may desire.
Any person may hold two or more offices, except that the offices of President
and Secretary may not be held by the same person.
(c) Election and Term of Office. The Officers shall be elected by the
---------------------------
Executive Committee at the annual meeting by Majority Vote in accordance with
Section 8.1(b)(vi) above. Each Officer shall hold office until the annual
meeting following the date of election of such Officer. Any Officer may be
removed by the Executive Committee by Majority Vote with or without cause.
Vacancies in any office shall be filled by the Executive Committee by Majority
Vote.
(d) Chairperson of the Executive Committee. The Chairperson, or if
--------------------------------------
the Chairperson is unable to perform his/her duties hereunder, or in the absence
of the Chairperson, the President, if the President is a Representative, or
otherwise a Representative selected by the Chairperson shall preside at meetings
of the Executive Committee, and shall exercise such powers and perform such
duties as may be assigned to him/her by this Operating Agreement or the
Executive Committee.
(e) President. The President, subject to the general control of the
---------
Executive Committee, shall be responsible for the day-to-day operation and
direction of the affairs of the Company, employees and agents, shall supervise
generally the affairs of the Company, and, subject to the limitations imposed by
this Operating Agreement, the Operating Policy, any employment agreement, any
employee plan, or any resolution of the Executive Committee, shall have full
authority to execute all documents and to take all actions that the Company may
legally take.
21
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(f) Vice Presidents. In the absence of the President or in the event
---------------
that the President is unable to perform its duties hereunder, the Vice
Presidents designated by the Executive Committee shall, except as hereinafter
provided, have all of the powers and duties conferred upon the President. Each
of the Vice Presidents shall, subject to the limitations imposed by this
Operating Agreement, any employment agreement, any employee plan, or any
resolution of the Executive Committee, have the same power as the President to
sign certificates, contracts and other instruments of the Company. Any Vice
President shall perform such other duties and may exercise such other powers as
may from time to time be assigned to him by this Operating Agreement, the
Operating Policy, the Executive Committee, the Chairperson or the President.
(g) Secretary and Assistant Secretaries. The Secretary shall attend
-----------------------------------
and record or cause to be recorded in books provided for that purpose the
minutes of the meetings or actions of the Members and the meetings or actions of
the Executive Committee or any subcommittees thereof, shall see that all notices
are duly given in accordance with the provisions of this Operating Agreement and
as required by law, shall be custodian of all records (other than financial
records), shall see that the books, reports, statements, certificates and all
other documents and records required by law are properly kept and filed, and, in
general, shall perform all duties incident to the office of Secretary and such
other duties as may, from time to time, be assigned to him/her by the Executive
Committee or the Chairperson. The Assistant Secretaries shall exercise the
powers of the Secretary during that Officer's absence or inability or refusal to
act.
(h) Treasurer and Assistant Treasurers. The Treasurer shall keep or
----------------------------------
cause to be kept the books of account of the Company and shall render statements
of the financial affairs of the Company in such form and as often as required by
this Operating Agreement, the Executive Committee or the Chairperson. The
Treasurer, subject to the order of the Executive Committee, shall have the
custody of all funds and securities of the Company. The Treasurer shall perform
all other duties commonly incident to his/her office and shall perform such
other duties and have such other powers as the Executive Committee or the
Chairperson shall designate from time to time. The Assistant Treasurers shall
exercise the power of the Treasurer during that Officer's absence or inability
or refusal to act.
(i) Powers of Attorney. The Executive Committee may grant powers of
------------------
attorney or other authority as appropriate to establish and evidence the
authority of the Officers.
(j) Borrowed Employees. The Company may borrow a Member's employees,
------------------
or a Member's Affiliate's employees, with that Member's or Affiliate's consent,
from time to time on a temporary basis for purposes associated with the
Company's business at the hourly rates agreed to by Majority Vote of the
Executive Committee, excluding the Representatives of the lending Member, which
may be modified or supplemented by a Member with respect to its employees or a
Member's Affiliate's employees from time to time upon 30 days' prior written
notice to the other Members and if agreed to by Majority Vote of
22
<PAGE>
the Executive Committee, excluding the Representatives of the lending Member.
Such hourly rates shall be based on the cost to such Member or Member's
Affiliate of such employee's salary, benefits and other related expenses. The
lending Member shall furnish all Representatives on the Executive Committee with
a monthly statement of the salary, benefits and other related expenses
associated with any such employee, supported by invoices and other supporting
documents, and shall maintain adequate records supporting the setting of such
hourly rates.
(k) Deferral. The Executive Committee may, by Majority Vote, elect to
--------
defer the appointment and election of Officers until such time as the magnitude
of the Company's operations warrant the appointment thereof. If so deferred,
all references herein to Officers shall be deemed references to the Executive
Committee acting by Majority Vote or the Executive Committee's designee.
8.9 EXPENSES. The Company shall pay only those expenses incurred by the
--------
Officers and employees that are directly attributable to the Company's business.
ARTICLE IX
CONTRIBUTIONS AND CAPITAL ACCOUNTS
9.1 INITIAL CAPITAL CONTRIBUTIONS.
-----------------------------
(a) In consideration for its respective Company Interest, each Member
has made, or immediately shall make, an Initial Capital Contribution to the
Company. The Initial Capital Contributions of the Members shall consist of the
property listed on Exhibit C-1. Each Member shall receive the Allocable Shares
listed on Exhibit B in exchange for these Initial Capital Contributions. In
addition, CTI shall make the additional Capital Contributions ("CTI Deferred
------------
Capital Contributions") set forth on Exhibit C-2 at the times indicated therein.
- ---------------------
(b) Each Additional Member that has acquired a Company Interest from
the Company shall make the capital contributions described in such Additional
Members' Admission Agreement ("Admission Agreement"). Such Additional Member's
-------------------
Capital Contributions shall reduce the Members' Allocable Shares pro rata in
accordance with their respective Allocable Shares. The amount of such
Additional Members' Capital Contributions, the time for making such
contributions, and any changes in the other Members' Capital Accounts and
Allocable Shares that result, shall be set forth in such Additional Members'
Admission Agreement.
(c) CTI shall also make loans or capital contributions ("CTI
---
Administrative Contributions") during the term of the Company to cover the
- ----------------------------
administrative and other operating expenses of the Company. The CTI
Administrative Contributions shall be made in such amounts and at such times as
determined by the Executive Committee. Such CTI Administrative Contributions
shall (x) be repaid in full on the earlier of: (i) the First
23
<PAGE>
Commercial Sale; and (ii) the execution of a Corporate Partnering Arrangement;
and (y) converted into CTI Capital Contributions on the effective date of a
Dissolution Event.
9.2 ADDITIONAL CAPITAL CONTRIBUTIONS.
--------------------------------
(a) As and when the Executive Committee determines by Majority Vote or
Unanimous Vote, as may be required by Section 8.1, that the Company requires
additional resources from time to time, each Member, other than COH (who shall
have the option, but not the obligation to make Additional Capital
Contributions), agrees that it shall make additional Capital Contributions (the
"Additional Capital Contributions") to the Company in an amount in accordance
--------------------------------
with its respective Allocable Share for the purposes determined by the vote of
the Executive Committee authorizing such Capital Contributions in accordance
with Section 8.1.
(The information below marked ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)
(b) Notwithstanding Section 9.1, this Section 9.2 or any other
provision of this Operating Agreement, CTI may make Additional Capital
Contributions ("CTI Unmatched Additional Contributions") to the Company, subject
--------------------------------------
to COH's right to contribute up to its pro rata share of such Additional Capital
Contributions. The first $***** of CTI Unmatched Additional Contributions in
excess of those specified in Section 9.1(a) will not affect COH's Allocable
Share. CTI Unmatched Additional Capital Contributions in excess thereof shall
affect COH's Allocable Share as follows:
(The information below marked ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)
(i) the first $***** of such CTI Unmatched Additional Capital
Contributions in excess of such $***** (the "CTI Preferred Capital
---------------------
Contributions") shall not affect COH's Allocable Share, but instead shall have a
- -------------
Preferred Return; and
(The information below marked ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)
(ii) any CTI Unmatched Additional Capital Contributions in excess
of $***** (e.g., total CTI Capital Contributions, exclusive of CTI
Administrative Contributions, in excess of $***** million), shall decrease COH's
Allocable Share, but not below *****%, by the percentage amount which is the
product of multiplying (x) a fraction, the numerator of which is the amount of
CTI Unmatched Additional Capital Contributions in excess of $***** and the
denominator of which is the aggregate Capital Contributions made by the Members
to the Company after giving effect to all CTI Unmatched Additional Capital
Contributions, by (y) one-half.
(c) Additional Members' Initial Capital Contributions will reduce the
Members' Allocable Shares pro rata in accordance with their Allocable Shares.
9.3 MAINTENANCE OF CAPITAL ACCOUNTS. The Company, acting through the
-------------------------------
Treasurer or Assistant Treasurer, shall establish and maintain an Account (the
"Capital Account") for each Member. The Capital Account of each Member shall
------- -------
equal: (i) the Initial Capital Contributions of each Member, as set forth on
Exhibit C-1 (ii) increased by any Additional Capital Contributions of such
Member, including, in the case of CTI, the CTI Deferred Capital Contributions;
(iii) increased by the Net Profits of the Company previously
24
<PAGE>
allocated to such Member under Section 10.1(a); (iv) decreased by the Net
Losses, if any, of the Company previously allocated to such Member under Section
10.1(b); and (v) decreased by the amount of any cash and the value of any
property distributed to such Member on or before such time (net of any
liabilities assumed by the Member in conjunction with such distribution or to
which the distributed property is subject). Upon a distribution of property
other than cash to any Member, the value of such property shall be restated on
the books of the Company at its fair market value immediately prior to such
distribution and the Capital Account of each Member shall be restated to reflect
such adjustment, determined as if the Company had sold such asset for its fair
market value and the resulting gain or loss had been charged or credited to the
Members' Capital Accounts as provided in this Operating Agreement. Following
such adjustment to the Members' books, the Capital Accounts of the Members
receiving the distributions shall be adjusted to reflect the amount of the
distribution.
9.4 WITHDRAWAL OF CAPITAL. Except as otherwise provided herein, no Member
---------------------
shall be entitled to withdraw all or any portion of its Capital Contribution or
receive interest on its contributed capital or Capital Account.
