AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER , 2000
REGISTRATION NO. 333-45496
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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STEMCELLS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other Jurisdiction 2836 94-3078125
of Incorporation or (Primary Standard Industrial (I.R.S. Employer
Organization) Classification Code Number) Identification No.)
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525 DEL REY AVENUE, SUITE C
SUNNYVALE, CA 94085
(408)731-8670
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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IRIS BREST, ESQ.
STEMCELLS, INC.
525 DEL REY AVENUE, SUITE C
SUNNYVALE, CA 94085
(408)731-8670
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
GEOFFREY B. DAVIS, ESQ.
Ropes & Gray
One International Place
Boston, Massachusetts 02110
(617) 951-7000
(617) 951-7050 (fax)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) REGISTRATION FEE
Common Stock, par value $.01 per share....... 3,205,486 Shares $8.22 $26,349,094 $6,956.16
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. The maximum price
per share information is based on the average of the high and low sale
prices on the Nasdaq National Market on September 7, 2000.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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PROSPECTUS
NOVEMBER , 2000
STEMCELLS, INC.
SHARES OF COMMON STOCK
---------------
The selling stockholders listed on page 44 of this prospectus or in an
accompanying supplement to this prospectus are offering to sell 3,205,486 shares
of our common stock.
Our common stock is traded on the Nasdaq National Market under the symbol
"STEM."
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THIS INVESTMENT INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
TABLE OF CONTENTS
PAGE
--------
Prospectus Summary..................... 2
Risk Factors........................... 4
Forward-Looking Statements............. 11
Industry and Market Data............... 11
Use of Proceeds........................ 11
Dividend Policy........................ 11
Capitalization......................... 12
Dilution............................... 13
Selected Consolidated Financial Data... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 15
Business............................... 22
Management............................. 40
Executive Compensation................. 42
Selling Stockholders................... 44
PAGE
--------
Security Ownership of Certain
Beneficial Owners and Management..... 45
Relationships and Transactions with
Related Parties...................... 47
Description of Capital Stock........... 50
Plan of Distribution................... 54
Legal Matters.......................... 55
Experts................................ 55
Where You Can Find More Information.... 55
Index to Financial Statements.......... F-1
Condensed Consolidated Balance
Sheets............................... F-25
Condensed Consolidated Statements of
Operations........................... F-26
Condensed Consolidated Statements of
Cash Flows........................... F-27
Notes to Condensed Consolidated
Financial Statements................. F-28
i
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS IMPORTANT INFORMATION REGARDING OUR BUSINESS AND
THIS OFFERING. BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL THE
INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS
CAREFULLY, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS AND RELATED
NOTES, BEFORE DECIDING TO INVEST IN OUR COMMON STOCK.
STEMCELLS, INC.
We are engaged in research and development efforts focused on the
identification, isolation and expansion of stem cells as the underlying
technology for developing potential cell transplant therapies. Stem cells are
key cells in the body that produce all of the functional mature cell types found
in normal, healthy individuals. Our goal is to develop therapies that will use
stem cells to repopulate or repair tissues, such as those of the brain, pancreas
or liver, that have been damaged or lost as a result of disease or injury. All
of our programs are currently at the discovery or pre-clinical stage.
Many diseases, such as Alzheimer's, Parkinson's and other degenerative
diseases of the brain or nervous system, involve the failure of organs that
cannot be transplanted. Other diseases, such as hepatitis and diabetes, involve
organs such as the liver or pancreas that can be transplanted, but there is a
very limited supply of those organs available for transplant. We estimate based
on information available to us from the Alzheimer's Association, the Centers for
Disease Control, the Family Caregiver's Alliance and the Spinal Cord Injury
Information Network, that these conditions affect more than 18 million people in
the United States and account for more than $150 billion annually in health care
costs.
We believe that our stem cell technologies, if successfully developed, may
provide the basis for effective therapies for these and other conditions. Our
aim is to return patients to productive lives and significantly reduce the
substantial health care costs often associated with these diseases and
disorders. We have made significant progress toward developing stem cell
therapies for the nervous system by identifying and characterizing the human
central nervous system stem cell. We have also made significant advances in our
search for the stem cells of the pancreas and the liver by identifying novel
markers on the surface of cells so they can be isolated and tested to determine
whether they are stem cells.
We have established our intellectual property position with respect to stem
cell therapies for each of these three areas--the central nervous system, the
pancreas and the liver--by patenting or seeking patent protection for our
discoveries and by entering into exclusive licensing arrangements. Our portfolio
of issued patents includes a method of culturing normal human neural stem cells
in our proprietary medium, and our published studies show that our cultured and
expanded cells give rise to all three major cell types of the central nervous
system. In addition, the Company recently announced the results of a new study
that showed that human brain stem cells can be successfully isolated with the
use of markers present on the surface of freshly obtained brain cells. We
believe this is the first reproducible process for isolating highly purified
populations of well-characterized normal human neural stem cells, and we have
applied for a composition of matter patent. We also have filed an improved
process patent for the growth and expansion of these purified normal human
neural cells.
Historical Note: We were formerly known as CytoTherapeutics and were
incorporated in Delaware in 1988. We currently have one subsidiary, StemCells
California, Inc., a California corporation we acquired in September 1997. Until
mid-1999, we had programs in a different technology, encapsulated cell therapy,
as well as stem cell programs. In 1999, we embarked on a major restructuring of
our research and development operations and sold the encapsulated cell therapy
technology. We now focus exclusively on the discovery, development and
commercialization of our proprietary platform of stem cell technologies.
2
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes the consolidated financial data for our
business. You should read this table together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and notes included elsewhere in this prospectus.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
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1995 1996 1997 1998 1999 1999 2000
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STATEMENT OF OPERATIONS DATA
Revenue from collaborative agreements................ $11,761 $ 7,104 $ 10,617 $ 8,803 $ 5,022 $ 5,022 $ --
Research and development expenses.................... 14,730 17,130 18,604 17,659 9,991 8,432 3,350
Acquired research and development.................... 8,344
ECT wind-down expenses............................... 6,048 4,078 769
Net loss............................................. $(8,891) $(13,759) $(18,114) $(12,628) $(15,709) $(10,484) $(4,865)
Basic and diluted net loss per share................. $ (0.69) $ (0.89) $ (1.08) $ (0.69) $ (0.84) $ (0.56) $ (0.26)
Shares used in computing basic and diluted net loss
per share.......................................... 12,799 15,430 16,704 18,291 18,706 18,561 19,683
The following table provides a summary of our consolidated balance sheets.
AS OF
AS OF DECEMBER 31 SEPTEMBER 30
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1995 1996 1997 1998 1999 2000
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BALANCE SHEET DATA
Cash, cash equivalents and marketable securities........... $44,192 $42,607 $29,050 $17,386 $ 4,760 $ 7,247
Restricted investments..................................... 27,204
Total assets............................................... 56,808 58,397 44,301 32,866 15,781 41,632
Long-term debt, including capitalized leases............... 5,441 8,223 4,108 3,762 2,937 2,692
Redeemable common stock.................................... 8,159 5,583 5,249 5,249
Stockholders' equity....................................... 45,391 34,747 28,900 17,897 3,506 37,126
In July 1999 we began restructuring the company to focus solely on our stem
cell technology. As part of this restructuring we terminated all activities
related to our former encapsulated cell technology and we relocated our
headquarters from Lincoln, Rhode Island to Sunnyvale, California. The results
shown for the nine months ended September 30, 2000 includes $768,783 in expenses
related to the restructuring. For more information on this restructuring see
"Risk Factors," "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and notes included elsewhere in this prospectus.
During 2000 we realized a $1,427,686 gain and recognized an increase in
value related to our remaining holdings of $27,204,333 in connection with our
investment in Modex Therapeutics Ltd., a Swiss biotechnology company that
completed an initial public offering on June 23, 2000. For more information on
Modex see "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and notes included elsewhere in this prospectus.
3
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION REGARDING STEMCELLS, INC. WE MAY FACE OTHER RISKS NOT
DESCRIBED BELOW THAT WE DO NOT PRESENTLY KNOW ABOUT OR THAT WE CURRENTLY DEEM
IMMATERIAL.
OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE
MATERIALLY ADVERSELY AFFECTED BY ANY OF THESE RISKS. CONSEQUENTIALLY, THE
TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, RESULTING IN THE LOSS OF ALL OR
PART OF YOUR INVESTMENT.
OUR TECHNOLOGY IS AT AN EARLY STAGE OF DISCOVERY AND DEVELOPMENT AND WE MAY
FAIL TO DEVELOP ANY PRODUCTS.
Our stem cell technology is at the early pre-clinical stage for the brain
stem cell and at the discovery phase for the liver and pancreas stem cells and
has not yet led to the development of any proposed product. We may fail to
discover the stem cells we are seeking, to develop any products, to obtain
regulatory approvals, to enter clinical trials, or to commercialize any
products. Any product using stem cell technology may fail to (i) survive and
persist in the desired location, (ii) provide the intended therapeutic benefits,
(iii) properly integrate into existing tissue in the desired manner, or
(iv) achieve benefits therapeutically equal to or better than the standard of
treatment at the time of testing. In addition, any such product may cause
undesirable side effects. Results of early pre-clinical research may not be
indicative of the results that will be obtained in later stages of preclinical
or clinical research. If the appropriate regulatory authorities do not approve
our products, or if we fail to maintain regulatory compliance, we would have
limited ability to commercialize our products, and our business and results of
operations would be harmed. Furthermore, since stem cells are a new form of
therapy, the marketplace may not accept any products we may develop.
If we do succeed in developing products, we will face many potential
obstacles such as the need to obtain regulatory approvals, and to develop or
obtain manufacturing, marketing and distribution capabilities. In addition, we
will face substantial additional risks such as product liability.
WE HAVE LIMITED LIQUIDITY AND CAPITAL RESOURCES AND MAY NOT OBTAIN THE
SIGNIFICANT CAPITAL RESOURCES WE WILL NEED TO SUSTAIN OUR RESEARCH AND
DEVELOPMENT EFFORTS.
We have limited liquidity and capital resources and must obtain substantial
additional capital to support our research and development programs, for
acquisition of technology and intellectual property rights, and, to the extent
we decide to undertake these activities ourselves, for pre-clinical and clinical
testing of our anticipated products, pursuit of regulatory approvals,
establishment of production capabilities, establishment of marketing and sales
capabilities and distribution channels, and general administrative expenses.
Even though we own 126,193 shares of Modex Therapeutics Ltd., stock with an
estimated fair market value on June 30, 2000 of $19,220,165 based on the per
share price of approximately $152.00, which we converted from a market price of
247.50 Swiss francs on June 30, 2000, we are restricted from selling these
shares until December 23, 2000. On October 31, 2000, the market price of Modex
stock was 329.50 Swiss francs, which converts to $183.28 using the exchange
rates on that date, and represents an estimated fair market value of $23,128,598
for our holdings. The performance of Modex stock since Modex's initial public
offering does not predict its future value and the value of our holdings is
subject to change and could decrease significantly. If we decide to sell our
Modex shares, due to the relatively small trading volume in Modex shares and the
relatively large size of our holding, or other factors, we may not be able to
sell our Modex shares at their market value or at all, and we may have to sell
these shares at a significant discount to the market price. In addition,
fluctuations in currency exchange rates could decrease the proceeds we might
realize on a potential sale of Modex shares.
4
We intend to pursue our needed capital resources through equity and debt
financings, corporate alliances, grants and collaborative research arrangements.
Our ability to complete any such arrangements successfully will depend upon
market conditions and, more specifically, on continued progress in our research
and development efforts. We may fail to obtain the necessary capital resources
from any such sources when needed or on terms acceptable to us. If we do not
obtain the necessary capital resources, we may have to delay, reduce or
eliminate some or all of our research and development programs or license our
technology or any potential products to third parties rather than
commercializing them ourselves.
WE HAVE PAYMENT OBLIGATIONS RESULTING FROM REAL PROPERTY OWNED OR LEASED BY
US IN RHODE ISLAND, WHICH ADVERSELY AFFECT OUR ABILITY TO FUND OUR STEM CELL
RESEARCH AND DEVELOPMENT.
Prior to our reorganization in 1999 and the resulting consolidation of all
functions in California, we carried out our former encapsulated cell therapy
programs at facilities in Lincoln, Rhode Island, where we also had our
administrative offices. Although we have vacated these facilities, we have
continuing obligations for lease payments and operating costs of approximately
$950,000 per year for our former science and administrative facility, which we
have leased through June 30, 2013, and debt service payments and operating costs
of approximately $1,000,000 per year for our former encapsulated cell therapy
pilot manufacturing facility. We are currently seeking to sublease the science
and administrative facility and to sell the pilot manufacturing facility, but
may not be able to do so. These continuing costs significantly reduce our cash
resources and adversely affect our ability to fund further development of our
stem cell technology. The lease for the science and administrative facility
contains a provision requiring occupancy of the premises and we currently are in
violation of this provision. The landlord has agreed not to take any action as a
result of this violation until November 19, 2000. We intend to seek an
additional period of forebearance from the landlord, but we cannot give any
assurance that the landlord will grant this additional forebearance or that we
will be able to sublease the premises during any additional period of time. If
the landlord decides to pursue its rights after any period of forebearance, we
may be required to pay the landlord the entire amount due for the rest of the
lease period.
WE MAY NEED BUT FAIL TO OBTAIN PARTNERS TO SUPPORT OUR STEM CELL DEVELOPMENT
EFFORTS AND TO COMMERCIALIZE OUR TECHNOLOGY.
Equity and debt financings alone may not be sufficient to fund the cost of
developing our stem cell technologies and we may need to rely on our ability to
reach partnering arrangements to provide financial support for our stem cell
discovery and development efforts. In addition, in order to successfully develop
and commercialize our technology, we may need to enter into a wide variety of
arrangements with corporate sponsors, pharmaceutical companies, universities,
research groups and others. While we have engaged, and expect to continue to
engage, in discussions regarding such arrangements, we have not reached any
agreement regarding any such arrangement and we may fail to obtain any such
agreement on terms acceptable to us, if at all. Even if we enter into these
arrangements, we may not be able to satisfy our obligations under them or renew
or replace them after their original terms. Furthermore, these arrangements may
require us to grant certain rights to third parties, including exclusive
marketing rights to one or more products, or may have other terms that are
burdensome to us, and may involve the acquisition of our securities. If any of
our collaborators terminates its relationship with us or fails to perform its
obligations in a timely manner, the development or commercialization of our
technology and potential products may be adversely affected.
We entered into a Sponsored Research Agreement with the Scripps Research
Institute under which we funded certain research in return for licenses or
options to license the inventions resulting from the research. This agreement
expired on November 14, 2000 and we are negotiating with Scripps to extend the
term of this agreement or to enter into a new agreement. As of the date of this
prospectus, we have not yet completed our negotiations with Scripps and we
cannot give any assurance
5
that our negotiations will be successful. If we are unable to extend the term of
this agreement or enter into a new agreement, we will have to find a replacement
to perform this research or we will have to perform this research ourselves. In
either case, we may experience delay and additional expense in connection with
this research effort.
WE HAVE A HISTORY OF OPERATING LOSSES AND WE MAY FAIL TO OBTAIN REVENUES OR
BECOME PROFITABLE.
We have incurred $124,237,900 in operating losses through September 30, 2000
and expect to continue to incur substantial operating losses in the future in
order to conduct our research and development activities, and if those
activities are successful, to fund clinical trials and other expenses. These
expenses include the cost of acquiring technology, product testing, acquiring
regulatory approvals, establishing production, marketing, sales and distribution
programs, and administrative expenses. We have not earned any revenues from
sales of any product. All of our past revenues have been derived from, and any
revenues we may obtain for the foreseeable future are expected to be derived
from, cooperative agreements, research grants, investments and interest on
invested capital. We have no cooperative agreements and we have received only
two research grants for our stem cell technology, and we may not obtain any such
agreements or additional grants in the future, or receive any revenues from
them.
WE DO NOT ANTICIPATE RECEIVING FUTURE REVENUES FROM THE SALE OF OUR
ENCAPSULATED CELL TECHNOLOGY.
In December 1999, we sold our encapsulated cell therapy technology to
Neurotech S.A. While under the terms of the sale we may receive royalty and
other payments from Neurotech under certain circumstances, we do not anticipate
receiving any material payments from Neurotech in the near future, if at all.
WE DEPEND ON PATENTS AND PROPRIETARY RIGHTS TO PROTECT OUR INTELLECTUAL
PROPERTY FROM INFRINGEMENT. NEVERTHELESS, SUCH PROTECTION IS UNCERTAIN AND, IF
GAINED, MAY OFFER ONLY LIMITED PROTECTION. IF WE ARE UNABLE TO PROTECT OUR
PATENTS AND PROPRIETARY RIGHTS, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATION WILL BE HARMED.
We own or license a number of patents or pending patent applications
covering human nerve stem cell cultures, central nervous system stem cell
cultures, neuroblast cultures, peripheral nervous system stem cell cultures, and
an animal model for liver failure. Patent protection for products such as those
we propose to develop is highly uncertain and involves complex and continually
evolving factual and legal questions. The governmental authorities that consider
patent applications can deny or significantly reduce the patent coverage
requested in an application before or after issuing the patent. Consequently, we
do not know whether any of our pending applications will result in the issuance
of patents, or if any existing or future patents will provide sufficient
protection or significant commercial advantage or if others will circumvent
these patents. Since patent applications are secret until patents are issued in
the United States or until the applications are published in foreign countries,
and since publication of discoveries in the scientific or patent literature
often lags behind actual discoveries, we cannot be certain that we were the
first to make the inventions covered by each of our pending patent applications
or that we were the first to file patent applications for such inventions. Our
patents may not issue from our pending or future patent applications or, if
issued, may not be of commercial benefit to us, or may not afford us adequate
protection from competing products. In addition, third parties may challenge our
patents or governmental authorities may declare them invalid. In the event that
a third party has also filed a patent application relating to inventions claimed
in our patent applications, we may have to participate in proceedings to
determine priority of invention. This could result in substantial uncertainties
and cost for us, even if the eventual outcome is favorable to us, and the
outcome might not be favorable to us. Even if a patent issues, a court could
decide that the patent was issued invalidly.
6
IF OTHERS ARE FIRST TO DISCOVER AND PATENT ANY STEM CELLS WE ARE SEEKING TO
DISCOVER, WE COULD BE BLOCKED FROM FURTHER WORK ON THAT STEM CELL, AND OUR
BUSINESS WOULD BE HARMED.
Because the first person or entity to discover and obtain a valid patent to
a particular stem or progenitor cell may effectively block all others, it will
be important to our development efforts for us or our collaborators to be the
first to discover any stem cell that we are seeking. Failure to be the first
could prevent us from commercializing all of our research and development
related to such stem cell and have a material adverse effect on the Company.
WE MAY NEED TO OBTAIN LICENSES TO THIRD PARTY PATENTS, AND MAY NOT BE ABLE
TO GET THEM.
A number of pharmaceutical, biotechnology and other companies, universities
and research institutions have filed patent applications or have received
patents relating to cell therapy, stem cells and other technologies potentially
relevant to or necessary for our expected products. We cannot predict which, if
any, of the applications will issue as patents. We are also aware of a number of
patent applications and patents claiming use of genetically modified cells to
treat disease, disorder or injury. We are aware of three patents issued to two
competitors claiming certain methods for enriching central nervous system stem
cells through gene modification of in vitro cultured cells. These patents were
issued or licensed to NeuralStem and Layton Bioscience. It is possible that
NeuralStem or Layton Bioscience will be able to produce commercially available
stem cell products before we can. These genetically modified cells may be
effective in treating defective, diseased or damaged central nervous system
tissue.
If third party patents or patent applications contain claims infringed by
our technology and these claims are valid, we may be unable to obtain licenses
to these patents at a reasonable cost, if at all, and may also be unable to
develop or obtain alternative technology. If we are unable to obtain such
licenses at a reasonable cost, our business could be significantly harmed. We
may have to to defend ourselves in court against allegations of infringement of
third party patents. Patent litigation is very expensive and could consume
substantial resources and create significant uncertainties. An adverse outcome
in such a suit could subject us to significant liabilities to third parties,
require disputed rights to be licensed from third parties, or require us to
cease using such technology.
Proprietary trade secrets and unpatented know-how are also important to our
research and development activities. We cannot be certain that others will not
independently develop the same or similar technologies on their own or gain
access to our trade secrets or disclose such technology, or that we will be able
to meaningfully protect our trade secrets and unpatented know-how and keep them
secret.
We require our employees, consultants, and significant scientific
collaborators and sponsored researchers to execute confidentiality agreements
upon the commencement of an employment or consulting relationship with us. These
agreements may, however, fail to provide meaningful protection or adequate
remedies for us in the event of unauthorized use, transfer or disclosure of such
information or inventions.
We have obtained rights from universities and research institutions to
technologies, processes and compounds that we believe may be important to the
development of our products. Licensors may cancel our licenses or convert them
to non-exclusive licenses if we fail to use the relevant technology or otherwise
breach these agreements. Loss of such licenses could expose us to the risks of
third party patents and/or technology. We can give no assurance that any of
these licenses will provide effective protection against our competitors.
WE COMPETE WITH COMPANIES THAT HAVE SIGNIFICANT ADVANTAGES OVER US.
The market for therapeutic products that address degenerative diseases is
large and competition is intense. We expect competition to increase. We believe
that our most significant competitors will be
7
fully integrated pharmaceutical companies and more established biotechnology
companies, such as Biogen, Inc. and Genzyme, an Elan Corporation. These
companies already produce or are developing treatments for degenerative diseases
that are not stem-cell based, and they have significantly greater capital
resources and expertise in research and development, manufacturing, testing,
obtaining regulatory approvals and marketing than we do. Many of these potential
competitors have significant products approved or in development that could be
competitive with our potential products, and also operate large, well-funded
research and development programs. In addition, we expect to compete with
smaller companies such as NeuralStem and Layton Bioscience and with universities
and other research institutions who are developing treatments for degenerative
diseases that are stem-cell based.
Our competitors may succeed in developing technologies and products that are
more effective than those being developed by us, or that would render our
technology obsolete or non-competitive.
The relative speed with which we and our competitors can develop products,
complete the clinical testing and approval processes, and supply commercial
quantities of a product to market will affect our ability to gather market
acceptance and market share. With respect to clinical testing, competition may
delay progress by limiting the number of clinical investigators and patients
available to test our potential products.
DEVELOPMENT OF OUR TECHNOLOGY WILL BE SUBJECT TO EXTENSIVE GOVERNMENT
REGULATION.
Our research and development efforts, as well as any future clinical trials,
and the manufacturing and marketing of any products we may develop, will be
subject to extensive regulation by governmental authorities in the United States
and other countries. The process of obtaining U.S. Food and Drug Administration
and other necessary regulatory approvals is lengthy, expensive and uncertain. We
or our collaborators may fail to obtain the necessary approvals to commence or
continue clinical testing or to manufacture or market our potential products in
reasonable time frames, if at all. In addition, the United States Congress and
other legislative bodies may enact regulatory reforms or restrictions on the
development of new therapies that could adversely affect the regulatory
environment in which we operate or the development of any products we may
develop.
We base our research and development on the use of human stem and progenitor
cells obtained from fetal tissue. The federal and state governments and other
jurisdictions impose restrictions on the use of fetal tissue. These restrictions
change from time to time and may become more onerous. Additionally, we may not
be able to identify or develop reliable sources for the cells necessary for our
potential products--that is, sources that follow all state and federal
guidelines for cell procurement. Further, we may not be able to obtain such
cells in the quantity or quality sufficient to satisfy the commercial
requirements of our potential products. As a result we may be unable to develop
or produce our products in a profitable manner.
We may apply for status under the Orphan Drug Act for certain of our
therapies, in order to gain a seven year period of marketing exclusivity for
those therapies. The U.S. Congress in the past considered, and in the future
again may consider, legislation that would restrict the extent and duration of
the market exclusivity of an orphan drug. If enacted, such legislation could
prevent us from obtaining some or all of the benefits of the existing statute
even if we were to apply for and be granted orphan drug status with respect to a
potential product.
WE DEPEND ON A LIMITED NUMBER OF KEY PERSONNEL.
We are highly dependent on the principal members of our management and
scientific staff and certain of our outside consultants, including the members
of our scientific advisory board, our chief executive officer, each of our vice
presidents and the directors of our neural stem cell and liver stem cell
programs. Although we have entered into employment agreements with some of these
individuals, they may terminate their agreements at any time. We currently have
outside consultants and interim
8
personnel in key management and scientific positions who are not permanent
employees. Loss of services of any of these individuals could have a material
adverse effect on our operations, because these individuals possess management
experience or specialized scientific skills which we do not otherwise have and
which we may not be able to replace. In addition, our operations are dependent
upon our ability to attract and retain additional qualified scientific and
management personnel. More generally, we may not be able to attract and retain
the personnel we need on acceptable terms given the competition for experienced
personnel among pharmaceutical, biotechnology and health care companies,
universities and research institutions. If we lose the services of these key
personnel or are unable to attract and retain additional qualified personnel, we
may have to delay, reduce or eliminate some or all of our research and
development programs.
