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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, 2002 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: 00024889
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) (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, 2002 there were 35,260,273 shares of Common Stock, par value $0.01
per share, outstanding including 1,700,000 shares of Common Stock issued in
escrow related to the class action litigation settlement.
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 2002
PART 1 FINANCIAL INFORMATION (UNAUDITED) Page
----
Item 1 Financial Statements:
Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001........................................................ 2
Consolidated Statements of Operations for the three and six
months ended June 30, 2002 and 2001 and for the period
from inception (August 10, 1990) to June 30, 2002............................ 3
Consolidated Statements of Cash Flows for the
six months ended June 30, 2002 and 2001 and for the period
from inception (August 10, 1990) to June 30, 2002............................ 4
Notes to Consolidated Financial Statements .................................. 5 - 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 8 - 13
Item 3 Quantitative and Qualitative Disclosures about Market Risk................... 14
PART II OTHER INFORMATION
Item 1 Legal Proceedings............................................................ 14
Item 2 Changes in Securities........................................................ 14
Item 4 Submission of Matters to a Vote of Security Holders.......................... 14
Item 6 Exhibits and Reports on Form 8-K............................................. 15
Signatures................................................................... 16
1
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................................ $ 3,091,656 $ 2,905,767
Short-term investments ................................................................... 15,538,479 24,808,148
Accounts receivable ...................................................................... 2,029,097 318,450
Inventory ................................................................................ 1,234,141 --
Prepaid expenses and other ............................................................... 1,585,515 1,130,971
Due from insurance company ............................................................... 2,000,000 2,000,000
------------- -------------
Total current assets ............................................................... 25,478,888 31,163,336
EQUIPMENT, FURNITURE and LEASEHOLD IMPROVEMENTS ............................................ 986,945 992,856
RESTRICTED CASH ............................................................................ 466,524 463,499
NOTES RECEIVABLE FROM OFFICERS ............................................................. 1,025,193 944,397
OTHER ASSETS ............................................................................... 1,016,679 57,400
------------- -------------
$ 28,974,229 $ 33,621,488
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of note payable .......................................................... $ 297,168 $ 277,473
Current installments of obligation under capital lease ................................... 54,626 40,493
Accounts payable ......................................................................... 499,704 847,552
Accrued compensation ..................................................................... 766,394 764,843
Deferred revenue ......................................................................... 1,730,070 --
Accrued litigation settlement and expense ................................................ 2,185,939 2,642,822
Other accrued liabilities ................................................................ 2,409,097 3,272,314
------------- -------------
Total current liabilities .......................................................... 7,942,998 7,845,497
------------- -------------
NOTE PAYABLE ............................................................................... 26,653 180,330
------------- -------------
OBLIGATION UNDER CAPITAL LEASE ............................................................. 65,840 62,020
------------- -------------
Contingencies (Note 7)
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 10,000,000 shares authorized, none issued
and Outstanding ......................................................................... -- --
Common Stock, $.01 par value, 150,000,000 shares
authorized; 35,260,273 (including 1,700,000 shares
issued in escrow) and 31,148,255 shares issued and outstanding .......................... 352,602 311,482
Additional paid-in capital ............................................................... 151,356,619 148,631,231
Stock subscription receivable from issuance of Common Stock .............................. -- (50,683)
Deferred compensation .................................................................... (66,162) (73,652)
Deficit accumulated during the development stage ......................................... (130,704,321) (123,284,737)
------------- -------------
Total stockholders' equity ......................................................... 20,938,738 25,533,641
------------- -------------
$ 28,974,229 $ 33,621,488
============= =============
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
2
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
PERIOD FROM
THREE MONTHS ENDED SIX MONTHS ENDED INCEPTION
JUNE 30, JUNE 30, (AUGUST 10, 1990)
---------------------------- ---------------------------- TO
2002 2001 2002 2001 JUNE 30, 2002
------------- ------------- ------------- ------------- -------------
REVENUES ................................... $ 303,578 $ -- $ 303,578 $ 316,973 $ 1,575,503
EXPENSES:
Research and development ................ 4,116,395 3,415,882 8,427,641 7,198,096 101,833,877
Selling, general and administrative ..... 2,513,794 1,920,761 4,773,270 3,863,393 34,451,187
Litigation settlement and expense ....... (4,437,000) -- (5,287,000) -- 3,205,000
------------- ------------- ------------- ------------- -------------
Operating loss ....................... (1,889,611) (5,336,643) (7,610,333) (10,744,516) (137,914,561)
INTEREST INCOME, net ....................... 101,928 459,129 190,749 1,100,135 7,210,240
------------- ------------- ------------- ------------- -------------
NET LOSS ................................... $ (1,787,683) $ (4,877,514) $ (7,419,584) $ (9,644,381) $(130,704,321)
============= ============= ============= ============= =============
Basic and diluted net loss per Common Share $ (0.05) $ (0.16) $ (0.23) $ (0.31)
============= ============= ============= =============
Shares used in computing basic and
diluted net loss per Common Share ....... 33,560,273 31,100,945 32,447,420 31,095,422
============= ============= ============= =============
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
3
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
PERIOD FROM
SIX MONTHS ENDED INCEPTION
JUNE 30, (AUGUST 10, 1990)
-------------------------------- TO
2002 2001 JUNE 30, 2002
------------- ------------- -----------------
OPERATING ACTIVITIES:
Net loss ............................................................ $ (7,419,584) $ (9,644,381) $(130,704,321)
Adjustments to reconcile net loss to net cash used in