9.5 CAPITAL ACCOUNT, ALLOCATIONS, AND DISTRIBUTIONS ATTRIBUTABLE TO
---------------------------------------------------------------
TRANSFERRED INTEREST. At the close of business on any day that any interest in
- --------------------
the Company has been transferred or purchased, the transferee Member shall
succeed to the Capital Account of the transferor Member, and the Company's books
shall be closed so that Net Profits, Net Losses, credits and distributions can
be attributed to the Members based on their interests in the Company when items
were actually received, paid or incurred.
9.6 COMPLIANCE WITH SECTION 704(B) OF THE CODE. The provisions of this
------------------------------------------
Article as they relate to the maintenance of Capital Accounts are intended, and
shall be construed, and, if necessary, modified, to cause the allocations of
profits, losses, income, gain and credit pursuant to Article X to have
substantial economic effect under the Regulations promulgated under Section
704(b) of the Code, in light of the distributions made pursuant to this
Operating Agreement. Notwithstanding anything herein to the contrary, this
Operating Agreement shall not be construed as creating a deficit restoration
obligation or, except as otherwise specifically agreed herein, otherwise
personally obligating any Member to make a Capital Contribution in excess of the
Initial Capital Contribution.
ARTICLE X
ALLOCATIONS AND DISTRIBUTIONS
10.1 ALLOCATIONS OF NET PROFITS AND NET LOSSES. As of the end of each
-----------------------------------------
Fiscal Year (or any other, shorter period selected by the Executive Committee),
the Net Profits or Net Losses of the Company shall be determined by the
Treasurer as provided in the definitions of "Net Profits and Net Losses" in
Article I. The Net Profits or Net Losses of the Company for any period shall be
allocated to the Members' Capital Accounts in the following priority:
25
<PAGE>
(a) Net Profits shall be allocated:
(i) First, as necessary to offset in reverse order any previously
unoffset items of Net Losses allocated pursuant to Section 10(b);
(ii) Next, 100% to CTI to the extent necessary for CTI to have
received allocations of Net Profits equal to the CTI Unpaid Preferred Return;
and
(iii) Finally, to the Members in proportion to their respective
Allocable Shares.
(b) Net Losses shall be allocated:
(i) First, 100% to CTI to the extent of the CTI Ordinary Capital
Contributions, if any;
(ii) Next, 100% to CTI to the extent of the CTI Preferred Capital
Contributions, if any;
(iii) Next, 100% to CTI to the extent of the CTI Unpaid Preferred
Return, if any;
(iv) Next, 100% to COH to the extent of the COH Capital Contributions,
if any;
(v) Next, to the Members to the extent paid in proportion to
allocations of Net Profits to such Members pursuant to Section 10.1(a)(i) and
(iii); and
(vi) Next, to the Members in proportion to their respective Allocable
Shares.
10.2 ALLOCATIONS OF TAXABLE INCOME OR TAXABLE LOSS. Except as otherwise
---------------------------------------------
provided herein, for federal, state, and local income tax purposes, the taxable
income or taxable loss (and each item of income, gain, loss, deduction, or
credit) of the Company for any period shall be allocated among the Members in
the same manner as allocated pursuant to Section 10.1 and shall otherwise be
kept in accordance with applicable United States treasury regulations
promulgated under Section 704(b) of the Code.
10.3 TAX ALLOCATIONS: SECTION 704(C). If any Company asset has a book value
-------------------------------
different than its adjusted tax basis to the Company for federal income tax
purposes (whether by reason of the contribution of such property to the Company,
the revaluation of such property hereunder or otherwise), allocations of income,
gain, loss, deduction, credit and tax preference under this Article X with
respect to such asset shall take account of any variation between the adjusted
tax basis of such asset for federal income tax purposes and its book value in
the manner prescribed by Section 704(c) of the Code or the principles set forth
in
26
<PAGE>
Section 1.704-1(b)(2)(iv)(g) of the treasury regulations, as the case may be,
using the remedial allocation method.
10.4 DISTRIBUTIONS.
-------------
(a) Notwithstanding the provisions of clause (a), the Executive
Committee, upon the reasonable request of a Member, shall make an annual
distribution of cash to such Member pursuant to this clause (b) in an amount not
greater than the amount, if any, by which (A) the maximum combined United States
federal and state income tax payable by such Member (or by such Member's
ultimate limited and general partners if such Member is taxed as a partnership)
on account of the amount of all income Net Profits that have been allocated to
such Member for United States federal income tax purposes since the formation of
the Company, taking into consideration all losses Net Losses allocated to such
partner since the formation of the Company, exceeds (B) any amounts distributed
to such Member pursuant to this Section 10.4. To the extent any distribution is
made to CTI upon its request pursuant to the first sentence of this Section
10.4, a corresponding proportionate (based upon the amount of Net Profits and
Net Losses allocated to COH as compared to those allocated to CTI) distribution
shall be made to COH (utilizing the same tax assumptions utilized in arriving at
the sum to be distributed to CTI, regardless of COH's actual tax status).
Subject to the provisions of Article XIII, the Company will make distributions
of cash or cash equivalents or property to the Members in such aggregate amounts
and at such time or times as the Executive Committee may determine by Majority
Vote. Except as otherwise provided in Section 13.3, all distributions shall be
made to the Members in proportion to their respective Allocable Shares.
(b) For purposes of computing the CTI Unreturned Preferred Capital
Contributions, the CTI Unreturned Ordinary Capital Contributions and CTI Unpaid
Preferred Return, all distributions to CTI pursuant to this Operating Agreement
shall be deemed first, payment of any CTI Unpaid Preferred Return, then, a
return of CTI Preferred Capital Contributions, and next a return of the CTI
Ordinary Capital Contribution.
10.5 WITHHOLDING. The Company is authorized to withhold from distributions
-----------
to be made to a Member, or with respect to allocations to a Member, and to pay
over to a federal, state or local government, any amounts required to be
withheld pursuant to the Code or any provisions of any other federal, state or
local law. Any amounts so withheld shall be treated as distributed to such
Member pursuant to this Section 10.5 for all purposes of this Operating
Agreement and shall be offset against the net amounts otherwise distributable to
such Member. The Company may also withhold from distributions that would
otherwise be made to a Member, and apply to the obligations of such Member, any
amounts that such Member owes to the Company. In addition, any tax imposed upon
the Company resulting from the Company Interest of any Member shall be treated
as a distribution to such Member and shall reduce future distributions to such
Member.
27
<PAGE>
ARTICLE XI
TAXES
11.1 TAX RETURNS. For each Fiscal Year, the Executive Committee shall cause
-----------
federal, state and local tax returns for the Company to be prepared and filed
with the appropriate authorities in a timely manner. Within 90 days of the close
of the Fiscal Year, the Company shall cause to be delivered to each Person who
was a Member at any time during such Fiscal Year all information concerning the
Company necessary for the preparation of such Person's tax returns, including a
statement showing such Person's share of taxable gain or taxable loss (or items
thereof) for such year for federal, state and local tax purposes.
11.2 TAX MATTERS MEMBER. CTI is hereby appointed the "Tax Matters Member"
------------------ ------------------
of the Company for all purposes pursuant to Sections 6221 and 6231 of the Code.
The Tax Matters Member shall (i) furnish to each Member a copy of each notice or
other communication received from the Internal Revenue Service or applicable
state authority (except such notices or communications as are sent directly to
each such Member), (ii) keep each Member informed of any administrative or
judicial Proceeding, as required by Section 6223 of the Code, (iii) allow each
Member an opportunity to participate in all administrative and judicial
Proceedings involving the tax makers of the Company, and (iv) advise and consult
with each Member as to proposed adjustments to the federal or state income tax
returns of the Company. The Tax Matters Member shall not take any action that
will cause the Company to be taxed as a corporation under Regulation 301.7701
3(a) of the Code. The Company shall pay fees or other compensation to the Tax
Matters Member in its capacity as such, as set forth in such Member's Services
Agreement and the Company shall reimburse the Tax Matters Member for any and all
reasonable out-of-pocket costs and expenses (including reasonable attorney's and
other professional fees) incurred by it in its capacity as Tax Matters Member.
The Company shall indemnify, defend and hold the Tax Matters Member harmless
from and against any loss, liability, damage, cost or expense (including
reasonable attorneys' fees) sustained or incurred as a result of any act or
decision concerning Company tax matters and within the scope of such Member's
responsibility as Tax Matters Member, so long as such act or decision was not
done fraudulently or in bad faith or as a result of willful misconduct or gross
negligence or, with respect to any criminal Proceeding against the Tax Matters
Member, such Member had no reasonable cause to believe its conduct was unlawful.
The Tax Matters Member may resign upon thirty (30) days written notice to the
Company.
ARTICLE XII
DISPOSITION OF COMPANY INTERESTS; EXIT RIGHTS
12.1 RIGHT OF DISPOSITION. Each Member agrees not to Dispose of its Company
--------------------
Interest, in whole or in part, or to withdraw from the Company, except as
provided in this Article XII. In connection with any Disposition, each Member
party to such Disposition (including any Additional Member admitted as a Member
as a result of such Disposition)
28
<PAGE>
shall provide to the Company the information required to amend Exhibits B and C
only as to such Members.
12.2 DISPOSITIONS NOT IN COMPLIANCE WITH THIS ARTICLE VOID. Any attempted
-----------------------------------------------------
Disposition of a Company Interest, or any part thereof, not in compliance with
this Article XII is null and void ab initio.
-- ------
12.3 DISSOLUTION UPON BREACH.
-----------------------
(a) In the event that any Member shall be in material breach of this
Operating Agreement and shall fail to cure such material breach within a term of
sixty (60) calendar days from the date of notice to that effect given by another
Member, then the Member giving notice may elect to dissolve the Company in
accordance with Article XIII.
(b) It is expressly acknowledged by the Members that in the event that
any act of government, war conditions (declared or undeclared), fire,
explosions, flood, strikes, labor troubles or other industrial disturbances,
inevitable accidents, embargoes, blockades, legal restrictions, riots or
insurrections, or any other act or occurrence of whatever nature beyond the
reasonable control of any Member ("Force Majeure"), shall prevent or delay
-------------
compliance by such Member with the terms and conditions of this Operating
Agreement, then such failure or delay in compliance by such Member shall be
excused while, but not longer than, the Force Majeure conditions described
herein prevail.
