<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: June 30, 1999
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 JULY 30, 1999
----- -----------------------------
Common Stock, no par value (including asso-
ciated Preferred Stock Purchase Rights).... 15,567,959
This report on Form 10-Q, including all exhibits, contains 19 pages.
The exhibit index is located on page 18.
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1
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CELL THERAPEUTICS, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets -- June 30, 1999 and December 31,
1998............................................................ 3
Consolidated Statements of Operations -- Three months and six
months ended June 30, 1999 and 1998 and the period from
September 4, 1991 (date of incorporation) to June 30, 1999...... 4
Consolidated Statements of Cash Flows -- Six months ended
June 30, 1999 and 1998 and the period from September 4, 1991
(date of incorporation) to June 30, 1999........................ 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 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 15
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K................................ 16
SIGNATURES...................................................... 17
EXHIBIT INDEX................................................... 18
2
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PART I
ITEM 1. FINANCIAL STATEMENTS
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,326,403 $ 4,362,486
Securities available-for-sale 27,426,181 42,072,276
Interest receivable 433,822 637,330
Collaboration agreement receivables - 3,254,491
Prepaid expenses and other current assets 818,672 920,136
------------- --------------
Total current assets 32,005,078 51,246,719
Property and equipment 16,718,904 16,517,674
Accumulated depreciation (10,633,674) (9,691,777)
------------- --------------
Property and equipment, net 6,085,230 6,825,897
Other assets 79,758 83,879
------------- --------------
Total assets $ 38,170,066 $ 58,156,495
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 572,386 $ 1,106,832
Accrued expenses 3,791,928 4,816,385
Current portion of long-term obligations 1,124,220 1,180,702
------------- --------------
Total current liabilities 5,488,534 7,103,919
Long-term obligations, less current portion 3,301,554 3,887,603
Commitments
Shareholders' equity:
Common Stock, no par value:
Authorized shares-100,000,000
Issued and outstanding shares-
15,567,959 and 15,534,359 at
June 30, 1999 and December 31,
1998, respectively 169,901,055 169,618,635
Notes receivable from officers (380,000) (380,000)
Deficit accumulated during development
stage (140,049,490) (122,070,032)
Accumulated other comprehensive loss (91,587) (3,630)
------------ --------------
Total shareholders' equity 29,379,978 47,164,973
------------ --------------
Total liabilities and shareholders' equity $ 38,170,066 $ 58,156,495
============ ==============
</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,
1991 (Date of
Three Months Ended Six Months Ended Incorporation,)
June 30, June 30, To June 30,
-------------------------------- --------------------------------
1999 1998 1999 1998 1999
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues:
Collaboration agreements $ - $ 4,138,391 $ - $ 7,416,326 $ 34,252,652
Operating expenses:
Research and development 7,304,792 7,217,416 13,668,987 15,027,895 131,056,415
General and administrative 2,958,275 2,834,619 5,103,950 5,379,291 51,536,423
-------------- -------------- -------------- -------------- --------------
10,263,067 10,052,035 18,772,937 20,407,186 182,592,838
-------------- -------------- -------------- -------------- --------------
10,263,067 (5,913,644) (18,772,937) (12,990,860) (148,340,186)
Loss from operations:
Other income (expense):
Investment income 475,509 805,951 1,058,841 1,777,740 11,021,343
Interest expense (131,899) (109,277) (265,361) (215,042) (2,730,646)
-------------- -------------- -------------- -------------- --------------
Net loss: $ (9,919,457) $ (5,216,970) $ (17,979,457) $ (11,428,162) $ (140,049,489)
============== ============== ============== ============== ==============
Net loss per share:
Basic and diluted net loss per share $ (0.64) $ (0.34) $ (1.16) $ (0.74)
-------------- -------------- -------------- --------------
Shares used in computation of basic
and diluted net loss per share $ 15,534,728 $ 15,385,950 $ 15,534,545 $ 15,383,801