operating activities:
Settlement of litigation through agreement to
issue Common Stock ................................................ (5,287,000) -- 2,550,000
Depreciation and amortization expense ............................... 273,466 264,153 2,553,318
Loss on disposal of assets .......................................... -- -- 19,152
Interest income on notes receivable from officers ................... (26,796) (20,597) (82,239)
Interest income on promissory note from director .................... (284) -- (13,967)
Amortization of deferred compensation ............................... 7,490 -- 8,738
Issuance of Common Stock for services rendered ...................... -- -- 48,578
Issuance of Common Stock options for services rendered .............. (45,834) 169,035 428,492
Provision for redemption of Redeemable Preferred Stock .............. -- -- 1,017,387
Write-off of deferred offering costs ................................ -- -- 469,515
(Increase) decrease in accounts receivable .......................... (1,710,647) 329,694 (2,029,097)
Other ............................................................... -- -- 68,399
Increase in prepaid expenses and other current assets ............... (454,544) (182,775) (1,266,889)
Increase in due from insurance company .............................. -- -- (2,000,000)
(Increase) decrease in other assets ................................. (945) 32,693 92,422
Increase in inventory ............................................... (1,234,141) -- (1,234,141)
Increase in deferred revenue ........................................ 1,730,070 -- 1,730,070
Increase (decrease) in accounts payable and accrued liabilities ..... (1,209,514) (1,926,487) 1,054,204
Increase (decrease) in accrued litigation settlement and expense .... (456,883) -- 2,185,939
------------- ------------- -------------
Net cash flows used in operating activities ....................... (15,835,146) (10,978,665) (125,104,440)
------------- ------------- -------------
INVESTING ACTIVITIES:
Purchase of equipment, furniture and leasehold improvements ......... (185,200) (71,390) (5,829,528)
Sale of leasehold improvements ...................................... -- -- 3,000,000
Purchase of marketing and distribution rights ....................... (1,000,000) -- (1,000,000)
Increase in notes receivable from officers .......................... (54,000) (106,000) (942,954)
Cash paid for deposits .............................................. -- -- (50,767)
(Purchase) sale of short term investments ........................... 9,269,669 (28,510,409) (15,538,479)
------------- ------------- -------------
Net cash flows provided by (used in) investing activities .......... 8,030,469 (28,687,799) (20,361,728)
------------- ------------- -------------
FINANCING ACTIVITIES:
Proceeds from the issuance of Common Stock, net of offering costs ... 8,007,324 -- 44,707,573
Proceeds from the exercise of Series E, F, G, and Common Stock
warrants to purchase stock ........................................ -- -- 19,966,894
Proceeds from the issuance of Common Stock under the Employee Stock
Purchase Plan ...................................................... 92,018 88,505 777,328
Proceeds from issuance of Convertible Preferred Stock, net of related
offering costs ..................................................... -- -- 47,185,046
Proceeds from the transaction with Tseng Labs, Inc. ................. -- -- 27,966,372
Proceeds from the exercise of options to purchase Common Stock ...... -- 23,752 2,846,692
Decrease in shareholder receivable .................................. -- -- 23,626
Redemption of Redeemable Preferred Stock ............................ -- -- (546,051)
Proceeds from bridge loan ........................................... -- -- 791,000
Partner cash contributions .......................................... -- -- 5,312,355
(Increase) decrease in restricted cash .............................. (3,025) 217,572 (466,524)
Cash received from stock subscription .............................. 50,967 -- 50,967
Principal payments under capital lease obligations .................. (22,736) (38,218) (381,275)
Proceeds from borrowings ............................................ -- -- 950,000
Repayment of borrowings ............................................. (133,982) (116,811) (626,179)
------------- ------------- -------------
Net cash flows provided by financing activities .................... 7,990,566 174,800 148,557,824
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents ................ 185,889 (39,491,664) 3,091,656
CASH AND CASH EQUIVALENTS, beginning of period ...................... 2,905,767 49,528,407 --
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of period ............................ $ 3,091,656 $ 10,036,743 $ 3,091,656
============= ============= =============
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
4
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(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, the successor to, a Delaware
corporation of the same name. As the context requires, the "Company" is used
herein to signify the successor and/or the predecessor corporations.
The Company is a development stage pharmaceutical company focused on
the research and development of products to treat and prevent cancer, the future
commercialization of such products and the marketing and selling of
oncology-related products produced by others. The Company has not generated any
revenues from the sale of its products to date, nor is there any assurance of
any future product revenues from the development of its products. 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, profits from the sale of oncology-related
products produced by others, and corporate alliances. There is no assurance,
however, that such additional funding will be available on terms acceptable to
the Company, if at all, or that profits will be generated from the sale of
products produced by others. The Company will continue to be considered in the
development stage until such time as it generates significant revenues from
operations, whether through the marketing of its own products or through the
sales and marketing of products manufactured by third parties. Management
believes that the Company's existing cash, cash equivalents and short-term
investments will be adequate to fund operations into the second quarter of 2003,
based on projected revenue and expenditure levels. As of June 30, 2002, the
Company had a deficit accumulated during the development stage of $130,704,321.
Should appropriate sources of funding not be available on terms acceptable to
the Company, management would take action which could include the delay of
certain clinical trials and research activities until such time as appropriate
sources of funding were available.
On November 3, 1998, the Company completed a financing through the
acquisition of Tseng Labs, Inc. ("Tseng") (a publicly held company with no
continuing operations) 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 consolidated financial
statements include the accounts of the Company from inception (August 10, 1990)
and the accounts of Tseng after November 3, 1998.
In July 2000, the Company entered into an exclusive marketing and
promotion agreement (the "Nilandron Agreement") with Aventis Pharmaceuticals
Inc. ("Aventis"), to market Nilandron(R)(nilutamide) to urologists in the U.