On September 22, 2000 we announced that George Dunbar, our acting President
and Chief Executive Officer, would be phasing out his service. Mr. Dunbar will
continue in his position on a reduced time basis during this transition period.
We are actively seeking to hire a permanent chief executive officer, but we can
give no assurance that we will be able to find a candidate possessing the
necessary qualifications. If we are unable to hire and retain a qualified chief
executive officer, our business and operations could suffer materially.
HEALTHCARE INSURERS AND OTHER ORGANIZATIONS MAY NOT PAY FOR OUR PRODUCTS OR
MAY IMPOSE LIMITS ON REIMBURSEMENTS.
In both domestic and foreign markets, sales of potential products are likely
to depend in part upon the availability and amounts of reimbursement from third
party health care payor organizations, including government agencies, private
health care insurers and other health care payors such as health maintenance
organizations and self-insured employee plans. There is considerable pressure to
reduce the cost of therapeutic products, and government and other third party
payors are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new therapeutic products, and by
refusing, in some cases, to provide any coverage for uses of approved products
for disease indications for which the Food and Drug Administration has not
granted marketing approval. Significant uncertainty exists as to the
reimbursement status of newly approved health care products. We can give no
assurance that reimbursement will be provided by such payors at all or without
substantial delay, or, if such reimbursement is provided, that the approved
reimbursement amounts will be sufficient to enable us to sell products we
develop on a profitable basis. Changes in reimbursement policy could also
adversely affect the willingness of pharmaceutical companies to collaborate with
us on the development of our stem cell technology.
In certain foreign markets, pricing or profitability of prescription
pharmaceuticals is subject to government control. We expect that there will
continue to be a number of Federal and state proposals to implement government
control over health care costs. Efforts at healthcare reform are likely to
continue in future legislative sessions. We do not know what legislative
proposals Federal or state governments will adopt or what actions Federal, state
or private payers for healthcare goods and services may take in response to
healthcare reform proposals or legislation. We cannot predict the effect
government control and other healthcare reforms may have on our business.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.
Our operating results have varied, and may in the future continue to vary,
significantly from quarter to quarter due to a variety of factors. These factors
include the receipt of one-time license or milestone payments under
collaborative agreements, costs associated with the winddown of our encapsulated
cell therapy programs, variation in the level of expenses related to our
research and development efforts, receipt of grants or other support for our
research and development efforts, and other factors. Quarterly comparisons of
our financial results are not necessarily meaningful and you should not rely
upon them as an indication of future performance.
9
OUR STOCK PRICE MAY BE VOLATILE AND THIS VOLATILITY COULD RESULT IN LAWSUITS
OR MAKE IT DIFFICULT TO RAISE CAPITAL.
The market price for our common stock has been volatile and could decline
below the offering price for the shares. We believe that the market price for
our common stock could fluctuate substantially due to some or all of the risk
factors enumerated above.
The stock market has recently experienced extreme price and volume
fluctuations. These fluctuations have especially affected the market price of
the stock of many high technology and health care-related companies. Such
fluctuations have often been unrelated to the operating performance of these
companies. Nonetheless, these broad market fluctuations may negatively affect
the market price of our common stock. In the past, companies that have
experienced volatility in the market price of their stock have been the objects
of securities class action litigation. If we were the object of securities class
action litigation, we could incur material costs and suffer a diversion of our
management's attention and resources. In addition, volatility in our stock price
may make it difficult for us to obtain additional capital resources through
financings on terms acceptable to us.
EVENTS WITH RESPECT TO OUR SHARE CAPITAL COULD CAUSE THE PRICE OF OUR COMMON
STOCK TO DECLINE.
Sales of substantial amounts of our common stock on the open market, or the
availability of such shares for sale, could adversely affect the price of our
common stock. In particular, as of October 31, 2000, we had outstanding stock
options to purchase approximately 2,566,530 shares of common stock, at an
average exercise price of approximately $4.402 per share, subject to adjustment
in certain circumstances. Of this total, options covering approximately 941,309
shares are currently exercisable at an average exercise price of approximately
$4.742 per share.
10
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. You can identify these
statements by forward-looking words such as "may," "will," "possibly," "expect,"
"anticipate," "project," "believe," "estimate" and "continue" or similar words.
You should read statements that contain these words carefully because they
discuss our future expectations, contain projections of our future results of
operations or of our financial condition, or state other "forward-looking"
information. We believe that it is important to communicate our future
expectations to our investors. However, there will be events in the future that
we have not been able to accurately predict or control and that may cause our
actual results to differ materially from those discussed. For example,
contaminations at our facilities, changes in the pharmaceutical or biotechnology
industries, competition and changes in government regulations or general
economic or market conditions could all have significant effects on our results.
These factors should be considered carefully and readers should not place undue
reliance on our forward-looking statements. Before you invest in our common
stock, you should be aware that the occurrence of the events described in the
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" sections and elsewhere in this prospectus
could harm our business, operating results and financial condition. All forward
looking statements attributable to us or persons acting on our behalf are
expressly qualified in their entirety by the cautionary statements and risk
factors contained throughout this prospectus.
INDUSTRY AND MARKET DATA
In this prospectus, we rely on and refer to information and statistics
regarding disease occurrences, costs of treatment, biotechnology, and the market
sectors in which we may compete in the future. We obtained this information and
statistics from various third party sources, discussions with our consultants
and/or our own internal estimates. We believe that these sources and estimates
are reliable, but we have not independently verified them.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares offered
pursuant to this prospectus.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings to fund the development and
growth of our business. We do not, therefore, anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay dividends
will be at the discretion of our board of directors and will be dependent on
then existing conditions, including our financial stability, results of
operations, contractual restrictions, capital requirements, business prospects
and other factors our board of directors deems relevant.
11
CAPITALIZATION
The following table presents our consolidated capitalization as of
September 30, 2000. This table excludes
- 2,797,518 shares of common stock issuable upon the exercise of outstanding
stock options and warrants as follows:
a) as of September 30, 2000, 2,501,031 shares of common stock upon the
exercise of stock options pursuant to our stock option plans at a
weighted average price of $4.209 per share.
b) 101,587 shares of common stock upon the exercise of a warrant held by
Millennium Partners, L.P in conjunction with the aforementioned
August 3, 2000 financing at an exercise price of $4.725 per share.
c) 19,900 shares of common stock upon the exercise of a warrant held by
Millennium Partners, L.P. in conjunction with the aforementioned
August 30, 2000 financing at an exercise price of $6.03 per share.
d) 100,000 shares of common stock upon the exercise of warrants granted to
May Davis Group, Inc. and four of its affiliates in connection with the
aforementioned financing at an exercise price of $5.0375 per share.
e) 75,000 shares of common stock upon the exercise of warrants at $6.58125
per share held by holders of our 6% cumulative convertible preferred
stock purchased on April 13, 2000 for $1,500,000.
- The right under certain circumstances for holders of our 6% cumulative
convertible preferred stock to acquire up to a total of 1,126 additional
shares of our 6% cumulative convertible preferred stock, which is
convertible at the option of the holders into common stock at $6.33 per
share subject to customary antidilution protection.
- Millennium Partners, L.P.'s option to purchase up to an additional
$2,000,000 of common stock through August 3, 2001.
- The right of the holders of our 6% cumulative convertible preferred stock
to convert their preferred shares into 397,878 shares of common stock at
$3.77 per share.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and notes thereto included elsewhere in this prospectus.
AS OF
SEPTEMBER 30,
2000
--------------
Stockholders' equity:
Convertible Preferred Stock, par value $0.01 per share,
1,000,000 shares authorized, 2,626 designated as 6%
Cumulative Convertible Preferred Stock, 1,500 shares
issued.................................................. $ 1,500,000
Common stock, par value $0.01 per share, 45,000,000 shares
authorized, 20,881,812 shares issued.................... 208,818
Additional paid-in-capital................................ 134,698,668
Stock subscription receivable............................. (1,250,004)
Accumulated deficit....................................... (124,237,900)
Accumulated other comprehensive income.................... 27,204,333
Deferred compensation..................................... (997,664)
-------------
Total stockholders' equity.............................. $ 37,126,251
=============
12
DILUTION
This offering is for sales of stock by our existing stockholders on a
continuous or delayed basis in the future. Sales of common stock by stockholders
will not result in any substantial change to the net tangible book value per
share before and after the distribution of shares by the selling stockholders.
There will be no change in net tangible book value per share attributable to
cash payments made by purchasers of the shares being offered. Prospective
investors should be aware, however, that the price of our shares may not bear
any rational relationship to net tangible book value per share.
13
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and notes
to those statements and other financial information included elsewhere in this
prospectus.
The consolidated historical financial data presented below as of
December 31, 1995, 1996, 1997, 1998, and 1999 and for the years then ended are
derived from our consolidated financial statements, which have been audited by
Ernst & Young LLP, our independent auditors. The selected consolidated financial
data as of September 30, 1999 and 2000, and for the nine months then ended are
derived from our unaudited financial statement. In the opinion of management,
the unaudited financial statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position and results of operations for such
periods. The selected consolidated financial data for the nine months ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000 or any other future period.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA
Revenue from collaborative
agreements...................... $11,761 $ 7,104 $ 10,617 $ 8,803 $ 5,022 $ 5,022 $ --
Research and development
expenses........................ 14,730 17,130 18,604 17,659 9,991 8,432 3,350
Acquired research and
development..................... 8,344
ECT wind-down and corporate
relocation expenses............. 6,048 4,078 769
Net loss.......................... $(8,891) $(13,759) $(18,114) $(12,628) $(15,709) $(10,484) $(4,865)
======= ======== ======== ======== ======== ======== =======
Basic and diluted net loss per
share........................... $ (0.69) $ (0.89) $ (1.08) $ (0.69) $ (0.84) $ (0.56) $ (0.26)
Shares used in computing basic and
diluted net loss per share...... 12,799 15,430 16,704 18,291 18,706 18,561 19,683
The following table provides a summary of our consolidated balance sheets.
AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- -------------
BALANCE SHEET DATA
Cash, cash equivalents and marketable
securities.............................. $44,192 $42,607 $29,050 $17,386 $ 4,760 $ 7,247
Restricted investments.................... 27,204
Total assets.............................. 56,808 58,397 44,301 32,866 15,781 41,632
Long-term debt, including capitalized
leases.................................. 5,441 8,223 4,108 3,762 2,937 2,692
Redeemable common stock................... 8,159 5,583 5,249 5,249 --
Stockholders' equity...................... 45,391 34,747 28,900 17,897 3,506 37,126
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations for the nine months ended September 30, 2000 and 1999 and the years
ended December 31, 1999, 1998, and 1997 should be read in conjunction with our
consolidated financial statements and notes to those statements and other
financial information included elsewhere in this prospectus.
RESULTS OF OPERATIONS
OVERVIEW
Since our inception in 1988, we have been primarily engaged in research and
development of human therapeutic products. As a result of a restructuring in the
second half of 1999, our sole focus is now on our stem cell technology. At the
beginning of last year, by contrast, our corporate headquarters, most of our
employees, and the main focus of our operations were primarily devoted to a
different technology--encapsulated cell therapy, or ECT. Since that time, we
terminated a clinical trial of the ECT then in progress, we wound down our other
operations relating to the ECT, we terminated the employment of those who worked
on the ECT, we sold the ECT and we relocated from Rhode Island to Sunnyvale,
California. Comparisons with last year's results are correspondingly less
meaningful than they may be under other circumstances.
We were known as CytoTherapeutics, Inc., until May 23, 2000, when we changed
our name to StemCells, Inc.
We have not derived any revenues from the sale of any products, and we do
not expect to receive revenues from product sales for at least several years. We
have not commercialized any product and in order to do so we must, among other
things, substantially increase our research and development expenditures as
research and product development efforts accelerate and clinical trials are
initiated. We have incurred annual operating losses since inception and expect
to incur substantial operating losses in the future. As a result, we are
dependent upon external financing from equity and debt offerings and revenues
from collaborative research arrangements with corporate sponsors to finance our
operations. There are no such collaborative research arrangements at this time
and there can be no assurance that such financing or partnering revenues will be
available when needed or on terms acceptable to us.
Our results of operations have varied significantly from year to year and
quarter to quarter and may vary significantly in the future due to the
occurrence of material, nonrecurring events, including without limitation the
receipt of one-time, nonrecurring licensing payments, and the initiation or
termination of research collaborations, in addition to the winding-down of
terminated research and development programs referred to above.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
For the nine months ended September 30, 2000 and 1999, revenues from
collaborative agreements totaled $0 and $5,021,707, respectively. The decrease
in revenues resulted from the June 1999 termination of a Development, Marketing
and License Agreement related to our former ECT. We have not entered into
revenue-producing collaborations with respect to our platform of stem cell
technologies.
During the second quarter 2000 we realized a $1,427,686 gain in connection
with our investment in Modex Therapeutics Ltd ("Modex"), a Swiss biotechnology
company that completed an initial public offering on June 23, 2000. At
September 30, 2000, we owned 126,193 shares with an estimated fair value of
$27,204,333, based on the per share price of $215.58 which we converted from a
market price of 372.00 Swiss francs on that date. On October 31, 2000 the market
price was 329.50 Swiss Francs,
15
which converts to $183.28 and results in an estimated fair value of $23,128,598
for the Company's holdings.
Research and development expenses totaled $3,350,101 for the nine months
ended September 30, 2000, compared with $8,432,262 for the same period in 1999.
The decrease of $5,634,384, or 67% from 1999 to 2000 is primarily attributable
to the wind-down of research activities relating to the ECT.
General and administrative expenses were $2,172,137 for the nine months
ended September 30, 2000, compared with $3,195,672 for the same period in 1999.
The decrease of $1,023,535, or 32%, from 1999 to 2000 was primarily attributable
to lower payroll costs (approximately $882,000) resulting from the restructuring
of administrative operations and to the establishment of a smaller corporate
office in California (approximately $136,000).
Wind-down expenses related to our ECT research, our Rhode Island operations
and the transfer of our headquarters to Sunnyvale, California for the nine
months ended September 30, 2000 and 1999 was $768,733 and $4,078,034
respectively. In 1999 we had created a reserve of $1,634,569 for wind-down
expenses related to the first half of 2000.
Interest income for the nine months ended September 30, 2000 and 1999 was
$218,480 and $504,114 respectively. The decrease in interest income in 2000 was
attributable to the lower average investment balances during such period.
Interest expense was $209,287 for the nine months ended September 30, 2000,
compared with $236,836 for the same period in 1999. The decrease in 2000 was
attributable to lower outstanding debt and capital lease balances in 2000
compared to 1999.
Net loss for the nine months ended September 30, 2000 was $4,865,190 or
($0.25) per share, as compared to net loss of $10,483,760 or ($0.56) per share,
for the comparable period in 1999. The decrease in net loss of $5,618,570 or 54%
from the same period in 1999 was primarily attributable to the wind-down of
research activities relating to the ECT and reflects a gain of $1,427,686 in
connection with our investment in Modex. We (then known as CytoTherapeutics,
Inc.) were one of the founders of Modex, a Swiss biotherapeutics company
established in 1996 to pursue encapsulated cell technologies related to our
former programs. After Modex' Initial Public offering on the Swiss Neue Market
on June 23, 2000 and our sale of 23,807 shares, we own 126,193 shares of Modex
common stock. The IPO price was 168.00 Swiss Francs, and the share price on
September 30 was 372.00 Swiss Francs. On October 31, 2000 the market price was
329.50 Swiss Francs. The shares are subject to a lockup for 6 months from the
date of the IPO.
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Revenues from collaborative agreements totaled $5,022,000, $8,803,000 and
$10,617,000 for the years ending December 31, 1999, 1998 and 1997, respectively.
We earned revenues primarily from a Development, Marketing and License Agreement
with AstraZeneca Group plc, which we signed in March 1995. The decrease in
revenues from 1998 to 1999 resulted primarily from the June 1999 termination of
the AstraZeneca Agreement. 1997 revenues included a $3,000,000 milestone payment
from AstraZeneca related to the Phase II clinical trials for an ECT product.
Research and development expenses totaled $9,984,000 in 1999, as compared to
$17,659,000 in 1998 and $18,604,000 in 1997. The decrease of $7,668,000, or 43%,
from 1998 to 1999 was primarily attributable to the wind-down of research
activities relating to the ECT, precipitated by termination of the AstraZeneca
Agreement. The decrease of $945,000, or 5%, from 1997 to 1998 was primarily
attributable to a reduction in spending on research agreements and a reduction
in research and development personnel.
Acquired research and development consists of a one-time charge of
$8,344,000 related to the acquisition of StemCells California, Inc., in 1997.
Commercialization of this technology will require significant incremental
research and development expenses over a number of years. With the recent
16
completion of the restructuring of our research operations, we are now focused
solely on the research and development of our platform of stem cell
technologies, which encompasses the technology acquired upon the acquisition of
StemCells California, Inc. and related technology we have developed or licensed.
General and administrative expenses were $4,927,303 for the year ended
December 31, 1999, compared with $4,603,000 in 1998 and $6,158,000 in 1997. The
1999 general administrative expenses were positively impacted by the reduction
in facility costs that were included in wind-down ($239,000), reduction in
amortization of patents and intangible assets of approximately $338,000, as well
as reduced activities and related personnel costs estimated at approximately
$500,000 that were not incurred. This was due to the wind-down of our ECT
programs and relocation of our headquarters in October 1999. The reduction of
$1,555,000, or 25%, from 1997 to 1998 was primarily attributable to a reduction
in legal fees, recruiting and relocation expenses, as well as a reduction in
employees.
Wind-down and relocation expenses totaled $6,047,806 for the year ended
December 31, 1999; no such expenses were incurred in 1998 and 1997. These
expenses relate to the wind-down of our encapsulated cell technology research
and our other Rhode Island operations the transfer of our corporate headquarters
to Sunnyvale, California.
They include accruals of approximately $1,554,000 for employee severance
costs, $1,858,000 in losses and reserves for the write-down of related patents
and fixed assets, $1,172,000 for our costs of settlement of a 1989 funding
agreement with the Rhode Island Partnership for Science and Technology, $702,000
of estimated additional carrying costs through disposition of the Rhode Island
facilities, and other related expenses totaling $762,000.
Interest income for the years ended December 31, 1999, 1998 and 1997 totaled
$564,000, $1,254,000 and $1,931,000, respectively. The average cash and
investment balances were $10,663,000, $21,795,000 and $33,343,000 in 1999, 1998
and 1997, respectively. The decrease in interest income from 1997 to 1998 to
1999 was attributable to lower average balances.
In 1999, interest expense was $335,000, compared with $472,000 in 1998 and
$438,000 in 1997. The decrease from 1998 to 1999 was attributable to lower
outstanding debt and capital lease balances. The increase from 1997 to 1998 was
primarily attributable to capitalization of $210,000 of interest on the new
facility in 1997.
In October 1997, we recognized a gain in the amount of $3,387,000 related to
the sale of 50 percent of our interest in Modex Therapeutics Ltd.
The net loss in 1999, 1998 and 1997 was $15,709,000, $12,628,000, and
$18,114,000, respectively. The loss per share was $0.84, $0.69 and $1.08 in
1999, 1998 and 1997, respectively. The increase from 1998 to 1999 is primarily
attributable to the elimination of revenue from the AstraZeneca Agreement, which
was terminated in June 1999, as well as expenses related to the wind-down of our
ECT research and our other Rhode Island operations, the transfer of our
corporate headquarters to Sunnyvale, California and an accrual of approximately
$1,172,000 for our estimate of the costs of settlement of the funding agreement
with RIPSAT. The decrease from 1997 to 1998 was attributable to a one-time
charge of $8,344,000 for acquired research and development related to the
purchase of StemCells California, Inc. offset by the $3,387,000 gain on a
partial sale of our interest in Modex in 1997.
The 1999 decrease in patents of $3,229,932 from 1998 was primarily due to
management's decision to wind down the ECT program and dispose of the related
intellectual property. During the fourth quarter of 1999 we sold the patents
related to our encapsulated cell technology to Neurotech for $3,000,000.
Accrued expenses increased by $1,584,949, primarily due to the accrual of
approximately $1,172,000 for our estimate of the costs of settlement of a 1989
funding agreement with the Rhode
17
Island Partnership for Science and Technology and $463,000 for the estimated
lease payments and operating costs of the Rhode Island facilities through an
expected disposal date of June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through the sale of
common and preferred stock, the issuance of long-term debt and capitalized lease
obligations, revenues from collaborative agreements, research grants and
interest income.
We had unrestricted cash and cash equivalents totaling $5,535,264 at
June 30, 2000. Cash equivalents are invested in money market funds.
We also hold 126,193 shares of Modex stock, which is publicly traded on the
Swiss Neue Market exchange. While our Modex stock had an estimated fair market
value of $27,204,333 on September 30, 2000 (and $23,128,598 on October 31,
2000), the fair market value of our Modex stock has varied significantly since
the Modex public offering and may continue to vary significantly based on
increases and decreases in the reported per share price, in Swiss francs, of the
Modex stock and on foreign currency exchange rates. We are prohibited under a
lock-up agreement entered into at the time of Modex's public offering from
selling any of our Modex shares until December 23, 2000. In addition, there is a
limited trading market for Modex stock, and if we were to attempt to sell any
significant portion of our Modex holdings, we would likely be able to do so only
at a significant discount to the then market price, if at all.
Our liquidity and capital resources were, in the past, significantly
affected by our relationships with corporate partners, which were related to our
former ECT. These relationships are now terminated, and we have not yet
established corporate partnerships with respect to our stem cell technology.
In March 1995, we signed a collaborative research and development agreement
with AstraZeneca plc for the development and marketing of certain
encapsulated-cell products to treat pain. AstraZeneca made an initial,
nonrefundable payment of $5,000,000, included in revenue from collaborative
agreements in 1995, a milestone payment of $3,000,000 in 1997 and was to remit
up to an additional $13,000,000 subject to achievement of certain development
milestones. Under the agreement, we were obligated to conduct certain research
and development pursuant to a four-year research plan agreed upon by the
parties. Over the term of the research plan, we originally expected to receive
annual payments of $5 million to $7 million from AstraZeneca, which was to
approximate the research and development costs incurred by us under the plan.
Subject to the successful development of such products and obtaining necessary
regulatory approvals, AstraZeneca was obligated to conduct all clinical trials
of products arising from the collaboration and to seek approval for their sale
and use. AstraZeneca had the exclusive worldwide right to market products
covered by the agreement. Until the later of either the expiration of all
patents included in the licensed technology or a specified fixed term, we were
entitled to a royalty on the worldwide net sales of such products in return for
the marketing license granted to AstraZeneca and our obligation to manufacture
and supply products. AstraZeneca had the right to terminate the original
agreement beginning April 1, 1998. On June 24, 1999, AstraZeneca informed us of
the results of AstraZeneca's analysis of the double-blind, placebo-controlled
trial of a potential ECT product, an encapsulated bovine cell implant for the
treatment of severe, chronic pain in cancer patients. AstraZeneca determined
that, based on criteria it established, the results from the 85-patient trial
did not meet the minimum statistical significance for efficacy established as a
basis for continuing worldwide trials for the therapy. AstraZeneca therefore
indicated that it did not intend to further develop the bovine cell-containing
implant therapy and exercised its right to terminate the agreement. See also
Note 17--"Research Agreements" to the Accompanying Consolidated Financial
Statements.
In the third quarter of 1999, we announced restructuring plans for the
wind-down of operations relating to our ECT and to focus our resources on the
research and development of our platform of
18
proprietary stem cell technologies. We terminated approximately 68 full time
employees and, in October 1999, relocated our corporate headquarters to
Sunnyvale, California. We recorded $6,047,806 of wind-down expenses including
employee separation and relocation costs during 1999.
On December 30, 1999 we sold our ECT and assigned our intellectual property
assets in it to Neurotech S.A. for a payment of $3,000,000, royalties on future
product sales, and a portion of certain Neurotech revenues from third parties.
In addition, we retained certain non-exclusive rights to use ECT in combination
with our proprietary stem cell technologies and in the field of vaccines for
prevention and treatment of infectious diseases. We received $2,800,000 of the
initial payment on January 3, 2000 with a remaining balance of $200,000 placed
in escrow, to be released to us upon demonstration satisfactory to Neurotech
that certain intellectual property is not subject to other claims.
As part of our restructuring of operations and relocation of corporate
headquarters to Sunnyvale, California, we identified a significant amount of
excess fixed assets. In December of 1999, we completed the disposition of those
excess fixed assets, from which we received more than $746,000. The proceeds are
being used to fund our continuing operations.