12.4 THIRD PARTY DISPOSITION PROCEDURES.
----------------------------------
(a) After the fifth anniversary of the Effective Date, a Member (the
"Selling Member") may sell all or any part of its Company Interest to any third
- ---------------
party purchaser permitted to be a member of a limited liability company under
the Act for cash or other consideration, provided that (x) the Selling Member
allows the remaining Members to match the offer; and (y) such disposition is
subject to the Member Veto Right. No such third party purchaser may become an
Additional Member without execution of an Admission Agreement. To satisfy
clause (x) above, the Selling Member shall present a written offer to the
remaining Members, through the Executive Committee, stating the name of the
proposed purchaser, the proposed price and all other basic purchase terms. Each
of the remaining Members shall have the right for a period of sixty (60) days
from receipt of such written offer to elect to accept such written offer on the
same terms and conditions applicable to such proposed purchaser or to exercise
their Member Veto Right.
(b) In the event that more than one of the remaining Members accepts
such offer to purchase such Company Interest from the Selling Member, the
remaining Members who wish to purchase such Company Interest may do so at the
proposed price on a pro rata basis in accordance with their Allocable Shares and
the Members' Capital Accounts (and Allocable Shares) will be ratably adjusted.
The Member Veto Right and right of first refusal contained in this Section 12.4
shall expire upon (i) the closing of an initial public offering of
29
<PAGE>
securities of the Company, and (ii) upon the merger or consolidation of the
Company with or into any other Person other than a transaction in which the
Company Interests are not affected or the Members, as a result of the conversion
of their Company Interests in such transaction, own 100% of the equity interests
of the surviving or resulting entity.
12.5 WITHDRAWAL FROM COMPANY. Upon a transfer of a Member's entire Company
-----------------------
Interest and admission of a transferee as a new Member pursuant to an Admission
Agreement, such Member (the "Withdrawing Member") shall be deemed to have
------------------
withdrawn as a Member and shall have no further rights or obligations as a
Member hereunder (including, without limitation, obligations under Section 9.1),
except those obligations set forth under Section 15.8. Nothing in this Section
12.5 shall alter a Member's obligations set forth in Section 6.1 or shall affect
a Member's rights under Section 12.6.
12.6 INVOLUNTARY REGULATORY WITHDRAWAL. A Member may withdraw from the
---------------------------------
Company in the event a federal, state or foreign governmental body, including,
without limitation, a legislative, regulatory or judicial body, by order,
decree, statute, or judgment (i) determines that such Member's continued
ownership of its Company Interest is contrary to statute, regulation or other
law; or (ii) imposes any condition on such Member or an Affiliate of such Member
that has a material adverse impact on the Member or its Affiliate which arises
from such Member's continued participation in the Company as a Member, such
Member's or Affiliate's participation as a party to an agreement with the
Company, or otherwise in connection with the Company. The Withdrawing Member may
sell its Company Interest to a third party during the time period permitted by
the relevant regulatory authority subject to (x) the right of the remaining
members to match the offer pursuant to Section 12.4 hereof, and (y) the Member
Veto Right.
12.7 DISPOSITION RESTRICTIONS. No admission (or purported admission) of a
------------------------
Member, and no transfer (or purported transfer) of all or any part of a Member's
Company Interest (or any economic interest therein), whether to another Member
or to a person who is not a Member, shall be effective, and any such admission
or transfer (or purported admission or transfer) shall be void ab initio, and no
-- ------
Person shall otherwise become a Member if after such admission or transfer (or
purported admission or transfer) the Company would have more than one hundred
(100) Members. For purposes of determining whether the Company will have more
than 100 Members, each Person indirectly owning a Company Interest through a
partnership (including any entity treated as a partnership for federal income
tax purposes), a grantor trust or an S corporation (each such entity a "flow-
through entity") shall be treated as a Member unless the Executive Committee
unanimously determines, after consulting with qualified tax counsel, that less
than substantially all of the value of the beneficial owner's interest in the
follow-through entity is attributable to the flow-through entity's interest
(direct or indirect) in the Company.
30
<PAGE>
12.8 CONVERSION EVENTS
-----------------
(a) Conversion Event. A "Conversion Event" means and shall be deemed
---------------- ----------------
to occur when: (i) the Company realizes the First Commercial Sale, (ii) upon the
consummation of a Corporate Partnering Arrangement; or (iii) the Company merges
or consolidates with or into any other Person other than a transaction in which
the Company Interests are not affected or the Members, as a result of the
conversion of their Company Interests in such transaction, own 100% of the
equity interests of a surviving or resulting entity.
(b) CTI Buy-Out Right. During the sixty (60) day period immediately
-----------------
following a Conversion Event occurring after January 5, 2000 and during the
sixty (60) day period following January 5, 2000 if a Conversion Event shall have
occurred prior to such date (the "CTI Buy-Out Option Period"), CTI may or may
-------------------------
cause one of its Affiliates, by written notice (the "CTI Buy-Out Notice") to the
------------------
other Members, to purchase all, but not less than all, of such Members' Company
Interests at the Fair Market Value of such Company Interests pursuant to the
terms and provisions set forth in Section 12.8(e) (the "CTI Buy-Out Right").
-----------------
(c) COH Put Option. In the event that CTI does not exercise the CTI
--------------
Buy-Out Right during the CTI Buy-Out Option Period or a Conversion Event occurs
prior to January 5, 2000, COH shall have the right (the "COH Put Right"),
-------------
exercisable upon written notice (the "COH Put Notice") delivered to CTI within
--------------
thirty (30) days of the expiration of the CTI Buy-Out Period or at COH's option
within thirty days after the occurrence of such Conversion Event occurring prior
to January 5, 2000, to require CTI to purchase its Company Interest at the Fair
Market Value of such Company Interest pursuant to the terms and provisions set
forth in Section 12.8(e).
(d) Fair Market Value. For purposes of this Section 12.8, Fair Market
-----------------
Value shall be determined as at the date of the Conversion Event, or in the case
of a Conversion Event occurring prior to January 5, 2000 as to which COH did not
exercise its COH Put Right, as at January 5, 2000 (the "Determination Date") and
------------------
in accordance with the following:
(i) by CTI and COH through good faith negotiations; and
(ii) if, within the thirty (30) day period following the
Determination Date, CTI and COH have not reached agreement under subclause (i),
each of CTI and COH shall select an internationally-recognized investment
banking firm to determine Fair Market Value, and such firms shall jointly select
a third internationally-recognized investment banking firm without any
significant relation to any of the parties. CTI and COH shall bear 100% of the
fees and expenses of their chosen investment banking firm and 50% of the fees
and expenses of the third investment banking firm. Within forty-five (45) days
of the date of selection of the third investment bank, each investment banking
firm shall submit to each of COH and CTI its determination of the Fair Market
Value setting forth in reasonable detail the
31
<PAGE>
basis for such determination. The Fair Market Value shall be the average of the
three amounts so submitted.
(e) Payment. At the closing of the exercise of the CTI Buy-Out Right
-------
or COH Put Right specified in this Section 12.8, CTI shall pay an amount equal
to the Fair Market Value in shares of CTI Common Stock, whose value shall be the
Market Price on the tenth business day after receipt by COH of the CTI Buy-Out
Notice, or CTI of the COH Put Notice, respectively. In the event that the
Members receive CTI Common Stock pursuant to this Section 12.8(e), the Members
and CTI shall have the rights and obligations set forth in Schedule II. If
payment of Fair Market Value in CTI Common Stock would require CTI to obtain
shareholder approval under Delaware Law (without regard to CTI's Charter or by-
law provisions) or pursuant to the rules and regulations of any self-regulatory
organization or securities exchange, then CTI shall pay in shares of CTI Common
Stock that portion of Fair Market Value which would not require shareholder
approval and the remainder in cash.
(f) Expiration. The CTI Buy-Out Right and COH Put Right shall expire
----------
at the earlier of (i) the closing of an initial public offering of securities by
the Company, or (ii) at such time as CTI's Allocable Share becomes less than 33-
1/3%.
ARTICLE XIII
DISSOLUTION AND WINDING UP
13.1 DISSOLUTION. The Company shall be dissolved and its affairs wound up
-----------
upon the first to occur of the following events ("Dissolution Event"):
-----------------
(a) the expiration of the term described in Section 2.6 hereof;
(b) the unanimous written consent of all of the Members;
(c) an event which makes it unlawful for the Company business to be
continued;
(d) the sale or disposition of all or substantially all of the
Company's assets and properties;
(e) a material breach of this Operating Agreement in accordance with
Section 13.3;
(f) non-renewal of the License Agreement under Section 4.2(e) thereof;
(g) the entry of a decree of judicial dissolution under Section 18-802
of the Act; and
32
<PAGE>
(h) the withdrawal, Bankruptcy or dissolution of CTI or COH, including
the occurrence of any event that terminates the continued membership of CTI or
COH in the Company under the Act, unless the business of the Company is
continued by the unanimous vote of the remaining Members (calculated without
regard to any Member that has withdrawn, entered Bankruptcy or been dissolved)
within ninety (90) days following the occurrence of any such event.
13.2 EFFECT OF DISSOLUTION. Upon dissolution, the Company shall cease
---------------------
carrying on as distinguished from winding up the Company business; however, the
Company is not terminated, but continues until the winding up of the affairs of
the Company is completed and the certificate of cancellation has been issued by
the Secretary of the State of Delaware. The Liquidating Trustee shall in an
orderly manner wind up the affairs of the Company and make an accounting of the
Capital Account of each Member and of the Company assets, liabilities and
operations from the date of the last previous accounting to the date of such
dissolution.
13.3 DISTRIBUTION OF ASSETS ON DISSOLUTION. Upon the winding up of the
-------------------------------------
Company, the Company Property shall be distributed:
(a) to creditors, including Members who are creditors (other than by
reason of the operation and effect of Sections 18-601 or 18-604 of the Act) to
the extent otherwise permitted by law in satisfaction of the Company's
liabilities; and then
(b) to the establishment of any reserves which the Liquidating Trustee
may deem reasonably necessary for any contingent or unforeseen liabilities or
obligations of the Company arising out of or in connection with the Company,
which reserves may be paid over by the Liquidating Trustee to an agent, as
escrowee, to be held by him for the purpose of disbursing such reserves in
payment of any of the aforementioned contingencies, and, at the expiration of
such period as the Liquidating Trustee shall deem advisable, for distributing
the balance thereafter remaining in the manner hereinafter provided; and then
(c) to Members in satisfaction of liabilities for distributions under
Section 18-601 or Section 18-604 of the Act; and then
(d) thereafter, to Members to the extent of and in proportion with
their respective positive Capital Accounts; and then
(e) the remainder, if any, to the Members in proportion to their
respective Allocable Shares as in effect at the moment of the event giving rise
to such dissolution.