S. and Puerto Rico for use in patients who suffer from prostate cancer. The
Company began to market and promote Nilandron(R) in September 2000. Under the
terms of the Nilandron Agreement, which is scheduled to expire at the end of
2002 unless extended by mutual consent, the Company is responsible for its
marketing and promotion expenses and receives from Aventis a percentage of the
gross margin on Aventis' sales in excess of a pre-established gross margin
threshold, if any.
In January 2002, the Company entered into a ten-year exclusive
distribution agreement (the "Gelclair Agreement") with Sinclair Pharmaceuticals
Ltd. ("Sinclair") to promote and distribute Gelclair(TM) Bioadherent Oral Gel in
North America (U.S., Canada and Mexico). Gelclair(TM) is an oral gel formulation
for the management and relief of pain associated with inflammation and
ulceration of the mouth caused by chemotherapy or radiotherapy treatments and
other causes. In June 2002, the Company began to promote Gelclair(TM) in the
oncology market. The Company purchases Gelclair(TM) from Sinclair and resells to
wholesale customers in the U.S.
5
Basis of Presentation
The unaudited consolidated financial statements as of June 30, 2002 and
for the three and six months ended June 30, 2002 and 2001 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, 2001 included in the Company's annual report on Form 10-K filed with the
Securities and Exchange Commission.
Concentration of Credit Risk
As of June 30, 2002, four wholesale customers represented 95% of the
accounts receivable due from shipments of Gelclair(TM). Credit risk is
controlled through use of credit limits, credit approvals and periodic credit
evaluations of wholesale customers.
2. ACQUISITION OF PRODUCT RIGHTS
In January 2002, the Company entered into a ten-year exclusive
distribution agreement with Sinclair to promote and distribute Gelclair(TM) in
North America. In June 2002, the Company began to promote Gelclair(TM) in the
U.S. oncology market (See Note 5). Under the Gelclair Agreement, the Company has
paid Sinclair $1 million for the exclusive right to market and distribute
Gelclair(TM) in North America, which amount has been capitalized and is being
amortized over the ten-year term of the Gelclair Agreement. The Company made a
$2 million payment in the first quarter of 2002 for inventory purchases,
committed to additional inventory purchases of $2 million, $3 million and $5
million in 2002, 2003 and 2004, respectively, and could be responsible for
milestone payments totaling $3 million related to the achievement of certain
sales, patent and clinical trial milestones. The Company purchases Gelclair(TM)
from Sinclair and resells to wholesale customers in the U.S.
3. SHORT TERM INVESTMENTS
The Company invests in U.S. Government securities. Securities with
maturities greater than three months at the time of purchase are considered to
be investments. The investments are classified as held-to-maturity and are
stated at amortized cost. The carrying amount of the investments approximates
fair value due to their short maturities.
4. INVENTORY
Inventory is comprised solely of Gelclair(TM) and is stated at the
lower of cost or market as determined using the first-in, first-out method.
Inventory consisted of the following as of June 30, 2002:
Finished goods on hand $ 656,638
Inventory subject to return 577,503
----------
$1,234,141
==========
Inventory subject to return represents the amount of Gelclair(TM)
shipped to wholesale customers which has not been recognized as revenue (See
Note 5).
5. REVENUE RECOGNITION
The Company recognizes revenue under the Nilandron Agreement in the
period in which marketing services are performed if Aventis' sales of
Nilandron(R) for that period exceed specified thresholds.
Product revenues are recognized upon shipment of product and are
recorded net of reserves for returns and allowances. A reserve for returns is
determined by using reports from external, independent sources. These reports
provide data on prescriptions filled through retail outlets as well as shipments
made from our wholesaler customers to the retail pharmacies. The reserve is
established and adjusted based on the movement of product through the supply
chain, thereby identifying slow moving product that is more likely to be
returned. The reserve is reviewed at each reporting period and adjusted to
reflect current data.
Product sales of Gelclair(TM) to the Company's wholesale customers were
initiated in the U.S. in May 2002. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 48, "Revenue Recognition When Right of Return
Exists", the Company fully deferred revenue on product shipments of Gelclair(TM)
to wholesale customers based on the following criteria: (a) Gelclair(TM) is a
new product and the Company has limited sales, returns and collection history;
6
(b) the product can be returned for up to 36 months from shipment; (c) wholesale
customers received extended payment terms for their initial orders; (d)
prescription data from external, independent sources was limited or not
available at the date of the preparation of the financial statements; (e) the
Company is not able to reasonably estimate market penetration during product
launch; and (f) to-date, wholesale customer reorders have been minimal. At each
reporting period, the Company intends to monitor shipments from wholesale
customers to pharmacies, wholesale customer reorder history and prescriptions
filled by pharmacies. Should this data indicate a flow of product through the
supply chain, which would indicate that returns are less likely to occur, the
product deferral amount would be adjusted, which could result in the recognition
of revenue. For the three months ended June 30, 2002, shipments to wholesale
customers were $1,730,000 and have been recorded as deferred revenue in the
accompanying balance sheet. In addition, the related cost of the product shipped
to wholesale customers has also been deferred and is reflected as a component of
inventory (See Note 4).
6. BASIC AND DILUTED NET LOSS PER COMMON SHARE
The Company presents basic and diluted net loss per Common share
pursuant SFAS No. 128, "Earnings Per Share." SFAS No. 128 requires dual
presentation of basic and diluted net loss per Common share. "Basic" net loss
per Common share equals net loss divided by the weighted average Common shares
outstanding during the period. "Diluted" net loss per Common share equals net
loss divided by the sum of the weighted average Common shares outstanding during
the period plus Common Stock equivalents. The Company's basic and diluted net
loss per share amounts are the same since the assumed exercise of stock options
and warrants is anti-dilutive due to the Company's losses. The amount of Common
Stock equivalents excluded from the calculation are options and warrants to
purchase 4,668,842 and 7,947,062 shares of Common Stock as of June 30, 2002 and
2001, respectively. In addition, the weighted average Common Stock outstanding
excludes 1,700,000 shares issued in escrow in connection with the settlement of
litigation (See Note 7).
