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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 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: 0001066284
CELL PATHWAYS, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2969600
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
702 Electronic Drive
Horsham, Pennsylvania 19044
(Address of principal executive office, including zip code)
(215) 706-3800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
At July 31, 1999 there were 24,548,394 shares of Common Stock, par value $0.01
per share, outstanding.
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CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 1999
PART 1 FINANCIAL INFORMATION (UNAUDITED) Page
----
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998................................................. 3
Condensed Consolidated Statements of Operations for the three
months and six months ended June 30, 1999 and 1998 and for the
period from inception (August 10, 1990) to June 30, 1999.......... 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 1998 and for the period from
inception (August 10, 1990) to June 30, 1999...................... 5
Notes to Condensed Consolidated Financial Statements ............. 6 - 7
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 8 - 11
Item 3 Quantitative and Qualitative Disclosures about Market Risk........ 12
PART II OTHER INFORMATION
Item 1 Legal Proceedings................................................. 13
Item 4 Submission of Matters to a Vote of Security Holders............... 13
Item 6 Exhibits and Reports on Form 8-K.................................. 13
Signatures........................................................ 14
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CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................................... $ 26,912,345 $ 37,232,404
Prepaid expenses and other ..................................... 496,698 512,474
------------ ------------
Total current assets ..................................... 27,409,043 37,744,878
EQUIPMENT, FURNITURE and LEASEHOLD IMPROVEMENTS, NET ............. 1,565,272 1,533,634
OTHER ASSETS ..................................................... 876,215 954,187
------------ ------------
$ 29,850,530 $ 40,232,699
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of obligations under capital lease ........ $ 146,260 $ 146,260
Accounts payable ............................................... 611,143 601,988
Other accrued liabilities ...................................... 1,784,378 3,192,436
------------ ------------
Total current liabilities ................................ 2,541,781 3,940,684
------------ ------------
OBLIGATIONS UNDER CAPITAL LEASE, EXCLUDING CURRENT INSTALLMENTS .. 98,787 159,897
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 5,000,000 shares authorized, none
issued and outstanding ......................................... -- --
Common Stock $.01 par value, 70,000,000 shares authorized;
24,425,075 and 24,279,526 shares issued and outstanding ........ 244,251 242,796
Additional paid-in capital ....................................... 81,969,785 81,256,094
Stock subscription receivable from issuance of Common Stock ...... (37,000) (37,000)
Deficit accumulated during the development stage ................. (54,967,074) (45,329,772)
------------ ------------
Total stockholders' equity ............................... 27,209,962 36,132,118
------------ ------------
$ 29,850,530 $ 40,232,699
============ ============
The accompanying notes to the condensed consolidated financial
statements are an integral part of these statements.
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CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED PERIOD
JUNE 30, JUNE 30, FROM INCEPTION
------------------------------ ------------------------------ (AUGUST 10, 1990)
1999 1998 1999 1998 TO JUNE 30, 1999
------------ ------------ ------------ ------------ ----------------
EXPENSES:
Research and development .......... $ 3,590,342 $ 3,351,715 $ 8,118,235 $ 6,897,545 $ 45,246,565
General and administrative ........ 1,067,752 650,749 2,212,296 1,966,372 11,021,341
Provision for redemption of the
Redeemable Preferred Stock ...... -- -- -- -- 1,017,000
------------ ------------ ------------ ------------ ------------
Total expenses .................. 4,658,094 4,002,464 10,330,531 8,863,917 57,284,906
INTEREST INCOME ...................... 325,383 159,808 693,229 243,254 2,317,832
------------ ------------ ------------ ------------ ------------
NET LOSS ............................. $ (4,332,711) $ (3,842.656) $ (9,637,302) $ (8,620,663) $(54,967,074)
============ ============ ============ ============ ============
Basic and diluted net loss per
Common Share ...................... $ (0.18) $ (1.29) $ (0.40) $ (2.88)
============ ============ ============ ============
Shares used in computing basic and
diluted net loss per
Common Share ...................... 24,340,270 2,990,095 24,324,887 2,990,095
============ ============ ============ ============
The accompanying notes to the condensed consolidated financial
statements are an integral part of these statements.