13.4 WINDING UP AND CERTIFICATE OF CANCELLATION. The winding up of the
------------------------------------------
Company shall be completed when all debts, liabilities, and obligations of the
Company have been paid and discharged or reasonably adequate provision therefor
has been made, and all of the remaining property and assets of the Company have
been distributed to the Members. Upon the completion of winding up of the
Company, a certificate of cancellation shall be
33
<PAGE>
delivered to the Secretary of the State of Delaware for filing. The certificate
of cancellation shall set forth the information required by the Act.
13.5 TERMINATION. A reasonable time shall be allowed for the orderly
-----------
liquidation of the assets of the Company and the discharge of liabilities to
creditors so as to enable the Executive Committee (or other Person winding up
the Company's affairs) to minimize the normal losses attendant upon a
liquidation. Each of the Members shall be furnished, by the Executive Committee,
with a statement setting forth the assets and liabilities of the Company as of
the date of complete liquidation. Upon compliance with the distribution plan set
forth in Section 13.3 hereof (including payment over to the agent-escrowee if
there are sufficient funds therefor), the Company terminates.
13.6 USE OF COMPANY IDENTITY. Unless the Members agree otherwise in a
-----------------------
signed written agreement approved by Unanimous Vote of the Executive Committee,
no Member or Affiliate shall use the Company's telephone number, name (or any
deceptively similar name), trademarks, service marks, trade names or logo.
ARTICLE XIV
AMENDMENT
This Operating Agreement may be amended or modified from time to time only
by a written instrument adopted by the Unanimous Vote of the Executive Committee
and by its execution of this Operating Agreement each Member agrees to be bound
by the terms of any amendment or modification determined by Unanimous Vote of
the Executive Committee. No Member shall have any vested rights in this
Operating Agreement which may not be modified through an amendment to this
Operating Agreement.
ARTICLE XV
MISCELLANEOUS PROVISIONS
15.1 ENTIRE AGREEMENT. This Operating Agreement represents the entire
----------------
agreement with respect to the subject matter hereof among all the Members and
between the Members and the Company.
15.2 SUCCESSORS AND ASSIGNS. Subject to the provisions on Disposition set
----------------------
forth herein, this Operating Agreement shall bind and inure to the benefit of
the parties hereto and their respective successors and permitted assigns.
34
<PAGE>
15.3 GOVERNING LAW; CONSENT TO ARBITRATION.
-------------------------------------
(a) Governing Law. THIS Operating Agreement SHALL BE GOVERNED BY AND
-------------
INTERPRETED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF DELAWARE.
(b) Dispute Resolution.
------------------
(i) Arbitration. Any controversy, claim or dispute among the
-----------
Members, directly or indirectly, concerning this Agreement or the breach hereof
or the subject matter hereof, but not including (i) questions concerning the
scope and applicability of this dispute resolution clause and (ii)
controversies, claims or disputes regarding Company Intellectual Property, shall
be submitted by the Members to arbitration by JAMS/Endispute, Inc. or its
successor ("JAMS") in San Francisco, California. Such arbitration shall be
----
undertaken by three neutral arbitrators (the "Arbitrators") one of whom shall be
-----------
selected by CTI, one by COH, and one of whom shall be chairperson of the
arbitral tribunal and shall be chosen by agreement between the first and second
Arbitrators. COH and CTI shall select such Arbitrators within fifteen (15) days
after the Member desiring arbitration notifies the other Members in writing.
Such notice demanding arbitration shall state specifically the question or
questions to be submitted for decision or the point or point in controversy and
shall include such Member's selection of an Arbitrator. If, at the expiration of
fifteen (15) days from receipt of such notice, the Members of COH or CTI, after
receiving such notice have not informed the Member demanding the arbitration of
its selection of a second arbitrator, the Member making the demand may make such
selection. The first and second Arbitrators shall select a third Arbitrator
within fifteen (15) days from the date of the appointment of the second
Arbitrator. If the first and second Arbitrators cannot agree as to a third
Arbitrator, such third Arbitrator may be appointed upon ten (10) days' notice
upon application of either COH or CTI to the chief or presiding judge, or judge
acting as chief of or presiding judge, of the Superior Court of California in
and for the county of San Francisco. The arbitral tribunal shall set the dates,
time and place for each hearing shall give to each of the Members at least
thirty (30) days' advance written notice of the date, time and place of the
initial hearing and shall proceed without delay to hear and determine the
matters in dispute. Such arbitration shall be conducted in such manner as the
Arbitrators shall determine, consistent with the JAMS Rules of Practice and
Procedure for Arbitration. To the extent herewith, the arbitration shall be
governed by the laws of the State of California. Each Member shall bear any
expenses incurred by it prior to arbitration, including legal and accounting
fees, if any, with respect to any disagreement hereunder. If the matter is
submitted to arbitration, the Arbitrators shall designate the Member or Members
to bear the expenses of such arbitration and/or the respective amounts to be
borne by each Member. In making such an allocation of costs, the Arbitrators
shall be expressly instructed by the Members that, absent extraordinary
circumstances, the prevailing Member or Members in such a proceeding, shall be
entitled to reimbursement for its or their reasonable attorneys' fees and other
reasonable expenses incurred in connection therewith by the nonprevailing
Members. The Arbitrators shall render their written decision in respect of the
controversy at issue within
35
<PAGE>
ninety (90) days after the date on which a notice demanding arbitration is first
given. The determination of the Arbitrators as to any matter submitted to
arbitration shall be conclusive and binding upon the Members hereto; provided,
however, that in no event shall the Arbitrators award indirect, consequential,
special or punitive damages or loss of profits. A written transcript of the
proceedings shall be prepared at the expense of the Member requesting such
transcript, if any, or, if all Members hereto shall so request, they shall share
the cost equally. The Arbitrators shall have the power to enforce the discovery
rights and obligations set forth in clause (3) below. The Members hereto agree
that they will cooperate in good faith in such proceedings in order to work
toward the prompt resolution of the subject conflict.
(ii) Consent to Jurisdiction. The Members agree that any action
-----------------------
arising out of enforcement of any arbitration decision shall be brought in the
San Francisco division of the United States District Court for the Northern
District of California. The Members consent to the venue and personal
jurisdiction of those courts in any action brought pursuant to the provisions
hereof. Each Member hereby waives any right it may have to transfer or change
the venue of any enforcement of any arbitration decision brought against it by
another Member in connection with this Agreement in accordance with this clause
(2) and each Member hereby waives any claim of forum non conveniens. In the
event that any Member hereto shall be required to take any action to enforce any
such judgment, such Member shall be entitled to reimbursement for its reasonable
attorneys' fees and other reasonable expenses in connection therewith by the
nonprevailing Member or Members.
(iii) Discovery. In connection with any arbitration proceeding
---------
under clause (i) above, each Member shall have full access to the relevant books
and records of the other employee, agent or officer of any other Member for
testimony and all other rights to discovery afforded under the Code of Civil
Procedure of the State of California (as well as the rules or laws applicable to
a court proceeding in the Superior Court of California in and for the county in
which such proceedings take place) all of which shall be fully enforceable by
the Arbitrators or, if they fail to effect such enforcement, by the California
Superior Court having jurisdiction over such matters; provided, however, that
any discovery by the Members to the arbitration shall be performed within a
discovery period to be defined and limited by the Arbitrators (which period
shall not exceed sixty (60) days).
15.4 NOTICES. All notices required or permitted to be given or made under
-------
this Operating Agreement shall be given or made in writing. Such notices shall
be delivered by hand delivery, by facsimile or similar electronic means, by
nationally recognized overnight courier, or by certified or registered mail,
return receipt requested, addressed as set forth in Exhibit F hereof or any
amendment thereto. Any party may change its address for the purpose of this
Section 15.4 by notice to the other(s) given in the manner set forth above.
15.5 RIGHTS OF CREDITORS AND THIRD PARTIES UNDER OPERATING AGREEMENT.
---------------------------------------------------------------
This Operating Agreement is entered into among the Company and the Members for
the exclusive benefit of the Company, its Members, and their successors and
permitted assignees. This
36
<PAGE>
Operating Agreement is expressly not intended for the benefit of any creditor of
the Company or any other Person (other than any Person with a right to
indemnification under Section 6.8 hereof). Except and only to the extent
provided by applicable statute, no such creditor or third party shall have any
rights under this Operating Agreement or any agreement between the Company and
any Member with respect to any Capital Contribution or otherwise.
15.6 NO ACTION FOR PARTITION. No Member shall have any right to maintain
-----------------------
any action for partition with respect to the property of the Company.
15.7 TITLE TO COMPANY PROPERTY. Title to Company Property shall be held in
-------------------------
the name of the Company or its nominee.
15.8 CONFIDENTIALITY. Except as otherwise provided in the Ancillary
---------------
Agreements, or hereinafter provided, the Company and each Member (a) shall treat
as confidential and not disclose to any unauthorized third party (including a
Member's employees or Affiliates have no need to know) any confidential
information, technical data, or know-how, including, but not limited to, that
which relates to research, product plans, products, services, customers,
markets, software, developments, inventions, processes, designs, drawings,
engineering, hardware configuration information, marketing or finances, or other
business or technical information obtained either directly or indirectly from
any other Member pursuant to this Operating Agreement and designated by such
Member as confidential in writing prior to or at the time of delivery pursuant
to this Agreement, or confidential information developed or acquired on behalf
of the Company by the Executive Committee or the Company's Officers or employees
(collectively "Confidential Information"), and (b) shall not use any such
------------------------
Confidential Information for any purpose other than in connection with the
activities of the Company pursuant to this Operating Agreement. The limitations
in this Section 15.8 shall not apply to the extent Confidential Information: (i)
was already in the possession of the receiving Member, or its Affiliate, at the
time it obtained such Confidential Information; (ii) was or is published or
otherwise is or becomes generally available to the public through no fault of
such receiving Member, or its Affiliate, (iii) was or is lawfully made available
to such Member or its Affiliate without restriction by any Person which is not
bound by an obligation of confidentiality or use with respect to the
information; (iv) was or is independently developed by such Member or its
Affiliate; or (v) is required to be disclosed by operation of law or regulation,
required in any Proceeding, requested by a regulatory body and the disclosing
Member deems it advisable, in its discretion, to comply with the request, or
deemed advisable to be disclosed in the good faith judgment of the disclosing
Member in any Proceeding. In the event disclosure is required or requested, the
disclosing Member shall exercise all reasonable efforts to disclose such
Confidential Information pursuant to a confidentiality agreement or protective
order. Nothing in this Section 15.8 shall be construed to prohibit a Member's
disclosure of Confidential Information to its attorneys, auditors, or other
consultants. The obligations set forth in this Section 15.8 shall survive the
termination of this Operating Agreement.