In July 1999, as a result of our decision to close our Rhode Island
facilities, the Rhode Island Partnership for Science and Technology, or RIPSAT,
alleged that we were in default under a June, 1989 Funding Agreement, and
demanded payment of approximately $2.6 million. While we believe we were not in
default under the Funding Agreement, we deemed it best to resolve the dispute
without litigation and, on March 3, 2000, entered into a settlement agreement
with RIPSAT, the Rhode Island Industrial Recreational Building Authority, or
IRBA, and the Rhode Island Industrial Facilities Corporation, or RIIFC. We
agreed to pay RIPSAT $1,172,000 in full satisfaction of all of our obligations
to them under the Funding Agreement. At the same time, IRBA agreed to return to
us the full amount of our debt service reserve, comprising approximately
$610,000 of principal and interest, relating to the bonds we had with IRBA and
RIIFC. The $610,000 debt service reserve was transferred directly to RIPSAT,
leaving the remainder of approximately $562,000 to be paid by us. We made this
payment in March of 2000.
Our liquidity and capital resources could have also been affected by a claim
by Genentech, Inc., arising out of the their collaborative development and
licensing agreement with us relating to the development of products for the
treatment of Parkinson's disease; however, the claim was resolved with no effect
on our resources. On May 21, 1998, Genentech exercised its right to terminate
the Parkinson's collaboration and demanded that we redeem, for approximately
$3,100,000, certain shares of our redeemable Common Stock held by Genentech.
Genentech's claim was based on provisions in the agreement requiring us to
redeem, at the price of $10.01 per share, the shares representing the difference
between the funds invested by Genentech to acquire such stock and the amount
expended by us on the terminated program less an additional $1,000,000. In
March 2000, we entered into a Settlement Agreement with Genentech under which
Genentech released us from any obligation to redeem any shares of our Common
Stock held by Genentech, without cost to us. Accordingly, the $5.2 million of
redeemable common stock shown as a liability in our December 31, 1999 balance
sheet was transferred to equity in March, 2000 without any impact on our
liquidity and capital resources. We and Genentech also agreed that all
collaborations between us were terminated, and that neither of us had any rights
to the intellectual property of the other.
In May 1996, we secured an equipment loan facility with a bank in the amount
of $2,000,000. On August 5, 1999 we made a payment of approximately $752,000 of
principal and interest to the lender to retire this loan facility rather than
seek a waiver by the lender of our violation of a loan covenant requiring us to
maintain unrestricted liquidity in an amount equal to or in excess of
$10 million.
We continue to have outstanding obligations in regard to our former
facilities in Lincoln, Rhode Island, including lease payments and operating
costs of approximately $950,000 per year associated with our former research
laboratory and corporate headquarters building, and debt service payments and
19
operating costs of approximately $1,000,000 per year with respect to our pilot
manufacturing and cell processing facility. We are actively seeking to sublease,
assign or sell our interests in these facilities. Failure to do so within a
reasonable period of time will have a material adverse effect on our liquidity
and capital resources.
On April 13, 2000, we sold 1,500 shares of our 6% cumulative convertible
preferred stock plus warrants for a total of 75,000 shares of our common stock
to two members of our Board of Directors for $1,500,000, on terms more favorable
to us than we were able to obtain from outside investors. The face value of the
shares of preferred stock is convertible at the option of the holders into
common stock at $3.77 per share. The holders of the preferred stock have
liquidation rights equal to their original investments plus accrued but unpaid
dividends. The investors would be entitled to make additional investments in our
securities on the same terms as those on which we complete offerings of our
securities with third parties within 6 months, if any such offerings are
completed. They have waived that right with respect to the common stock
transactions described below. If offerings totaling at least $6 million are not
completed during the 6 months, the investors have the right to acquire up to a
total of 1,126 additional shares of convertible preferred stock, the face value
of which is convertible at the option of the holders into common stock at $6.33
per share. Any unconverted preferred stock is converted, at the applicable
conversion price, on April 13, 2002 in the case of the original stock and two
years after the first acquisition of any of the additional 1,126 shares, if any
are acquired. The warrants expire on April 13, 2005.
On August 3, 2000, we completed a $4 million common stock financing
transaction with Millennium Partners, LP, or the Fund, an investment fund with
more than a billion dollars in assets under management. We received $3 million
of the purchase price at the closing and will receive the remaining $1 million
upon effectiveness of a registration statement covering the shares purchased by
the Fund. The Fund purchased our common stock at $4.33 per share. The Fund may
be entitled, pursuant to an adjustable warrant issued in connection with the
sale of common stock to the Fund, to receive additional shares of common stock
on eight dates beginning six months from the closing and every three months
thereafter. The number of additional shares the Fund may be entitled to on each
date will be based on the number of shares of common stock the Fund continues to
hold on each date and the market price of our common stock over a period prior
to each date. We will have the right, under certain circumstances, to cap the
number of additional shares by purchasing part of the entitlement from the Fund.
The Fund also received a warrant to purchase up to 101,587 shares of common
stock at $4.725 per share. This warrant is callable by us at $7.875 per
underlying share.
In addition, the Fund has the option for twelve months to purchase up to
$3 million of additional common stock. On August 23, 2000 the Fund exercised
$1,000,000 of its option to purchase additional common stock at $5.53 per share.
The Fund paid $750,000 of the purchase price in connection with the closing on
August 30, 2000, and will pay the remaining $250,000 upon effectiveness of a
registration statement covering the shares owned by the Fund. At the closing on
August 30, 2000, we issued to the Fund an adjustable warrant similar to the one
issued on August 3, 2000. This adjustable warrant was canceled by agreement
between us and the Fund on November 1, 2000. The Fund also received a warrant to
purchase up to 19,900 shares of common stock at $6.03 per share. This warrant is
callable by us at $10.05 per underlying share.
We have limited liquidity and capital resources and must obtain significant
additional capital resources in the future in order to sustain our product
development efforts. Substantial additional funds will be required to support
our research and development programs, for acquisition of technologies and
intellectual property rights, for preclinical and clinical testing of our
anticipated products, pursuit of regulatory approvals, acquisition of capital
equipment, laboratory and office facilities, establishment of production
capabilities and for general and administrative expenses. Our ability to obtain
additional capital will be substantially dependent on our ability to obtain
partnering support for our stem cell technology and, in the near term, on our
ability to realize proceeds from the sale, assignment or
20
sublease of our facilities in Rhode Island. Failure to do so will have a
material effect on our liquidity and capital resources. Until our operations
generate significant revenues from product sales, we must rely on cash reserves
and proceeds from equity and debt offerings, proceeds from the transfer or sale
of our intellectual property rights, equipment, facilities or investments,
government grants and funding from collaborative arrangements, if obtainable, to
fund our operations.
We intend to pursue opportunities to obtain additional financing in the
future through equity and debt financings, grants and collaborative research
arrangements. The source, timing and availability of any future financing will
depend principally upon market conditions, interest rates and, more
specifically, on our progress in our exploratory, preclinical and future
clinical development programs. Lack of necessary funds may require us to delay,
reduce or eliminate some or all of our research and product development programs
or to license our potential products or technologies to third parties. Funding
may not be available when needed--at all, or on terms acceptable to us.
While our cash requirements may vary, as noted above, we currently expect
that our existing capital resources, including income earned on invested
capital, will be sufficient to fund our operations into the first quarter of
2001. Our cash requirements may vary, however, depending on numerous factors.
Lack of necessary funds may require us to delay, scale back or eliminate some or
all of our research and product development programs and/or our capital
expenditures or to license our potential products or technologies to third
parties.
21
BUSINESS
OVERVIEW
We are engaged in research aimed at the development of therapies that would
use stem and progenitor cells derived from fetal or adult sources to treat, and
possibly cure, human diseases and injuries such as Parkinson's disease,
hepatitis, diabetes, and spinal cord injuries. The body uses certain key cells
known as stem cells to produce all the functional mature cell types found in
normal organs of healthy individuals. Progenitor cells are cells that have
already developed from the stem cells, but can still produce one or more types
of mature cells within an organ.
Many diseases, such as Alzheimer's, Parkinson's, and other degenerative
diseases of the brain or nervous system, involve the failure of organs that
cannot be transplanted. Other diseases, such as hepatitis and diabetes, involve
organs such as the liver or pancreas that can be transplanted, but there is a
very limited supply of those organs available for transplant. We estimate, based
on information available to us from the Alzheimer's Association, the Centers for
Disease Control, the Family Caregiver's Alliance and the Spinal Cord Injury
Information Network, that these conditions affect more than 18 million people in
the United States and account for more than $150 billion annually in health care
costs.
Our proposed therapies are based on the transplanting of healthy human stem
and progenitor cells to repair or replace central nervous system, pancreas or
liver tissue that has been damaged or lost as a result of disease or injury,
potentially returning patients to productive lives and significantly reducing
health care costs. We believe that we have achieved significant progress in
research regarding stem cells of the central nervous system through the advances
we have made in the isolation, purification and transplantation of central
nervous system stem and progenitor cells. We have also made advances in our
research programs to discover the stem cells of the pancreas and of the liver.
We have established an intellectual property position in all three areas of our
stem cell research--the central nervous system, the pancreas and the liver--by
patenting our discoveries and entering into exclusive licensing arrangements. We
believe that, if successfully developed, our platform of stem cell technologies
may create the basis for therapies that would address a number of conditions
with significant unmet medical needs.
CELL THERAPY BACKGROUND
ROLE OF CELLS IN HUMAN HEALTH AND TRADITIONAL THERAPIES
Cells maintain normal physiological function in healthy individuals by
secreting or metabolizing substances, such as sugars, amino acids,
neurotransmitters and hormones, which are essential to life. When cells are
damaged or destroyed, they no longer produce, metabolize or accurately regulate
those substances. Impaired cellular function is associated with the progressive
decline common to many degenerative diseases of the nervous system, such as
Parkinson's disease, Alzheimer's disease and amyotrophic lateral sclerosis.
Recent advances in medical science have identified cell loss or impaired
cellular function as leading causes of degenerative diseases. Biotechnology
advances have led to the identification of some of the specific substances or
proteins that are deficient. While administering these substances or proteins as
medication does overcome some of the limitations of traditional pharmaceuticals
such as lack of specificity, there is no existing technology that can deliver
them to the precise sites of action and in the appropriate physiological
quantities or for the duration required to cure the degenerative condition.
Cells, however, do this naturally. As a result, investigators have
considered replacing failing cells that are no longer producing the needed
substances or proteins by implanting stem or progenitor cells capable of
regenerating the cell that the degenerative condition has damaged or destroyed.
Where
22
there has been irreversible tissue damage or organ failure, transplantation of
stem cells offers the possibility of generating new and healthy tissue, thus
potentially restoring the organ function and the patient's health.
THE POTENTIAL OF OUR STEM CELL-BASED THERAPY
We believe that, if successfully developed, stem cell-based therapy--the use
of stem or progenitor cells to treat diseases--has the potential to provide a
broad therapeutic approach comparable in importance to traditional
pharmaceuticals and genetically engineered biologics.
Stem cells are rare and only available in limited supply, whether from the
patients themselves or from donors. Cells obtained from the same person who will
receive them may be abnormal if the patient is ill or the tissue is contaminated
with disease-causing cells. Also, the cells can often be obtained only through
significant surgical procedures. The challenge, therefore, has been three-fold:
1) to identify the stem cells;
2) to create techniques and processes that can be used to expand these rare
cells in sufficient quantities for effective transplants; and
3) to establish a bank of normal human stem or progenitor cells that can be
used for transplantation into individuals whose own cells are not
suitable because of disease or other reasons.
We have developed and demonstrated a process, based on a proprietary IN
VITRO culture system in chemically defined media, that reproducibly grows normal
human central nervous system, or CNS, stem and progenitor cells. We believe this
is the first reproducible process for growing normal human CNS stem cells. More
recently, we have discovered markers on the cell surface that identify the human
CNS stem cells. This allows us to purify them and eliminate other unwanted cell
types. Together, these discoveries enable us to select normal human CNS stem
cells and to expand them in culture to produce a large number of pure stem
cells.
Because these cells have not been genetically modified, they may be
especially suitable for transplantation and may provide a safer and more
effective alternative to therapies that are based on cells derived from cancer
cells, from cells modified by a cancer gene to make them grow, from an
unpurified mixture of many different cell types, or from animal derived cells.
We believe our proprietary stem cell technologies may enable therapies to
replace specific cells that have been damaged or destroyed, permitting the
restoration of function through the replacement of normal cells where this has
not been possible in the past. In our research, we have shown that stem cells of
the central nervous system transplanted into hosts are accepted, migrate, and
successfully specialize to produce mature neurons and glial cells.
More generally, because the stem cell is the pivotal cell that produces all
the functional mature cell types in an organ, we believe these cells, if
successfully identified and developed for transplantation, may serve as
platforms for five major areas of regenerative medicine and biotechnology:
- tissue repair and replacement,
- correction of genetic disorders,
- drug discovery and screening,
- gene discovery and use, and
- diagnostics.
23
We will be pursuing key alliances in these areas.
OUR PLATFORM OF STEM CELL TECHNOLOGIES
Stem cells have two defining characteristics:
- some of the cells developed from stem cells produce all the kinds of
mature cells making up the particular organ; and
- they "self renew"--that is, other cells developed from stem cells are
themselves new stem cells, thus permitting the process to continue again
and again.
Stem cells are known to exist for many systems of the human body, including
the blood and immune system, the central and peripheral nervous systems
(including the brain), and the liver, pancreas endocrine, and the skin systems.
These cells are responsible for organ regeneration during normal cell
replacement and, to a more or less limited extent, after injury. We believe that
further research and development will allow stem cells to be cultivated and
administered in ways that enhance their natural function, so as to form the
basis of therapies that will replace specific subsets of cells that have been
damaged or lost through disease, injury or genetic defect.
We also believe that the person or entity that first identifies and isolates
a stem cell and defines methods to culture any of the finite number of different
types of human stem cells will be able to obtain patent protection for the
methods and the composition, making the commercial development of stem cell
treatment and possible cure of currently intractable diseases financially
feasible.
Our strategy is to be the first to identify, isolate and patent multiple
types of human stem and progenitor cells with commercial importance. Our
portfolio of issued patents includes a method of culturing normal human central
nervous system stem and progenitor cells in our proprietary chemically defined
medium, and our published studies show that these cultured and expanded cells
give rise to all three major cell types of the central nervous system. Also, a
separate study sponsored by us using these cultured stem and progenitor cells
showed that the cells are accepted, migrate, and successfully specialize to
produce neurons and glial cells.
More recently, we announced the results of a new study that showed that
human central nervous system stem cells can be successfully isolated by markers
present on the surface of freshly obtained brain cells. We believe this is the
first reproducible process for isolating highly purified populations of
well-characterized normal human central nervous system stem cells, and have
applied for a composition of matter patent. Because the cells are highly
purified and have not been genetically modified, they may be especially suitable
for transplantation and may provide a safer and more effective alternative than
therapies that are based on cells derived from cancer cells, or from cells
modified by a cancer gene to make them grow, or from an unpurified mixture of
many different cell types or cells derived from animals. We have also filed an
improved process patent for the growth and expansion of these purified normal
human central nervous system cells.
Neurological disorders such as Parkinson's disease, epilepsy, Alzheimer's
disease, and the side effects of stroke, affect a significant portion of the
U.S. population and there currently are no effective long-term therapies for
them. We believe that therapies based on our process for identifying, isolating
and culturing neural stem and progenitor cells may be useful in treating such
diseases. We are continuing our research into, and have initiated the
development of, human central nervous system stem and progenitor cell-based
therapies for these diseases.
We continue to advance our research programs to discover the islet stem cell
in the human pancreas and the liver stem cell. Islet cells are the cells that
produce insulin, so islet stem cells may be useful in the treatment of Type 1
diabetes and those cases of Type 2 diabetes where insulin secretion is
24
defective. Liver stem cells may be useful in the treatment of diseases such as
hepatitis, cirrhosis of the liver and liver cancer.
EXPECTED ADVANTAGES OF OUR STEM CELL TECHNOLOGY
NO OTHER TREATMENT
To the best of our knowledge, no one has developed an FDA-approved method
for replacing lost or damaged tissues from the human nervous system. Replacement
of tissues in other areas of the human body is limited to those few sites, such
as bone marrow or peripheral blood cell transplants, where transplantation of
the patient's own cells is now feasible. In a few additional areas, including
the liver, transplantation of donor organs is now used, but is limited by the
scarcity of organs available through donation. We believe that our stem cell
technologies have the potential to reestablish function in at least some of the
patients who have suffered the losses referred to above.
REPLACED CELLS PROVIDE NORMAL FUNCTION
Because stem cells can duplicate themselves, or self-renew, and specialize
into the multiple kinds of cells that are commonly lost in various diseases,
transplanted stem cells may be able to migrate limited distances to the proper
location within the body, to expand and specialize and to replace damaged or
defective cells, facilitating the return to proper function. We believe that
such replacement of damaged or defective cells by functional cells is unlikely
to be achieved with any other treatment.
RESEARCH EFFORTS AND PRODUCT DEVELOPMENT PROGRAMS
OVERVIEW OF RESEARCH AND PRODUCT DEVELOPMENT STRATEGY
We have devoted substantial resources to our research programs to isolate
and develop a series of stem and progenitor cells that we believe can serve as a
basis for replacing diseased or injured cells. Our efforts to date have been
directed at methods to identify, isolate and culture large varieties of stem and
progenitor cells of the human nervous system, liver and pancreas and to develop
therapies utilizing these stem and progenitor cells.
The following table lists the potential therapeutic indications for, and
current status of, our primary research and product development programs and
projects. The table is qualified in its entirety by reference to the more
detailed descriptions of such programs and projects appearing elsewhere in this
prospectus. We continually evaluate our research and product development efforts
and reallocate resources among existing programs or to new programs in light of
experimental results, commercial potential, availability of third party funding,
likelihood of near-term efficacy, collaboration success or significant
technology enhancement, as well as other factors. Our research and product
development
25
programs are at relatively early stages of development and will require
substantial resources to commercialize.
RESEARCH AND PRODUCT DEVELOPMENT PROGRAMS
------------------------------------------------------------
PROGRAM DESCRIPTION AND OBJECTIVE STAGE/STATUS(1)
- --------------------------------- ------------------------------------------------------------
HUMAN NEURAL STEM CELL PRECLINICAL
Repair or replace damaged central - Demonstrated IN VITRO the ability to initiate and expand
nervous system tissue (including stem cell-containing human neural cultures and
spinal cord, degenerated retinas specialization into three types of central nervous system
and tissue affected by certain cells
genetic disorders) - Demonstrated the ability of neurosphere-initiating stem
cells from human brain
- Demonstrated in rodent studies that transplanted human
brain-derived stem cells are accepted and properly
specialized into the three major cell types of the
central nervous system.
PANCREAS ISLET STEM CELL RESEARCH
Repair or replace damaged pancreas - Identified markers on the surface of cells to identify,
islet tissue isolate and culture islet stem cells of the pancreas
- Commenced small animal testing
LIVER STEM CELL RESEARCH
Repair or replace damaged liver - Demonstrated the production of hepatocytes from purified
tissue including tissue resulting mouse hematopoietic stem cells
from certain metabolic genetic - Identified IN VITRO culture assay for growth of human
diseases bipotent liver progenitor cells that can produce both
bile duct and hepatocytes
- Showed that the in vitro culture of human bipotent liver
cells can also grow human hepatitis virus
- ------------------------
(1) "Research" refers to early stage research and product development activities
IN VITRO, including the selection and characterization of product candidates
for preclinical testing. "Preclinical" refers to further testing of a
defined product candidate IN VITRO and in animals prior to clinical studies.
RESEARCH AND DEVELOPMENT PROGRAMS
Our portfolio of stem cell technology results from our exclusive licensing
of central nervous system, stem and progenitor cell technology, animal models
for the identification and/or testing of stem and progenitor cells and our own
research and development efforts to date. We believe that therapies using stem
cells represent a fundamentally new approach to the treatment of diseases caused
by lost or damaged tissue. We have assembled an experienced team of scientists
and scientific advisors to consult with and advise our scientists on their
continuing research and development of stem and progenitor cells. This team
includes, among others, Irving L. Weissman, M.D., of Stanford University, Fred
H. Gage, Ph.D., of The Salk Institute and David Anderson, Ph.D., of the
California Institute of Technology.
BRAIN STEM AND PROGENITOR CELL RESEARCH AND DEVELOPMENT PROGRAM
We began our work with central nervous system stem and progenitor cell
cultures in collaboration with NeuroSpheres, Ltd., in 1992. We believe that
NeuroSpheres was the first to invent these cultures. We are the exclusive,
worldwide licensee from NeuroSpheres to such inventions and associated patents
and patent applications for all uses, including transplantation in the human
body, as embodied in these patents. See "License Agreements and Sponsored
Research Agreements--NeuroSpheres, Ltd."
26
In 1997, our scientists invented a reproducible method for growing human
CNS, stem and progenitor cells in cultures. In preclinical IN VITRO and early IN
VIVO studies, we demonstrated that these cells specialize into all three of the
cell types of the central nervous system. Because of these results, we believe
that these cells may form the basis for replacement of cells lost in certain
degenerative diseases. We are continuing research into, and have initiated the
development of, our human CNS stem and progenitor cell cultures. We have
initiated the cultures and demonstrated that these cultures can be expanded for
a number of generations IN VITRO in chemically defined media. In collaboration
with us, Dr. Anders Bjorklund has shown that cells from these cultures can be
successfully transplanted and accepted into the brains of rodents where they
subsequently migrated and specialized into the appropriate cell types for the
site of the brain into which they were placed.
In 1998, we expanded our preclinical efforts in this area by initiating
programs aimed at the discovery and use of specific monoclonal antibodies to
facilitate identification and isolation of CNS and other stem and progenitor
cells or their specialized progeny. Also in 1998, our researchers devised
methods to advance the IN VITRO culture and passage of human CNS stem cells that
resulted in a 100-fold increase in CNS stem and progenitor cell production after
6 passages. We are expanding our preclinical efforts toward the goal of
selecting the proper indications to pursue.
In December 1998, we announced that the US Patent and Trademark Office had
granted patent No. 5,851,832, covering our methods for the human CNS cell
cultures containing central nervous system stem cells, for compositions of human
CNS cells expanded by these methods, and for use of these cultures in human
transplantation. These human CNS stem and progenitor cells expanded in culture
may be useful for repairing or replacing damaged central nervous system tissue,
including the brain and the spinal cord.
In October 1999, the US Patent and Trademark Office granted patent number
5,968,829 entitled "Human CNS Neural Stem Cells," covering our composition of
matter patent for human CNS stem cells, and also allowed a separate patent
application for our media for culturing human CNS stem cells.
Also in 1999, we announced the filing of a US patent application covering
our proprietary process for the direct isolation of normal human CNS stem cells
based on the markers found to be present on the surface of freshly obtained
brain cells. Since the filing of this patent application, our researchers have
completed a study designed to identify, isolate and culture human CNS stem cells
utilizing this proprietary process. In November 1999, we announced the study's
first results: Our researchers, by using our proprietary markers on the surface
of the cell, had succeeded in identifying, isolating and purifying human CNS
stem cells from brain tissue, and were able to expand the number of these cells
in culture.
We believe that this is the first study to show a reproducible process for
isolating highly purified populations of well-characterized normal human CNS
stem cells. Because the cells are normal human CNS stem cells and have not been
genetically modified, they may be especially suitable for transplantation and
may provide a safer and more effective alternative to therapies that are based
on cells derived from cancer cells or from an unpurified mix of many different
cell types, or from animal derived cells.
In January 2000, we reported what we regard as an even more important
result: In long term animal studies, our researchers were able to take these
purified and expanded stem cells and transplant them into normal mouse brain
hosts, where they take hold and grow into neurons and glial cells.
During the course of the study, the transplanted human CNS stem cells
survived for as long as one year and migrated to specific functional domains of
the host brain, with no sign of tumor formation or adverse effects on the animal
recipients; moreover, the cells were still dividing. These findings show that
when CNS stem cells isolated and cultured with our proprietary processes are
transplanted, they adopt the characteristics of the host brain and act like
normal stem cells. In other words, the study suggests the possibility of a
continual replenishment of normal human brain cells.
27
As noted above, human CNS stem and progenitor cells harvested and purified
and expanded using our proprietary processes may be useful for creating
therapies for the treatment of degenerative brain diseases such as Parkinson's,
Huntington's and Alzheimer's disease. These conditions affect more than
5 million people in the United States and there are no effective long-term
therapies currently available. We believe the ability to purify human brain stem
cells directly from fresh tissue is important because:
- it provides an enriched source of normal stem cells, not contaminated by
other unwanted or diseased cell types, that can be expanded in culture
without fear of also expanding some unwanted cell types;
- it opens the way to a better understanding of the properties of these
cells and how they might be manipulated to treat specific diseases. For
example, in certain genetic diseases such as Tay Sachs and Gaucher's, a
key metabolic enzyme required for normal development and function of the
brain is absent. Brain-derived stem cell cultures might be genetically
modified to produce those proteins. The modified brain stem cells could be
transplanted into patients with these genetic diseases;
- the efficient acceptance of these non-transformed normal human stem cells
into host brains means that the cell product can be tested in animal
models for its ability to correct deficiencies caused by various human
neurological diseases. This technology could also provide a unique animal
model for the testing of drugs that act on human brain cells either for
effectiveness of the drug against the disease or its toxicity to human
nerve cells.