============== ============== ============== ==============
</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,
1991 (Date of
Six Months Ended Incorporation)
June 30, To June 30,
--------------------------------
1999 1998 1999
-------------- --------------------------------
<S> <C> <C> <C>
Operating activities
Net loss $ (17,979,457) $ (11,428,162) $ (140,049,489)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 941,897 793,393 11,032,311
Noncash research and development expense - - 1,155,750
Noncash interest expense - - 25,918
Noncash rent expense (66,445) 40,770 458,966
Noncash compensation expense 211,894 - 735,003
Investment premium/(discount) amortization/(accretion) 242,270 (78,002) 786,502
(Gain)/loss on sale of investment securities 859 20,691 (30,744)
Changes in assets and liabilities:
Interest receivable 203,508 180,971 (433,822)
Collaboration agreement receivables 3,254,491 (316,447) -
Prepaid expenses and other current assets 101,464 (836,342) (818,672)
Other assets 4,121 136,594 (190,983)
Accounts payable (534,446) 848,934 572,386
Accrued expenses (1,024,457) (977,258) 3,791,928
-------------- -------------- --------------
Total adjustments 3,335,156 (186,696) 17,084,543
-------------- -------------- --------------
Net cash used in operating activities (14,644,301) (11,614,858) (122,964,946)
-------------- -------------- --------------
Investing activities
Purchases of securities available-for-sale (18,129,735) (43,857,369) (243,212,019)
Proceeds from sales of securities available-for-sale 4,754,743 12,783,918 47,669,726
Proceeds from maturities of securities available-for-sale 27,690,000 40,178,558 167,257,952
Purchases of property and equipment (201,230) (2,014,090) (16,878,296)
Dispositions of property and equipment - - 167,300
-------------- -------------- --------------
Net cash provided/(used) in investing activities 14,113,778 7,091,017 (44,995,337)
-------------- -------------- --------------
Financing activities
Sale of common stock to founders - - 80,000
Proceeds from borrowings from shareholders - - 850,000
Sale of common stock via public offerings, net of offering costs - - 61,064,250
Sale of preferred stock via private placements, net of offering costs - - 52,326,204
Sale of common stock via private placements, net of offering costs - - 52,307,084
Repurchase of common stock - - (2,522)
Notes receivable from officers to acquire common stock - - (380,000)
Proceeds from common stock options exercised - 86,992 760,026
Proceeds from common stock warrants exercised - - 305,558
Proceeds from employee stock purchase plan 70,526 108,061 286,172
Repayment of long-term obligations (576,086) (827,544) (12,154,687)
</TABLE>
5
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<TABLE>
<S> <C> <C> <C>
Proceeds from the issuance of long-term obligations - - 15,844,601
---------------- ---------------- ----------------
Net cash provided/(used) in financing activities (505,560) (632,491) 171,286,686
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents (1,036,083) (5,156,332) 3,326,403
Cash and cash equivalents at beginning of period 4,362,486 8,876,990 -
---------------- ---------------- ----------------
Cash and cash equivalents at end of period $ 3,326,403 $ 3,720,658 $ 3,326,403
================ ================ ================
Supplemental schedule of noncash investing 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
================ ================ ================
Supplemental disclosure of cash flow information
Cash paid during the period for interest obligations $ 265,361 $ 215,042 $ 2,704,209
================ ================ ================
</TABLE>
See accompanying notes
6
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CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial information of Cell Therapeutics, Inc.
(the "Company") as of June 30, 1999 and for the three and six months ended June
30, 1999 and 1998 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 and six month periods ended June 30, 1999 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,
1998 included in the Company's Form 10-K for the year ended December 31, 1998.
Certain prior year balances have been reclassified to conform to the current
year presentation.
(2) REPORTING COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net loss or shareholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in shareholders' equity, to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to the requirements
of Statement 130.