37
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Operating Agreement
to be executed and delivered as of the date first above written.
CELL THERAPEUTICS, INC.
By: ________________________
Title: _____________________
CITY OF HOPE NATIONAL MEDICAL CENTER
By: ________________________
Title: _____________________
38
<PAGE>
EXHIBIT A
CELL CITY, LLC
ADMISSION AGREEMENT
[RESERVED]
A-1
<PAGE>
EXHIBIT B
ALLOCABLE SHARES
NAME: Share (%)
---- ---------
CTI 70
COH 30
B-1
<PAGE>
EXHIBIT C-1
CAPITAL CONTRIBUTIONS - INITIAL CAPITAL CONTRIBUTIONS
(The information below marked ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)
NAME: Amount ($)
---- ----------
CTI $*****
COH $***** (License)
C-1
<PAGE>
EXHIBIT C-2
CAPITAL CONTRIBUTIONS - CTI DEFERRED CAPITAL CONTRIBUTIONS
(The information below marked ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)
CTI Deferred Capital Contributions shall consist of $****** to be used for
research activities to be conducted pursuant to the initial development plan and
budget attached hereto as Schedule I and the Services Agreements. Unless
otherwise determined by a Majority Vote of the Executive Committee, the Initial
Capital Contributions made by CTI with respect to the activities set forth in
this Initial Development Plan and Budget shall be payable as follows: $***** at
Effective Date and $***** at the end of each full calendar quarter after the
Effective Date until the aggregate of such payments equals $*****.
C-2
<PAGE>
EXHIBIT D
LICENSE AGREEMENT
See Attached License Agreement
D-1
<PAGE>
EXHIBIT E
CERTIFICATE OF FORMATION
CERTIFICATE OF FORMATION
OF
CELL CITY, LLC
This Certificate of Formation is being executed as of December 17,
1997, for the purpose of forming a limited liability company pursuant to the
Delaware Limited Liability Act, 6 Del. C. Sections 18-101, et seq. (the "Act").
--- - -- --- ---
The undersigned, being duly authorized to execute and file this
Certificate, do hereby certify as follows:
1. Name. The name of the limited liability company is Cell City,
----
LLC (the "Company").
-------
2. Registered Office and Registered Agent. The Company's registered
--------------------------------------
office in the State of Delaware is located at Corporation Trust Center, 1209
Orange Street, Wilmington, Delaware, New Castle County, Delaware 19801. The
registered agent of the Company for service of process at such address is The
Corporation Trust Company, Inc.
3. Dissolution. The Company does not have a specific date of
-----------
dissolution.
4. Management. The business and affairs of the Company shall be
----------
managed by or under the direction of the Members.
IN WITNESS WHEREOF, the undersigned, being all the Members of the
Company, have duly executed the Certificate of Formation as of the day and year
first above written.
CELL THERAPEUTICS, INC.
By: __________________
Title: _______________
CITY OF HOPE NATIONAL MEDICAL CENTER
By: __________________
Title: _______________
E-1
<PAGE>
EXHIBIT F
ADDRESS FOR NOTICES
City of Hope National Medical Center
1500 East Duarte Road
Duarte, California 91010
Attention: Charles Balch, Chief Executive Officer
Glenn Krinsky, General Counsel
Cell Therapeutics, Inc.
201 Elliott Avenue West, Suite 400
Seattle, Washington 98119
Attention: James A. Bianco, M.D.
President and Chief Executive Officer
F-1
<PAGE>
EXHIBIT 99.2
Portions of this Exhibit have been
omitted pursuant to a request for
confidential treatment. The omitted
portions are marked ***** and have been
filed separately with the Commission.
EXECUTION COPY
--------------
EXCLUSIVE LICENSE AGREEMENT
CITY OF HOPE, as Licensor
and
CELL CITY, LLC, as Licensee
(The information below marked ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)
<PAGE>
EXCLUSIVE LICENSE AGREEMENT
THIS LICENSE AGREEMENT (this "Agreement") is made and effective as of the 5th
---------
day of January, 1998 (the "Effective Date"), by and between City of Hope
--------------
National Medical Center, 1500 East Duarte Road, Duarte, California 91010, a
California nonprofit corporation ("Licensor"), and Cell City, LLC, a Delaware
--------
limited liability company ("Licensee").
--------
A. CTI has entered into a Limited Liability Company Agreement (the "Operating
---------
Agreement") of even date herewith providing for the implementation of this
- ---------
License Agreement (capitalized terms not otherwise defined herein shall have the
meaning set forth in the Operating Agreement);
B. Licensor has developed, owns the entire right, title, and interest in,
subject to the rights reserved by the United States Government, certain
technology related to the 12-lipoxygenase pathway more fully described and
claimed in Patent Application Serial No. PCT/US96/06328 filed May 5, 1996; and
C. Licensee desires to acquire from Licensor, and Licensor desires to grant to
Licensee, certain rights to such technology subject to the terms and conditions
set forth in this Agreement.
NOW THEREFORE, in consideration of the covenants and premises contained herein,
the sufficiency of which is acknowledged, the parties agree as follows:
1. DEFINITIONS
-----------
1.1 "Affiliated Companies" The term "Affiliated Companies" shall mean any
-------------------- --------------------
subsidiary, parent, closely held corporation, or any other legal entity in which
the Licensee owns or controls, directly or indirectly, equal to or greater than
twenty-five percent (25%) of such Affiliated Company's voting stock or where
such Affiliated Company owns or controls, directly or indirectly, equal to or
greater than twenty-five percent (25%) of Licensee's voting stock; or any
company under common control with Licensee, where at least 25% of the voting
stock is owned, directly or indirectly, or controlled by an entity which owns,
directly or indirectly, or controls at least 25% of the voting stock of
Licensee.
1.2 "Licensed Products" The term "Licensed Products" shall mean, collectively,
----------------- -----------------
all products, devices, apparatuses, kits or component parts of any of the
foregoing, and/or any method, procedure, or process, the manufacture, promotion,
sale, marketing, distribution or use of which by Licensee, but for the rights
granted in Section 2.1, would infringe a valid unexpired patent claim under the
Patent Rights (as defined below).
<PAGE>
1.3 "Net Sales" means the amount invoiced by Licensee, its Affiliates or its
---------
sublicensees from sales to third parties in arms length transactions of Licensed
Products, less reasonable and customary deductions applicable to the Licensed
Products for (i) transportation charges and charges such as insurance, relating
thereto paid by the selling party; (ii) sales and excise taxes or customs duties
paid by the selling party and any other governmental charges imposed upon the
sales of Licensed Products and paid by the selling party; (iii) distributors'
fees, rebates or allowances actually granted, allowed or incurred; (iv) quantity
discounts, cash discounts or chargebacks actually granted, allowed or incurred
in the ordinary course of business in connection with the sale of the Licensed
Product; (v) allowances or credits to customers, not in excess of the selling
price of the Licensed Product, on account of governmental requirements,
rejection, outdating, recalls or return of the Licensed Product; and (vi) a
reserve for bad debts determined in accordance with US GAAP. Sales of Licensed
Products between Licensee and its Affiliates or sublicensees solely for research
or clinical testing purposes shall be excluded from the computation of Net
Sales. As used above and below, "third parties" means a third party that is
not Licensee, any Affiliated Companies, Licensee's sublicensees or any of their
affiliates (collectively "Related Parties"). Sales of Licensed Products between
Related Parties shall be excluded from Net Sales, which shall be based upon the
first sale or other disposal of a Licensed Product to a person that is not a
Related Party. In the event a non-arms length sale is made between a Related
Party and a person that is not a Related Party, Net Sales shall be based upon
the average gross selling price earned by Licensee (or its sublicensees) in the
then most recent full calendar quarter from sales of Licensed Products to
unaffiliated third parties in arms length transactions. In the event that a
Licensed Product is sold in combination as a single Licensed Product by the
Company with one or more other Licensed Products of the Company or components
for which no royalty would be due hereunder if sold separately, Net Sales shall
be computed by multiplying the Net Sales for the combination of such Licensed
Product by the fraction A/(A+B), where A equals the bona fide list price for
such Licensed Product if sold separately and B equals the bona fide list price,
or sum of list prices, of the other such Licensed Product(s) or component(s) if
sold separately. If there are no separate list prices, in the event of such
combination sales, Net Sales shall be determined by any reasonable method.
1.4 "Patent Rights" The term "Patent Rights" shall mean, collectively, all
------------- -------------
right, title and interest of Licensor in, to and under (i) Patent Application
Serial No. PCT/US96/06328 titled Human Leukocyte 12-Lipoxygenase and Its Role
in the Pathogenesis of Disease States" filed on May 5, 1996, (ii) any and all
continuations, continuations-in-part (solely to the extent the claims thereof
are supported by the disclosure of the patent described in subparagraph (i)
above), reissues, reexaminations, substitutions, divisions and/or patent term
extension applications and any equivalent thereof, or (iii) any and all foreign
counterpart(s) of (i) and (ii) of this Section 1.4.
1.5 "Patent Application" The term "Patent Application" shall mean patent
------------------ ------------------
application, continuation, continuation-in-part, reissue, renewal, substitution,
reexamination, division or patent term extension application or any equivalent
of the foregoing.
2
<PAGE>
2. LICENSE OF PATENT RIGHTS
------------------------
2.1 Patent Right Licensor hereby grants to Licensee, and Licensee hereby
------------
accepts from Licensor, to the extent that they each lawfully may do so, the
exclusive right and license under the Patent Rights to manufacture, cause to be
manufactured, promote, import, sell, market, distribute and use Licensed
Products to block, inhibit, enhance or otherwise affect the 12-lipoxygenase
enzyme for the prevention and treatment of diseases or ailments in humans or
animals for which the regulation of 12-lipoxygenase may provide therapeutic
benefit, including the use of ribozymes (including chimeric ribozymes) for any
therapeutic or diagnostic purpose (hereinafter, the "Field"), in the United
-----
States, Canada, Australia, the United Kingdom, France and Germany and all other
countries where Licensor now, or hereinafter, may have valid and enforceable
Patent Rights (hereinafter, the "Designated Countries").