PANCREAS STEM CELLS DISCOVERY RESEARCH PROGRAMS
Our discovery program directed to the identification, isolation and
culturing of the pancreas stem and progenitor cells is currently being conducted
by Nora Sarvetnick, Ph.D., of The Scripps Research Institute, in collaboration
with some of our senior researchers.
According to diabetes and juvenile diabetes foundations, between 800,000 and
1.5 million Americans have Type 1 diabetes, which is often called "juvenile
diabetes" and most commonly diagnosed in childhood; and 30,000 new patients are
diagnosed with the disease every year. It is a costly, serious, lifelong
condition, requiring constant attention and insulin injections every day for
survival.
About 15 million other people in the United States have Type 2 diabetes
mellitus, which is also a chronic and potentially fatal condition; and more than
700,000 new patients are diagnosed annually.
In 1998, we obtained an exclusive, worldwide license from The Scripps
Research Institute to novel technology developed by Dr. Sarvetnick which may
facilitate the identification and isolation of pancreas stem and progenitor
cells by using a mouse model that continuously regenerates the pancreas. We
believe that stem cells produce the regeneration, in which case this animal
model may be useful for identifying specific markers on the cell surface unique
to the pancreas stem cells. We believe this may lead to the development of
cell-based treatments for Type 1 diabetes and that portion of Type 2 diabetes
characterized by defective secretion of insulin.
In 1999, advances in the research sponsored by us resulted in our obtaining
additional exclusive, worldwide licenses from The Scripps Research Institute to
novel markers on the cell surface identified by Dr. Sarvetnick and her research
team as being unique to the pancreas islet stem cell for which we have now filed
a US patent application. In collaboration with Dr. Sarvetnick, we continue to
advance the discovery program directed at the identification, isolation and
culturing of pancreas stem and progenitor cells utilizing this technology.
28
LIVER STEM CELLS DISCOVERY RESEARCH PROGRAMS
We initiated our discovery work for the liver stem and progenitor cell
through a sponsored research agreement with Markus Grompe, Ph.D., of Oregon
Health Sciences University. Dr. Grompe's work focuses on the discovery and
development of a suitable method for identifying and assessing liver stem and
progenitor cells for use in transplantation. We have also obtained a worldwide
exclusive license to a novel mouse model of liver failure for evaluating cell
transplantation developed by Dr. Grompe.
Approximately 1 in 10 Americans suffers from diseases and disorders of the
liver for which there are currently no effective, long-term treatments.
In 1998, our researchers continued to advance methods for establishing
enriched cell populations suitable for transplantation in preclinical animal
models. We are focused on discovering and utilizing our proprietary methods to
identify, isolate and culture liver stem and progenitor cells and to evaluate
these cells in preclinical animal models.
In 1999, our researchers devised a culture assay that we will use in our
efforts to identify liver stem and progenitor cells. In addition to supporting
the growth of an early human liver bipotent progenitor cell, it is also possible
to infect this culture with human hepatitis virus, providing a valuable system
for study of the virus. This technology could also provide a unique IN VITRO
model for the testing of drugs that act on, or are metabolized by, human liver
cells.
An important element of our stem cell discovery program is the further
development of intellectual property positions with respect to stem and
progenitor cells. We have also obtained rights to certain inventions relating to
stem cells from, and are conducting stem cell related research at, several
academic institutions. We expect to expand our search for new stem and
progenitor cells and to seek to acquire rights to additional inventions relating
to stem and progenitor cells from third parties.
WIND-DOWN OF ENCAPSULATED CELL THERAPY RESEARCH AND DEVELOPMENT PROGRAMS
Until mid-1999, we engaged in research and development in encapsulated cell
therapy technology, or ECT, including a pain control program funded by
AstraZeneca Group plc. The results from the 85-patient double-blind,
placebo-controlled trial of our encapsulated bovine cell implant for the
treatment of severe, chronic pain in cancer patients did not, however, meet the
criteria AstraZeneca had established for continuing trials for the therapy, and
in June 1999, AstraZeneca terminated the collaboration.
Consequently, in July 1999, we announced plans for the restructuring of our
research operations to abandon all further ECT research and to concentrate our
resources on the research and development of our proprietary platform of stem
cell technology. We reduced our workforce by approximately 68 full-time
employees who had been focused on ECT programs, wound down our research and
manufacturing operations in Lincoln, Rhode Island, and relocated our remaining
research and development activities, and our corporate headquarters, to the
facilities of our wholly owned subsidiary, StemCells California, Inc., in
Sunnyvale, California. We are actively seeking to sublease, assign or sell our
interest in our former corporate headquarters building and our pilot
manufacturing and cell processing facility in Rhode Island.
In December 1999 we sold our intellectual property assets related to our ECT
to Neurotech S.A., a privately held French company, in exchange for a payment of
$3 million, royalties on future product sales, and a portion of certain revenues
Neurotech may in the future receive from third parties. We retained certain
non-exclusive rights to use the ECT in combination with our proprietary stem
cell technology, and in the field of vaccines for prevention and treatment of
infectious diseases.
29
In a related development, by mutual consent we and the Advanced Technology
Program of the National Institute of Standards and Technology terminated two
grants previously awarded to us for our encapsulated cell therapy and stem
cell-related research. The encapsulated cell therapy grant was obviated by the
sale of the technology to Neurotech. The funding agency has invited us to
resubmit a proposal consistent with the new directions we are taking in our
research and development of our platform of stem cell technologies.
SUBSIDIARY
STEMCELLS CALIFORNIA, INC.
On September 26, 1997, we acquired by merger StemCells, Inc. (now StemCells
California, Inc.), a California corporation, in exchange for 1,320,691 shares of
our common stock and options and warrants for the purchase of 259,296 common
shares. Simultaneously with the acquisition, its President, Richard M. Rose,
M.D., became our President, Chief Executive Officer and a director, and Irving
L. Weissman, M.D., a founder of the California corporation, became a member of
our board of directors. We, as the sole stockholder of our subsidiary, voted on
February 23, 2000, to amend its Certificate of Incorporation to change its name
to StemCells California, Inc.
CORPORATE INVESTMENT
In July 1996, we, together with certain founding scientists, established
Modex Therapeutics SA, a Swiss biotherapeutics company, to pursue extensions of
our former technology of ECT for certain applications outside the central
nervous system. Modex, headquartered in Lausanne, Switzerland, was formed to
integrate technologies developed by us and by several other institutions to
develop products to treat diseases such as diabetes, obesity and anemia. After
our disposition of the encapsulated cell technology in December 1999, we no
longer had common research or development interests with Modex, but we held
approximate 17% of its stock. Modex completed an initial public offering on
June 23, 2000, in the course of which we realized a gain of approximately
$1.4 million from the sale of certain shares. We now own 126,193 shares, or
approximately 9%, of Modex's equity, subject to a lockup until December 23,
2000. The closing market price of Modex stock on the Swiss Neue Market exchange
on October 31, 2000 was 329.50 Swiss francs, or approximately $183, per share.
LICENSE AGREEMENTS AND SPONSORED RESEARCH AGREEMENTS
We have entered into a number of license agreements with commercial and
non-profit institutions, as well as a number of research-plus-license agreements
with academic organizations. The research agreements provide that we will fund
certain research costs, and in return, will have a license or an option for a
license to the resulting inventions. Under the license agreements, we will
typically be subject to obligations of due diligence and the requirement to pay
royalties on products that use patented technology licensed under such
agreements.
NEUROSPHERES, LTD.
In March 1994, we entered into a Contract Research and License Agreement
with NeuroSpheres, Ltd., which was clarified in a License Agreement dated as of
April 1, 1997. Under the agreement as clarified, we obtained an exclusive patent
license from NeuroSpheres in the field of transplantation, subject to a limited
right of NeuroSpheres to purchase a nonexclusive license from us, which right
was not exercised and has expired. We have developed additional intellectual
property relating to the subject matter of the license. We entered into an
additional license agreement with NeuroSpheres as of October 31, 2000, under
which we obtained an exclusive license in the field of non-transplant uses, such
as drug discovery and drug testing, so that together the licenses are exclusive
for all uses of the technology. We will make up-front payments to NeuroSpheres
of 65,000 shares of our
30
common stock and $50,000, and additional cash payments when milestones are
achieved in the non-transplant field, or in any products employing NeuroSpheres
patents for generating cells of the blood and immune system from neural stem
cells. Milestone payments would total $500,000 for each product that is approved
for market. Our agreements with NeuroSpheres will terminate at the expiration of
all patents licensed to us, but can terminate earlier if we breach without
curing our obligations under the agreement or if we declare bankruptcy. We would
have a security interest in the licensed technology in the event that
NeuroSpheres declares bankruptcy.
SIGNAL PHARMACEUTICALS, INC.
In December 1997, we entered into two license agreements with Signal
Pharmaceuticals, Inc. under which each party licensed to the other certain
patent rights and biological materials for use in defined fields. An initial
disagreement as to the interpretation of the licensed rights was resolved by the
parties, and the agreements are operating in accordance with their terms. Signal
has now been acquired by Celgene. Each agreement with Signal will terminate at
the expiration of all patents licensed under it, but the licensing party can
terminate earlier if the other party breaches its obligations under the
agreement or declares bankruptcy. Also, the party receiving the license can
terminate the agreement at any time upon notice to the other party. Under these
agreements, we must reimburse Signal for payments it must make to the University
of California based on products we develop and for 50% of certain other payments
Signal must make.
SPONSORED RESEARCH AGREEMENTS
Under Sponsored Research Agreements with The Scripps Research Institute and
Oregon Health Sciences University, we funded certain research in return for
licenses or options to license the inventions resulting from the research. We
have also entered into license agreements with the California Institute of
Technology. All of these agreements relate largely to stem or progenitor cells
and or to processes and methods for the isolation, identification, expansion or
culturing of stem or progenitor cells.
Our research agreement with Scripps expired on November 14, 2000 and we are
negotiating with Scripps to extend the term of this agreement or to enter into a
new agreement. As of the date of this prospectus, we have not yet completed our
negotiations with Scripps and we cannot give any assurance that our negotiations
will be successful. If we are unable to extend the term of this agreement, we
will have to find a replacement to perform this research or we will have to
perform this research ourselves. In either case, we may experience delay and
additional expense in connection with this research effort. Our license
agreements with Scripps will terminate upon expiration, revocation or
invalidation of the patents licensed to us, unless governmental regulations
require a shorter term. These license agreements also will terminate earlier if
we breach without curing our obligations under the agreement or if we declare
bankruptcy, and we can terminate the license agreements at any time upon notice.
Upon the initiation of the Phase II trial for our first product using Scripps
licensed technology, we must pay Scripps $50,000 and upon completion of that
Phase II trial we must pay Scripps an additional $125,000. Upon approval of the
first product for sale in the market, we must pay Scripps $250,000.
Our license agreements with the California Institute of Technology will
expire upon expiration, revocation, invalidation or abandonment of the patents
licensed to us. We can terminate any of these license agreements by giving 30
days' notice to the California Institute of Technology. Either party can
terminate these license agreements upon a material breach by the other party. We
paid $10,000 to the California Institute of Technology upon execution of the
license agreements, and we must pay an additional $10,000 upon the issuance of
the patent licensed to us under the relevant agreement. We also will pay $5,000
on the anniversary of the issuance of the patent licensed to us under the
relevant agreement. These amounts are creditable against royalties we must pay
under the license agreements. The maximum royalties that we will have to pay to
the California Institute of Technology will be
31
$2 million per year, with an overall maximum of $15 million. Once we pay the
$15 million maximum royalty, the licenses will become fully paid and
irrevocable.
MANUFACTURING
The keys to successful commercialization of brain stem and progenitor cells
are efficacy, safety, consistency of the product, and economy of the process. We
expect to address these issues by appropriate testing and banking representative
vials of large-scale cultures. Commercial production is expected to involve
expansion of banked cells and packaging them in appropriate containers after
formulating the cells in an effective carrier. The carrier may also be used to
improve the stability and acceptance of the stem cells or their progeny. Because
of the early stage of our stem and progenitor cell programs, all of the issues
that will affect manufacture of stem and progenitor cell products are not yet
clear.
MARKETING
We expect to market and sell our products primarily through co-marketing,
licensing or other arrangements with third parties. There are a number of
substantial companies with existing distribution channels and large marketing
resources who are well equipped to market and sell our products. It is our
intent to have the marketing of our products undertaken by such partners,
although we may seek to retain limited marketing rights in specific narrow
markets where the product may be addressed by a specialty or niche sales force.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
We believe that proprietary protection of our inventions will be of major
importance to our future business. We have an aggressive program of vigorously
seeking and protecting our intellectual property which we believe might be
useful in connection with our products. We believe that our know-how will also
provide a significant competitive advantage, and we intend to continue to
develop and protect our proprietary know-how. We may also from time to time seek
to acquire licenses to important externally developed technologies.
We have exclusive or non-exclusive rights to a portfolio of patents and
patent applications related to various stem and progenitor cells and methods of
deriving and using them. These patents and patent applications relate mainly to
compositions of matter, methods of obtaining such cells, and methods for
preparing, transplanting and utilizing such cells. Currently, our U.S. patent
portfolio in the stem cell therapy area includes nineteen issued U.S. patents,
six of which have issued within the last year. An additional thirteen patent
applications are pending, one of which has been allowed.
We own or have filed patent applications which have been published for the
following U.S. patents: Patent Number 5,968,829 (Human CNS neural stem cells);
Patent Number 6,103,530 (Human CNS neural stem cells--culture media);
Application Number WO 99/11758 (Cultures of human CNS neural stem cells); and
Application Number WO 00/36091 (An animal model for identifying a common
stem/progenitor to liver cells and pancreatic cells). We have licensed the
following patents or pending patent applications from Neurospheres Holdings
Ltd.: Patent Number 5,851,832 (In vitro proliferation); Patent Number 5,750,376
(In vitro genetic modification); Patent Number 5,981,165 (In vitro production of
dopaminergic cells from mammalian central nervous system multipotent stem cell
compositions); Patent Number 6,093,531 (Generation of hematopoietic cells from
multipotent neural stem cells); Application Number WO 93/01275 (Mammalian
central nervous system multipotent stem cell compositions); Application Number
WO 94/09119 (Remyelination using mammalian central nervous system multipotent
stem cell compositions); Application Number WO 94/10292 (Biological factors
useful in differentiating mammalian central nervous system multipotent stem cell
compositions); Application Number WO 94/16718 (Genetically engineered mammalian
central nervous system
32
multipotent stem cell compositions); Application Number WO 96/15224
(Differentiation of mammalian central nervous system multipotent stem cell
compositions); and Application Number WO 96/15226 (In vitro production of
dopaminergic cells from mammalian central nervous system multipotent stem cell
composition). We have licensed the following patents or pending patent
applications from the University of California, San Diego: Patent
Number 5,776,948 (Method of production of neuroblasts); Patent Number 6,013,521
(Method of production of neuroblasts); Patent Number 6,020,197 (Method of
production of neuroblasts); and Application Number WO 94/16059 (Method of
production of neuroblasts). We have licensed the following patents or pending
patent applications from the California Institute of Technology: Patent
Number 5,629,159 (Immortalization and disimmortalization of cells); Application
Number WO 96/40877 (Immortalization and disimmortalization of cells); Patent
Number 5,935,811 (Neuron restrictive silencer factor proteins); Application
Number WO 96/27665 (Neuron restrictive silencer factor proteins); Patent
Number 5,589,376 (Mammalian neural crest stem cells); Patent Number 5,824,489
(Methods for isolating mammalian multipotent neural crest stem cells);
Application Number WO 94/02593 (Mammalian neural crest stem cells); Patent
Number 5,654,183 (Genetically engineered mammalian neural crest stem cells);
Patent Number 5,928,947 (Mammalian multipotent neural crest stem cells); Patent
Number 5,693,482 (In vitro neural crest stem cell assay); Patent
Number 6,001,654 (Methods for differentiating neural stem cells to neurons or
smooth muscle cells (TGFb)); Application Number WO 98/48001 (Methods for
differentiating neural stem cells to neurons or smooth muscle cells (TGFb));
Patent Number 5,672,499 (Methods for immortalizing multipotent neural crest stem
cells); Patent Number 5,849,553 (Immortalizing and disimmortalizing multipotent
neural crest stem cells); and Patent Number 6,033,906 (Differentiating mammalian
neural stem cells to glial cells using neuregulins).
We also rely upon trade-secret protection for our confidential and
proprietary information and take active measures to control access to that
information.
Our policy is to require our employees, consultants and significant
scientific collaborators and sponsored researchers to execute confidentiality
agreements upon the commencement of an employment or consulting relationship
with us. These agreements generally provide that all confidential information
developed or made known to the individual by us during the course of the
individual's relationship with us is to be kept confidential and not disclosed
to third parties except in specific circumstances. In the case of employees and
consultants, the agreements generally provide that all inventions conceived by
the individual in the course of rendering services to us shall be our exclusive
property.
We have obtained rights from universities and research institutions to
technologies, processes and compounds that we believe may be important to the
development of our products. These agreements typically require us to pay
license fees, meet certain diligence obligations and, upon commercial
introduction of certain products, pay royalties. These include exclusive license
agreements with NeuroSpheres, The Scripps Institute, the California Institute of
Technology and the Oregon Health Sciences University, to certain patents and
know-how regarding present and certain future developments in CNS and pancreas
stem cells.
COMPETITION
The targeted disease states for our initial products in some instances
currently have no effective long-term therapies. However, we do expect that our
initial products will have to compete with a variety of therapeutic products and
procedures. Major pharmaceutical companies currently offer a number of
pharmaceutical products to treat neurodegenerative and liver diseases, diabetes
and other diseases for which our technologies may be applicable. Many
pharmaceutical and biotechnology companies are investigating new drugs and
therapeutic approaches for the same purposes, which may achieve new efficacy
profiles, extend the therapeutic window for such products, alter the prognosis
of these diseases, or prevent their onset. We believe that our products, when
successfully developed, will
33
compete with these products principally on the basis of improved and extended
efficacy and safety and their overall economic benefit to the health care
system.
The market for therapeutic products that address degenerative diseases is
large, and competition is intense. We expect competition to increase. We believe
that our most significant competitors will be fully integrated pharmaceutical
companies and more established biotechnology companies. Smaller companies may
also be significant competitors, particularly through collaborative arrangements
with large pharmaceutical or biotechnology companies. Many of these competitors
have significant products approved or in development that could be competitive
with our potential products.
Competition for our stem and progenitor cell products may be in the form of
existing and new drugs, other forms of cell transplantation, ablative and
simulative procedures, and gene therapy. We believe that some of our competitors
are also trying to develop stem and progenitor cell-based technologies. We
expect that all of these products will compete with our potential stem and
progenitor cell products based on efficacy, safety, cost and intellectual
property positions.
We may also face competition from companies that have filed patent
applications relating to the use of genetically modified cells to treat disease,
disorder or injury. We may be required to seek licenses from these competitors
in order to commercialize certain of our proposed products.
Once our products are developed and receive regulatory approval, they must
then compete for market acceptance and market share. For certain of our
potential products, an important success factor will be the timing of market
introduction of competitive products. This is a function of the relative speed
with which we and our competitors can develop products, complete the clinical
testing and approval processes, and supply commercial quantities of a product to
market. These competitive products may also impact the timing of clinical
testing and approval processes by limiting the number of clinical investigators
and patients available to test our potential products.
While we believe that the primary competitive factors will be product
efficacy, safety, and the timing and scope of regulatory approvals, other
factors include, in certain instances, obtaining marketing exclusivity under the
Orphan Drug Act, availability of supply, marketing and sales capability,
reimbursement coverage, price, and patent and technology position.
GOVERNMENT REGULATION
Our research and development activities and the future manufacturing and
marketing of our potential products are, and will continue to be, subject to
regulation for safety and efficacy by numerous governmental authorities in the
United States and other countries.
In the United States, pharmaceuticals, biologicals and medical devices are
subject to rigorous Food and Drug Administration, or FDA, regulation. The
Federal Food, Drug and Cosmetic Act, as amended, and the Public Health Service
Act, as amended, the regulations promulgated thereunder, and other Federal and
state statutes and regulations govern, among other things, the testing,
manufacture, safety, efficacy, labeling, storage, export, record keeping,
approval, marketing, advertising and promotion of our potential products.
Product development and approval within this regulatory framework takes a
number of years and involves significant uncertainty combined with the
expenditure of substantial resources. In addition, the federal, state, and other
jurisdictions have restrictions on the use of fetal tissue.
34
FDA APPROVAL
The steps required before our potential products may be marketed in the
United States include:
STEPS CONSIDERATIONS
1. Preclinical laboratory and animal tests Preclinical tests include laboratory
evaluation of the product and animal studies
in specific disease models to assess the
potential safety and efficacy of the product
and our formulation as well as the quality
and consistency of the manufacturing process.
2. Submission to the FDA of an application The results of the preclinical tests are
for an Investigational New Drug Exemption, or submitted to the FDA as part of an IND, and
IND, which must become effective before U.S. the IND becomes effective 30 days following
human clinical trials may commence its receipt by the FDA, as long as there are
no questions, requests for delay or
objections from the FDA.
3. Adequate and well-controlled human Clinical trials involve the evaluation of the
clinical trials to establish the safety and product in healthy volunteers or, as may be
efficacy of the product the case with our potential products, in a
small number of patients under the
supervision of a qualified physician.
Clinical trials are conducted in accordance
with protocols that detail the objectives of
the study, the parameters to be used to
monitor safety and the efficacy criteria to
be evaluated. Any product administered in a
U.S. clinical trial must be manufactured in
accordance with clinical Good Manufacturing
Practices, or cGMP, determined by the FDA.
Each protocol is submitted to the FDA as part
of the IND. The protocol for each clinical
study must be approved by an independent
Institutional Review Board, or IRB, at the
institution at which the study is conducted
and the informed consent of all participants
must be obtained. The IRB will consider,
among other things, the existing information
on the product, ethical factors, the safety
of human subjects, the potential benefits of
the therapy and the possible liability of the
institution.
Clinical development is traditionally
conducted in three sequential phases, which
may overlap:
- In Phase I, products are typically
introduced into healthy human subjects or
into selected patient populations to test
for adverse reactions, dosage tolerance,
absorption and distribution, metabolism,
excretion and clinical pharmacology.
35
- Phase II involves studies in a limited
patient population to (i) determine the
efficacy of the product for specific
targeted indications and populations, (ii)
determine optimal dosage and dosage
tolerance and (iii) identify possible
adverse effects and safety risks. When a
dose is chosen and a candidate product is
found to be effective and to have an
acceptable safety profile in Phase II
evaluations, Phase III trials begin.
- Phase III trials are undertaken to
conclusively demonstrate clinical efficacy
and to test further for safety within an
expanded patient population, generally at
multiple study sites.
The FDA continually reviews the clinical
trial plans and results and may suggest
changes or may require discontinuance of the
trials at any time if significant safety
issues arise.
4. Submission to the FDA of marketing The results of the preclinical studies and
authorization applications clinical studies are submitted to the FDA in
the form of marketing approval authorization
applications.
5. FDA approval of the application(s) prior The testing and approval process will require
to any commercial sale or shipment of the substantial time, effort and expense. The
drug. Biologic product manufacturing time for approval is affected by a number of
establishments located in certain states also factors, including relative risks and
may be subject to separate regulatory and benefits demonstrated in clinical trials, the
licensing requirement availability of alternative treatments and
the severity of the disease. Additional
animal studies or clinical trials may be
requested during the FDA review period which
might add to that time.
After FDA approval for the initial indications and requisite approval of the
manufacturing facility, further clinical trials may be required to gain approval
for the use of the product for additional indications. The FDA may also require
unusual or restrictive post-marketing testing and surveillance to monitor for
adverse effects, which could involve significant expense, or may elect to grant
only conditional approvals.
FDA MANUFACTURING REQUIREMENTS
Among the conditions for product licensure is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to the FDA's cGMP requirement. Even after product licensure approval, the
manufacturer must comply with cGMP on a continuing basis, and what constitutes
cGMP may change as the state of the art of manufacturing changes. Domestic
manufacturing facilities are subject to regular FDA inspections for cGMP
compliance which are normally held at least every two years. Foreign
manufacturing facilities are subject to periodic FDA inspections or inspections
by the foreign regulatory authorities with reciprocal inspection agreements with
the FDA. Domestic manufacturing facilities may also be subject to inspection by
foreign authorities.