For the three months ended June 30, 1999 and 1998, the Company's comprehensive
loss was as follows:
<TABLE>
<CAPTION>
Three months ended
------------------------------
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Net loss $(9,919,457) $(5,216,970)
Other comprehensive gain/(loss):
Unrealized holding gains/(losses) arising
during period (77,412) 62,703
----------- -----------
Total comprehensive loss $(9,996,869) $(5,154,267)
=========== ===========
</TABLE>
For the six months ended June 30, 1999 and 1998, the Company's comprehensive
loss was as follows:
<TABLE>
<CAPTION>
Six months ended
------------------------------
June 30, 1998 June 30, 1999
------------- -------------
<S> <C> <C>
Net loss $(17,979,457) $(11,428,162)
Other comprehensive gain/(loss):
Unrealized holding gains/(losses) arising
during period (87,959) 92,977
------------ ------------
Total comprehensive loss $(18,067,416) $(11,335,185)
============ ============
</TABLE>
7
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(3) CAPITAL STOCK
The Company maintains an Employee Stock Purchase Plan (the "Purchase Plan").
285,714 shares of the Company's common stock have been reserved for purchase
under the Purchase Plan, under which eligible employees may purchase a limited
number of shares of the Company's common stock at 85% of the lower of the
subscription date fair market value and the purchase date fair market value.
There are two six-month offerings per year. Under the Purchase Plan, the
Company has issued 33,600 shares to employees in 1999. There is a balance of
156,579 shares reserved for future purchases at June 30, 1999.
8
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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, 1998 WHICH IS ON FILE 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
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"). Under the terms of the Collaboration
Agreement, Johnson & Johnson paid 60% of the U.S. development costs in
connection with obtaining regulatory approval of lisofylline ("LSF-TM") for use
with bone marrow transplants ("BMT"). After exercising its option in 1997,
Johnson & Johnson expanded its participation in the development of LSF to
include the treatment of patients undergoing induction chemotherapy to treat
acute myeloid leukemia ("AML"). In July 1998, after reviewing the results of the
Company's Phase III clinical trial for LSF among patients receiving BMT from
related donors, in which the primary endpoints were not met, Johnson & Johnson
reached an agreement in principle with the Company to revise the Collaboration
Agreement. On November 16, 1998, the Company and Johnson & Johnson formally
amended the Collaboration Agreement. Under the terms of the amended
Collaboration Agreement, Johnson & Johnson agreed to pay the Company $13.1
million for development cost reimbursements for BMT and AML for the year ending
December 31, 1998. After reviewing the interim data from the Company's pivotal
Phase II/III trial for LSF in patients with acute lung injury and acute
respiratory distress syndrome and the results of the Company's pivotal Phase III
trial for LSF in patients following induction chemotherapy for AML, which AML
data and results are expected to be available later this year, Johnson & Johnson
may or may not elect to resume responsibility for the development and
commercialization of LSF subject to certain additional payments upon resumption
of its obligations. If Johnson & Johnson does not elect to resume development
activities, then the Company will be free to license LSF to other third parties.
As of December 31, 1998, the Company had recorded approximately $40.8 million in
equity payments, license and milestone fees, and development cost reimbursements
with Johnson & Johnson.
As of June 30, 1999, the Company had incurred aggregate net losses of
approximately $140.0 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 sales of equity securities, which
have raised aggregate net proceeds of approximately $168.0 million.
RESULTS OF OPERATIONS
Three months ended June 30, 1999 compared with three months ended June 30,
1998.
The Company did not record any development cost reimbursements from Johnson &
Johnson under the amended Collaboration Agreement during the three months ended
June 30, 1999.
9
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Development cost reimbursements for the comparable three month period in 1998
were approximately $4.1 million.
Research and development expenses increased to approximately $7.3 million
for the three months ended June 30, 1999 from approximately $7.2 million for the
three months ended June 30, 1998. The Company expects that research and
development expenses will increase in future years as the Company expands its
research and development programs and undertakes additional clinical trials.
General and administrative expenses increased to approximately $2.9 million
for the three months ended June 30, 1999 from approximately $2.8 million for the
three months ended June 30, 1998. 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 decreased to
approximately $476,000 for the three months ended June 30, 1999 from
approximately $806,000 for the three months ended June 30, 1998. This decrease
was associated primarily with interest earnings on lower average cash balances
on hand during the second quarter of 1999 when compared to the second quarter of
1998. Interest expense increased to approximately $132,000 for the three months
ended June 30, 1999 from approximately $109,000 for the three months ended June
30, 1998. This increase was due primarily to higher average balances of
outstanding long-term obligations.