7. LITIGATION
In March, April and May of 2001, eleven stockholder class actions were
filed in the United States District Court for the Eastern District of
Pennsylvania against the Company and certain of its officers and directors
seeking unspecified damages. The lawsuits alleged that the Company and its
officers made false and misleading statements about the Company's drug
candidate, Aptosyn(R), which caused artificial inflation of the Company's
stock price during the class period of October 27, 1999 to September 22, 2000,
when the Company announced that the FDA had informed the Company that it would
be receiving a "not approvable" letter for its new drug application for
Aptosyn(R). In February 2002, a stipulation of settlement was agreed to and
submitted to the Court. Pursuant to this stipulation of settlement, the
Company's insurance carrier has paid $2 million into escrow and the Company has
issued 1.7 million shares into escrow. On June 6, 2002, the Court entered an
order certifying the class for settlement purposes, approving the notice of
class action certification and proposed settlement, and setting a hearing for
September 6, 2002 to determine whether the settlement should be approved and, if
so, how the settlement fund should be allocated, what the attorneys' fees should
be and how other matters related to the settlement should be handled. As of
December 31, 2001, the Company recorded the fair value of the 1.7 million shares
of Common Stock of $7,837,000, as an increase to additional paid-in capital and
recorded a charge to litigation settlement expense for the fair value of the
Common Stock. As of June 30, 2002, the fair value of the 1.7 million shares was
adjusted to $2,550,000 based on the current fair value of the shares as of June
30, 2002, which resulted in a $5,287,000 reduction to the litigation settlement
expense and a decrease to additional paid-in capital during the six months ended
June 30, 2002. In addition, the Company has accrued the $2 million paid by the
Company's insurance company as a liability and recorded a corresponding asset
due from the insurance company. Until such time as the settlement is approved by
the court, the Company will adjust the above value of the 1.7 million shares
based on the then current fair value of the shares. Such adjustments will result
in non-cash income or expense in subsequent interim periods.
7
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 in this report, and oral statements made in respect
of this report, 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. Statements of historic fact must also be understood in the
context of, and subject to, these risks. Such risks and uncertainties relate to,
among other factors: early stage of development; absence of approved products;
history of operating losses; the need for further financing; dependence on the
development, regulatory approval and market acceptance of one or more of our
product candidates for one or more significant disease indications; the costs,
delays and uncertainties inherent in scientific research, basic pharmaceutical
research, drug development, clinical trials and the regulatory approval process,
with respect to both our current product candidates and our future product
candidates, if any; the risks that CP461 will not exhibit safety and efficacy in
its current and future clinical trials in cancer indications, in Crohn's disease
or in any other disease indication; the risks that accrual of our Phase III
trial of Aptosyn(R) and Taxotere(R) is not completed by year-end and that
safety and efficacy are not demonstrated by this combination therapy in this
trial; 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; uncertainty that additional studies, if
any, of Aptosyn(R), CP461 or any other compound may not be positive;
uncertainty of obtaining regulatory approval of any compound for any disease
indication whether due to adequacy of the development program, changing
regulatory requirements or otherwise; the risk that the Company does not conduct
the clinical studies it may have planned to conduct or does not pursue
development plans it may have planned to pursue; the risk that the U.S. Food and
Drug Administration may stop or delay any clinical study for reasons of safety
or otherwise; the risk that a registration strategy for CP461 in cancer is not
fully developed by year-end, whether due to the nature or timing of further
clinical results or otherwise; the risk that clinical studies do not result in
the safety and efficacy necessary to obtain regulatory approvals; the risks of
conducting clinical trials, including the risk of conducting clinical trials of
our drugs in combination with other drug therapies; the commercial risk and risk
of liability in marketing and selling Gelclair(TM) Bioadherent Oral Gel,
including the risk that the prescribers do not prescribe the product and sales
do not materialize, the risk that the Company does not achieve an arrangement
for distribution of Gelclair(TM) into the dental market, the risk that the
market opportunity available to Gelclair(TM) is smaller than estimated, due to
inaccurate assumptions, competition or other factors, the risks associated with
the product launch, manufacturing and marketing risks, and the risk that the
Company's sales of Gelclair(TM) are less than the Company's minimum purchase
obligations; the commercial risk and risk of liability in providing marketing
services promoting Nilandron(R) (nilutamide) manufactured by Aventis
Pharmaceuticals, Inc., including the risk that Aventis' sales of Nilandron(R)
do not exceed the threshold entitling the Company to a percentage of gross
margin; the risk that the Company may enter into, or may fail to enter into,
licensing, partnership or collaborative arrangements or strategic alliances
which accord to other companies rights with respect to one or more Company
compounds, technologies or programs in exchange for financing and operational
assistance, or in which the Company acquires rights and obligations; the
volatility of the market price of our Common Stock; our ability to sell
securities registered under the shelf registration statement or otherwise; the
risk of dilution through the effects of further financings or strategic
alliances; acceptance of any product candidates by physicians and providers of
healthcare reimbursement; the actions of competitors; the pace of technological
changes in the biopharmaceutical industry; dependence upon third parties; the
validity, scope and enforceability of patents; the risk of pending or future
class action securities litigation; potential product liability claims; and
availability and adequacy of insurance.
These and other risks are detailed in our reports filed from time to
time under the Securities Act and/or the Securities Exchange Act, including the
sections entitled "Business," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Other Events" in
our annual reports on Form 10-K, quarterly reports on Form 10-Q and periodic
reports on Form 8-K and in such registration statements on Form S-3 as we may
file from time to time. You are encouraged to read these filings as they are
made. They are available over the Internet from the SEC in its EDGAR database at
http://www.sec.gov and from the Company. Be sure to read the "Risk Factors" in
Item 1 of Form 10-K (and also the discussion of the related subject matters
appearing in Item 1 of Form 10-K).