ORPHAN DRUG ACT
The Orphan Drug Act provides incentives to drug manufacturers to develop and
manufacture drugs for the treatment of diseases or conditions that affect fewer
than 200,000 individuals in the United States. Orphan drug status can also be
sought for treatments for diseases or conditions that
36
affect more than 200,000 individuals in the United States if the sponsor does
not realistically anticipate its product becoming profitable from sales in the
United States. We may apply for orphan drug status for certain of our therapies.
Under the Orphan Drug Act, a manufacturer of a designated orphan product can
seek tax benefits, and the holder of the first FDA approval of a designated
orphan product will be granted a seven-year period of marketing exclusivity in
the United States for that product for the orphan indication. While the
marketing exclusivity of an orphan drug would prevent other sponsors from
obtaining approval of the same compound for the same indication, it would not
prevent other types of products from being approved for the same use including,
in some cases, slight variations on the originally designated orphan product.
PROPOSED FDA REGULATIONS
Proposed regulations of the FDA and other governmental agencies would place
restrictions, including disclosure requirements, on researchers who have a
financial interest in the outcome of their research. Under the proposed
regulations, the FDA could also apply heightened scrutiny to, or exclude the
results of, studies conducted by such researchers when reviewing applications to
the FDA, which contain such research. Certain of our collaborators have stock
options or other equity interests in us that could subject such collaborators
and us to the proposed regulations.
Our research and development is based on the use of human stem and
progenitor cells. The FDA has published a "Proposed Approach to Regulation of
Cellular and Tissue-Based Products" which relates to the use of human cells. We
cannot now determine the effects of that approach or what regulatory actions
might be taken from it. Restrictions exist on the testing or use of cells,
whether human or non-human.
OTHER REGULATIONS
In addition to safety regulations enforced by the FDA, we are also subject
to regulations under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act and other present and potential
future foreign, Federal, state and local regulations.
Outside the United States, we will be subject to regulations which govern
the import of drug products from the United States or other manufacturing sites
and foreign regulatory requirements governing human clinical trials and
marketing approval for our products. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursements vary widely from
country to country. In particular, the European Union, or EU, is revising its
regulatory approach to high tech products, and representatives from the United
States, Japan and the EU are in the process of harmonizing and making more
uniform the regulations for the registration of pharmaceutical products in these
three markets.
37
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our investment in 126,193 shares of Modex Therapeutics Ltd. Stock was valued
at $27,204,333 based on the per share price of $215.58, which we converted from
a market price of 372.00 Swiss francs on September 30, 2000. Our value in this
investment is subject to both equity price risk and foreign currency exchange
risk. Modex shares were offered in an IPO on the Swiss Neue Market on June 23,
2000 at a price of 168.00 Swiss francs. From the date of the IPO to the date of
this prospectus, the Modex closing share price has fluctuated from a low of
200.00 Swiss francs on June 23, 2000 to a high of 390.00 Swiss francs on October
6, 2000. The market price of the Modex stock on October 31, 2000 was 329.50
Swiss francs, which converts to $183.28 using exchange rates on that date, which
represents an estimated fair market value of $23,128,598 for our holdings. If we
were to seek to liquidate all or part of our investment in Modex, our proceeds
would depend on the share price and foreign currency exchange rates at the time
of conversion. Additionally, if we sell a sizable portion of our holdings, we
may have to sell these shares at a discount to market price. We are restricted
from any sale of our shares in Modex until December 23, 2000.
The company's sole market risk sensitive instrument is:
MARKET VALUE EXPECTED
ASSOCIATED AT SEPTEMBER 30, FUTURE
NO. OF SHARES DESCRIPTION RISKS 2000 CASH FLOWS
123,193 Modex Equity/Foreign $27,204,333 (1)
Therapeutics Currency
Translation
- ------------------------
(1) Although the company has not formally adopted a liquidation plan for this
investment, liquidation may be necessary to meet operating cash flow
requirements. Under the agreement with Modex, the company is restricted from
selling its holding through December 23, 2000.
REIMBURSEMENT AND HEALTH CARE COST CONTROL
Reimbursement for the costs of treatments and products such as ours from
government health administration authorities, private health insurers and others
both in the United States and abroad is a key element in the success of new
health care products. Significant uncertainty often exists as to the
reimbursement status of newly approved health care products.
The revenues and profitability of some health care-related companies have
been affected by the continuing efforts of governmental and third party payers
to contain or reduce the cost of health care through various means. Payers are
increasingly attempting to limit both coverage and the level of reimbursement
for new therapeutic products approved for marketing by the FDA, and are
refusing, in some cases, to provide any coverage for uses of approved products
for disease indications for which the FDA has not granted marketing approval.
For example, in certain foreign markets, pricing or profitability of
prescription pharmaceuticals is subject to government control. In the United
States, there have been a number of Federal and state proposals to implement
government control over health care costs.
EMPLOYEES
As of August 15, 2000, we had twenty full-time employees, of whom five have
Ph.D. degrees, as well as two half-time employees. The equivalent of fifteen
full-time employees work in research and development and laboratory support
services. A number of our employees have held positions with other biotechnology
or pharmaceutical companies or have worked in university research programs. No
employees are covered by collective bargaining agreements.
38
SCIENTIFIC ADVISORY BOARD
Members of our Scientific Advisory Board provide us with strategic guidance
in regard to our research and product development programs, as well as
assistance in recruiting employees and collaborators. Each Scientific Advisory
Board member has entered into a consulting agreement with us. These consulting
agreements specify the compensation to be paid to the consultant and require
that all information about our products and technology be kept confidential. All
of the Scientific Advisory Board members are employed by employers other than us
and may have commitments to or consulting or advising agreements with other
entities that limit their availability to us. The Scientific Advisory Board
members have generally agreed, however, for so long as they serve as consultants
to us, not to provide any services to any other entities which would conflict
with the services the member provides to us. Members of the Scientific Advisory
Board offer consultation on specific issues encountered by us as well as general
advice on the directions of appropriate scientific inquiry for us. In addition,
Scientific Advisory Board members assist us in assessing the appropriateness of
moving our projects to more advanced stages. The following persons are members
of our Scientific Advisory Board:
- Irving L. Weissman, M.D., is the Karel and Avice Beekhuis Professor of
Cancer Biology, Professor of Pathology and Professor of Developmental
Biology at Stanford University. Dr. Weissman was a cofounder of
SyStemix, Inc., and Chairman of its Scientific Advisory Board. He has
served on the Scientific Advisory Boards of Amgen Inc., DNAX and T-Cell
Sciences, Inc. Dr. Weissman is Chairman of the Scientific Advisory Board
of StemCells, Inc.
- David J. Anderson, Ph.D., is Professor of Biology, California Institute of
Technology, Pasadena, California and Investigator, Howard Hughes Medical
Institute.
- Fred H. Gage, Ph.D., is Professor, Laboratory of Genetics, The Salk
Institute for Biological Studies, La Jolla, California and Adjunct
Professor, Department of Neurosciences, University of California, San
Diego, California.
39
MANAGEMENT
The following table sets forth the name, age and position of each of our
executive officers, key members of management, and directors.
NAME AGE POSITION
- ---- -------- --------
John J. Schwartz, Ph.D.................... 66 Director, Chairman of the Board
George W. Dunbar, Jr...................... Acting President and Chief Executive
54 Officer
Donald Kennedy, Ph.D...................... 69 Director
Mark J. Levin............................. 50 Director
Irving L. Weissman, M.D................... 60 Director
- John J. Schwartz, Ph.D., was elected to the board of directors in December
1998 and was elected Chairman of the board at the same time. He was
formerly Senior Vice President and General Counsel of SyStemix, Inc. from
1993 to 1995, and then President and Chief Executive Officer of SyStemix,
Inc. from 1995 to 1997. Dr. Schwartz is currently President of Quantum
Strategies Management Company, a registered investment advisor located in
Atherton, California. Prior to his positions at SyStemix, he served as
Assistant Professor and a Vice President and General Counsel at Stanford
University in California. Dr. Schwartz graduated from Harvard Law School
in 1958 and received his Ph.D. in physics from the University of Rochester
in 1966.
- George W. Dunbar, Jr., was appointed Acting President and Chief Executive
Officer of the company effective as of February 1, 2000. Mr. Dunbar joined
the company as Acting President of StemCells California, Inc., the
company's wholly owned subsidiary, on November 8, 1999, and still holds
this office. From September 1999 through the present, Mr. Dunbar has been
a founding member of iCEO, LLC. From July 1991 until July 1999, Mr. Dunbar
was President, Chief Executive Officer and a member of the Board of
Directors of Metra Biosystems, a medical device company, which merged with
Quidel Corporation during 1999. Prior to Metra Biosystems, Mr. Dunbar was
a vice president of The Ares-Serono Group, a Swiss healthcare company, and
served before that as a vice president of Amersham International plc's
life sciences business in the United States. Mr. Dunbar serves as a Board
member for Competitive Technologies, Quidel Corporation, LJL Biosystems,
Sonus Pharmaceuticals and The Valley Medical Center Foundation. He also
sits on the MBA Advisory Board of the Auburn University School of
Business, his alma mater.
- Donald Kennedy, Ph.D., has served as a director of the company since July
1999. Dr. Kennedy is the Bing Professor of Environmental Science,
Professor of Education, and President Emeritus of Stanford University. He
is Editor-in-Chief of SCIENCE magazine. He is also co-director of the
Center for Environmental Science and Policy at Stanford. From 1960 to
1977, Dr. Kennedy held various faculty positions at Stanford University.
From 1977 to 1979, he served as Commissioner at the U.S. Food and Drug
Administration. From 1979 to 1980, he served as Provost of Stanford
University. From 1980 to 1992, Dr. Kennedy served as President of Stanford
University, and from 1992 to present, he has served as a Stanford faculty
member. He is Chairman of Children Now; a member of the National Academy
of Sciences, the National Institute of Medicine, and the American
Philosophical Society; and a fellow of the American Academy of Arts and
Sciences, the American Association for the Advancement of Science, and the
California Academy of Sciences. Dr. Kennedy is a member of the Board of
Directors of AxyS Pharmaceuticals, Inc., and Alzeta Corp. Dr. Kennedy
holds a Ph.D. in biology from Harvard University.
40
- Mark J. Levin is a founder of the company and has served as a director
since the company's inception. From inception until January 1990 and from
May 1990 until February 1991, Mr. Levin served as the company's President
and acting Chief Executive Officer. From November 1991 until March 1992,
he served as Chief Executive Officer of Tularik, Inc., a biotechnology
company. From August 1991 until August 1993, Mr. Levin was Chief Executive
Officer and a director of Focal, Inc., a biomedical company. Mr. Levin is
currently the Chairman of the Board and Chief Executive Officer of
Millennium Pharmaceuticals, Inc., a biotechnology company. Mr. Levin is
also currently on the Board of Directors of Tularik, Inc.
- Irving L. Weissman, M.D., Director, is the Karel and Avice Beekhuis
Professor of Cancer Biology, Professor of Pathology and Professor of
Developmental Biology at Stanford University. Stanford has employed Dr.
Weissman since July 1967, and he has been a Faculty member since January
1969. He has been a full professor of pathology since September 1987, and
also of developmental biology since July 1989. Since October 1990, Dr.
Weissman has also served as a professor of biology (by courtesy). He has
been Chairman of the Stanford University Immunology Program since 1986.
Dr. Weissman was a cofounder of SyStemix, Inc., and Chairman of its
Scientific Advisory Board. He has served on the Scientific Advisory Boards
of Amgen Inc., DNAX and T-Cell Sciences, Inc. Dr. Weissman is a member of
the National Academy of Sciences and also serves as Chairman of our
Scientific Advisory Board. He also serves as Chief Executive Officer and a
member of the Board of Managers of Celtrans, LLC.
Our Restated Certificate of Incorporation and Amended and Restated By-laws
provide for the classification of the board of directors into three classes, as
nearly equal in number as possible, with the term of office of one class
expiring each year. There are no family relationships between any of our
directors or executive officers. Our executive officers are elected by, and
serve at the discretion of, the board of directors.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has an audit committee and compensation committee.
The board may also establish other committees to assist in the discharge of its
responsibilities.
The audit committee oversees our financial reporting process on behalf of
the board of directors, makes recommendations to the board regarding the
independent auditors to be nominated for election by the stockholders, reviews
the independence of such auditors, approves the scope of their annual audit
activities, reviews their audit results, assures that our financial reporting is
of high quality, and reviews the interim financial statements with our
management and the independent auditors prior to the filing of our Quarterly
Report on Form 10-Q. The audit committee is currently comprised of Dr. Schwartz
and Dr. Kennedy.
The duties of the compensation committee are to make recommendations to the
board and our management concerning salaries in general, determine executive
compensation, and approve incentive compensation. The compensation committee is
currently comprised of Mr. Levin and Dr. Schwartz.
41
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by us to our Chief
Executive Officer during the three most recent fiscal years ended December 31,
and the two other most highly compensated executive officers who served in such
capacities during the fiscal year ended December 31, 1999 but who were not
serving in such capacities as of the end of such fiscal year. There were no
other persons serving as executive officers at the end of such fiscal year.
SUMMARY COMPENSATION TABLE
AWARDS
------------------------
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------- ------------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION ($) AWARDS($) OPTIONS (#) COMPENSATION
- --------------------------- -------- --------- -------- ---------------- ---------- ----------- ------------
Richard M. Rose M.D...... 1999 279,974 0 0 0 0 4667(2)
Chief Executive 1998 286,553 0 0 0 150,000(3) 11,330(4)
Officer(1) 1997 68,750 0 0 0 300,000(5) 76,268(6)
Phillip K. Yachmetz...... 1999 406,731(8) 0 0 0 12,000 71,355(9)
Senior Vice President 1998 155,780 10,000 0 0 75,000 86,695(10)
And General Counsel
Acting Chief Financial
Officer and Treasurer(7)
Moses Goddard, M.D....... 1999 195,176(12) 0 0 0 18,000 7,921(13)
Vice President, Chief 1998 188,957 0 0 0 67,875(14) 0
Technical Officer Cell
Encapsulation (11)
- ------------------------
(1) Dr. Rose became Chief Executive Officer on September 26, 1997. Dr. Rose
resigned as a director and officer of the company and its wholly owned
subsidiary effective as of January 31, 2000.
(2) Represents the personal portion of the use of a company vehicle, as well as
$5,000 of fair market value of our matching contributions of common stock to
Dr. Rose's account in the company's 401(k) Plan.
(3) Represents the regrant of an option in the original amount of 200,000 shares
which was reduced to 150,000 shares as a result of the employee equity
incentive repricing plan approved by the Board of Directors on
July 10,1998.
(4) Represents $4,666.56 of fair market value of the company matching
contributions of common stock to Dr. Rose's account in our 401(k)Plan.
(5) One option grant for 200,000 shares was reduced to 150,000 shares upon there
pricing of the grant effective as of July 10, 1998 at a price of $1.28 per
share.
(6) Represents advance for relocation expenses of $75,000 and fair market value
of $1,268 of our matching contributions of common stock to Dr. Rose's
account in our 401(k) plan.
(7) Mr. Yachmetz was appointed Acting Chief Financial Officer and Treasurer
effective as of April 2, 1999. The term of Mr. Yachmetz' Employment
Agreement expired on October 31, 1999.
42
(8) Includes $204,807 of compensation and accrued and unused vacation paid upon
the expiration of Mr. Yachmetz' Employment Agreement in accordance with the
terms of such agreement.
(9) Represents $15,304 as the fair market value of 9,601 shares of our common
stock earned in 1998 and issued in 1999, $3,990 of fair market value of our
matching contributions of common stock to Mr. Yachmetz' account in our
401(k) Plan and $52,061 of temporary living and relocation expenses adjusted
for taxes.
(10) Represents $14,724 of temporary living and relocation expenses adjusted for
taxes paid to Mr. Yachmetz and personal use of a company vehicle. Also
represents $1,827 of fair market value of our matching contributions of
common stock to Mr. Yachmetz' account in our 401(k) Plan.
(11) Dr. Goddard resigned as a director and officer of the company effective as
of August 30, 1999 and served as a consultant to the company through
March 28, 2000.
(12) Includes $70,945 of compensation paid to Dr. Goddard in accordance with the
severance agreement entered into with us.
(13) Represents the fair market value of 4,687 shares of our common stock
granted to Dr. Goddard through our 1992 Equity Incentive Plan.
(14) Represents the regrant of options in the total original amount of 90,500
shares which was reduced to 67,875 shares as a result of the employee equity
incentive repricing plan approved by the Board of Directors on July 10,
1998.
43
SELLING STOCKHOLDERS
SALES BY MEMBERS OF THE COMPANY'S BOARD
Dr. Irving Weissman and Mark J. Levin, two members of our Board of
Directors, will be selling shares of common stock in this offering.
Dr. Weissman and Mr. Levin acquired their shares pursuant to a 6% cumulative
convertible preferred stock financing in April, 2000, which is described in the
section titled "Relationships and Transactions with Certain Related Parties."
Both Dr. Weissman and Mr. Levin are party to a registration rights agreement in
which we agreed to register their shares of Common Stock upon their request and
to use our best efforts to keep the registration statement effective for five
(5) years, or until all of their registered shares of StemCells, Inc. Common
Stock are sold, whichever comes first. Registration of these shares does not
necessarily mean that the selling stockholders will sell all or any of the
shares.
The material relationships between Dr. Weissman, Mr. Levin and
StemCells, Inc. are as follows: Mark J. Levin is a Class I Director, and from
inception until January 1990 and from May 1990 until February 1991, he served as
our President and acting Chief Executive Officer. Irving L. Weissman, M.D. is a
Class II Director. In addition, both Dr. Weissman and Mr. Levin may donate or
transfer as gifts some or all of their StemCells, Inc. shares, or may transfer
their shares for no value to other beneficial owners. The selling stockholders
will include these donees or transferees as selling stockholders in a prospectus
supplement if the donees or transferees wish to use this prospectus to re-offer
the shares.
SALES BY MILLENNIUM PARTNERS, L.P.
Millennium Partners, L.P. and May Davis Group, Inc. and four of its
affiliates also will be selling shares in this offering. On August 3, 2000, we
issued 923,521 shares of Common Stock to Millennium Partners, L.P., or the Fund.
At the same time we also issued to Millennium Partners a callable warrant to
purchase 101,587 shares of Common Stock and an adjustable warrant for a number
of shares, to be determined on eight dates beginning six months after the
closing and then every three months thereafter. On August 30, 2000 we issued an
additional 180,914 shares to the Fund, together with a callable warrant to
purchase 19,900 shares of Common Stock and an adjustable warrant for a number of
shares, to be determined on eight dates beginning six months after the closing
and then every three months thereafter. On November 1, 2000, we agreed with
Millennium to cancel the adjustable warrant issued on August 30, 2000 and to
decrease the number of shares for which the adjustable warrant issued on
August 3, 2000 may be exercisable. In connection with the Millennium Partners
transaction, we issued warrants for a total of 100,000 shares of Common Stock to
May Davis Group, Inc., who acted as placement agent for the transaction, and
four of its affiliates. These warrants expire on August 3, 2005.
We entered into a registration rights agreement with Millennium Partners in
which we agreed to register the shares of Common Stock purchased by Millennium
partners and issuable upon exercise of the warrants issued to Millennium
Partners. We agreed to use commercially reasonable efforts to keep the
registration statement in effect for five years, until all shares covered by the
registration statement are eligible for resale pursuant to Rule 144(k), or until
Millennium Partners and its transferees no longer hold the shares covered by the
registration statement, whichever occurs first. We also agreed to include in
this registration statement the shares issuable upon exercise of the warrants
issued to May Davis and its affiliates.
44
SECURITY OWNERSHIP OF THE SELLING STOCKHOLDERS, CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table shows information regarding the beneficial ownership of
our common stock as of August 30, 2000 for:
- each person or group of affiliated persons known by us to own beneficially
more than 5% of the outstanding shares of common stock;
- each selling stockholder;
- each director and named executive officer; and
- all directors and executive officers as a group.
The address for each listed director and officer is c/o StemCells, Inc., 525
Del Rey Avenue, Suite C, Sunnyvale, CA 94085.
We have determined beneficial ownership in the table in accordance with the
rules of the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percentage ownership of that
person, we have deemed to be outstanding shares of common stock subject to
options or warrants held by that person that are currently exercisable or will
become exercisable within 60 days of August 15, 2000, assuming that this
offering occurs in that 60-day period, but we have not deemed these shares to be
outstanding for computing the percentage ownership of any other person. The
shares listed below for the selling stockholders represent all of the shares
that each selling stockholder currently beneficially owns, the number of shares
each of them may offer and the number of shares each of them will own after the
offering assuming they sell all of the shares. To our knowledge, except as set
forth in the footnotes below, each stockholder identified in the table possesses
sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by that stockholder. Beneficial ownership percentage
is based on 20,538,742 shares of our common stock outstanding on August 15, 2000
and as adjusted for unexercised options and warrants as of that date as noted
below and 180,914 shares and 19,900 warrants issued to one of the Selling
Shareholders on August 30, 2000.
The number of shares of our Common Stock that will be issuable upon exercise
of the warrants issued to Millennium Partners is based upon fluctuations in the
market price and the number of shares of our Common Stock that will be issuable
upon conversion of the Preferred Stock held by Messrs. Weissman and Levin is
subject to anti-dilution provisions, so the actual number of shares of our
Common Stock that will be issuable and beneficially owned upon exercise of the
warrants and conversion of the Preferred Stock cannot be determined at this
time. As a result, we have agreed to register, and in the registration statement
of which this prospectus is a part, we are registering a number of shares of
Common Stock that is greater than the number of shares of Common Stock currently
beneficially owned by the selling stockholders.
45
The selling stockholders may offer all or some of their shares. All numbers
in the following table are based on information obtained by questionnaires
received by the company.
SHARES OF COMMON
STOCK BENEFICIALLY
SHARES OF COMMON STOCK SHARES OF COMMON OWNED AFTER THIS
BENEFICIALLY OWNED PRIOR TO STOCK OFFERED OFFERING
THIS OFFERING HEREBY ---------------------
---------------------------- ---------------- NUMBER
NUMBER OF NUMBER OF OF
NAME OF BENEFICIAL OWNER SHARES PERCENTAGE SHARES SHARES PERCENTAGE
- ------------------------ -------------- ----------- ---------------- -------- ----------
Donald Kennedy, Ph.D............... 9,234(1) * -- 9,234 *
Mark J. Levin...................... 390,726(2) 1.9 472,743 154,287 0.7
John J. Schwartz, Ph.D............. 139,180(3) 0.7 -- 139,180 0.7
Irving Weissman, M.D............... 600,298(4) 2.9 472,743 363,859 1.8
George W. Dunbar, Jr............... 50,000(5) * -- 50,000 *
All directors and executive
officers as a group (5
persons)......................... 1,189,439(6) 5.6 945,486 716,561 3.4
Millennium Partners, L.P.**........ 1,225,922(7) 5.9 2,160,000 -- --
May Davis Group.................... 100,000(8) 0.5 100,000 -- --
- ------------------------
* Less than 0.1%
** Millennium Partners, L.P., a Cayman Islands limited partnership, is a
private investment partnership whose general partners are Millennium
Management, L.L.C., a Delaware limited liability company whose managing
member is Israel A. Englander, and Englander (Cayman Islands) Limited, a
Cayman Islands exempted company. Both Millennium Management, L.L.C., and
Englander (Cayman Islands) Limited are controlled by Mr. Englander.
(1) Includes 9,234 shares issuable upon exercise of stock options exercisable
within 60 days.
(2) Includes 27,555 shares issuable upon exercise of stock options exercisable
within 60 days. Includes 198,871 shares issuable upon conversion of
cumulative convertible preferred shares at the currently applicable
conversion price, and a warrant to purchase 37,500 shares.
(3) Includes 139,180 shares issuable upon exercise of stock options exercisable
within 60 days.
(4) Includes 31,250 shares issuable upon exercise of stock options exercisable
within 60 days and 7,160 shares issuable upon exercise of warrants
exercisable within 60 days. Includes 198,871 shares issuable upon conversion
of 6% cumulative convertible preferred shares at the currently applicable
conversion price. Includes a total of 50,791 shares owned by trusts for the
benefit of Dr. Weissman's children as to which he disclaims beneficial
ownership. Also includes a warrant to purchase 37,500 shares.
(5) Includes 50,000 shares issuable upon exercise of stock options exercisable
within 60 days. Mr. Dunbar was appointed Acting President and Chief
Executive Officer of our wholly owned subsidiary, StemCells
California, Inc., effective as of November 8, 1999, and was appointed Acting
President and Chief Executive Officer of the company effective as of
February 1, 2000.
(6) Includes 339,379 shares exercisable upon exercise of warrants and stock
options exercisable within 60 days.
(7) Includes 180,914 shares issued as of August 30, 2000 and 19,900 shares
issuable upon exercise of warrants issued together with those shares.
Includes 101,587 shares issuable upon exercise of warrants issued August 3,
2000.
(8) Includes shares issuable upon exercise of warrants held by four affiliates
of May Davis Group.