Six months ended June 30, 1999 compared with six months ended June 30, 1998.
The Company did not record any development cost reimbursements from Johnson
& Johnson under the amended Collaboration Agreement during the six months ended
June 30, 1999. Development cost reimbursements for the comparable six month
period in 1998 were approximately $7.4 million.
Research and development expenses decreased to approximately $13.7 million
for the six months ended June 30, 1999 from approximately $15.0 million for the
six months ended June 30, 1998. This decline was due primarily to a decrease in
manufacturing and preclinical development activities for LSF. The Company
expects that research and development expenses will increase in future years as
the Company expands its research and development programs and undertakes
additional clinical trials.
General and administrative expenses decreased to approximately $5.1 million
for the six months ended June 30, 1999 from approximately $5.4 million for the
six months ended June 30, 1998. This decrease was due primarily to the reduction
in operating expenses associated with supporting the Company's 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 decreased to approximately $1.1 million for the six
months ended June 30, 1999 from approximately $1.8 million for the six months
ended June 30, 1998. This decrease was associated primarily with interest
earnings on lower average cash balances on hand during the six months ended June
30, 1999 when compared to the six months ended June 30, 1998. Interest expense
increased to approximately $265,000 for the six months ended June 30, 1999 from
approximately $215,000 for the six months ended June 30, 1998. This increase was
due primarily to higher 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 and from its collaboration with Johnson & Johnson.
As of June 30, 1999, the Company has raised aggregate net proceeds of
approximately $168.0 million through the sale of equity securities including
public offerings of common stock, private placements of Series A and B
convertible stock and common stock, a bridge loan, the exercise of stock options
and warrants and the sale of common stock pursuant to the Employee Stock
Purchase Plan. In addition, the Company financed the purchase of $16.2 million
of property and equipment through financing agreements and capital lease
obligations of which approximately $4.0 million remained outstanding as of June
30, 1999.
10
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At June 30, 1999, the Company had approximately $31.2 million in cash, cash
equivalents, short-term investments and interest receivable. The Company invests
in U.S. government obligations and other highly rated liquid debt instruments.
The Company intends to use the substantial portion of its financial resources to
fund its research and development activities with respect to the Company's Apra
and PG-TXL 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, and 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 potential
resumption by Johnson & Johnson of its obligations under 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 ability of the Company to establish collaborative agreements
with other companies. A variety of other factors, some of which are beyond the
Company's control, could also affect the application of the proceeds.
The Company also expects to use a portion of its financial resources to add
research and product development programs. On June 30, 1998, the Company entered
into an agreement with PG-TXL Company, L.P. and scientists at the M.D. Anderson
Cancer Center, granting the Company an exclusive worldwide license to the rights
to PG-TXL, a water soluble form of the cancer drug, Taxol(R), and to all
potential uses of PG-TXL's polymer technology. Under the terms of the agreement,
the Company will fund the research, development, manufacture, marketing and sale
of anti-cancer drugs developed using PG-TXL's polymer technology. On December
11, 1998, the Company entered into an exclusive option agreement with SynChem
Research, Inc. ("SynChem") to acquire an exclusive worldwide license (the
"SynChem License") to a novel class of compounds which are inhibitors of tumor
angiogenesis. The Company's option to acquire the SynChem license shall be
exercisable at the end of a six-month evaluation period upon the payment of an
initial license fee. On August 5, 1999, the Company and SynChem amended the
option agreement, in which the evaluation period was shortened and the related
option fee was reduced. Under the terms of the option agreement as amended, the
SynChem License will provide that the Company will fund research, development,
manufacture, marketing and sale of anti-cancer drugs using SynChem's copper
chelation technology. The Company's research and development expenditures will
vary as such research and product development programs are added, expanded or
discontinued.