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CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
PERIOD FROM
INCEPTION
SIX MONTHS ENDED (AUGUST 10,
JUNE 30, 1990) TO
--------------------------------- JUNE 30,
1999 1998 1999
------------ ------------ ------------
OPERATING ACTIVITIES:
Net loss ......................................... $ (9,637,302) $ (8,620,663) $(54,967,074)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation expense and amortization ............ 269,224 65,736 657,241
Issuance of Common Stock for services
rendered ....................................... -- -- 48,578
Issuance of Common Stock options for
services rendered .............................. -- -- 13,313
Provision for redemption of Redeemable
Preferred Stock ................................ -- -- 1,017,387
Write-off of deferred offering costs .............. -- 469,515 469,515
Other ............................................. -- 809 68,399
(Increase) decrease in prepaid and other
current assets ................................. 15,776 (259,639) (178,072)
(Increase) decrease in other assets ............... 77,972 -- (130,276)
Increase (decrease) in accounts payable
and accrued liabilities ........................ (1,398,903) (1,259,194) (225,470)
------------ ------------ ------------
Net cash flows used in operating
activities ..................................... (10,673,233) (9,603,436) (53,226,459)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of equipment and leasehold
improvements ................................... (300,862) (1,908,640) (4,700,662)
Sale of leasehold improvements ................... -- 2,458,460 3,000,000
Cash paid for deposits ........................... -- 8,671 (34,767)
------------ ------------ ------------
Net cash flows provided by (used in)
investing activities ......................... (300,862) 558,491 (1,735,429)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of Convertible
Preferred Stock, net of related offering
costs ........................................... -- 21,198,027 47,185,046
Proceeds from the transaction with Tseng
Labs, Inc. ...................................... -- -- 27,966,372
Proceeds from exercise of Series E, F,
and G warrants to purchase stock ................ 439,205 -- 1,120,759
Decrease in shareholder receivable ................ -- -- 23,626
Cash received for Common Stock options
exercised ....................................... 275,941 -- 722,622
Redemption of Redeemable Preferred Stock .......... -- -- (546,051)
Proceeds from bridge loan ......................... -- -- 791,000
Partner cash contributions ........................ -- -- 5,312,355
Increase in restricted cash ....................... -- (202,445) (611,172)
Principal payments under capital lease
obligations ..................................... (61,110) -- (90,324)
Proceeds from borrowings .......................... -- -- 150,000
Repayment of borrowings ........................... -- (62,502) (150,000)
------------ ------------ ------------
Net cash flows provided by (used in)
financing Activities .......................... 654,036 20,933,080 81,874,233
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents ....................................... (10,320,059) 11,888,135 26,912,345
CASH AND CASH EQUIVALENTS, beginning of
Period ............................................ 37,232,404 8,460,839 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period ............ $ 26,912,345 $ 20,348,974 $ 26,912,345
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES:
Accrual of leasehold improvements payable ........... $ -- $ -- $ 848,000
============ ============ ============
Accrual of deferred offering costs .................. $ -- $ 97,000 $ 441,375
============ ============ ============
Conversion of partners' investment to
Preferred Stock ................................... $ -- $ -- $ 5,312,355
============ ============ ============
Conversion of bridge loan to Convertible
Preferred Stock ................................... $ -- $ -- $ 791,000
============ ============ ============
Conversion of Convertible Preferred Stock
for Common Stock .................................. $ -- $ -- $ 53,766,991
============ ============ ============
Issuance of Convertible Preferred Stock
to investment advisors ............................ $ -- $ 425,742 $ 540,742
============ ============ ============
Issuance of Common Stock as payment of
management bonus .................................. $ -- $ -- $ 59,200
============ ============ ============
Redemption of Redeemable Preferred Stock
for Common Stock .................................. $ -- $ -- $ 545,949
============ ============ ============
Sale of Common Stock in exchange for
stock subscription receivable ..................... $ -- $ -- $ 37,000
============ ============ ============
Sale of Convertible Preferred Stock in
exchange for stock subscription receivable ........ $ -- $ 214,118 $ 23,626
============ ============ ============
Issuance of Common Stock as payment for
accounts payable ................................. $ -- $ -- $ 48,578
============ ============ ============
The accompanying notes to the condensed consolidated financial
statements are an integral part of these statements.