46
RELATIONSHIP AND TRANSACTIONS WITH RELATED PARTIES
Dr. Schwartz, a member and Chairman of the Board of Directors, was retained
in July 1998 to serve as a consultant to us rendering strategic business advice
and consulting services, including assistance in the negotiation and
consummation of strategic collaboration transactions specified by us. Under
terms of an agreement dated December 19, 1998, and amended as of July 1, 1999
(the "Letter Agreement") Dr. Schwartz agreed to serve as a Director and Chairman
of the Board of Directors of the Company for a term expiring at the 2001 Annual
Meeting of Stockholders. The Letter Agreement incorporates certain payments
provided for under a consulting services agreement dated July 27, 1998, and
amended as of December 19, 1998 (the "Consulting Services Agreement"). As a
result, Dr. Schwartz is entitled to a retainer of $192,000 per year plus $1,500
for each Board meeting or Committee meeting (if held at a date and time separate
from the Board meeting) physically attended and $500 for each Board meeting or
Committee meeting (if held at a date and time separate from the Board meeting)
held by conference call, payable quarterly in arrears. Dr. Schwartz is obligated
to spend no less than thirty business days per calendar quarter devoted to the
performance of his duties under the Letter Agreement. In the event Dr. Schwartz
devotes more than thirty business days in any calendar quarter to the
performance of his duties, Dr. Schwartz is entitled to receive additional
compensation at the rate of $1,500 per day. Under the Letter Agreement,
Dr. Schwartz was granted a stock option covering 40,000 shares of Common Stock
that vests in equal portions on the last day of each of the 29 months of the
term of the Letter Agreement. By virtue of provisions incorporated from the
Consulting Services Agreement, Dr. Schwartz also holds an option to purchase
76,000 shares of the Company's Common Stock at $1.281 per share, the fair market
value of the Company's Common Stock at the time the option was granted, vesting
at a rate of 3,167 shares per month for the ensuing 23 months after the date of
the grant, with a final vesting of 3,159 shares in the 24th month, plus another
option to purchase 48,000 shares of Common Stock at the then current fair market
value of the Company's Common Stock on July 27, 1999, vesting at a rate of 2,000
shares per month. In the event Dr. Schwartz ceases to be Chairman of the Board
of Directors, either as a result of an affirmative vote of the Board of
Directors for reasons other than cause or due to his disability or his
resignation from such position, but remains a Director, his cash compensation
and remaining unvested portion of the 40,000-share time-based stock option will
be reduced to the then current rate for a Director of the Company, plus $5,000
per month pursuant to the Consulting Services Agreement. In the event
Dr. Schwartz ceases to be Chairman of the Board of Directors, either as a result
of an affirmative vote of the Board of Directors for reasons other than cause or
due to his disability or his resignation from such position, and then he resigns
as a Director or is removed as a Director pursuant to the Company's By-laws, the
Company shall have no further obligation to pay cash compensation to
Dr. Schwartz under the Letter Agreement but he would receive $5,000 per month
pursuant to the Consulting Services Agreement. Dr. Schwartz shall have one year
from such date to exercise the vested portion of the 40,000-share time-based
option and any unvested portion of that option shall lapse. In the event
Dr. Schwartz is removed from his positions as Director and Chairman of the Board
of Directors for cause, as defined in the Letter Agreement, the Company shall
have no further obligation to pay cash compensation to Dr. Schwartz under the
Letter Agreement, any unvested portion of the 40,000-share time-based option
shall lapse and the exercise of any vested portion shall be governed by the
terms of the Company's 1992 Equity Incentive Plan. The termination of the Letter
Agreement for any reason shall have no effect on the Consulting Services
Agreement, which had an initial term through July 27, 2000 and was renewed on a
month-to-month basis, and Dr. Schwartz shall serve as a consultant to the
Company rendering strategic business advice and counseling services, including
assistance in the negotiation and consummation of strategic collaboration
transactions specified by the Company as provided therein. At a meeting of the
Board on February 23, 2000, in order to conserve cash and demonstrate his
continuing confidence in the Company's future, the Board of Directors, upon the
suggestion of Dr. Schwartz, approved a resolution revising the compensation
arrangement between Dr. Schwartz and the Company, for the period commencing
January 1, 2000. Under this resolution,
47
Dr. Schwartz waives any and all cash payments which may accrue to him for his
retainer, monthly and meeting fees, and agrees to take, in lieu of such cash
payments, compensation in the form of options to purchase shares of the
Company's common stock at below-market prices ($0.25 per share). To effectuate
the intention of Dr. Schwartz and other members of the Board to change the form
but not the amount of compensation, Dr. Schwartz will be granted options
covering a number of shares of the Company's common stock such that the
difference between the aggregate exercise price of such options and the
aggregate market value of the shares underlying such options (using the closing
price of the Company's common stock for the date of the subject Board or
Committee meeting (if such Committee meeting is not held contemporaneously with
a Board meeting) or, with respect to the quarterly or monthly retainer payments
of $33,000 and $5,000 respectively, the closing price for the last business day
of the quarter or month) is equal to the compensation he is entitled to receive.
All options so issued to Dr. Schwartz vest immediately. The Consulting Services
Agreement expired under its terms on July 27, 2000 and the board of directors
renewed it on a month-to-month basis on September 19, 2000.
Dr. Weissman, a member of the Board of Directors, was retained in
September 1997 to serve as a consultant to us. Pursuant to his Consulting
Agreement, Dr. Weissman has agreed to provide consulting services to us and
serve on our Scientific Advisory Board. We agreed to pay Dr. Weissman $50,000
per year for his services and granted him an option to purchase 500,000 shares
of Common Stock for $5.25 per share, of which 31,250 shares vested at the date
of grant. Originally, the remainder of the option would have vested upon the
occurrence of certain milestones related to the Company's stem cell research
program and in the event of certain changes of control. We agreed to amend the
option on October 27, 2000 so that the shares would become exercisable over
eight years from the original grant date (so the option is currently exercisable
for 200,000 shares) or in the event of certain changes of control. We expect to
incur a charge of approximately $800,000 during the fourth quarter of 2000 as a
result of this change in the option. The Company also agreed to nominate
Dr. Weissman for a position on the Board of Directors. The Consulting Agreement
contains confidentiality, noncompetition, and assignment of invention provisions
and is for a term of ten years, subject to earlier termination by us for cause
or frustration of purpose and earlier termination by Dr. Weissman for good
reason. Dr. Weissman receives no compensation as a member of the Board of
Directors or for attending meetings of the Board or its committees or meetings
of our Scientific Advisory Board, but is reimbursed for reasonable expenses he
incurs in attending such meetings.
George W. Dunbar, Jr., Acting President and Chief Executive Officer as of
February 1, 2000, was a founding member of iCEO, LLC ("iCEO") in
September 1999. Mr. Dunbar joined the company as Acting President of StemCells
California, Inc., our wholly owned subsidiary, and he still holds this position
currently. Under the terms of two agreements dated as of November 17, 1999 and
effective as of November 8, 1999, the first between us and iCEO and the second
between us and Mr. Dunbar, Mr. Dunbar agreed to serve as Acting President of
StemCells California, Inc., our wholly owned subsidiary. Pursuant to the terms
of his agreement with us, Mr. Dunbar is entitled to an annual salary of $175,000
and was granted a stock option to purchase 48,000 shares of our common stock
that will vest at the rate of 4,000 shares per month commencing on December 6,
1999 and continuing until fully vested so long as he continues to serve as
Acting President. The vesting under the option will be accelerated in the event
of certain changes of control. Additionally, the agreement provides that the
Board will consider once per quarter the grant of an option for an additional
3,000 shares if it is determined that the services rendered by Mr. Dunbar during
the preceding quarter exceeded expectations. Mr. Dunbar is an at-will employee
and as such may resign or be terminated with or without reason. On September 22,
2000 we announced that George Dunbar, our acting President and Chief Executive
Officer, would be phasing out his service. Mr. Dunbar will continue in his
position on a reduced time basis during this transition period. The agreement
has no provisions for any severance payments or other benefits upon
Mr. Dunbar's resignation or termination. Pursuant to the terms of the agreement
between iCEO and us, iCEO is entitled to receive annual compensation of $75,000
for so long as Mr. Dunbar continues to serve in his role as Acting President of
StemCells California, Inc. or
48
in any other interim role with the Company. In addition, iCEO was granted a
stock option to purchase 48,000 shares of our common stock that will vest at the
rate of 4,000 shares per month commencing on December 6, 1999 and continuing
until fully vested so long as Mr. Dunbar continues to serve as Acting President
of StemCells California, Inc. or in any other interim role with the company.
Additionally, the iCEO agreement provides that the Board will consider once per
quarter the grant of an option to iCEO for an additional 3,000 shares if it is
determined that the services rendered by Mr. Dunbar during the preceding quarter
exceeded expectations. As a member of iCEO, Mr. Dunbar is entitled to receive,
once annually, a distribution of his assigned allocable percentage of net
taxable income and net long-term gain with respect to the pooled income and gain
from shares of stock or exercised options received by iCEO from its clients,
including that received from us. When Mr. Dunbar was appointed Acting President
and Chief Executive Officer effective as of February 1, 2000, there was no
adjustment to his or iCEO's compensation or stock options. In the event that
during the period of his service as Acting President and Chief Executive Officer
or within 120 days from the termination of such services, Mr. Dunbar was to
become a permanent employee in any capacity, we are obligated under the iCEO
agreement to pay iCEO a fee equal to one-third of the then targeted first year's
compensation for Mr. Dunbar.
In April 2000, we sold 750 shares of our 6% cumulative convertible preferred
stock plus a warrant to purchase 37,500 shares of our common stock to each of
Dr. Weissman and Mr. Levin for $750,000, for a total of $1,500,000, on terms
more favorable to us than we were able to obtain from outside investors. The
face value of the shares is convertible at the option of the holder into common
stock at $3.77 per share. The holders of the preferred stock have liquidation
rights equal to their original investments plus accrued but unpaid dividends.
The investors would be entitled to make additional investments in our securities
on the same terms as those on which we complete offerings of our securities with
third parties within 6 months, if any such offerings are completed. If offerings
totaling at least $6 million are not completed during the 6 months, the
investors have the right to acquire up to a total of 1,126 additional shares of
convertible preferred stock the face value of which is convertible at the option
of the holder into common stock at $6.33 per share. Any unconverted preferred
stock will be converted into common stock on April 13, 2002 in the case of the
original stock issued and two years after the first acquisition of any of the
additional 1,126 shares, if any are acquired. The warrants expire on April 13,
2005.
49
DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
Upon completion of this offering, the total amount of our authorized capital
stock will consist of 45,000,000 shares of common stock, $.01 par value per
share, and 1,000,000 shares of undesignated preferred stock, $.01 par value per
share, to be issued from time to time in one or more series, with such
designations, powers, preferences, rights, qualifications, limitations and
restrictions as our board of directors may determine. As of August 15, 2000, we
had outstanding 20,538,928 shares of common stock and 1,500 shares of 6%
cumulative convertible preferred stock.
As of August 15, 2000, we had 249 stockholders of record with respect to our
common stock and outstanding options to purchase 2,556,486 shares of our common
stock, of which 608,976 were currently exercisable. The following summary of
provisions of our capital stock describes all material provisions of, but does
not purport to be complete and is subject to, and qualified in its entirety by,
our restated certificate of incorporation and our amended and restated by-laws,
which are included as exhibits to the registration statement of which this
prospectus forms a part, and by the provisions of applicable law.
COMMON STOCK
The issued and outstanding shares of common stock are, and the shares of
common stock to be issued by us in connection with the offering will be, validly
issued, fully paid and nonassessable. Holders of our common stock are entitled
to any and all dividends as such dividends are declared by the Board of
Directors. This right is not cumulative, and no right shall accrue to holders of
common stock by reason of the fact that dividends on said shares were not
declared in any prior period. The shares of common stock are not convertible and
the holders thereof have no preemptive or subscription rights to purchase any of
our securities. Upon liquidation, dissolution or winding up of our company, the
holders of common stock are entitled to an amount equal to $1.00 per share,
subject to the rights of the holders of the preferred stock. After payment to
the holders of the common stock of the full preferential amounts due to them,
the holders of common stock have the right to share equally in the distribution
of the entire remaining assets of the company legally available for
distribution, subject to the rights of the holders of the preferred stock. Each
outstanding share of common stock is entitled to one vote on all matters
submitted to a vote of stockholders, such voting rights to be counted together
with all other shares of capital stock having voting powers and not as a
separate class, except as otherwise required by law.
Our common stock is traded on the Nasdaq National Market under the symbol
"STEM."
PREFERRED STOCK
Our board of directors may from time to time direct the issuance of shares
of preferred stock in series and may, at the time of issuance, determine the
rights, preferences and limitations of each series. Shares of preferred stock of
any one series shall be identical with each other in all respects except as to
the dates from which dividends shall accrue and/or cumulate. In the event of any
liquidation, dissolution or winding up of the company, the holders of
undesignated preferred stock of each series are entitled to receive an amount
fixed by the company's Restated Certificate of Incorporation or by the
resolution(s) of the board of directors providing for the issuance of such
series.
The board of directors designated 2,626 shares, $.01 par value per share, as
6% cumulative convertible preferred stock, 1,500 shares of which are issued and
outstanding. The holders of these preferred shares are entitled to receive
cumulative dividends at a per share rate of 6% of the liquidation preference of
each share, per annum accruing daily and compounding quarterly, with priority
over payment of any dividend on common stock or any other class or series of
equity security of the company. In the event of any liquidation, dissolution or
winding up of the company, the holders
50
of the 6% cumulative convertible preferred stock are entitled to receive in
preference to holders of any other class or series of equity securities, an
amount equal to $1,000 per share plus (i) dividends added to the liquidation
preference, (ii) all accrued but unpaid dividends and (iii) all "Monthly Delay
Payments" under the Registration Rights Agreement. The 6% cumulative convertible
preferred stock was issued pursuant to a Securities Purchase Agreement. Each
holder of the 6% cumulative convertible preferred stock has at any time the
right to convert any or all 6% cumulative convertible preferred stock held by
such holder into fully paid, validly issued and nonassessable shares of common
stock, $.01 par value per share, at which point the rights of the holders of
converted 6% cumulative convertible preferred stock shall be treated as having
become the owners of such common stock. The affirmative vote of a majority in
interest of the outstanding 6% cumulative convertible preferred stock is
required for (i) any amendment, modification or repeal of the Certificate of
Designations, Certificate of Incorporation or by-laws that may amend or change
or adversely affect any of the rights or preference of the 6% cumulative
convertible preferred stock; provided, however, that the holders of 6%
cumulative convertible preferred stock who are affiliates of the company shall
not participate in such votes, and such shares shall be deemed not to be
outstanding for purposes of such votes. We have no current intention to issue
any more of our unissued, authorized shares of undesignated preferred stock.
However, the issuance of any shares of undesignated preferred stock in the
future could adversely affect the rights of the holders of common stock.
WARRANTS
As of September 30, 2000, we had outstanding warrants to purchase 296,487
shares of common stock at an average exercise price of $5.3876 per share,
subject to customary antidilution adjustment. The warrants were issued at
various times during this year to eight different parties as described below.
As of April 13, 2000, we issued to each of Irving Weissman and Mark Levin a
warrant in connection with a Securities Purchase Agreement dated as of
April 13, 2000. Each warrant is to purchase 37,500 shares of our common stock at
an exercise price of $6.58125 per share. Each warrant is exercisable, in whole
or in part, at any time on or after April 13, 2000 and on or prior to April 13,
2005. The exercise price is subject to adjustment for subdivisions,
combinations, stock dividends, reorganizations and various other issuances.
Under the terms of the warrants, during any time that the warrant shares are not
subject to an effective registration statement, each investor may elect to
receive a reduced number of warrant shares in lieu of tendering the exercise
price in cash. Each investor is not entitled to any rights as a shareholder
until he exercises the warrant. In the event of a transaction by us in which
more than 50% of our voting power is disposed of, each investor shall have the
right to purchase, by exercise of the warrant and payment of the exercise price,
the kind and amount of shares and other securities and property which he would
have owned or have been entitled to receive after the occurrence of the
transaction had the warrant been exercised immediately prior thereto, subject to
the adjustment of the exercise price as described in the warrant and above. We
may, at any time during the term of the warrant, reduce the exercise price to
any amount for any period of time deemed appropriate by our Board of Directors.
Under the terms of the warrants, the number of shares of common stock that each
investor may acquire upon exercise cannot exceed a number that, when added to
the total number of shares of common stock the investor is deemed to
beneficially own, together with all shares of common stock deemed beneficially
owned by the investor's affiliates (as defined by Rule 144 of the Securities Act
of 1933), would exceed 9.99% of the total issued and outstanding shares of the
common stock.
We issued a warrant to Millennium Partners L.P. on August 3, 2000, which may
entitle them to receive additional shares of common stock on eight dates
beginning six months from that date and every three months thereafter. On
August 30, 2000 we issued a second warrant to Millennium which may entitle them
to receive additional shares of common stock on eight dates beginning six months
from August 30, 2000 and every three months thereafter. On November 1, 2000, we
agreed with
51
Millennium to cancel the adjustable warrant issued on August 30, 2000 and to
decrease the number of shares for which the adjustable warrant issued on August
3, 2000 may be exercisable. The number of additional shares Millennium will be
entitled to receive on each date will be based on the number of shares of common
stock Millennium continues to hold on each date and the market price of our
common stock over a period prior to each date. We will have the right, under
certain circumstances, to limit the number of additional shares by purchasing
part of the entitlement from Millennium. The remaining warrant is exercisable,
in whole or in part, at any time on or prior to 30 days after the last date
which may entitle Millennium to receive additional shares. This warrant is
subject to adjustment for subdivisions, combinations, stock dividends,
reorganizations and various other issuances of common stock. During any period
of time that the shares of common stock underlying this warrant are not subject
to an effective registration statement, Millennium may elect to exercise the
warrant by receiving a reduced number of shares in lieu of tendering the
exercise price in cash. In the event of certain mergers, asset sales and tender
or exchange offers, Millennium shall have the right to purchase, by exercise of
this warrant and payment of the exercise price, the kind and amount of shares
and other securities and property it would have owned or have been entitled to
receive after the occurrence of the transaction had the warrant been exercised
immediately before the transaction, subject to the adjustment of the exercise
price as described in the warrant and above, or, if applicable, the right to
receive a substitute warrant after a merger or the right to tender the warrant
for the consideration that would have been received if the warrant had been
exercised and the shares issued upon exercise had been tendered. Under the terms
of this warrant, the number of shares of common stock that Millennium may
acquire upon exercise cannot exceed a number that, when added to the total
number of shares of common stock Millennium is deemed to beneficially own,
together with all shares of common stock deemed beneficially owned by
Millennium's affiliates (as defined by Rule 144 of the Securities Act of 1933),
would exceed 9.99% of the total issued and outstanding shares of the common
stock.
Millennium also received a warrant on August 3, 2000 to purchase up to
101,587 shares of common stock at $4.725 per share, which is callable by us at
$7.875 per underlying share. On August 30, 2000 we issued an additional warrant
to purchase up to 19,900 shares of common stock at $6.03 per share which is
callable by us at $10.05 per underlying share. Each callable warrant is
exercisable, in whole or in part, at any time on or after the issuance date and
on or prior to the fifth year anniversary of the issuance date. The exercise
price and number of shares are subject to adjustment for subdivisions,
combinations, stock dividends, reorganizations and various other issuances.
Under the terms of the callable warrants, during any time that the warrant
shares are not subject to an effective registration statement, Millennium may
elect to receive a reduced number of warrant shares in lieu of tendering the
exercise price in cash. Millennium is not entitled to any rights as a
shareholder until it exercises the warrant. In the event of certain mergers,
asset sales and tender or exchange offers, Millennium shall have the right to
purchase, by exercise of the callable warrant and payment of the exercise price,
the kind and amount of shares and other securities and property it would have
owned or have been entitled to receive after the occurrence of the transaction
had the warrant been exercised immediately prior thereto, subject to the
adjustment of the exercise price as described in the warrant and above, or, if
applicable, the right to receive a substitute warrant after a merger or the
right to tender the warrant for the consideration that would have been received
if the warrant had been exercised and the shares issued upon exercise had been
tendered. Under the terms of the callable warrants, the number of shares of
common stock that Millennium may acquire upon exercise cannot exceed a number
that, when added to the total number of shares of common stock Millennium is
deemed to beneficially own, together with all shares of common stock deemed
beneficially owned by Millennium's affiliates (as defined by Rule 144 of the
Securities Act of 1933), would exceed 9.99% of the total issued and outstanding
shares of the common stock.
On August 3, 2000 we issued a warrant to the May Davis Group and four of its
affiliates to purchase up to 100,000 shares of common stock at $5.0375 per
share. The warrant is exercisable, in
52
whole or in part, at any time on or after the issuance date and on or prior to
the fifth year anniversary of the issuance date. The exercise price and number
of shares are subject to adjustment for subdivisions, combinations, stock
dividends, reorganizations and various other issuances.
PROVISIONS OF DELAWARE LAW GOVERNING BUSINESS COMBINATIONS
We are subject to the "business combination" provisions of the Delaware
General Corporation Law. In general, such provisions prohibit a publicly held
Delaware corporation from engaging in various "business combination"
transactions with any "interested stockholder" for a period of three years after
the date of the transaction in which the person became an "interested
stockholder," unless:
- the transaction is approved by the board of directors prior to the date
the "interested stockholder" obtained such status;
- upon consummation of the transaction which resulted in the stockholder
becoming an "interested stockholder," the "interested stockholder" owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by (a) persons who are
directors and also officers and (b) employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- on or subsequent to such date the "business combination" is approved by
the board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the "interested
stockholder."
A "business combination" is defined to include mergers, asset sales and
other transactions resulting in financial benefit to a stockholder. In general,
an "interested stockholder" is a person who, together with affiliates and
associates, owns 15% or more of a corporation's voting stock or within three
years did own 15% or more of a corporation's voting stock. The statute could
prohibit or delay mergers or other takeover or change in control attempts.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is EquiServe L.P.
53
PLAN OF DISTRIBUTION
We will not receive any of the proceeds from the sale by the selling
stockholders of the common stock offered hereby.
The shares of the common stock offered hereby may be sold from time to time
by the selling stockholders, or by pledgees, donees, transferees or other
successors in interest (i) to or through underwriters or dealers, (ii) directly
to one or more other purchasers, (iii) through agents on a best-efforts basis,
or (iv) through a combination of any such methods of sale. Such sales may be
made on one or more exchanges or in the over-the-counter market, or otherwise at
prices and at terms then prevailing or at prices related to the then current
market price, or in privately negotiated transactions. The shares may be sold by
one or more of the following: (a) a block trade in which the broker or dealer so
engaged will attempt to sell the shares as agent but may position and resell a
portion of the block as principal to facilitate the transaction; (b) purchases
by a broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this prospectus; (c) an exchange distribution in accordance
with the rules of such exchange; and (d) ordinary brokerage transactions and
transactions in which the broker solicits purchasers; and (e) privately
negotiated transactions without a broker or dealer. In effecting sales, brokers
or dealers engaged by the selling stockholders may arrange for other brokers or
dealers to participate. Brokers or dealers will receive commissions or discounts
from selling stockholders in amounts to be negotiated prior to the sale. In
addition, any securities covered by this prospectus which qualify for sale
pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this
prospectus.
In addition, the selling stockholders may engage in short sales and other
transactions in the common stock or derivatives thereof, and may pledge, sell,
deliver or otherwise transfer the common stock offered under this prospectus in
connection with such transactions.
If we are notified by a selling stockholder that a material arrangement has
been entered into with a broker-dealer for the sale of shares through a block
trade, special offering, exchange distribution or secondary distribution, or a
purchase by a broker-dealer as a principal, a supplemental prospectus will be
filed listing:
- the name of each selling stockholder and of the participating
broker-dealer(s);
- the number of shares involved;
- the price at which such shares were sold;
- the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable; and
- other facts material to the transaction.
We have agreed to pay the cost of registering the shares covered by this
prospectus and the costs of preparing this prospectus and the registration
statement under which it is filed. We will provide the estimated total of these
expenses by amendment.
We and the selling stockholders have agreed to indemnify each other against
certain liabilities, including liabilities arising under the Securities Act.
54
LEGAL MATTERS
The validity of the shares of our common stock offered hereby will be passed
upon for us by Ropes & Gray, Boston, Massachusetts.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1999 and 1998, and for each of the three
years in the period ended December 31, 1999, as set forth in their report. We
have included our financial statements in the prospectus and elsewhere in the
Registration Statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock to be sold in this offering.