The Company also expects to use portions of its financial resources to
improve facilities, 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 its cash balances 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 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 and the interest earned thereon will enable the Company to maintain
its current and planned operations at least through mid 2000. 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 many factors,
including the potential resumption by Johnson & Johnson of its obligations under
the Collaboration Agreement; the ability of the Company to establish additional
collaborative arrangements and the terms of any additional collaborative
arrangements that the Company may enter into; the continued scientific progress
in the Company's research and development programs; the magnitude of such
programs; the progress of preclinical testing and clinical trials; the time and
costs involved in obtaining regulatory approvals; the costs involved in
preparing, filing, prosecuting, maintaining, enforcing and defending patent
claims; the competing technological and market developments; the cost of
establishing manufacturing facilities; the cost of
11
<PAGE>
commercialization activities and the demand for the Company's products if and
when approved.
The Company intends to raise additional funds through additional equity or
debt financings, research and development financings, collaborative
arrangements, acquisitions, 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 by itself.
The Company is exposed to market risk related to changes in interest rates
and foreign currency exchange rates, each of which could adversely affect the
value of the Company's investments. The Company does not use derivative
financial instruments for speculative or trading purposes. The Company maintains
a short-term investment portfolio consisting of interest bearing securities with
an average maturity of less than one year. These securities are classified as
"available-for-sale" securities. The interest bearing securities are subject to
interest rate risk and will fall in value if market interest rates increase. If
market interest rates were to increase immediately and uniformly by 10% from
levels at June 30, 1999, the fair value of the portfolio would decline by an
immaterial amount. Because the Company has the ability to hold its fixed income
investments until maturity, it does not expect its operating results or cash
flows to be affected to any significant degree by a sudden change in market
interest rates on its securities portfolio. As of June 30, 1999, the Company has
not entered into any foreign exchange contracts to hedge any exposure in its
primary overseas contract because such exposure is immaterial.
As of June 30, 1999, the Company had available for Federal income tax
purposes net operating loss carryforwards of approximately $134.1 million and
research and development credit carryforwards of approximately $4.9 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 candidates, LSF and Apra, or any of 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.
A key element of the Company's strategy is to enhance its drug discovery
and development programs and to fund its capital requirements, in part, by
entering into various collaborative arrangements with corporate partners, such
as Johnson & Johnson, as well as academic collaborators and licensors. There can
be no assurance that Johnson & Johnson will resume its development activities
under the Collaboration Agreement, in which case, the Company would be free to
license LSF to other third parties. However,
12
<PAGE>
there can be no assurance that the Company will be able to negotiate
collaborative arrangements with such third parties or that these collaborations,
if entered into, will be on terms favorable to the Company. If the Company is
unable to enter into future collaborations with capable partners and on
commercially reasonable terms, the development and commercialization of its
product candidates would be delayed and possibly postponed indefinitely.
There also can be no assurance that the Company will be able to establish
effective sales and distribution capacities or will be successful in gaining
market acceptance for any of its products. The Company currently has no internal
manufacturing facilities and has no experience in sales, marketing or
distribution. The Company currently relies on one third party, ChiRex, Ltd.
("ChiRex"), to manufacture LSF bulk drug under a short-term contract and three
suppliers for clinical trial quantities of the finished drug product. The
Company's products have never been manufactured on a commercial scale and there
can be no assurance that the Company will be able to transition to commercial
production. The Company has identified manufacturers with adequate capacity to
meet forecasted commercial quantities of LSF; however, there can be no assurance
that the Company will be able to enter into a long-term commercial agreement
with one or more manufacturers on acceptable terms. There also can be no
assurance that the manufacturing facilities of contract manufacturers, including
ChiRex, will comply with applicable manufacturing regulations of the FDA or meet
the Company's requirements for quality, quantity or timeliness.
The Company's strategy for commercializing its oncology applications is to
establish a strategic alliance with a corporate partner that has an established,
skilled, and experienced field sales organization with which to collaborate in
the areas of marketing strategy and clinical liaison. There can be no assurance
that the Company will be able to establish such a strategic alliance. Should the
Company have to market and sell its products directly, it would need to develop
a marketing and sales force with technical expertise and distribution
capability. The creation of an infrastructure to commercialize pharmaceutical
products is an expensive and time-consuming process. There can be no assurance
that the Company would be able to develop the necessary marketing and sales
capabilities or be successful in gaining market acceptance for its products.