Given the uncertainties affecting pharmaceutical companies in the
development stage, you are cautioned not to place undue reliance on any such
forward-looking statements, any of which may turn out to be wrong due to
inaccurate assumptions, unknown risks, uncertainties or other factors. No
forward-looking statement can be guaranteed; actual future results may vary
materially.
8
Both forward-looking statements and statements of historic fact must be
understood in the context of, and subject to, the risks referred to above which
characterize our development stage business. We undertake no obligation to
update or revise the statements made herein or the risk factors that may relate
thereto.
OVERVIEW
Cell Pathways, Inc. is a development stage pharmaceutical company
focused on the research and development of products to treat and prevent cancer,
the future commercialization of such products and the marketing and selling of
oncology-related products produced by others. 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
and, commencing in September 2000, the marketing of products produced by others.
The Company's initial investigational new drug application ("IND") was filed
with the U.S. Food and Drug Administration ("FDA") in December 1993 for human
clinical trials of the Company's first product candidate, Aptosyn(R)
(exisulind). The Company filed an IND for its second product candidate, CP461,
in December 1998. In August 1999, the Company submitted to the FDA a new drug
application ("NDA") for use of Aptosyn(R) in treating familial adenomatous
polyposis, an orphan drug indication. In September 2000, the Company received a
"not approvable" letter from the FDA for this NDA. The Company currently is
focusing its development resources on Aptosyn(R) and CP461 in various cancer
indications. In March 2001, the Company initiated a Phase III randomized,
placebo controlled, double-blind multi-center study of approximately 600
patients with advanced non-small cell lung cancer ("NSCLC"), refractory to
standard platinum-containing combination chemotherapy, designed to evaluate
Aptosyn(R) in combination with Taxotere(R) versus Taxotere(R) and
placebo. In October 2001, the FDA put this study on clinical hold to new patient
accrual pending completion of a planned interim safety analysis. Patients
already enrolled on the protocol were allowed to continue treatment. Subsequent
reviews by both the independent data and safety monitoring board ("DSMB") and
the FDA resulted in the lifting of the clinical hold in December 2001 at which
time the Company resumed enrollment of new patients. In the third quarter of
2001, the Company initiated pilot Phase IIa studies of CP461 in various cancer
indications.
On November 3, 1998, CPI completed a financing through the acquisition
of Tseng Labs, Inc. ("Tseng") (a publicly held company with no continuing
operations) 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. In October 1999, the Company issued 1.555 million shares of Common
Stock for net proceeds of approximately $13.5 million. During the year ended
December 31, 2000, the Company received approximately $23.1 million from the
issuance of 3.2 million shares of Common Stock and approximately $20.8 million
primarily from the exercise of previously issued Common Stock warrants and
options. In March 2002, the Company received approximately $8.0 million from the
issuance of 2.4 million shares of Common Stock. Common Stock outstanding at June
30, 2002 and December 31, 2001 was 35.3 million (including 1.7 million shares
issued in escrow for the class action litigation settlement) and 31.1 million
shares, respectively.
In July 2000, the Company entered into an exclusive marketing and
promotion agreement (the "Nilandron Agreement") with Aventis Pharmaceuticals
Inc. ("Aventis"), to market Nilandron(R) (nilutamide) to urologists in the
U.S. and Puerto Rico for use in patients who suffer from prostate cancer. The
Company began to market Nilandron(R) in September of 2000. Under the terms of
the Nilandron Agreement, which is scheduled to expire at the end of 2002 unless
extended by mutual agreement, the Company is responsible for its marketing and
promotion expenses and receives from Aventis a percentage of the gross margin on
Aventis' sales in excess of a pre-established gross margin threshold, if any.
The Company recognized revenue of $303,578 for the second quarter and six months
ended June 30, 2002, respectively, and $0 and $316,973 for the second quarter
and six months ended June 30, 2001, respectively, under the Nilandron Agreement.
In January 2002, the Company entered into a ten-year exclusive
distribution agreement (the "Gelclair Agreement") with Sinclair Pharmaceuticals
Ltd. ("Sinclair") to promote and distribute Gelclair(TM) Bioadherent Oral Gel in
North America (U.S., Canada and Mexico). Gelclair(TM) is an oral gel formulation
for the management and relief of pain associated with inflammation and
ulceration of the mouth caused by chemotherapy or radiotherapy treatments and
other causes. Product sales of Gelclair(TM) to the Company's wholesale customers
were initiated in the U.S. in May 2002. The Company purchases Gelclair(TM) from
Sinclair and resells to wholesale customers in the U.S. For the three months
ended June 30, 2002, the Company shipped $1,730,000 to wholesale customers,
which, under the Company's revenue recognition policy, was fully deferred (See
Note 5).
The Company has not generated any revenue from the sale of its own
products, and none of its product candidates has been approved for marketing.
The Company's income has been limited to interest income from investments and,
beginning in the fourth quarter of 2000, revenues from the Nilandron Agreement;
its primary source of capital has been the sale of its equity securities,
including the transaction with Tseng. Net losses were $31,404,435 and
$26,916,808 for the years ended December 31, 2001 and 2000, respectively, and
the net loss for the six months ended June 30, 2002 was
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$7,419,584. As of June 30, 2002, the accumulated deficit was $130,704,321 and
the cash, cash equivalents and short-term investments were $18,630,135. The
Company anticipates that it will continue to incur additional operating losses
for the next several years and that it will need to raise additional capital
through financings or corporate alliances to sustain its operations. Should
appropriate sources of funding not be available on terms acceptable to the
Company, management would take action which could include the delay of certain
clinical trials and research activities until such time as appropriate sources
of funding were available. There can be no assurance that any of the Company's
product candidates will be approved for marketing, that profitability will be
attained or, if profitability is achieved, that the Company will remain
profitable on a quarterly or annual basis in the future. The Company's operating
results will fluctuate from quarter to quarter. Some of these fluctuations may
be significant and, as a result, quarter to quarter comparisons may not be
meaningful.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 Compared with Three Months Ended June
30, 2001.