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CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Cell Pathways, Inc. was incorporated in Delaware in July 1998 as a
subsidiary of, and as of November 3, 1998 successor to, a Delaware corporation
of the same name. As the context requires, "Company" is used herein to signify
the successor and/or the predecessor corporations.
The Company is a pharmaceutical company focused on the research,
development and future commercialization of products to prevent and treat
cancer. The Company is in the development stage and has not generated any
product revenues to date, nor is there any assurance of any future product
revenues. The Company's intended products are subject to long development cycles
and there is no assurance the Company will be able to successfully develop,
manufacture, obtain regulatory approval for or market its products. During the
period required to develop its products, the Company plans to continue to
finance operations through debt and equity financings, corporate alliances or
through combinations thereof. There is no assurance, however, that such
additional funding will be available on terms acceptable to the Company, if at
all. The Company will continue to be considered in the development stage until
such time as it generates significant revenues from its principal operations. As
of June 30, 1999, the Company had a deficit accumulated during the developmental
stage of $54,967,074.
On November 3, 1998, the Company completed a financing through the
acquisition of Tseng Labs, Inc. ("Tseng") (a publicly held shell company) in
which the Company issued to Tseng stockholders approximately 5.5 million shares
of the Company's Common Stock and received net proceeds of approximately $26.4
million. The accompanying financial statements include the accounts from
inception (August 10, 1990) through June 30, 1999, (including the accounts of
Tseng after November 3, 1998).
Basis of Presentation
The unaudited condensed consolidated financial statements as of June
30, 1999 and for the three months and six months ended June 30, 1999 and 1998,
are unaudited but include all adjustments (consisting only of normal recurring
adjustments) which, in the opinion of management, are necessary to state fairly
the financial information set forth therein in accordance with generally
accepted accounting principles. The interim results may not be indicative of the
results that may be expected for the year. These financial statements should be
read in conjunction with the audited consolidated financial statements for the
year ended December 31, 1998 included in the Company's annual report on Form
10-K filed with the Securities and Exchange Commission.
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2. BASIC AND DILUTED NET LOSS PER COMMON SHARE
Statement of Financial Accounting Standards No. 128, "Earnings per
Share", became effective at the end of 1997 and requires presentation of two
calculations of earnings per common share. "Basic" earnings per common share
equals net income divided by the weighted average common shares outstanding
during the period. "Diluted" earnings per common share equals net income divided
by the sum of the weighted average common shares outstanding during the period
plus common stock equivalents. The Company's basic and diluted per share amounts
are the same since the assumed exercise of stock options and warrants,
conversion of Convertible Preferred Stock, and the redemption of Redeemable
Preferred Stock are all anti-dilutive. The amount of Common Stock equivalents
excluded from the calculation are options and warrants to purchase 2,043,408 and
1,226,055 shares of Common Stock, Convertible Preferred Stock convertible into 0
and 16,614,266 shares of Common Stock, warrants to purchase 0 and 422,188 shares
of Convertible Preferred Stock convertible into the same number of shares of
Common Stock and 0 and 33,052 shares of Common Stock to be issued upon
redemption of the Redeemable Preferred Stock that were outstanding as of June
30, 1999 and 1998, respectively.