This prospectus does not contain all the information included in the
registration statement and the related exhibits and schedules. You will find
additional information about us and our common stock in the registration
statement. The registration statement and the related exhibits and schedules may
be inspected and copied at the public reference facilities maintained by the SEC
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the public reference facilities of the SEC's Regional Offices: New York
Regional Office, Seven World Trade Center, Suite 1300, New York, New York 10048;
and Chicago Regional Office, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661. Copies of this material may also be obtained from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549
at prescribed rates. You can obtain information on the operation of the public
reference facilities by calling 1-800-SEC-0330. The SEC also maintains a site on
the World Wide Web (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants, including
us, that file electronically with the SEC. Statements made in this prospectus
about legal documents may not necessarily be complete and you should read the
documents which are filed as exhibits or schedules to the registration statement
or otherwise filed with the SEC.
55
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets at December 31, 1999 and 1998... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.......................... F-4
Consolidated Statements of Changes in Redeemable Common
Stock and Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997.......................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Condensed Consolidated Balance Sheets at September 30, 2000
and December 31, 1999 (unaudited)......................... F-25
Condensed Consolidated Statements of Operations for the nine
months ended September 30, 2000 and June 30, 1999
(unaudited)............................................... F-26
Condensed Statements of Cash Flows for the nine months ended
September 30, 2000 and June 30, 1999 (unaudited).......... F-27
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... F-28
Pro Forma Financial Information............................. F-31
Additional schedules are not provided either because they are inapplicable
or because the required information is included in the accompanying financial
statements.
F-1
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
StemCells, Inc., (formerly CytoTherapeutics, Inc.)
We have audited the accompanying consolidated balance sheets of
StemCells, Inc. (formerly CytoTherapeutics, Inc.) as of December 31, 1999 and
1998, and the related consolidated statements of operations, changes in
redeemable common stock and stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
StemCells, Inc. (formerly CytoTherapeutics, Inc.) at December 31, 1999 and 1998,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Providence, Rhode Island
April 14, 2000
F-2
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------
1999 1998
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,760,064 $ 7,864,788
Marketable securities..................................... -- 9,520,939
Accrued interest receivable............................... 42,212 206,609
Technology sale receivable................................ 3,000,000 --
Debt service fund......................................... 609,905 --
Other current assets...................................... 558,674 841,674
------------- -------------
Total current assets........................................ 8,970,855 18,434,010
Property held for sale...................................... 3,203,491 --
Property, plant and equipment, net.......................... 1,747,885 8,356,009
Other assets, net........................................... 1,858,768 6,075,663
------------- -------------
Total assets................................................ $ 15,780,999 $ 32,865,682
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 631,315 $ 710,622
Accrued expenses.......................................... 2,605,068 1,020,119
Deferred revenue.......................................... -- 2,500,000
Current maturities of capitalized lease obligations....... 324,167 317,083
Current maturities of long-term debt...................... -- 1,000,000
------------- -------------
Total current liabilities................................... 3,560,550 5,547,824
Capitalized lease obligations, less current maturities...... 2,937,083 3,261,667
Long-term debt, less current maturities..................... -- 500,000
Deposits.................................................... 26,000 --
Deferred Rent............................................... 502,353 222,673
Commitments and contingencies
Redeemable common stock, $.01 par value; 524,337 shares
issued and outstanding at December 31, 1999 and 1998...... 5,248,610 5,248,610
Common stock to be issued................................... -- 187,500
Stockholders' equity:
Convertible preferred stock, $.01 par value; 1,000,000
shares authorized; no shares issued and outstanding..... -- --
Common stock, $.01 par value; 45,000,000 shares
authorized; 18,635,565 and 17,800,323 shares issued and
outstanding at December 31, 1999 and 1998,
respectively............................................ 186,355 178,003
Additional paid-in capital................................ 123,917,758 122,861,606
Accumulated deficit....................................... (119,372,710) (103,664,084)
Unrealized losses on marketable securities................ -- (5,198)
------------- -------------
Accumulated total comprehensive loss...................... (119,372,710) (103,669,282)
------------- -------------
Deferred compensation..................................... (1,225,000) (1,472,919)
------------- -------------
Total stockholders' equity.................................. 3,506,403 17,897,408
------------- -------------
Total liabilities and stockholders' equity.................. $ 15,780,999 $ 32,865,682
============= =============
See accompanying notes to consolidated financial statements.
F-3
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
Revenue from collaborative agreements............... $ 5,021,707 $ 8,803,163 $ 10,617,443
Operating expenses:
Research and development.......................... 9,984,027 17,658,530 18,603,523
Acquired research and development................. -- -- 8,343,684
General and administrative........................ 4,927,303 4,602,758 6,158,410
Encapsulated cell therapy wind down and corporate
relocation...................................... 6,047,806 -- --
------------ ------------ ------------
20,959,136 22,261,288 33,105,617
------------ ------------ ------------
Loss from operations................................ (15,937,429) (13,458,125) (22,488,174)
Other income (expense):
Interest income................................... 564,006 1,253,781 1,931,260
Interest expense.................................. (335,203) (472,400) (437,991)
Gain on partial sale of Modex..................... -- -- 3,386,808
Loss on sale/leaseback............................ -- -- (342,014)
Loss on equity investment......................... -- -- (105,931)
Other income (expense)............................ -- 48,914 (57,538)
------------ ------------ ------------
228,803 830,295 4,374,594
------------ ------------ ------------
Net loss............................................ $(15,708,626) $(12,627,830) $(18,113,580)
============ ============ ============
Basic and diluted net loss per share................ $ (.84) $ (.69) $ (1.08)
============ ============ ============
Shares used in computing basic and diluted net loss
per share......................................... 18,705,838 18,290,548 16,704,144
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY
REDEEMABLE
COMMON STOCK COMMON STOCK ADDITIONAL
---------------------- --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- ----------- ---------- -------- ------------
Balances, December 31, 1996................................. 815,065 $ 8,158,798 15,614,333 $156,144 $107,649,659
Issuance of common stock.................................... -- -- 307,548 3,074 1,552,432
Issuance of common stock under the stock purchase plan...... -- -- 31,822 319 180,103
Deferred compensation recorded in connection with the
granting of stock options................................. -- -- -- -- 1,750,000
Common stock issued pursuant to employee benefit plan....... -- -- 25,588 256 169,196
Issuance of common stock--StemCells......................... -- -- 1,219,381 12,194 7,381,206
Redeemable common stock lapses.............................. (257,311) (2,575,688) 257,311 2,573 2,573,115
Exercise of stock options................................... -- -- 75,237 752 244,427
Deferred compensation--amortization and cancellations -- -- (5,000) (50) (27,294)
Change in unrealized losses on marketable securities........ -- -- -- -- --
Change in cumulative translation adjustment................. -- -- -- -- --
Net loss.................................................... -- -- -- -- --
Comprehensive loss
-------- ----------- ---------- -------- ------------
Balances, December 31, 1997................................. 557,754 $ 5,583,110 17,526,220 $175,262 $121,472,844
Issuance of common stock.................................... -- -- -- -- --
Issuance of common stock under the stock purchase plan...... -- -- 43,542 436 83,622
Deferred compensation recorded in connection with the
granting of stock options................................. -- -- -- -- --
Common stock issued pursuant to employee benefit plan....... -- -- 84,812 848 143,025
Issuance of common stock--StemCells......................... -- -- 101,320 1,013 505,587
Redeemable common stock lapses.............................. (33,417) (334,500) 33,417 334 334,166
Exercise of stock options................................... -- -- 11,012 110 1,254
Deferred compensation--amortization and cancellations....... -- -- -- -- 321,108
Change in unrealized losses on marketable securities........ -- -- -- -- --
Net loss.................................................... -- -- -- -- --
Comprehensive loss..........................................
-------- ----------- ---------- -------- ------------
Balances, December 31, 1998................................. 524,337 $ 5,248,610 17,800,323 $178,003 $122,861,606
Issuance of common stock.................................... -- -- 196,213 1,962 318,221
Issuance of common stock under the stock purchase plan...... -- -- 57,398 574 41,619
Deferred compensation recorded in connection with the
granting of stock options................................. -- -- -- -- --
Common stock issued pursuant to employee benefit plan....... -- -- 90,798 908 102,502
Issuance of common stock--StemCells......................... -- -- -- -- --
Redeemable common stock lapses.............................. -- -- -- --
Exercise of stock options................................... -- -- 490,833 4,908 513,534
Deferred compensation--amortization and cancellations....... -- -- -- -- 80,276
Change in unrealized losses on marketable securities........ -- -- -- -- --
Net loss.................................................... -- -- -- -- --
Comprehensive loss..........................................
-------- ----------- ---------- -------- ------------
Balances, December 31, 1999................................. 524,337 $ 5,248,610 18,635,565 $186,355 $123,917,758
======== =========== ========== ======== ============
OTHER COMPREHENSIVE
INCOME
---------------------------
UNREALIZED
GAINS
(LOSSES) CUMULATIVE
ACCUMULATED ON MARKETABLE TRANSLATION DEFERRED
DEFICIT SECURITIES ADJUSTMENTS COMPENSATION
------------- ------------- ----------- -------------
Balances, December 31, 1996................................. $ (72,922,674) $ 14,760 $(60,416) $ (90,118)
Issuance of common stock.................................... -- -- -- --
Issuance of common stock under the stock purchase plan...... -- -- -- --
Deferred compensation recorded in connection with the
granting of stock options................................. -- -- -- (1,750,000)
Common stock issued pursuant to employee benefit plan....... -- -- -- --
Issuance of common stock--StemCells......................... -- -- -- --
Redeemable common stock lapses.............................. -- -- -- --
Exercise of stock options................................... -- -- -- --
Deferred compensation--amortization and cancellations -- -- -- 137,298
Change in unrealized losses on marketable securities........ -- (23,637) -- --
Change in cumulative translation adjustment................. -- -- 60,416 --
Net loss.................................................... (18,113,580) -- -- --
Comprehensive loss
------------- -------- -------- -----------
Balances, December 31, 1997................................. $ (91,036,254) $ (8,877) $ -- $(1,702,820)
Issuance of common stock.................................... -- -- -- --
Issuance of common stock under the stock purchase plan...... --
Deferred compensation recorded in connection with the
granting of stock options................................. -- -- -- --
Common stock issued pursuant to employee benefit plan....... -- -- -- --
Issuance of common stock--StemCells......................... -- -- -- --
Redeemable common stock lapses.............................. -- -- -- --
Exercise of stock options................................... -- -- -- --
Deferred compensation--amortization and cancellations....... -- -- -- 229,901
Change in unrealized losses on marketable securities........ -- 3,679 -- --
Net loss.................................................... (12,627,830) -- -- --
Comprehensive loss..........................................
------------- -------- -------- -----------
Balances, December 31, 1998................................. $(103,664,084) $ (5,198) $ -- $(1,472,919)
Issuance of common stock.................................... -- -- -- --
Issuance of common stock under the stock purchase plan...... -- 42,193
Deferred compensation recorded in connection with the
granting of stock options................................. -- -- -- --
Common stock issued pursuant to employee benefit plan....... -- -- -- --
Issuance of common stock--StemCells......................... -- -- -- --
Redeemable common stock lapses.............................. --
Exercise of stock options................................... -- -- -- --
Deferred compensation--amortization and cancellations....... -- -- -- 247,919
Change in unrealized losses on marketable securities........ -- 5,198 -- --
Net loss.................................................... (15,708,626) -- -- --
Comprehensive loss.......................................... --
------------- -------- -------- -----------
Balances, December 31, 1999................................. $(119,372,710) $ -- $ -- $(1,225,000)
============= ======== ======== ===========
TOTAL
STOCKHOLDERS'
EQUITY
------------
Balances, December 31, 1996................................. $ 34,747,355
Issuance of common stock.................................... 1,555,506
Issuance of common stock under the stock purchase plan...... 180,422
Deferred compensation recorded in connection with the
granting of stock options................................. --
Common stock issued pursuant to employee benefit plan....... 169,452
Issuance of common stock--StemCells......................... 7,393,400
Redeemable common stock lapses.............................. 2,575,688
Exercise of stock options................................... 245,179
Deferred compensation--amortization and cancellations 109,954
Change in unrealized losses on marketable securities........ (23,637)
Change in cumulative translation adjustment................. 60,416
Net loss.................................................... (18,113,580)
------------
Comprehensive loss (18,076,081)
------------
Balances, December 31, 1997................................. $ 28,900,155
Issuance of common stock.................................... --
Issuance of common stock under the stock purchase plan...... 84,058
Deferred compensation recorded in connection with the
granting of stock options................................. --
Common stock issued pursuant to employee benefit plan....... 143,873
Issuance of common stock--StemCells......................... 506,600
Redeemable common stock lapses.............................. 334,500
Exercise of stock options................................... 1,364
Deferred compensation--amortization and cancellations....... 551,009
Change in unrealized losses on marketable securities........ 3,679
Net loss.................................................... (12,627,830)
------------
Comprehensive loss.......................................... (12,624,151)
------------
Balances, December 31, 1998................................. $ 17,897,408
Issuance of common stock.................................... 320,183
Issuance of common stock under the stock purchase plan......
Deferred compensation recorded in connection with the
granting of stock options................................. --
Common stock issued pursuant to employee benefit plan....... 103,410
Issuance of common stock--StemCells......................... --
Redeemable common stock lapses..............................
Exercise of stock options................................... 518,442
Deferred compensation--amortization and cancellations....... 328,195
Change in unrealized losses on marketable securities........ 5,198
Net loss.................................................... (15,708,626)
------------
Comprehensive loss.......................................... (15,703,428)
------------
Balances, December 31, 1999................................. $ 3,506,403
============
See accompanying notes to consolidated financial statements.
F-5
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
Cash flows from operating Activities:
Net loss.................................................... $(15,708,626) $(12,627,830) $(18,113,580)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 1,717,975 2,244,146 1,968,234
Acquired research and development......................... -- 551,009 8,343,684
Amortization of deferred compensation..................... 328,195 -- 109,954
Fair market adjustment for property held for sale......... 300,000 -- --
Other non-cash charges.................................... 320,183 410,173 105,931
Gain on investment........................................ -- -- (3,386,808)
Loss on sale of fixed assets.............................. 1,117,286 -- 413,856
Loss on sale of intangibles............................... 440,486
Changes in operating assets and liabilities:
Accrued interest receivable............................. 164,397 346,577 100,004
Other current assets.................................... 283,000 (265,665) (232,604)
Accounts payable and accrued expenses................... 1,344,142 (2,378,613) (1,233,501)
Deferred rent........................................... 279,680 -- --
Deferred revenue........................................ (2,500,000) 2,483,856 (1,842,948)
------------ ------------ ------------
Net cash used in operating activities....................... (11,913,282) (9,236,347) (13,767,778)
Cash flows from investing activities:
Proceeds from sale of Modex, net of cash disposed........... -- -- 2,958,199
Purchases of marketable securities.......................... (4,397,676) (18,982,387) (14,182,521)
Proceeds from sales of marketable securities................ 13,923,813 22,573,625 23,736,242
Purchases of property, plant and equipment.................. (192,747) (2,153,525) (7,710,126)
Proceeds on sale of fixed assets............................ 746,448 -- 8,003,926
Purchase of other investment................................ -- -- (250,000)
Acquisition of other assets................................. (558,311) (400,219) (1,599,418)
Disposal of other assets.................................... 440,486 -- --
Acquisition of StemCells assets............................. -- -- (640,490)
Advance to Cognetix......................................... -- -- (250,000)
Repayment from Cognetix..................................... -- -- 250,000
------------ ------------ ------------
Net cash provided by investing activities................... 9,962,013 1,037,494 10,315,812
Cash flows from financing activities:
Proceeds from issuance of redeemable common stock........... -- -- --
Proceeds from issuance of common stock...................... 145,603 227,931 1,905,380
Proceeds from the exercise of stock options and warrants.... 518,442 1,364 245,179
Proceeds from debt financings............................... -- 1,259,300 --
Repayments of debt and lease obligations.................... (1,817,500) (1,366,655) (2,496,849)
------------ ------------ ------------
Net cash provided by (used in) financing activities......... (1,153,455) 121,940 (346,290)
Effect of exchange rate changes on cash and cash
equivalents............................................... -- -- (181,627)
------------ ------------ ------------
Decrease in cash and cash equivalents....................... (3,104,724) (8,076,913) (3,979,883)
Cash and cash equivalents, January 1........................ 7,864,788 15,941,701 19,921,584
------------ ------------ ------------
Cash and cash equivalents, December 31...................... $ 4,760,064 $ 7,864,788 $ 15,941,701
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid........................................... $ 335,203 $ 444,047 $ 436,461
NON-CASH TRANSACTION:
In December 1999, the Company sold intellectual property related to its
encapsulated cell technology. In association with the transaction, the Company
recorded a receivable of $3,000,000 and reduced intangible assets.
See accompanying notes to consolidated financial statements.
F-6
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. NATURE OF BUSINESS
StemCells, Inc. (formerly CytoTherapeutics, Inc.) (the "Company") is a
biopharmaceutical company engaged in the development of novel stem cell
therapies designed to treat human diseases and disorders.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include accounts of the Company and
StemCells California, Inc., a wholly owned subsidiary. Significant intercompany
accounts have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents include funds held in investments with original maturities
of three months or less when purchased. The Company's policy regarding selection
of investments, pending their use, is to ensure safety, liquidity, and capital
reservation while obtaining a reasonable rate of return. Marketable securities
consist of investments in agencies of the U.S. government, investment grade
corporate notes and money market funds. The fair values for marketable
securities are based on quoted market prices.
The Company determines the appropriate classification of cash equivalents
and marketable securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The Company classifies such holdings
as available-for-sale securities, which are carried at fair value, with
unrealized gains and losses reported as a separate component of stockholders'
equity.
PROPERTY HELD FOR SALE
As a result of the Company's decision to exit the encapsulated cell
technology and relocate its corporate headquarters to Sunnyvale, CA, certain
property considered by management to no longer be necessary has been made
available for sale or lease. The aggregate carrying value of such property has
been reviewed by management, subject to appraisal and adjusted downward to
estimated market value.
F-7
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including that held under capitalized lease
obligations, is stated at cost and depreciated using the straight-line method
over the estimated life of the respective asset, as follows:
Building and improvements................................... 3 -- 15 years
Machinery and equipment..................................... 3 -- 10 years
Furniture and fixtures...................................... 3 -- 10 years
PATENT COSTS
The Company capitalizes certain patent costs related to patent applications.
Accumulated costs are amortized over the estimated economic life of the patents,
not to exceed 17 years, using the straight-line method, commencing at the time
the patent is issued. Costs related to patent applications are written off to
expense at the time such patents are deemed to have no continuing value. At
December 31, 1999 and 1998, total costs capitalized were $718,000 and $4,285,000
and the related accumulated amortization were $9,000 and $347,000, respectively.
Patent expense totaled $539,000, $3,000, and $365,000 in 1999, 1998 and 1997,
respectively.
In December 1999, the Company sold its Encapsulated Cell Technology ("ECT")
to Neurotech, S.A. for an initial payment of $3,000,000, royalties on future
product sales, and a portion of certain Neurotech revenues from third parties,
in return for the assignment to Neurotech of intellectual property assets
relating to ECT. In addition, the Company retained certain non-exclusive rights
to use ECT in combination with its proprietary stem cell technology and in the
field of vaccines for prevention and treatment of infectious diseases. The
patent portfolio that was sold had a net book value of $3,180,000. The loss on
this transaction and expenses related to the write-down of ECT are included in
wind-down expenses on the Company's Consolidated Statement of Operations.
STOCK BASED COMPENSATION
The Company grants qualified stock options for a fixed number of shares to
employees with an exercise price equal to the fair market value of the shares at
the date of grant. The Company accounts for stock option grants in accordance
with APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and,
accordingly, recognizes no compensation expense for qualified stock option
grants.
For certain non-qualified stock options granted to non-employees, the
Company accounts for these grants in accordance with FAS No. 123--ACCOUNTING FOR
STOCK-BASED COMPENSATION and EITF96-18--ACCOUNTING FOR EQUITY INSTRUMENTS THAT
ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH
SELLING, GOODS OR SERVICES, and accordingly, recognizes as consulting expenses
the estimated fair value of such options as calculated using the Black-Scholes
valuation model. Fair value is determined using methodologies allowable by FAS
No. 123. The cost is amortized over the vesting period of each option or the
recipient's contractual arrangement, if shorter.
F-8
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The liability method is used to account for income taxes. Deferred tax
assets and liabilities are determined based on differences between financial
reporting and income tax bases of assets and liabilities, as well as net
operating loss carry forwards, and are measured using the enacted tax rates and
rates under laws that are expected to be in effect when the differences reverse.
Deferred tax assets may be reduced by a valuation allowance to reflect the
uncertainty associated with their ultimate realization.
REVENUE FROM COLLABORATIVE AGREEMENTS
Revenues from collaborative agreements are recognized as earned upon either
the incurring of reimbursable expenses directly related to the particular
research plan or the achievement of certain development milestones as defined
within the terms of the collaborative agreement. Payments received in advance of
research performed are designated as deferred revenue. Recorded revenues are not
refundable in the event research efforts are considered unsuccessful.
RESEARCH AND DEVELOPMENT COSTS
The company expenses all research and development costs as incurred.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares from stock options and
warrants are excluded, as their effect is antidilutive.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Securities Exchange Commission's recently issued Staff Accounting
Bulletin No. 101 provides guidance on revenue recognition that may impact the
Company's future reporting relative to recognizing revenues received from
collaborative and similar agreements. The Company does not expect this guidance
to result in significant changes to its existing revenue recognition policy,
subject to the specific terms of each individual collaborative agreement.
3. SALE OF 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK
On April 13, 2000, the Company completed arrangements to sell 1,500 shares
of 6% cumulative convertible preferred stock plus a warrant for 75,000 shares of
the Company's common stock to two members of its Board of Directors for
$1,500,000, on terms more favorable to the Company than it was then able to
obtain from outside investors. The shares are convertible at the option of the
holders into common stock at $3.77 per share (based on the face value of the
preferred shares). The conversion price may be below the trading market price of
the stock at the time of conversion. The Company has valued the beneficial
conversion feature using the intrinsic value method reflecting the April 13,
2000 commitment date and the most beneficial per share discount available to the
preferred shareholders. Such value was $265,000 and will be treated as a deemed
dividend as of the commitment date. The holders of the preferred stock have
liquidation rights equal to their original investment plus accrued
F-9
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
3. SALE OF 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK (CONTINUED)
but unpaid dividends. The investors would be entitled to make additional
investments in the Company on the same terms as those on which the Company
completes offerings of its securities with third parties within 6 months, if any
such offerings are completed. If offerings totaling at least $6 million are not
completed during the 6 months, the investors have the right to acquire up to
1,126 additional shares of convertible preferred stock at $6.33 per share. Any
unconverted preferred stock is converted (based on the face value of the
shares), at the applicable conversion price, on April 13, 2002 in the case of
the original stock and two years after the first acquisition of any of the
additional 1,126 shares, if any are acquired. The warrant expires on April 13,
2005.
4. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
Until mid-1999, the Company engaged in research and development in
encapsulated cell therapy technology, including a pain control program funded by
AstraZeneca Group plc. The results from the 85-patient double-blind,
placebo-controlled trial of our encapsulated bovine cell implant for the
treatment of severe, chronic pain in cancer patients did not, however, meet the
criteria AstraZeneca had established for continuing trials for the therapy, and
in June 1999 AstraZeneca terminated the collaboration, as allowed under the
terms of the original collaborative agreement signed in 1995.
As a result of termination, management determined in July 1999 to
restructure its research operations to abandon all further encapsulated cell
technology research and concentrate its resources on the research and
development of its proprietary platform of stem cell technologies.
The Company reduced its workforce by approximately 58 full-time employees
who had been focused on encapsulated cell technology programs and
10 administrative employees, wound down its research and manufacturing
operations in Lincoln, Rhode Island, and relocated its remaining research and
development activities, and its corporate headquarters, to the facilities of its
wholly owned subsidiary, StemCells California, Inc., in Sunnyvale, California,
in October 1999. As a result, the Company sold excess furniture and equipment in
December 1999 and is seeking to sublease the science and administrative facility
and to sell the pilot manufacturing facility.
Wind-down expenses totaled approximately $6,048,000 for the year ended
December 31, 1999; no such expenses were incurred in 1998 and 1997. These
expenses relate to the wind-down of the Company's encapsulated cell technology
research and development program and the Company's other Rhode Island
operations, and the transfer of the Company's corporate headquarters to
Sunnyvale, California.