For the three months ended June 30, 2002, revenue from the Nilandron
Agreement was $303,578 compared to $0 revenue for the same period of 2001.
Product shipments of Gelclair(TM) to the Company's wholesale customers were
initiated in the U.S. in May 2002. For the three months ended June 30, 2002,
shipments to wholesale customers were $1,730,000. The Company recognizes product
revenues upon shipment of product to its wholesale customers, net of reserves
for returns and allowances. Due to the recent launch of Gelclair(TM) and the
Company's lack of history and market data for this product, the Company has
fully deferred the $1,730,000 of product shipments for the three months ended
June 30, 2002. The Company's deferral is determined by using reports from
external, independent sources. These reports provide data on prescriptions
filled through retail outlets as well as shipments made from the Company's
wholesaler customers to the retail pharmacies. The deferral is established and
adjusted based on the movement of product through the supply chain, thereby
identifying slow moving product that is more likely to be returned. The reserve
will be reviewed at each reporting period and adjusted to reflect current data.
Total expenses for the three months ended June 30, 2002 were
$2,193,189. In the second quarter of 2002, the Company recorded a non-cash
reduction of litigation settlement expense of $4,437,000 related to the
Company's agreement to settle its securities class action litigation (See Note
7). This adjustment to the amount previously recorded by the Company in 2001 and
during the first quarter of 2002 represents the change in the fair value of 1.7
million shares of the Company's Common Stock, which in June 2002 was issued in
escrow, in connection with the settlement. The Company will continue to make
adjustments to this amount based on the fair value of the stock until the
settlement is final. Such adjustment will result in non-cash income or expense
in subsequent interim periods. Excluding the non-cash reduction of litigation
settlement expense of $4,437,000, total expenses for the three months ended June
30, 2002 would have been $6,630,189, an increase of $1,293,546 or 24.2% from the
same period in 2001.
Research and development ("R&D") expenses for the three months ended
June 30, 2002 were $4,116,395, an increase of $700,513 or 20.5% from the same
period in 2001. This increase was primarily due to clinical study expenses
associated with the Company's Phase III clinical trial of Aptosyn(R) in
combination with Taxotere(R) in patients with non-small cell lung cancer, and
three ongoing pilot Phase IIa clinical trials of CP461 in patients with chronic
lymphocytic leukemia, hormone-refractory prostate cancer and renal ("kidney")
cell carcinoma. Selling, general and administrative ("SG&A") expenses were
$2,513,794 for the three months ended June 30, 2002, an increase of $593,033, or
30.9% from the same period in 2001. This increase was primarily due to marketing
and promotion expenses for Gelclair(TM).
Interest income, net of interest expense, was $101,928 for the three
months ended June 30, 2002, a decrease of $357,201 from the same period of 2001,
due to lower average cash balances and lower average interest rates on
investments.
Six Months Ended June 30, 2002 Compared with Six Months Ended June 30,
2001.
Revenues from the Nilandron Agreement were $303,578 and $316,973 for
the six months ended June 30, 2002 and 2001, respectively. Product shipments of
Gelclair(TM) to the Company's wholesale customers were initiated in the U.S. in
May 2002. For the six months ended June 30, 2002, shipments to wholesale
customers were $1,730,000 which was fully deferred due to the recent launch of
Gelclair(TM) and the Company's lack of history and market data for this product.
The deferral will be reviewed at each reporting period and adjusted to reflect
current data.
Total expenses for the six months ended June 30, 2002 were $7,913,911.
For the six months ended June 30, 2002, the Company recorded a non-cash
reduction of litigation settlement expense of $5,287,000 related to the
Company's agreement to settle its securities class action litigation. This
adjustment to the amount previously recorded by the Company in 2001 represents
the change in the fair value of 1.7 million shares of the Company's Common
Stock, which in June 2002 was issued in escrow, in connection with the
settlement. The Company will continue to make
10
adjustments to this amount based on the fair value of the stock until the
settlement is final. Such adjustment will result in non-cash income or expense
in subsequent interim periods. Excluding the non-cash reduction of litigation
settlement expense of $5,287,000, total expenses for the six months ended June
30, 2002 would have been $13,200,911, an increase of $2,139,422 or 19.3% from
the same period in 2001.
R&D expenses for the six months ended June 30, 2002 were $8,427,641, an
increase of $1,229,545 or 17.1%, from the same period in 2001. This increase was
primarily due to clinical study expenses associated with the Company's Phase III
clinical trial of Aptosyn(R) in combination with Taxotere(R) in patients with
non-small cell lung cancer, and three ongoing pilot Phase IIa clinical trials of
CP461 in patients with chronic lymphocytic leukemia, hormone-refractory prostate
cancer and renal ("kidney") cell carcinoma. SG&A expenses were $4,773,270 for
the six months ended June 30, 2002, an increase of $909,877 or 23.6%, from the
same period in 2001. This increase was primarily due to marketing and promotion
expenses for Gelclair(TM).
Interest income, net of interest expense, was $190,749 for the six
months ended June 30, 2002, a decrease of $909,386 or 82.7% from the same period
of 2001, primarily due to lower average cash balances and lower average interest
rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily with
the net proceeds received from the sale of equity securities, including the
transaction with Tseng. Financing activities have generated net proceeds of
$148.6 million from inception through June 30, 2002.