3. LITIGATION
In February and March of 1999, five stockholder class actions were
filed against the Company and certain of its officers and directors in the
United States District Court for the Eastern District of Pennsylvania seeking
unspecified damages on behalf of various classes of persons, including all
persons who purchased Company common stock during certain periods in 1998 and
1999. The complaints alleged that the Company had made false and misleading
statements about the efficacy and near-term commercialization of exisulind, the
Company's lead drug candidate. These actions were consolidated into one action
by court order of April 28, 1999. On June 28, 1999 a consolidated amended
complaint was filed on behalf of a class of all purchasers of Company common
stock between October 7, 1998 and February 2, 1999, inclusive. The Company
believes that the allegations are without merit and intends to vigorously defend
the litigation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cell Pathways, Inc. was incorporated in Delaware in July 1998 as a
subsidiary of, and, as of November 3, 1998, the successor to, a Delaware
corporation of the same name. As the context requires, the "Company" or "CPI" is
used herein to signify the successor and/or the predecessor corporations
Certain statements made herein, and oral statements made in respect
hereof, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are those
which express plan, anticipation, intent, contingency or future development
and/or otherwise are not statements of historical fact. These statements are
subject to risks and uncertainties, known and unknown, which could cause actual
results and developments to differ materially from those expressed or implied in
such statements. Such risks and uncertainties relate to, among other factors,
the absence of approved products; history of operating losses; early stage of
development; the costs, delays and uncertainties inherent in basic
pharmaceutical research, drug development and clinical trials, with respect to
both the Company's current product candidates and its future product candidates,
if any; dependence on development of exisulind; the limitations on, or absence
of, the predictive value of data obtained in laboratory tests, animal models and
human clinical trials when planning additional steps in product development; the
uncertainty of obtaining regulatory approval, whether in connection with the
adequacy of the data generated in the clinical trials of exisulind or otherwise,
and the timing and scope of any approval received; acceptance by providers of
healthcare reimbursement; the validity, scope and enforceability of patents; the
actions of competitors; dependence upon third parties; product liability; the
need for further financing; and other risks detailed in Cell Pathways, Inc.'s
reports filed from time to time under the Securities Act of 1933 and/or the
Securities Exchange Act of 1934, including the sections entitled "Business" and
"Risk Factors" in the Company's report on Form 10-K for the year ended December
31, 1998. Given these uncertainties, current and prospective investors are
cautioned not to place undue reliance on any such forward-looking statements.
The Company undertakes no obligation to update or revise the statements made
herein or the factors which may relate thereto.
OVERVIEW
CPI is a development stage pharmaceutical company focused on the
research, development and commercialization of products to prevent and treat
cancer. From the inception of the Company's business in 1990, operating
activities have related primarily to conducting research and development,
raising capital and recruiting personnel. The Company's initial investigational
new drug application ("IND") was filed with the Food and Drug Administration
("FDA") in December 1993 for human clinical trials of the Company's first
product candidate, exisulind. The Company filed an IND for its second product
candidate, CP 461, in December 1998.
Phase I clinical trials for exisulind to treat adenomatous polyposis
coli ("APC"), an FDA designated orphan drug indication, began in February 1994;
a Phase I/II clinical trial began in August 1995; and a Phase III clinical trial
was initiated in the second quarter of 1997 and concluded in January 1999.
Patients that participated in the Phase III clinical trial have been allowed to
enter an extension trial for exisulind in APC. In December 1997, CPI initiated
Phase II/III clinical trials of exisulind for the treatment of sporadic
adenomatous colonic polyps (patient enrollment completed in April 1999) and for
the prevention of prostate cancer recurrence (patient enrollment completed in
the third quarter of 1998 with the extension phase initiated in February 1999)
as well as a pilot clinical trial of exisulind for the treatment of lung cancer.
In addition, a Phase II/III clinical trial of exisulind for prevention of breast
cancer recurrence (patient enrollment continuing) was initiated in February
1998; a Phase I clinical trial of exisulind in pediatric patients for APC was
initiated in June 1998 and completed in April 1999; a Phase II clinical trial of
exisulind in pediatric patients for APC was initiated in April 1999 (patient
enrollment continuing); a Phase II clinical trial of exisulind for the treatment
of Barrett's esophagus was initiated in January 1999 (patient enrollment
continuing); and a Phase II clinical trial of exisulind in patients with
progressive prostate cancer was initiated in May 1999 (patient enrollment
continuing). A Phase I clinical trial of CP 461 was conducted in the second
quarter of 1999.
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Since the end of the first quarter of 1999 the Company has obtained
favorable clinical data in three clinical trials. An independent interim
analysis of exisulind, at the six month time frame, in the one-year Phase II/III
clinical trial for the prevention of prostate cancer recurrence indicated a
positive statistically significant difference between drug and placebo groups.