--------------------
2.2 Exclusivity:
-----------
(a) Nothing in this Agreement shall prohibit Licensor from using Licensed
Products solely in connection with its internal, non-commercial
research, teaching, and clinical programs. Licensor shall retain all
right, title and interest in and to the Patent Rights except for the
rights explicitly granted to Licensee above in Section 2.1. Without
limiting the foregoing, Licensor shall retain the exclusive right
during the term of this Agreement: (i) to make, use, sell, offer for
sale, import and otherwise exploit any products (including but not
limited to Licensed Products) or processes covered by the Patent
Rights outside of the Field; and (ii) to license any and or all of the
foregoing rights set forth in subparagraph (i). After the term of
this Agreement but subject to the provisions of Section 4.3, Licensor
shall retain all of its exclusive rights with respect to Patent
Rights.
(b) Subject to Licensor's rights under Section 4.2, the rights granted by
Licensor to Licensee under Section 2.1 shall become non-exclusive at
the option of Licensor, if Licensee fails to perform in any material
respect any material term, condition or obligation to be performed
under this Agreement and Licensee does not cure such failure within
ninety (90) days of written notice to Licensee by Licensor of such
failure or mistake.
2.3 Sublicenses
-----------
(a) Licensee shall have the right to sublicense to any person any of the
rights granted by Licensor to Licensee under Section 2.1; provided,
however, except as is otherwise provided in Section 7.10 that (i)
Licensee shall deliver to Licensor the name, address and such other
information within its control reasonably requested by Licensor
regarding each proposed sublicensee, including, but not limited to,
information concerning its financial condition and
3
<PAGE>
production and marketing capabilities, together with the proposed
terms of the final agreements relating to the sublicense; (ii)
Licensor shall have the right to approve such sublicense (excluding a
sublicense granted to a counterparty in a Corporate Partnering
Arrangement) which approval shall not be unreasonably withheld; (iii)
the agreements relating to such sublicense shall require the
sublicensee to comply with all the terms and conditions of this
Agreement applicable to Licensee, except for Sections 3.1, 7.1(b) and
7.2(b); (iv) Licensee shall remain responsible for the performance of
its sublicensee(s) under this Agreement and shall pay to Licensor any
amounts or perform or cause to be performed any actions required to be
paid or performed under such agreements by such sublicensee if the
same are not paid or performed promptly when due hereunder; and (v)
Licensee's right to sublicense hereunder shall be exclusive to it for
the duration of Licensee's exclusive license except as otherwise
provided herein. Upon termination of this Agreement for any reason,
any and all sublicenses that are granted by Licensee pursuant to this
Section 2.3 will remain in effect in accordance with their respective
terms and shall be assigned to Licensor, except that Licensor shall
not be bound by any duties or obligations set forth in such
sublicenses that extend beyond the duties and obligations of Licensor
provided for in this Agreement. Licensee may not sublicense any rights
hereunder to CTI or any of its Affiliated Companies except in
connection with, or after, a conversion of Licensor's membership
interest under Article XII of the Operating Agreement, or after
withdrawal of Licensor as a Member under the Operating Agreement
(other than a withdrawal pursuant to Section 12.5 of the Operating
Agreement (unless all Members, after giving effect to such withdrawal,
consent to such assignment)).
(b) If Licensor exercises its right under Sections 2.2(b) or Section 4
herein, all rights of Licensee under this Section 2.3 shall terminate.
Any sublicense, including all duties owed to Licensee thereunder,
executed by Licensee shall be assigned to Licensor; provided, however,
that Licensor shall not assume any rights, benefits, obligations or
liabilities owed to Licensee by sublicensee or by Licensee to
sublicensee on or before the date of assignment.
(The information below marked ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)
2.4 Efforts
-------
Licensee shall use its commercially reasonable efforts to develop,
manufacture, promote, sell, market, distribute or use the Licensed
Products. Licensee will provide a proposed development plan to Licensor
and commence funding for designing ribozyme for cutting mRNA of hu 12-LO
within ***** of the Effective Date (the "Ribo Commitment"). If
---------------
Licensee has not satisfied the Ribo Commitment by such time, then the grant
of ribozymes under Section 2.1 shall be rescinded.
4
<PAGE>
2.5 Progress Reports
----------------
(The information below marked ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)
(a) On each January 1 and July 1 during the period commencing on the
Effective Date and ending with sales of Licensed Products of
$***** Licensee shall deliver to Licensor a written statement by
the President or the Chief Financial Officer of Licensee, setting
forth all reasonably significant actions taken or proposed to be taken
and progress by Licensee in connection with the research, development,
regulatory approval, manufacturing, testing, promotion, sale or
distribution of the Licensed Products in the preceding six (6) months
and subsequent six (6) month periods.
(b) Licensee shall report to Licensor in writing the date of first sale of
Licensed Products in each Designated Country under this Agreement
within thirty (30) days of the sale.
2.6 Rights of the United States Government Licensee hereby acknowledges that
--------------------------------------
the research which resulted in Patent Application Serial No. PCT/US96/06328 was
funded, in part, by the Government of the United States of America and,
accordingly, the rights granted by Licensor to Licensee under Section 2.1 are
subject to certain statutes and the rights, claims and limitations granted
therein to the Government of the United States of America. This Agreement shall
be subject to modification to the extent necessary to conform to such statutes
and regulations as amended.
2.7 Licensor's Purchase Price From time to time during the term of the rights
-------------------------
granted by Licensor to Licensee hereunder, the Licensee shall sell to the
Licensor such number of units of the Licensed Products as the Licensor may
request solely for the Licensor's own internal, non-commercial use, including,
but not limited to, use in connection with its internal, non-commercial
research, teaching and clinical programs. Prior to the First Commercial Sale,
the purchase price for any Licensed Products purchased by the Licensor from the
Licensee hereunder shall not exceed the direct costs of the Licensee for such
Licensed Products.
2.8 Grant Back Licensee hereby grants to Licensor a nonexclusive, non-
----------
transferable, non-sublicensable paid-up license and right to use any
improvements to Patent Rights invented, discovered, or made by Licensee during
the term of this Agreement to use solely for Licensor's own internal, non-
commercial research purposes. Licensee further grants to Licensor a
nonexclusive, non-transferable, non-sublicensable license and right to use all
information, data and reports developed by Licensee solely for Licensor's own
internal research purposes, subject to Licensor's confidentiality obligations
set forth in Section 7.19 below.
3. ROYALTIES
---------
(The information below marked ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)
3.1 Amount In consideration of the rights granted by Licensor to Licensee
------
under Section 2.1, Licensee shall pay, as per Section 3.5, to Licensor within
thirty (30) days of the
5
<PAGE>
Effective Date hereof a one-time license issue fee in the amount of ***** (U.S.
$*****) Such amount shall be non-refundable, is fully earned by Licensor and
is separate from and is not an advance or credit against any other amount
payable by Licensee to Licensor under this Agreement.
(The information below marked ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)
3.2 Royalty Payments and Reports. During the term hereof, Licensee shall pay
----------------------------
to Licensor royalties equal to *****% of Net Sales (less any royalty paid under
Section 3.3 for the immediately preceding period). Licensee shall make such
royalty payments to Licensor within sixty (60) days after the end of each
calendar quarter in which Net Sales occurred. A report summarizing the Net
Sales of Licensed Products during the relevant quarter on a country-by-country
basis shall be delivered to Licensor within sixty (60) days following the end of
each calendar quarter for which royalties are due.
(The information below marked ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)
3.3 After Second Anniversary of Effective Date Commencing December 31, 1999,
------------------------------------------
and on or before December 31 of each subsequent year, Licensee shall pay no
later than December 31 of each such year, Licensor an optional minimum royalty
as follows: (i) December 31, 1999, $***** (ii) December 31, 2000, $***** (iii)
December 31, 2001, $***** (iv) December 31, 2002, $***** (v) December 31, 2003,
$***** and (vi) each December 31 thereafter until expiration of the Patent
Rights, $***** If Licensee fails to make such payment in a given year, this
Agreement shall terminate on the January 31 following such December 31 unless
such payment is made within such period together with interest of *****% on the
amount paid.
3.4 Payments. Any payments due under this Agreement shall be made in United
--------
States dollars by check and sent to the address of the receiving party set forth
in Section 7.9 or by wire transfer to a designated bank account of the receiving
party. If any currency conversion shall be required in connection with the
calculation of royalties hereunder, such conversion shall be made in the manner
utilized by the Company's relevant sublicensee, or, if none, by using the
selling exchange rate for conversion of the foreign currency into U.S. Dollars,
quoted for current transactions reported in The Wall Street Journal for the last
business day of the calendar quarter to which such payment pertains.
3.5 Late Fee In the event any fee by Licensee to Licensor pursuant to this
--------
Section 3 shall not be paid promptly when due the unpaid balance thereof shall
bear interest at the lesser of (i) ten percent (10%) per annum or (ii) the
maximum rate permitted by law and shall be paid to Licensor upon demand thereby.
3.6 Audit Licensee and its Affiliated Companies and sublicensees shall keep
-----
complete, true, and accurate books of account and records for the purpose of
determining the royalty amounts payable under this Agreement. Such books and
records shall be kept at the principal place of business of Licensee or its
Affiliated Companies or sublicensees, as the case may be, for at least three (3)
years following the end of the calendar quarter to which they pertain. Such
records shall be open for inspection during such three (3) year period by an
independent certified accountant on behalf of Licensor for the purpose of
verifying the royalty statements
6
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provided pursuant to Section 3.6. Such inspections may be made no more than once
each calendar year, at reasonable times mutually agreed. The accountant shall be
obliged to execute a reasonable confidentiality agreement acceptable to Licensee
prior to commencing any such inspection. Inspections conducted under this
Section 3.6 shall be at the expense of Licensor, unless a variation or error
producing an increase exceeding ten percent (10%) of the amount stated for the
period covered by the inspection is established in the course of any such
inspection, whereupon all costs relating to the inspection and any unpaid
amounts shall be paid by Licensee. The accountant shall report to Licensor only
if there has been an underpayment and, if so, the amount thereof.
4. TERM AND TERMINATION
--------------------
4.1 Term Unless otherwise terminated in accordance with Section 4.2, the term
----
of the rights granted by Licensor to Licensee under Section 2.1 shall commence
on the Effective Date hereof and shall terminate on the expiration date of the
last to expire patent under the Patent Rights, or, if no patent under the Patent
Rights issues, fifteen (15) years after the Effective Date.