As of June 30, 2002, the Company had cash, cash equivalents, and
short-term investments of $18,630,135, a decrease of $9,083,780 from the
comparable balances at December 31, 2001. This decrease was primarily the result
of cash used to fund operations for the six months ended June 30, 2002, $3
million in payments to Sinclair for both the licensing rights to market
Gelclair(TM) and initial inventory commitments and a $0.6 million clinical trial
recruitment milestone payment for Aptosyn(R) in non-small cell lung cancer.
Partially offsetting the cash used in the first six months of 2002 was $8
million of cash received from a private placement of 2.4 million shares of the
Company's Common Stock. The Company invests its excess cash primarily in low
risk, highly liquid money market funds and U.S. government securities. As of
June 30, 2002 the Company had a portion of its excess cash invested in U.S.
government securities with original maturities in excess of three months,
thereby requiring such investments to be classified as short-term investments.
As of June 30, 2002, the Company had $466,524 in a restricted cash account
pledged for a security deposit under the lease of its Horsham, Pennsylvania
facility.
In March 2002, the Company sold 2,390,107 shares of Common Stock in a
private placement, mainly to institutional investors, at a price of $3.70 per
share, resulting in net proceeds of approximately $8.0 million. With each share
of Common Stock purchased, the Company issued a warrant to purchase twenty-five
one-hundredths (0.25) shares of the Company's Common Stock at $4.74 per share.
The warrants are exercisable until March 26, 2006.
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 believes its
facilities will be adequate for the foreseeable future.
In March, April and May of 2001, eleven stockholder class actions were
filed in the United States District Court for the Eastern District of
Pennsylvania against the Company and certain of its officers and directors
seeking unspecified damages. The lawsuits alleged that the Company and its
officers made false and misleading statements about the Company's drug
candidate, Aptosyn(R), which caused artificial inflation of the Company's
stock price during the class period of October 27, 1999 to September 22, 2000,
when the Company announced that the FDA had informed the Company that it would
be receiving a "not approvable" letter for its NDA for Aptosyn(R). In
February 2002, a stipulation of settlement was agreed to and submitted to the
Court. Pursuant to this stipulation of settlement, the Company's insurance
carrier has paid $2 million into escrow and the Company has issued 1.7 million
shares into escrow. On June 6, 2002, the Court entered an order certifying the
class for settlement purposes, approving the notice of class action
certification and proposed settlement, and setting a hearing for September 6,
2002 to determine whether the settlement should be approved and, if so, how the
settlement fund should be allocated, what the attorneys' fees should be and how
other matters related to the settlement should be handled. As of December 31,
2001, the Company recorded the fair value of the 1.7 million shares of Common
Stock of $7,837,000 as an increase to additional paid-in capital and recorded a
charge to the litigation settlement expense for the fair value of the Common
Stock and the estimated legal costs of $655,000. As of June 30, 2002, the
Company reduced the value of the 1.7 million shares by $5,287,000 resulting in a
reduction to both the litigation settlement expense and additional paid-in
capital based on the current fair value of the Common Stock as of June 30, 2002.
In addition, the Company has accrued the $2 million paid by the Company's
insurance company as a liability and recorded a corresponding asset due from the
insurance company.
11
Under the Gelclair Agreement, in the first quarter ended March 31,
2002, the Company paid Sinclair $1 million for the exclusive right to market and
distribute Gelclair(TM) in North America and $2 million for inventory purchases.
The Company committed to additional inventory purchases of $2 million, $3
million and $5 million in 2002, 2003 and 2004, respectively, and could be
responsible for milestone payments totaling $3 million related to the
achievement of certain sales, patent and clinical trial milestones.
The Company anticipates the annual expenditures for preclinical
studies, clinical trials, product development, research, selling and marketing,
and general and administrative expenses will increase significantly in future
years. CPI anticipates that it will need to raise additional capital. There can
be no assurance that the Company will be able to successfully complete the
clinical development of Aptosyn(R), CP461 or any other drug candidate for any
indication, that the FDA will grant approval of any drug candidate for any
indication, or that the other developments or expansions in CPI's research,
development and commercialization and sales and marketing programs will
ultimately lead to revenues or profitability for the Company.
CPI cannot predict the date of its first product approval, if any, the
rate of revenue generated from initial product sales, if achieved, the level of
expense which may be associated with such initial product sales, or the level of
revenue and expense associated with the marketing and/or selling of products
made by others. The Company anticipates that it will require additional
financing in the future to continue its research and development programs. Until
such time as CPI is able to generate sufficient revenue, if ever, CPI plans to
finance its anticipated growth and development largely through equity or debt
financing and/or strategic or corporate alliances. CPI believes, based on its
current operating plans, that its existing, cash, cash equivalents and
short-term investments balance of approximately $18.6 million as of June 30,
2002, together with interest earned on these balances, will be adequate to fund
operations into the second quarter of 2003. However, there can be no assurance
that 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 and 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 CPI, if at all. Should appropriate sources of funding not be
available on terms acceptable to the Company, management would take action which
could include the delay of certain clinical trials and research activities until
such time as appropriate sources of funding was available. Any additional equity
financing would be dilutive to stockholders. Debt financing, if available, may
include restrictive covenants and also may be dilutive. Corporate alliances
would generally require the Company to give up certain marketing rights or other
rights to its potential products and technology and may also be dilutive. 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 CPI to raise capital on acceptable terms if and when needed would
have a material adverse effect on CPI'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.
INCOME TAXES
As of June 30, 2002, CPI had 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, 2002. (Also see Note 11 of notes to consolidated financial
statements in the Company's December 31, 2001 annual report on Form 10-K.)