An analysis of exisulind in a Phase III clinical trial for APC indicated, in the
patient population targeted by the study, a positive statistically significant
difference between drug and placebo groups. The Company expects to file a New
Drug Application for exisulind, for the APC indication, in the third quarter of
1999. Favorable data was also obtained from a Phase I safety clinical trial of
CP 461.
On November 3, 1998, CPI completed a financing through the acquisition
of Tseng Labs, Inc. ("Tseng") (a publicly-held company with no continuing
operations which, subsequent to the transaction, became a subsidiary of CPI), in
which CPI issued to Tseng stockholders approximately 5.5 million shares of CPI
Common Stock and received net proceeds of approximately $26.4 million.
The Company has not received any revenue from the sale of products, and
no product candidate of CPI has been approved for marketing. CPI's income has
been limited to interest income from investments, and CPI's primary source of
capital has been the sale of its equity securities and the transaction with
Tseng. As of June 30, 1999 and December 31, 1998 CPI's accumulated deficit was
$54,967,074 and $45,329,772, respectively, and the unrestricted cash and cash
equivalents for the same periods were $26,912,345 and $37,232,404, respectively.
The Company anticipates that it will continue to incur additional operating
losses for the next several years. There can be no assurance that any of the
Company's product candidates will be approved for marketing, that the Company
will attain profitability or, if profitability is achieved, that the Company
will remain profitable on a quarterly or annual basis in the future. CPI's
operating results will fluctuate from quarter to quarter. Some of these
fluctuations may be significant and, therefore, quarter to quarter comparisons
may not be meaningful.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 Compared with Three Months Ended June
30, 1998. Total expenses for the three months ended June 30, 1999 were
$4,658,094 an increase of $655,630 or 16.4% from the same period in 1998.
Research and development expenses ("R&D") for the three months ended June 30,
1999 were $3,590,342, an increase of $238,627 or 7.1%, from the same period in
1998 due primarily to additional personnel to support research and product
development activities. General and administrative ("G&A") expenses were
$1,067,752 for the three months ended June 30, 1999, an increase of $417,006 or
64.1%, from the same period in 1998 due primarily to higher facility expenses
associated with the Company's new and expanded facility, marketing expenses
related to commercialization preparations for exisulind and an increase in
personnel.
Interest income was $325,383 for the three months ended June 30, 1999,
an increase of $165,575 from the same period of 1998 due to higher average cash
balances.
Six Months Ended June 30, 1999 Compared with Six Months Ended June 30,
1998. Total expenses for the six months ended June 30, 1999 were $10,330,531 an
increase of $1,466,614 or 16.5% from the same period in 1998. R&D expenses for
the six months ended June 30, 1999 were $8,118,235, an increase of $1,220,690 or
17.7%, from the same period in 1998. Such increase was primarily due to the
procurement of raw materials of exisulind for on-going and planned clinical
trials and in preparation for the potential commercialization of exisulind, an
increase in clinical study related expenses and additional personnel to support
research and product development activities. G&A expenses were $2,212,296 for
the six months ended June 30, 1999, an increase of $245,924 or 12.5%, from the
same period in 1998. In the six months ended June 30, 1998, the Company recorded
a one-time charge of approximately $715,000 related to expenses for an initial
public offering that was not completed. The increase in G&A expenses is due to
increases in facility expenses, marketing expenses related to commercialization
preparations for exisulind and personnel expenses, which were partially offset
by the one-time charge in the same period in 1998 related to the expenses for
the initial public offering that was not undertaken.
Interest income was $693,229 for the six months ended June 30, 1999, an
increase of $449,975 from the same period of 1998 due to higher average cash
balances.
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LIQUIDITY AND CAPITAL RESOURCES
CPI has financed its operations since inception primarily with the net
proceeds received from private placements of equity securities and the
transaction with Tseng. Financing activities have generated net proceeds of
$81,874,233 from inception through June 30, 1999.
At June 30, 1999, the Company had cash and cash equivalents of
$26,912,345. The Company's cash position decreased by $10,320,059 for the six
months ended June 30, 1999 primarily due to the net operating loss in the six
months ended June 30, 1999 of $9,637,302, a reduction in current liabilities of
$1,398,903 and the addition of $300,862 in laboratory and computer equipment.