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 results from
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. The
Company's systems are all relatively new and PC-based. All of the Company's
business software programs, with the exception of its fixed asset module, have
been evaluated as Year 2000 compliant. A Year 2000 compliant fixed asset module
was installed in the first quarter of 1999 and is expected to be operational by
September 30, 1999. The Company has also initiated an assessment of its non-
information technology ("non-IT") systems. Critical electro-mechanical
instruments containing software have been evaluated for Year 2000 compliance.
This evaluation was completed in the first quarter of 1999. The Company 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. During the
first quarter of 1999, the Company completed its follow up with these suppliers
to determine the extent of alternative sources or contingency plans that are
required. The Company presently believes the Year 2000 issue will not pose
significant operational problems for its computer systems, non-IT systems or
third-party relationships.
The Company has been continually upgrading its information technology
systems and critical laboratory instrumentation since inception in 1992. The
Company has not incurred to date, and does not have plans currently to incur,
material additional costs to accelerate the replacement of its existing
information technology systems or critical
13
<PAGE>
laboratory instrumentation due to Year 2000 issues. Costs incurred to date and
costs estimated to complete the Year 2000 project are not expected to be
material.
If corrections to the Company's Year 2000 issues are not completed, 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.
These impacts could include, but are not limited to, future revenue delays due
to delayed research, development, clinical trials or agency approvals.
The Company presently believes that the Year 2000 issues can be effectively
avoided, and has developed or is developing for each critical activity a
contingency plan to allow operations to continue even if significant issues are
experienced. The Company has a team assigned to review all information
technology systems, all equipment, and vendors of equipment and services that
may be impacted by Year 2000 issues.
14
<PAGE>
PART II OTHER INFORMATION
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 23, 1999, the Company held its 1999 Annual Meeting of Shareholders (the
"Annual Meeting"). Each share of Common Stock was entitled to one vote per
share.
At the Annual Meeting, the following Directors were elected to serve until the
Annual Meeting of Shareholders indicated below and until their respective
successors are elected and qualified:
TERM
DIRECTOR NOMINATED EXPIRES VOTES FOR WITHHELD
- ----------------------------------------------------------------------------
Max E. Link, Ph.D................ 2002 10,069,435 711,517
Terrence M. Morris............... 2002 10,071,335 709,617
Wilfred E. Jaeger................ 2002 10,070,435 710,517
Other directors whose terms of office continued after the meeting are as
follows: James A. Bianco, M.D., Jack L. Bowman, Jeremy L. Curnock Cook, Mary
O'Neil Mundinger, D.P.H., Phillip M. Nudelman, Jack W. Singer, M.D.
The Company's shareholders also ratified the selection of Ernst & Young LLP as
the independent auditors for the Company for the year ended December 31, 1999.
With respect to this proposal there were 10,167,663 votes cast for the proposal,
435,852 votes cast against the proposal, and 177,437 abstentions.
The foregoing matters are described in detail in the Company's proxy statement
dated March 30, 1999 for the 1999 Annual Meeting of Shareholders. No other
matters were voted on at the Annual Meeting.
15
<PAGE>
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
16
<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: August 16, 1999 By: /s/ James A. Bianco, M.D.
-----------------------------------
James A. Bianco, M.D.
President and Chief Executive
Officer
(Principal Executive Officer)
Dated: August 16, 1999 By: /s/ Louis A. Bianco
-----------------------------------
Louis A. Bianco
Executive Vice President,
Finance and Administration
(Principal Financial Officer,
Chief Accounting Officer)
17
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
EXHIBIT 27.1 Financial Data Schedule
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1999 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 3,326,403
<SECURITIES> 27,860,003
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,005,078
<PP&E> 16,718,904
<DEPRECIATION> 10,633,674
<TOTAL-ASSETS> 38,170,066
<CURRENT-LIABILITIES> 5,559,060
<BONDS> 0
0
0
<COMMON> 169,830,529
<OTHER-SE> (140,521,077)
<TOTAL-LIABILITY-AND-EQUITY> 38,170,066
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 18,772,937
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 265,361
<INCOME-PRETAX> (17,979,457)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,979,457)
<EPS-BASIC> (1.16)
<EPS-DILUTED> (1.16)
</TABLE>