4.2 Termination The rights granted by Licensor to Licensee under Sections 2.1
-----------
and 2.3 shall terminate prior to the expiration of the term set forth in Section
4.1 above upon the happening of any of the following events:
(a) At the option of either party if the other party shall fail to perform
in any material respect any material term, condition or obligation to
be performed by it under this Agreement and such failure is not cured
within sixty (60) days after written notice of such failure is given
by the terminating party to the defaulting party; or
(b) At the option of either party, if any material representation,
warranty, certification or statement made by the other party in this
Agreement or in any certificate or other document delivered by the
other party pursuant hereto shall have been incorrect in any material
respect when made; or
(c) Immediately and without any notice or other act by Licensor, if
Licensee shall commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to itself or
its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any
substantial part of its property, or shall consent to any such relief
or to the appointment of or taking possession by any such official in
an involuntary case or other proceeding commenced against it, or shall
make a general assignment for the benefit of creditors, or shall fail
generally to pay its debts as they become due, or shall take any
corporate action to authorize any of the foregoing; or
7
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(d) Immediately and without any notice or other act by Licensor, if an
involuntary case or other proceeding shall be commenced against
Licensee seeking liquidation, reorganization or other relief with
respect to it or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of
it or any substantial part of its property, and such involuntary case
remains unstayed and in effect for more than one-hundred twenty (120)
days;
(e) On the second anniversary of the Effective Date unless on or before
such date, and each successive anniversary of such second anniversary,
(i) Licensee has made the optional royalty payments specified in
Section 3.3 hereof, and (ii) Licensee uses diligent efforts to
develop, manufacture, promote, sell, market, distribute or use the
Licensed Products pursuant to the licensed Patent Rights, in which
case this Agreement shall be extended to the next anniversary date.
(f) Upon dissolution of Licensee pursuant to Section 13.1(c) of the
Operating Agreement.
4.3 Duties Upon Termination Upon the termination of the rights granted by
-----------------------
Licensor to Licensee under Sections 2.1 or 2.3, neither Licensor nor Licensee
shall have any remaining rights, duties or obligations hereunder, except that
(i) Licensee shall immediately cease to make, sell, market or distribute
Licensed Products or grant others the right to do so, except that Licensee and
its sublicensees shall have the right to (a) fill firm orders for Licensed
Products received prior to termination provided such inventories were not
stockpiled intentionally with a view toward such termination and (b) deplete
their existing inventories of Licensed Products for six (6) months after
termination provided such inventories were not stockpiled intentionally with a
view toward such termination; (ii) Licensee shall continue to pay promptly all
amounts due or accrued hereunder prior to the date of termination; (iii)
Licensor shall have the right, but not the obligation, to purchase from Licensee
the Licensed Products held by Licensee or on behalf of Licensee by any third
party, in whole or in part, at Licensee's actual cost by delivery to Licensee of
a written notice of intent to purchase the same within fifteen (15) days after
such termination; and (iv) any cause of action, claim or liability of Licensor
or Licensee accrued or to accrue due to any breach, omission, obligation or
other duty owed to the other party shall survive termination hereunder.
5. REPRESENTATIONS AND WARRANTIES
------------------------------
Licensor and Licensee each hereby represent and warrant to the other party that:
(i) it is a corporation duly organized, validly existing and in good standing
under the laws of its state of incorporation; (ii) it has the right and
authority to execute and deliver this Agreement and to consummate the
transactions hereunder; (iii) this Agreement is a legal, valid and binding
agreement of the party and enforceable against it; (iv) the execution and
delivery of this Agreement or the consummation of any transaction hereunder will
not breach any governing
8
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instrument or agreement of the party or any statute, regulation or any other
restriction upon the party; and (v) it has secured all requisite authorizations
and approvals necessary to the execution, delivery and performance of this
Agreement.
6. LIMITATIONS ON WARRANTIES AND REMEDIES
--------------------------------------
6.1 LIMITATIONS ON WARRANTIES EXCEPT AS EXPRESSLY SET FORTH IN SECTION 5,
-------------------------
LICENSOR MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESSED OR IMPLIED,
REGARDING THE LICENSED PRODUCTS, INCLUDING, BUT NOT LIMITED TO, (i) THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, OR (ii) ANY
REPRESENTATION OR WARRANTY WITH RESPECT TO THE VALIDITY OR SCOPE OF THE PATENT
RIGHTS, OR (iii) ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE OWNERSHIP OF
THE PATENT RIGHTS, THE LICENSED PRODUCTS OR THE INFRINGEMENT BY THE SAME OF ANY
PATENT, COPYRIGHT OR OTHER PROPRIETARY RIGHT OF ANY THIRD PARTY, OR (iv) ANY
REPRESENTATION OR WARRANTY WITH RESPECT TO THE ABSENCE OF ANY DEFECT IN THE
LICENSED PRODUCTS. LICENSEE REPRESENTS TO LICENSOR THAT IT HAS HAD THE
OPPORTUNITY TO REVIEW OR HAS REVIEWED THE PATENT RIGHTS, AND THE LICENSED
PRODUCTS TO VERIFY (i) THE SUITABILITY OF THE LICENSED PRODUCTS FOR LICENSEE'S
INTENDED PURPOSE AND (ii) LICENSOR'S OWNERSHIP OF THE PATENT RIGHTS. LICENSEE
SHALL NOT MAKE ANY STATEMENT, REPRESENTATION OR WARRANTY WHATSOEVER TO THIRD
PARTIES CONTRARY TO THE LIMITATIONS ON WARRANTIES AND REPRESENTATIONS HEREIN BY
LICENSOR.
6.2 LIMITATIONS ON REMEDIES IN NO EVENT SHALL LICENSOR BE LIABLE TO LICENSEE
-----------------------
FOR ANY DAMAGES, INCLUDING, BUT NOT LIMITED TO, ANY LOST PROFITS, LOST SAVINGS
OR OTHER INCIDENTAL OR CONSEQUENTIAL DAMAGES, ARISING OUT OF OR IN CONNECTION
WITH LICENSEE'S MANUFACTURE, SALE, DISTRIBUTION WITH THE MANUFACTURE, SALE,
MARKETING, DISTRIBUTION OR USE OF THE LICENSED PRODUCTS OR LICENSEE'S USE OF THE
PATENT RIGHTS IN CONNECTION OR USE OF THE LICENSED PRODUCTS, EVEN IF LICENSOR
HAS BEEN ADVISED OR THE POSSIBILITY OF SUCH DAMAGES. IN NO EVENT SHALL
LICENSOR'S LIABILITY TO LICENSEE UNDER THIS AGREEMENT EXCEED THE AMOUNT ACTUALLY
RECEIVED BY LICENSOR FROM LICENSEE UNDER SECTION 3.1. LICENSEE SHALL NOT MAKE
ANY STATEMENT WHATSOEVER TO THIRD PARTIES CONTRARY TO THE LIMITATIONS ON
REMEDIES HEREIN BY LICENSOR.
9
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7. MISCELLANEOUS
-------------
7.1 Patent Prosecution
------------------
(a) Licensor shall file, prosecute and maintain all United States of
America and foreign Patent Applications identified in Section 1.5 and
resulting patents by counsel of its choice, reasonably acceptable to
Licensee. Licensor shall promptly provide Licensee with copies of
relevant documentation so that Licensee may be informed of the
continuing prosecution. Licensee will have the right to review and
comment upon such documentation and correspondence, as well as all
specifications, claims and responses to office actions prior to their
submission to the relevant government patent office.
(b) Licensee shall reimburse Licensor within thirty (30) days of notice
for one-half of Licensor's reasonable and documented direct expenses,
including attorney's fees, incurred after the Effective Date in
connection with the preparation, filing, prosecution or maintenance of
any such patent or Patent Application described in Section 1.4 and
maintenance of such patent applications and patents. In the event
Licensor, pursuant to Section 2.2(b), converts the rights granted by
Licensor to Licensee under Section 2.1 from exclusive to non-exclusive
and, thereafter, grants additional licenses under the Patent Rights to
third parties, such prosecution and maintenance-related expenses going
forward will be shared equally between Licensee and all such third
party licensees.
(c) Licensee shall execute and deliver such documents and take such other
actions as Licensor reasonably may request in connection with the
preparation, filing, prosecution and maintenance of any such patent or
Patent Application described in Section 1.5.
7.2 Defense of Technology
---------------------
(a) In the event either party hereto discovers or becomes aware of any
infringement of, or unfair competition with, any of the rights granted
hereunder by Licensor to Licensee, or any proceeding, controversy or
claim relating to or affecting such rights, such party immediately
shall notify the other party in writing of the details of such
infringement, competition, proceeding, controversy or claim.
(b) Licensee, at its sole cost and expense and with counsel reasonably
satisfactory to Licensor, shall have the right, but not the
obligation, to take any appropriate action to defend the rights
granted hereunder by Licensor to Licensee against any suspected
infringement, competition, proceeding, controversy or claim; provided,
however, that Licensor at all times shall have the right to fully
participate in any such action at its own expense. Any judgment,
damages, settlement or award which results from any such action shall
be allocated (i)
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first, to Licensee and Licensor to the extent of the actual documented
unreimbursed costs incurred by each in connection therewith, and (ii)
thereafter to Licensee provided the Operating Agreement then remains
in effect and Licensor is still a Member, otherwise such award will be
treated as part of Net Sales in the fiscal quarter when received.
(c) In the event Licensee does not within a reasonable time to initiate
appropriate action pursuant to Section 7.2(b) hereto in connection
with any such infringement, competition, proceeding, controversy or
claim which in the reasonable judgment of Licensor adversely affects
or might adversely affect Licensor's rights in, to or under the Patent
Rights, or fails to pursue such action vigorously once commenced,
Licensor upon notice to Licensee shall have the right, but not the
obligation, to initiate or pursue any such appropriate action in
Licensor's name and at Licensor's expense, and Licensee shall
cooperate fully in any such action; provided, however, that Licensee
at all times shall have the right to fully participate in any such
action at its own expense. Any judgment, damages, settlement or award
which results from any such action shall be allocated (i) first, to
Licensor and Licensee to the extent of the actual documented
unreimbursed costs incurred by each in connection therewith, and (ii)
second, to 70% Licensor and 30% Licensee.