The Company received $439,205 and $275,941 in cash from the exercise of warrants
and stock options, respectively. CPI invests its excess cash primarily in low
risk, highly liquid money market funds and U.S. government treasuries. CPI has
$611,172 in a restricted account pledged as security for certain leases.
CPI leases approximately 40,000 square feet of laboratory and office
space in Horsham, Pennsylvania under a ten - year lease which expires in 2008
and which contains two five - year renewal options. The Company's lease expired
in June 1999 on its 7,900 square feet facility in Aurora, Colorado which was
vacated at the end of July 1998. The Company believes its facilities will be
adequate for the foreseeable future.
CPI anticipates that quarterly and annual expenditures for preclinical
studies, clinical trials, product development, research, selling, marketing and
administrative expenses will increase significantly in future periods. In
anticipation of possible FDA approval for the marketing of exisulind, in 1998
the Company began to make preparations and incurred expenses for the
commercialization of CPI's first product. There can be no assurance that CPI
will be able to successfully complete the clinical development of exisulind,
that the FDA will grant approval within the time frame expected, if at all, that
the other developments or expansions in CPI's research, development and
commercialization programs will not require additional funding or encounter
delays or that, in light of these or other circumstances, CPI will be able to
achieve anticipated levels of revenue, expense and cash flow.
CPI expects that it will require additional financing to continue its
research and development programs. CPI plans to finance its anticipated growth
and development largely through equity or debt financings and/or strategic
alliances with corporate partners. CPI believes, based on its current operating
plans, that its existing cash and cash equivalents balance of approximately
$26.9 million as of June 30, 1999, together with interest earned on the
Company's excess cash balances will provide sufficient working capital to
sustain operations into the fourth quarter of 2000. However, there can be no
assurance the Company will not require additional funding prior to that time, as
the Company must adapt to changing circumstances arising from within the
Company's programs or from outside the Company. There can be no assurance that
additional equity or debt financing or corporate collaborations will be
available on terms acceptable to the Company, if at all. Any additional equity
financing would be dilutive to stockholders. Debt financing, if available, may
include restrictive covenants. Corporate alliances could require the Company to
give up certain marketing rights or other rights to its potential products and
technology. If additional funds should be needed but are not available, the
Company may be required to modify its operations significantly or to obtain
funds by entering into collaborative arrangements or other arrangements on
unfavorable terms. The failure by the Company to raise capital on acceptable
terms if and when needed would have a material adverse effect on the Company's
business, financial condition and results of operations.
INFLATION
The Company does not believe that inflation has had any significant
impact on its business to date.
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INCOME TAXES
As of June 30, 1999, CPI has net operating loss carryforwards ("NOLs")
for income tax purposes available to offset future federal income tax, subject
to limitations for alternative minimum tax. In addition, the Company has other
significant deferred tax assets that will also offset future income tax. As the
Company has not yet achieved profitable operations, management believes the tax
assets do not satisfy the realization criteria of Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" and therefore the
Company has recorded a valuation allowance for the entire amount of its net tax
asset as of June 30, 1999. (Also see the Company's annual report on Form 10-K,
note 11 of notes to consolidated financial statements.)
The Tax Reform Act of 1986 contains provisions that may limit the NOLs
available to be used in any given year upon the occurrence of certain events,
including significant changes in ownership interest. A change in ownership of a
company of greater than 50% within a three-year period results in an annual
limitation on CPI's ability to utilize its NOLs from tax periods prior to the
ownership change. The Company believes that the transaction with Tseng triggered
such limitation. However, the Company does not expect such limitation to have a
significant impact on its operations.
RISKS ASSOCIATED WITH THE YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among others, a temporary
inability to process transactions and information, send invoices, or engage in
similar normal business activities.
The Company does not believe that it has material exposure to the Year
2000 issue with respect to its own information systems. The Company has reviewed
its existing systems and believes that they correctly define the Year 2000.
Non-information technology systems that utilize embedded technology, such as
microcontrollers, HVAC, and security may also face Year 2000 issues. However,
the Company believes that it does not have significant Year 2000 issues related
to non-information technology systems and is currently reviewing these systems.
This review will be completed in 1999.