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 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of long-lived assets
and the associated asset
12
retirement costs. SFAS No. 143 requires that the fair value of a liability
associated with an asset retirement be recognized in the period in which it is
incurred, with the associated retirement costs capitalized as part of the
carrying amount of the long-lived asset and subsequently depreciated over its
useful life. The adoption of SFAS No. 143 did not have any impact on the
Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which establishes a single
accounting model, based on the framework established in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," and resolves significant implementation issues related to SFAS
No. 121 and Accounting Principles Board ("APB") Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of a Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The Company is required to adopt SFAS No. 144 for its year ending
December 31, 2002, however early application is permitted. The Company adopted
SFAS No. 144 on January 1, 2002. The adoption had no impact on the Company's
financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses significant
issues regarding the recognition, measurement, and reporting of costs associated
with exit and disposal activities, including restructuring activities. SFAS No.
146 also addresses recognition of certain costs related to terminating a
contract that is not a capital lease, costs to consolidate facilities or
relocate employees, and termination benefits provided to employees that are
involuntarily terminated under the terms of a one-time benefit arrangement that
is not an ongoing benefit arrangement or an individual deferred-compensation
contract. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. Given that SFAS No. 146 was issued in June
2002 and is not yet effective, the impact on the Company's financial position or
results of operations from adopting SFAS No. 146 has not been determined.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 2 of the notes to consolidated financial statements,
in the Company's December 31, 2001 annual report on Form 10-K, includes a
summary of our significant accounting policies and methods used in the
preparation of our consolidated financial statements. While the preparation of
our consolidated financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
reported amounts of expenses during the reporting period, we do not believe the
Company's financial statements are significantly affected by complex accounting
policies and methods, given our stage of development.
REVENUE RECOGNITION
We recognize revenue under the Nilandron Agreement in the period in
which marketing services are performed if Aventis' gross margin of sales of
Nilandron(R)for that period exceed specified thresholds.
Product revenues are recognized upon shipment of product and are
recorded net of reserves for returns and allowances. A reserve for returns is
determined by using reports from external, independent sources. These reports
provide data on prescriptions filled through retail outlets as well as shipments
made from our wholesaler customers to the retail pharmacies. The reserve is
established and adjusted based on the movement of product through the supply
chain thereby identifying slow moving product that is more likely to be
returned. The reserve is reviewed at each reporting period and adjusted to
reflect current data.
Product sales of Gelclair(TM) to the Company's wholesale customers were
initiated in the U.S. in May 2002. In accordance with SFAS No. 48, "Revenue
Recognition When Right of Return Exists", the Company fully deferred revenue on
product shipments of Gelclair(TM) to wholesale customers based on the following
criteria: (a) Gelclair(TM) is a new product and the Company has limited sales,
returns and collection history; (b) the product can be returned for up to 36
months from shipment; (c) wholesale customers received extended payment terms
for their initial orders; (d) prescription data from external, independent
sources was limited or not available at the date of the preparation of the
financial statements; (e) the Company is not able to reasonably estimate market
penetration during product launch; and (f) to-date, wholesale customer reorders
have been minimal. At each reporting period, the Company intends to monitor
shipments from wholesale customers to pharmacies, wholesale customer reorder
history and prescriptions filled by pharmacies. Should this data indicate a flow
of product through the supply chain, which would indicate that returns are less
likely to occur, the product reserve amount would be adjusted, which could
result in the recognition of revenue.
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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 six months to ensure principal preservation. As
of June 30, 2002, the Company was primarily invested in U.S. Government
securities and money market funds, which were classified as cash, cash
equivalents and short-term investments in the Company's financial statements.
The investments had principal (or notional) amounts of $15,599,000 which were
equal to their fair value, an average interest rate of 1.9% and maturities of
less than one year.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Footnote 7 to the Notes to the Company's
consolidated financial statements included herein is hereby incorporated by
reference.
ITEM 2. CHANGES IN SECURITIES
In June 2002, as part of the Company's settlement of its class action
litigation, the Company issued in escrow 1.7 million shares of the Company's
Common Stock. The information set forth in Footnote 7 to the Notes to the
Company's consolidated financial statements included herein is hereby
incorporated by reference. If the settlement of the class action is approved by
the Court, the stock is expected to be issued to members of the class pursuant
to the exemption provided in Section 3(a)(10) of the Securities Act of 1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on May 29, 2002, the
following matters were submitted to a vote of security holders:
a) Two directors were elected for terms of three years each, as
follows:
Votes Votes Votes %
Director FOR AGAINST WITHHELD Voting FOR
-------- ---------- ------- -------- ----------
D. Bruce Burlington, M.D 27,185,781 -- 687,902 97.5%
Paul J. Duggan 27,226,456 -- 647,227 97.7%
b) The Amendment to the 1997 Non-Employee Directors' Stock Option
Plan was approved, as follows:
Votes Votes Votes %
FOR AGAINST WITHHELD Voting FOR
- ---------- --------- ------- ----------
24,569,038 3,201,155 103,490 88.1%
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 Certification Pursuant to 18U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
Exhibit 99.2 Certification Pursuant to 18U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
(b) The Company filed a report of Form 8-K dated June 14, 2002,
reporting under Item 4 - Changes in Registrant's Certifying
Accountant.
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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 13, 2002 By: /s/ Robert J. Towarnicki
-----------------------------
Robert J. Towarnicki
Chairman, President, Chief Executive Officer
and Director
(Principal Executive Officer)
Dated: August 13, 2002 By: /s/ Brian J. Hayden
------------------------
Brian J. Hayden
Chief Financial Officer; Vice President -
Finance; Treasurer
(Principal Financial and Accounting Officer)
16