7.3 Indemnification Licensee shall at all times during the term of this
---------------
Agreement and thereafter, indemnify, defend and hold Licensor, its trustees,
directors, officers, employees and affiliates, harmless against all claims,
liabilities, damages, expenses, proceedings, and demands, including reasonable
legal expenses and attorneys' fees, arising out of the death, injury, or illness
to any person(s), or out of any damage to property or products liability related
in any way to the production, manufacture, sales, use, consumption or
advertisement or other application of the Licensed Product or arising from the
breach of any warranty, condition, representation or obligation of Licensee
hereunder; provided that (i) Licensee is promptly notified of any and all
threats, claims and proceedings related thereto, (ii) Licensee shall have sole
control of the defense and/or settlement thereof, (iii) Licensor furnishes to
Licensee, upon Licensee's request, information available to Licensor for such
defense, and (iv) Licensor provides Licensee with reasonable assistance in
connection therewith.
7.4 Insurance Licensee shall obtain and maintain, during the term of this
---------
Agreement, Comprehensive General Liability Insurance, including Products
Liability Insurance, with a reputable secure insurance carrier(s) to cover acts
or omissions concerning use. manufacture, sale, promotion or distribution of the
Licensed Products by Licensee or anyone acting under its permission.
7.5 Patent Marking Licensee shall mark all Licensed Products, or their
--------------
containers or manuals, in accordance with all applicable United States and
foreign patent marking laws of any Designated Country in which such products are
made, sold, or used.
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7.6 Severable Provisions The provisions of this Agreement are severable, and
--------------------
if any one or more provisions may be determined to be illegal or otherwise
unenforceable, in whole or in part, the remaining provisions, and any partially
unenforceable provisions to the extent enforceable, shall nevertheless be
binding and enforceable.
7.7 Survival of Representations, Warranties and Agreements All
------------------------------------------------------
representations, warranties and agreements made by Licensor or Licensee in this
Agreement (including, but not limited to, statements contained in any schedule
or certificate or other instrument delivered by or on behalf of any party hereto
or in connection with the transactions contemplated hereby) shall survive the
Effective Date hereof and any investigations, inspections, examinations or
audits made by or on behalf of any party hereto.
7.8 Entire Agreement This Agreement constitutes the entire agreement between
----------------
the parties hereto pertaining to the subject matter hereof, and supersedes all
prior agreements, understandings, negotiations and discussions, whether oral or
written, relating to the subject matter of this Agreement. No supplement
modification, waiver or termination of this Agreement shall be valid unless in
writing and executed by the party to be bound thereby.
7.9 Notice Any notice or other communication required or permitted hereunder
------
shall be in writing and shall be deemed to have been given, if personally
delivered, when so delivered, or if mailed, seventy-two (72) hours after having
been placed in the United States mail, registered or certified, postage prepaid,
addressed to the party to whom it is directed at the address set forth below:
If to Licensor:
City of Hope National Medical Center
1500 East Dirty Road
Dirty, California 91010
Attention: Eric Jurrus, Ph.D.
Director, Office of Technology Transfer
If to Licensee:
Cell Therapeutics, Inc.
201 Elliott Avenue West, Suite 400
Seattle, Washington 98119
Attention: James A. Bianco, M.D.
President and Chief Executive Officer
12
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With a copy to:
Brobeck, Phleger & Harrison, LLP
Spear Street Tower, One Market
San Francisco, California 94105
Attention: Michael J. Kennedy, Esq.
Either party may change the address to which such notices are to be addressed by
giving the other party notice in the manner herein set forth.
7.10 Successors and Assigns Neither this Agreement nor any rights, obligations
----------------------
or duties hereunder shall be assigned or transferred by either party without the
prior written consent of the other party in each instance; provided, however,
that (i) Licensor may freely transfer, pledge or assign its right to receive
payments hereunder without any consent from Licensee, (ii) Licensee may freely
transfer, pledge or assign or sublicense its rights hereunder to any
counterparty to a Corporate Partnering Arrangement and to CTI or any Affiliated
Company of CTI without any consent from Licensor, after Licensor's Company
Interest, as such term is defined in the Operating Agreement, has been converted
or redeemed, or Licensor has withdrawn as a member under such Operating
Agreement (other than a withdrawal pursuant to Section 12.5 of the Operating
Agreement (unless all Members after giving effect to such withdrawal) consent to
such assignment)), (iii) Licensee may sublicense any of its rights under Section
2.1 on the terms and conditions set forth in Section 2.3 and (iv) either party
may assign or transfer any of its rights hereunder to any person who acquires
all or substantially all of the assets of such party without any consent from
the other party. Subject to the foregoing, all of the terms, provisions and
obligations of this Agreement shall inure to the benefit of and shall be binding
upon the parties hereto and their respective permitted successors and assigns.
7.11 Settlement of Disputes All disputes hereunder shall be settled by
----------------------
arbitration as provided in Section 15.3 of the Operating Agreement, excluding
disputes regarding the ownership of Intellectual Property not included in the
Patent Rights. This Section 7.11 shall not apply to issues relating to the
validity, construction or effect of the Patent Rights. Matters, controversies
or disputes concerning the Patent Rights shall be resolved in any court having
jurisdiction thereof or in any other manner mutually agreed to by the parties.
7.12 Jurisdiction Each party submits irrevocably to the non-exclusive
------------
jurisdiction of any court of the State of California or the United States of
America sitting, in the City of San Francisco, over any action or proceeding
relating to this Agreement. Each party waives and agrees, to the extent allowed
by law, to not assert through any defense or motion (i) any claim not subject to
the jurisdiction of such court; (ii) any objection to the venue of such court;
and (iii) any claim of inconvenient forum of such court. Each party agrees, to
the extent allotted by law, that any judgement on such action or proceeding
shall be conclusive, binding and enforceable in any court of the United States
of America or the State of
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<PAGE>
California or other court with jurisdiction over such party. Each party consents
to service of process in such action or proceeding by the mailing of a copy of
such process by United States mail, registered or certified, postage prepaid,
return receipt requested, to the address set forth in Section 7.9.
7.13 Governing Law The validity, construction and interpretation of this
-------------
Agreement shall be governed in all respects by the laws of the State of
California applicable to contracts made and to be performed wholly within that
State.
7.14 Heading Section and subsection headings are not to be considered part of
-------
this Agreement and are included solely for convenience and reference and in no
way define, limit, interpret or describe the scope of this Agreement or the
intent of any provisions hereof.
7.15 Attorneys' Fees In the event any party takes legal action to enforce any
---------------
of the terms of this Agreement, the unsuccessful party to such action shall pay
the successful party's expenses (including, but not limited to, reasonable
attorneys' fees, and costs of litigation) incurred in such action.
7.16 Injunctive Relief Each party hereby acknowledges and agrees that it would
-----------------
be difficult to fully compensate the other party for damages resulting from the
breach or threatened breach of any provision of this Agreement and, accordingly,
that the other party shall be entitled to temporary and injunctive relief,
including temporary restraining orders, preliminary injunctions and permanent
injunctions, to enforce such provisions without the necessity of proving actual
damages or being required to post any bond or undertaking in connection with any
such action. This provision with respect to injunctive relief shall not
diminish, however, the other party's right to any other relief or to claim and
recover damages.
7.17 Relationship of the Parties The relationship between the parties under
---------------------------
this Agreement is solely that of independent contractors as Licensor and
Licensee, and neither party hereto is or shall be construed to be a partner,
joint venturer, employee, agent, representative or participant of or with the
other party for any purpose whatsoever. Neither party shall have any right or
authority whatsoever to assume or to create any obligation or responsibility,
express or implied, on behalf of or in the name of the other party or to bind
the other party in any manner.
7.18 Confidential Information Except as hereinafter provided or provided in the
------------------------
Operating Agreement, the parties (a) shall treat as confidential and not
disclose to any unauthorized third party (including a party's employees or
Affiliates have no need to know) any Confidential Information and (b) shall not
use any such Confidential Information for any purpose other than in connection
with the activities pursuant to this Agreement. The limitations in this Section
7.18 shall not apply to the extent Confidential Information: (i) was already in
the possession of the receiving party, or its Affiliate, at the time it obtained
such Confidential Information; (ii) was or is published or otherwise is or
becomes generally available to the public through no fault of such receiving
party, or its Affiliate, (iii) was or is lawfully made
14
<PAGE>
available to such party or its Affiliate without restriction by any Person which
is not bound by an obligation of confidentiality or use with respect to the
information; (iv) was or is independently developed by such party or its
Affiliate; or (v) is required to be disclosed by operation of law or regulation,
required in any Proceeding, requested by a regulatory body and the disclosing
party deems it advisable, in its discretion, to comply with the request, or
deemed advisable to be disclosed in the good faith judgment of the disclosing
party in any Proceeding. In the event disclosure is required or requested, the
disclosing party shall exercise all reasonable efforts to disclose such
Confidential Information pursuant to a confidentiality agreement or protective
order. Nothing in this Section 7.18 shall be construed to prohibit a party's
disclosure of Confidential Information to its attorneys, auditors, or other
consultants. The obligations set forth in this Section 7.18 shall survive the
termination of this Agreement.
7.19 Publication Neither party shall disseminate this Agreement for any purpose
-----------
other than as required by law without the prior written approval of the other
party.
7.20 Export Licensee will be responsible for obtaining appropriate licenses, if
------
any, from the Federal Government prior to the export of all physical embodiments
of Patent Rights and Patent Application, including related technical data and
all progeny and derivative works thereof.
7.21 Use of Licensor's Name Licensee shall not use the name of Licensor or of
----------------------
any staff member or employee of Licensor or any adaptation thereof in any
advertising, promotion or sales literature in a manner which would constitute an
expressed or implied endorsement by Licensor or of any staff member or employee
thereof for any commercial product without the prior written consent of Licensor
in each instance.
7.22 Force Majeure Except for the obligation to pay royalties and other sums
-------------
under this Agreement, neither Licensee nor Licensor shall be liable for non-
performance caused by any circumstance beyond their reasonable control;
including without limitation the following: war, floods, earthquakes, other
acts of God, industrial disputes, civil disobedience, strikes, fire,
mobilization, changes in governmental regulation or interpretation, requisition,
embargo, restriction and shortage of transport facilities, fuel, energy or
supplies, for so long as such circumstance continues. Each party claiming the
benefit of such an excuse agrees to notify the other party promptly in writing
of any such delay or failure in performance, and to resume performance as soon
as is reasonably practicable.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date and year first set forth above.
CELL CITY, LLC CITY OF HOPE NATIONAL MEDICAL CENTER
By: By:
----------------------------- --------------------------------------
(Responsible Party) (Responsible Party) Date
(Title) (Title)
(Department) (Department)
16