In addition, CPI is conducting an analysis to determine the extent to
which its major suppliers', third-party researchers' and clinical trial sites'
systems (insofar as they relate to CPI's business) are subject to the Year 2000
issue. This review will be completed in 1999. CPI is currently unable to predict
the extent to which it would be vulnerable to its third parties failure to
remediate any Year 2000 issues on a timely basis. The failure of a major third
party subject to the Year 2000 issue to convert its systems on a timely basis or
a conversion that is incompatible with CPI's systems could have a material
adverse effect on CPI. However, CPI's activities to date have related primarily
to conducting research and development activities and therefore are not
significantly dependent on external third-party systems. All new contractual
arrangements with third parties require assurance that the third-party is Year
2000 compliant.
To date CPI has not made any contingency plans to address third-party
Year 2000 risks. CPI plans to formulate contingency plans to the extent
necessary in 1999. Historical costs directly related to Year 2000 issue
remediation have been immaterial as CPI's past infrastructure has been built
with Year 2000 issues in mind and to minimize these issues. Based on information
now known to CPI, the Company does not expect to incur material costs in the
future to address the Year 2000 issue, nor does the Company believe that it will
be required to make material capital expenditures to fix Year 2000 issues other
than system upgrades on a normal replacement schedule with only immaterial
opportunity costs of CPI personnel to ensure new systems and third parties are
Year 2000 compliant.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates
primarily relates to the Company's investment portfolio. The Company is averse
to principal loss and seeks to limit default risk, market risk and reinvestment
risk. In particular, the Company does not use derivative financial instruments
in its investment portfolio, places its investments with high quality issuers
and, except for investments with the U.S. Government, limits the amount of
credit exposure to any one issuer. The Company mitigates default risk by
investing in only the safest and highest credit quality securities,
predominantly those of the U.S. Government, and by positioning its portfolio to
respond appropriately to a significant reduction in a credit rating of any
investment issuer, guarantor or depository. The portfolio includes only
marketable securities with active secondary or resale markets to ensure
portfolio liquidity and has historically been invested in securities which have
original maturities of less than three months to ensure principal preservation.
As of June 30, 1999, the Company was invested in U.S. Government securities and
money market funds, which were classified as cash equivalents in the Company's
financial statements. The investments had principal (or notional) amounts of
$25,152,489 which were equal to their fair value, an average interest rate of
4.3% and mature in less than three months.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February and March of 1999, five stockholder class actions were
filed against the Company and certain of its officers and directors in the
United States District Court for the Eastern District of Pennsylvania seeking
unspecified damages on behalf of various classes of persons, including all
persons who purchased Company common stock during certain periods in 1998 and
1999. The complaints alleged that the Company had made false and misleading
statements about the efficacy and near-term commercialization of exisulind, the
Company's lead drug candidate. These actions were consolidated into one action
by court order of April 28, 1999. On June 28, 1999 a consolidated amended
complaint was filed on behalf of a class of all purchasers of Company common
stock between October 7, 1998 and February 2, 1999, inclusive. The Company
believes that the allegations are without merit and intends to vigorously defend
the litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on June 22, 1999, the
following three directors were elected for terms of three years each, as
follows:
Votes Votes Votes % of Outstanding
Director FOR AGAINST WITHHELD Voting FOR
-------- --- ------- -------- ----------
Thomas M. Gibson 21,849,782 0 109,181 89.86%
Roger J. Quy 21,905,641 0 53,332 90.09%
Randall M. Toig 21,905,737 0 53,226 90.09%
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following is a list of exhibits filed as part of the Form 10-Q.
27.1 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information only, and
not filed.
(b) There were no reports on Form 8-K filed during the quarter ended
June 30, 1999.
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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 PATHWAYS, INC.
Dated: August 16, 1999 By: /s/ ROBERT J. TOWARNICKI
-------------------------------------------------
Robert J. Towarnicki
President, Chief Executive Officer and Director
(Principal Executive Officer)
Dated: August 16, 1999 By: /s/ BRIAN J. HAYDEN
-------------------------------------------------
Brian J. Hayden
Chief Financial Officer; Vice President-Finance;
Treasurer (Principal Financial and
Accounting Officer)
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