F-10
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
4. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
(CONTINUED)
A description of these expenses, including the amounts and periods of
recognition, are as follows:
TOTAL
THIRD QUARTER FOURTH QUARTER WIND-DOWN
1999 1999 EXPENSE
------------- -------------- ----------
Employee severance costs............................... $1,554,000 $ -- $1,554,000
Impairment losses(1):
Fixed assets......................................... 800,000 -- 800,000
ECT patents.......................................... 260,000 -- 260,000
---------- ---------- ----------
1,060,000 -- 1,060,000
Rhode Island facilities carrying costs(2):
Corporate headquarters............................... 702,000 -- 702,000
Pilot manufacturing plant............................ 562,000 -- 562,000
---------- ---------- ----------
1,264,000 -- 1,264,000
Employee outplacement.................................. 200,000 -- 200,000
RIPSAT settlement(3)................................... -- 1,172,000 1,172,000
Loss on sale of assets(4):
Fixed assets......................................... -- 318,000 318,000
ECT patents.......................................... -- 180,000 180,000
---------- ---------- ----------
-- 498,000 498,000
Write-down of pilot plant(5)........................... -- 300,000 300,000
---------- ---------- ----------
$4,078,000 $1,970,000 $6,048,000
========== ========== ==========
- ------------------------
(1) Management's estimate of the fixed asset impairment was derived from
communications with an outside auction house. The patent impairment loss was
based on preliminary negotiations with parties interested in acquiring the
patents.
(2) Facilities carrying costs include operating lease payments, utilities,
property taxes, insurance, maintenance, interest and other non-employee
related expenses necessary to maintaining these facilities through the
expected date of disposition (June 30, 2000).
(3) The Company originally received funding from the Rhode Island Partnership
for Science and Technology (RIPSAT) for purposes of conducting ECT
activities conditioned upon maintaining the operation within the state.
RIPSAT claimed that the Company's decision to exit ECT activities and close
the Rhode Island operation was in violation of the funding arrangement and
that the Company was obligated to return a portion of the funding proceeds.
Although the Company disputed these claims, during the fourth quarter of
1999, management determined it was in the best interest of the Company to
settle the issue.
(4) The Company held an auction to sell all ECT fixed assets. Proceeds from that
sale resulted in a loss, which was related to machinery and equipment
($292,000), and furniture and fixtures ($26,000).
F-11
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
4. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
(CONTINUED)
(5) The write-down of the pilot plant was based on an independent property
appraisal, which was not available during the third quarter, when the
Company reached a decision to exit ECT activities and relocate the corporate
headquarters.
At December 31, 1999, the Company's $1.6 million wind-down reserve included
approximately $1.2 million for the RIPSAT settlement and approximately
$0.4 million for Rhode Island facility costs.
Property held for sale at December 31, 1999, consisted of $3.2 million
relating to the Company's pilot plant facility located in Lincoln, Rhode Island.
The Company suspended depreciation of these assets totalling approximately
$140,000 for the quarter ended December 31, 1999. The balance reflected the
$300,000 write-down included as part of the additional wind-down expenses
recognized during the fourth quarter, in accordance with Financial Accounting
Standards Board Statement 121, which requires that long-lived assets be reviewed
for impairment whenever events or circumstances indicate that the carrying value
of the asset may not be recoverable. There were no such assets at December 31,
1998.
5. STEMCELLS CALIFORNIA, INC.
In September 1997, a merger of a wholly owned subsidiary of the company and
StemCells California, Inc. was completed in the form of a purchase. Through the
merger, the Company acquired StemCells California, Inc. for a purchase price
totaling approximately $9,475,000, consisting of 1,320,691 shares of the
Company's common stock, valued at $6,600,000 and options and warrants for the
purchase of 259,296 common shares at nominal consideration, valued at
$1,300,000, the assumption of certain liabilities of $934,000 and transaction
costs of $641,000. Options and warrants were valued utilizing the intrinsic
method; the resultant value approximated the value determined using the Black-
Scholes method. The purchase price was allocated, based upon an asset valuation
study using income approach methods, to license agreements valued at $1,131,000
to be amortized over three years and acquired research and development of
$8,344,000, which was expensed. The acquired research and development had not
reached scientific feasibility and had no alternative future uses. As part of
the acquisition of StemCells, Richard M. Rose, M.D., became President, Chief
Executive Officer and director of the Company and Dr. Irving Weissman became a
director of the Company.
Upon consummation of the merger, the Company entered into consulting
arrangements with the principal scientific founders of StemCells: Dr. Irving
Weissman, Dr. Fred H. Gage and Dr. David Anderson. Additionally, in connection
with the merger, the Company was granted an option by the former shareholders of
StemCells to repurchase 500,000 of the Company's shares of Common Stock
exchanged for StemCells shares, upon the occurrence of certain events.
To attract and retain Drs. Rose, Weissman, Gage and Anderson, and to
expedite the progress of the Company's stem cell program, the Company awarded
these individuals options to acquire a total of approximately 1.6 million shares
of the Company's common stock, at an exercise price of $5.25 per share, the
quoted market price at the grant date. Under the original grants, approximately
100,000 of these options were exercisable immediately on the date of grant,
1,031,000 of these options would vest and become exercisable only upon the
achievement of specified milestones related to the Company's stem cell
development program and the remaining 469,000 options would vest over eight
years. The
F-12
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
5. STEMCELLS CALIFORNIA, INC. (CONTINUED)
expense associated with the grants that vested immediately was considered
non-employee compensation and was based on the fair value of the options
granted. The expense was considered immaterial. In connection with the 469,000
options issued to a non-employee, Dr. Anderson, the Company recorded deferred
compensation of $1,750,000, the fair value of such options at the date of grant,
which will be amortized over an eight-year period. The fair value was determined
using the Black-Scholes method with the following inputs: volatility .594,
expected life 8 years, dividend yield 0.0%, risk free rate 5.98%. If the
milestones specified relating to the 1,031,000 option granted to non-employees
Drs. Weissman and Gage are achieved, at that time the company will record
compensation expense for the fair market value of such options determined using
the Black-Scholes method. The company has also designated a pool of 400,000
options to be granted to persons in a position to make a significant
contribution to the success of the stem cell program.
Stem cell research is conducted pursuant to the provisions of an agreement
between the company and Drs. Weissman and Gage providing for a two-year research
plan. If the goals of the research plan are accomplished, the Company has agreed
to fund continuing stem cell research. Increases in stem cells research funding
of not more than 25% a year will be funded by the Company as long as the goals
of the research plan are being met. However, the Company will retain the option
of (i) ceasing or reducing brain stem cell research even if all research plan
goals are met, but will be required to accelerate the vesting of all
still-achievable performance based stock options, and (ii) ceasing or reducing
non-brain stem cell research even if all plan goals are being met by affording
the scientific research founders the opportunity to continue development of the
non-brain stem cell research by licensing the technology related to such
research to the founders in exchange for a payment to the Company equal to all
prior Company funding for such research, plus royalty payments.
6. MODEX
In October 1997, the Company completed a series of transactions, which
resulted in the establishment of its previously 50%-owned Swiss subsidiary,
Modex Therapeutics, Ltd., (Modex) as an independent company. In the
transactions, the Company reduced its ownership interest from 50% to
approximately 25% in exchange for $4 million cash and elimination of its prior
contingent obligation to contribute an additional Sfr 2.4 million (approximately
$1.7 million) to Modex in July 1998. In the transactions, all of the put and
call arrangements between the Company and other stockholders of Modex were
eliminated and the Company forgave $463,000 due from Modex to the Company. The
Company recorded a gain on the transactions of $3,387,000.
In April 1998, Modex completed an additional equity offering, in which the
Company did not participate. This resulted in a reduction in the Company's
ownership to less than 20% ownership; therefore, the Company accounted for this
investment under the cost method at December 31, 1999.
The pre-existing royalty-bearing Cross License Agreement between the Company
and Modex was assigned by the Company to Neurotech S.A., a privately held French
company, as part of the sale of the intellectual property assets related to the
Company's encapsulated cell therapy technology to Neurotech. Under the terms of
the sale to Neurotech, the Company will receive a portion of revenues Neurotech
receives from Modex under the Cross License Agreement.
F-13
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
7. MARKETABLE SECURITIES
During 1999, the Company sold all of its remaining marketable equitable
securities. At December 31, 1999, all of the Company's available funds were held
in cash and cash equivalents. The following is a summary of available-for-sale
securities held at December 31, 1998:
DECEMBER 31, 1998
---------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
U.S. government securities..................... $ 1,500,994 $1,720 $ (504) $ 1,502,210
U.S. corporate securities...................... 9,225,095 3,244 (9,658) 9,218,681
----------- ------ -------- -----------
Total debt securities.......................... $10,726,089 $4,964 $(10,162) 10,720,891
=========== ====== ========
Debt securities included in cash and cash
equivalents.................................. (1,199,952)
-----------
Debt securities included in marketable
securities................................... $ 9,520,939
===========
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
DECEMBER 31,
------------------------
1999 1998
---------- -----------
Building and improvements........................... $ 665,890 $ 5,665,077
Machinery and equipment............................. 1,691,096 9,887,251
Furniture and fixtures.............................. 219,260 869,831
---------- -----------
2,576,286 16,422,159
Less accumulated depreciation and amortization...... 828,401 8,066,150
---------- -----------
$1,747,885 $ 8,356,009
========== ===========
Depreciation and amortization expense was $1,436,000, $1,720,000, and
$1,778,000 for the years ending December 31, 1999, 1998 and 1997, respectively.
As part of the Company's restructuring of its operations, sale of its
encapsulated cell technology ("ECT"), and relocation of its corporate
headquarters to Sunnyvale, California, the Company identified machinery and
equipment and furniture and fixtures associated with the ECT or otherwise no
longer needed. In December of 1999, the Company disposed of these excess fixed
assets, realizing proceeds of approximately $746,000. At the time of the sale,
these assets had a net book value of approximately $1,063,000 after a third
quarter 1999 write-down of $800,000, which was based on management's estimate of
expected sale proceeds. The third quarter write-down and actual fourth quarter
loss were included in wind-down expenses.
Certain property, plant and equipment have been acquired under capitalized
lease obligations. These assets totaled $5,827,000 and $6,587,000, at
December 31, 1999 and 1998, respectively, with related accumulated amortization
of $2,747,000 and $2,860,000 at December 31, 1999 and 1998,
F-14
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
8. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
respectively. As a result of the Company's decision to exit ECT and relocate to
Sunnyvale, CA, this property has been classified as held for sale at
December 31, 1999.
9. OTHER ASSETS
Other assets are as follows:
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
Patents, net......................................... $ 708,823 $3,938,755
License agreements, net.............................. 282,750 659,750
Security deposit--building lease..................... 750,000 750,000
Restricted cash...................................... -- 603,467
Deferred financing costs, net........................ 117,195 123,701
---------- ----------
$1,858,768 $6,075,663
========== ==========
The decrease in patents from 1999 to 1998 was primarily due to management's
decision to exit encapsulated cell technology and dispose of the related
intellectual property. Management reached this decision during the third quarter
of 1999, and established a reserve that included $260,000 directly related to
the write-down of encapsulated cell technology patents. During the fourth
quarter, management established an additional reserve that included a $180,000
loss associated with the sale of encapsulated cell technology patents worth
$3,180,000.
At December 31, 1999 and 1998, accumulated amortization was $857,000 and
$818,000, respectively, for patents and license agreements.
10. ACCRUED EXPENSES
Accrued expenses are as follows:
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
Wind-down expenses................................... $1,634,522 $ --
External services.................................... 97,439 412,253
Employee compensation................................ 306,342 262,679
Collaborative research............................... 222,140 196,505
Other................................................ 344,625 148,682
---------- ----------
$2,605,068 $1,020,119
========== ==========
The reserve for wind-down expenses included approximately $1,172,000
relating to the RIPSAT settlement (Notes 4 and 11) and approximately $463,000
for the estimated six months of lease payments and operating costs for the Rhode
Island facilities through an expected disposal date of June 30, 2000.
F-15
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
11. LEASES
The Company has undertaken direct financing transactions with the State of
Rhode Island and received proceeds from the issuance of industrial revenue bonds
totaling $5,000,000 to finance the construction of its pilot manufacturing
facility. The related leases are structured such that lease payments will fully
fund all semiannual interest payments and annual principal payments through
maturity in August 2014. Fixed interest rates vary with the respective bonds'
maturities, ranging from 5.1% to 9.5%. The bonds contain certain restrictive
covenants which limit, among other things, the payment of cash dividends and the
sale of the related assets. In addition, the Company was required to maintain a
debt service reserve until December 1999. On March 3, 2000 the Company entered
into a settlement agreement with RIPSAT, the Rhode Island Industrial
Recreational Building Authority ("IRBA") and the Rhode Island Industrial
Facilities Corporation ("RIIFC"). The Company agreed to pay RIPSAT $1,172,000 in
full satisfaction of all obligations of the Company to RIPSAT under the Funding
Agreement dated as of June 22, 1989. On execution and delivery of this
Agreement, IRBA agreed to return to the Company the full amount of the Company's
debt service reserve ("Reserve Funds"), approximately $610,000 of principal and
interest, relating to the bonds the Company has with IRBA and RIIFC. Such amount
has been classified as debt service funds in current assets of the consolidated
balance sheet. In order to avoid the loss of interest on the Reserve Funds due
to early termination of certain investments, the parties agreed that the Company
would render a net payment to RIPSAT in the amount of approximately $562,000.
In 1997, the Company completed construction of a new headquarters and
laboratory facility. In November 1997, the Company entered into sale and
leaseback agreements with a real estate investment trust. Under the terms of
these agreements, the Company sold its new facility for $8,000,000, incurring a
$342,000 loss on the sale. The Company simultaneously entered into a
fifteen-year lease for the facility. The lease agreement calls for minimum rent
of $750,000 for the first five years, $937,500 for years six to ten, $1,171,900
for years eleven to fourteen and $1,465,000 in year fifteen, with a $750,000
security deposit held for the term of the lease. The Company is recognizing rent
expense on a straight line basis. At December 31, 1999, the Company had incurred
$426,790 in deferred rent expense.
F-16
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
11. LEASES (CONTINUED)
Future minimum capitalized lease obligations with non-cancelable terms in
excess of one year at December 31, 1999, are as follows:
2000........................................................ $ 606,268
2001........................................................ 589,217
2002........................................................ 519,719
2003........................................................ 436,909
2004........................................................ 425,713
Thereafter.................................................. 2,577,826
----------
Total minimum lease payments................................ 5,302,407
Less amounts representing interest.......................... 2,041,157
----------
Present value of minimum lease payments..................... 3,261,250
Less current maturities..................................... 324,167
----------
Capitalized lease obligations, less current maturities...... $2,937,083
==========
Rent expense for the years ended December 31, 1999, 1998 and 1997, was
$947,000, $1,052,000 and $499,000, respectively.
12. LONG-TERM DEBT
Long-term debt is as follows:
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
Term note payable, interest at the prime rate plus 1/2%
(8.75% at December 31, 1998), principal payments commence
in August 1998, due ratably through May 2000; secured by
certain equipment (prepaid during 1999)................... $ -- $1,500,000
Current maturities of long-term debt........................ -- 1,000,000
---------- ----------
Long-term debt, less current maturities..................... $ -- $ 500,000
========== ==========
13. REDEEMABLE COMMON STOCK
In November 1996, the Company signed certain collaborative development and
licensing agreements with Genentech, Inc, including one under which Genentech
purchased 829,171 shares of redeemable common stock for $8.3 million to fund
development of products to treat Parkinson's disease. The Agreement also
provided that Genentech had the right, at its discretion, to terminate the
Parkinson's program at specified milestones in the program, and that if the
program were terminated, Genentech had the right to require the Company to
repurchase from Genentech the shares of the Company's common stock having a
value equal to the amount by which the $8.3 million exceeded the expenses
incurred by the Company in connection with such program by more than
$1 million, based upon the share price paid by Genentech. Accordingly, the
common stock is classified as redeemable common stock until such time as the
related funds are expended. At December 31, 1998, $3,051,000 had been spent on
the collaboration with Genentech and, accordingly, the Company has reclassified
F-17
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
13. REDEEMABLE COMMON STOCK (CONTINUED)
those common shares and related value to stockholders' equity. On May 21, 1998,
Genentech exercised its right to terminate the collaboration and negotiations
ensued with respect to the amount of redeemable common stock to be redeemed in
accordance with the agreement and the method of such redemption. In March 2000,
the Company reached a settlement of this matter with Genentech. Under the
settlement agreement, Genentech released the Company from any obligation to
redeem any shares of the Company's Common Stock held by Genentech. Accordingly,
the Company reclassified the amount recorded at December 31, 1999 as Redeemable
Common Stock ($5,248,000) to Stockholders' Equity in March 2000. The Company and
Genentech also agreed that all of the agreements between them were terminated
and that neither had any claim to the intellectual property of the other.
14. COMMON STOCK TO BE ISSUED
In 1998, the Company entered into an agreement with a Company advisor, under
which the advisor prepared a strategic and business overview and provided
related implementation support for the Company. The advisor agreed to accept
cash and the Company's common stock as partial payment for its services. In
1999, the Company issued the $187,500 of common stock due to the advisor.
15. STOCKHOLDERS' EQUITY
STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
The Company has adopted several stock plans that provide for the issuance of
incentive and nonqualified stock options, performance awards and stock
appreciation rights, at prices to be determined by the Board of Directors, as
well as the purchase of Common Stock under an employee stock purchase plan at a
discount to the market price. In the case of incentive stock options, such price
will not be less than the fair market value on the date of grant. Options
generally vest ratably over four years and are exercisable for ten years from
the date of grant or within three months of termination. At December 31, 1999,
the Company had reserved 2,603,736 shares of common stock for the exercise of
stock options.
The following table presents the combined activity of the Company's stock
option plans (exclusive of the plans noted below) for the years ended
December 31:
1999 1998 1997
-------------------------- --------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- -------------- ---------- -------------- --------- --------------
Outstanding at January 1...... 1,654,126 $3.62 2,446,573 $7.48 2,423,025 $8.34
Granted....................... 536,078 1.08 1,174,118 1.70 679,074 5.33
Exercised..................... (604,362) 1.50 (11,012) .12 (82,737) 2.96
Canceled...................... (646,507) 5.31 (1,955,553) 7.08 (572,789) 9.21
--------- ----- ---------- ----- --------- -----
Outstanding at December 31.... 939,335 $2.65 1,654,126 $3.62 2,446,573 $7.48
========= ===== ========== ===== ========= =====
Options exercisable at
December 31................. 594,216 $3.44 1,108,936 $4.33 1,338,163 $7.79
========= ===== ========== ===== ========= =====
F-18
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
15. STOCKHOLDERS' EQUITY (CONTINUED)
On July 10, 1998, the Company re-priced 751,018 outstanding stock options.
No compensation expense was recorded since the re-priced options carried an
exercise equal to the market price of the Company's common stock on the date of
the re-pricing.
In addition to the options noted above, in conjunction with the StemCells
California merger, StemCells California options originally issued under a prior
StemCells California options plan were exchanged for options to purchase 250,344
shares of the Company's common stock at $.01 per share; 75,384 of these options
are exercisable at December 31, 1997, 96,750 of these options vest and become
exercisable only upon achievement of specified milestones, and the remaining
78,210 options vest over three years from the date of grant. The value of such
options utilizing the intrinsic method, which, approximated the value determined
using the Black-Scholes method, were accounted for as part of the StemCells
California acquisition price. Additionally, the Company adopted the 1997
CytoTherapeutics, Inc. StemCells California Research Stock Option Plan (the
StemCells California Research Plan) whereby an additional 2,000,000 shares of
Common Stock have been reserved. During 1997, the Company awarded options under
the StemCells Research Plan to purchase 1.6 million shares of the Company's
common stock to the Chief Executive Officer and scientific founders of StemCells
at an exercise price of $5.25 per share. Under the original grants,
approximately 100,000 of these options were exercisable immediately on the date
of grant, 1,031,000 of these options would vest and become exercisable only upon
achievement of specified milestones and the remaining 469,000 options would vest
over eight years. Options granted to Dr. Rose, in his capacity as Chief
Executive Officer, were valued using the intrinsic value method, in accordance
with the provisions of APB 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Options
granted to non-employees Drs. Weissman, Gage and Anderson were accounted for
using the fair value method in accordance with the provisions of Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
FAS 123 DISCLOSURES
The Company has adopted the disclosure provisions only of Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
("FAS 123") and accounts for its stock option plans in accordance with the
provisions of APB 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
The following table presents weighted average price and life information
about significant option groups outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YRS.) PRICE EXERCISABLE PRICE
- ------------------------------------------ ----------- ----------- -------- ----------- --------
Less than $5.00........................... 755,398 8.50 $ 1.12 411,945 $ 1.02
$5.01-$10.00.............................. 90,687 4.56 6.55 89,021 6.55
Greater than $10.00....................... 93,250 2.54 11.18 93,250 11.18
------- -------
939,335 594,216
======= =======
F-19
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
15. STOCKHOLDERS' EQUITY (CONTINUED)
Pursuant to the requirements of FAS 123, the following are the pro forma net
loss and net loss per share amounts for 1999, 1998, and 1997, as if the
compensation cost for the option plans and the stock purchase plan had been
determined based on the fair value at the grant date for grants in 1999, 1998,
and 1997, consistent with the provisions of FAS 123:
1999 1998 1997
--------------------------- --------------------------- ---------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------ ------------ ------------ ------------ ------------ ------------
Net loss............. $(15,708,626) $(15,764,569) $(12,627,830) $(14,919,389) $(18,113,580) $(19,924,437)
Net loss per share... $(.84) $(.84) $(.69) $(.82) $(1.08) $(1.19)
The weighted average fair value per share of options granted during 1999,
1998 and 1997 was $.88, $.82 and $3.40, respectively. The fair value of options
and shares issued pursuant to the stock purchase plan at the date of grant were
estimated using the Black-Scholes model with the following weighted average
assumptions:
OPTIONS STOCK PURCHASE PLAN
------------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
Expected life (years)................................. 5 5 5 5 .5 .5
Interest rate......................................... 5.5% 5.2% 6.2% 5.0% 4.64% 5.5%
Volatility............................................ 96.7% 63.5% 59.0% 96.7% 63.5% 59.0%
The Company has never declared nor paid dividends on any of its capital
stock and does not expect to do so in the foreseeable future.
The effects on 1999, 1998 and 1997 pro forma net loss and net loss per share
of expensing the estimated fair value of stock options and shares issued
pursuant to the stock purchase plan are not necessarily representative of the
effects on reporting the results of operations for future years as the period
presented includes only four, three or two years, respectively, of option grants
under the Company's plans. As required by FAS 123, the Company has used the
Black-Scholes model for option valuation, which method may not accurately value
the options described.
STOCK WARRANTS
In conjunction with the StemCells California merger, the Company exchanged
StemCells California warrants for warrants to purchase 8,952 shares of Company
common stock at $4.71 per share; such warrants were valued using the intrinsic
value method and were accounted for as part of the purchase price. In
conjunction with various equipment leasing agreements, the Company had
outstanding warrants to purchase 31,545 shares of common stock at prices ranging
from $4.00 to $9.00 per share. The warrants expired in October 2000.
In connection with a public offering of common stock in April 1995, the
Company issued warrants to purchase 434,500 shares of common stock at $8 per
share. The warrants are nontransferable and expired in April 2000, subject to
certain required exercise provisions. In addition to the foregoing rights, the
holder of such warrants has the right, in the event the Company issues
additional shares of common stock or other securities convertible into common
stock, to purchase at the then market price of such common stock, sufficient
additional shares of common stock to maintain the warrant holder's
F-20
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
15. STOCKHOLDERS' EQUITY (CONTINUED)
percentage ownership of the Company's common stock at 15%. This right, subject
to certain conditions and limitations, expired in April 2000.
COMMON STOCK RESERVED
The Company has reserved 6,461,846 shares of common stock for the exercise
of options, warrants and other contingent issuances of common stock.
16. RESEARCH AGREEMENTS
In November 1997, StemCells California, Inc., a wholly owned subsidiary of
the Company, signed a Research Funding and Option Agreement with The Scripps
Research Institute ("Scripps") relating to certain stem cell research. Under the
terms of the Agreement, StemCells agreed to fund research in the total amount of
approximately $931,000 at Scripps over a period of three years. StemCells paid
Scripps approximately $77,000 in 1997, $307,000 in 1998, and $309,000 in 1999.
In addition, the Company agreed to issue to Scripps 4,837 shares of the
Company's common stock and a stock option to purchase 9,674 shares of the
Company's Common Stock with an exercise price of $.01 per share upon the
achievement of specified milestones. Under the Agreement, StemCells has an
option for an exclusive license to the inventions resulting from the sponsored
research, subject to the payment of royalties and certain other amounts, and is
obligated to make payments totaling $425,000 for achievement of certain
milestones.
In April 1997, the Company entered into an agreement with
Neurospheres, Ltd., which superseded all previous licensing agreements and
settled a dispute with Neurospheres. Under the terms of the settlement, the
Company has an exclusive royalty bearing license for growth-factor responsive
stem cells for transplantation. Neurospheres had an option to acquire
co-exclusive rights but did not exercise by the April 1998 deadline. The Company
retains exclusive rights for transplantation. The parties have no further
research obligations to each other, and the Company is under no obligation to
provide additional funding.
In February 1997, the Company and Cognetix, Inc. entered into a
Collaboration and Development Agreement related to the Company's former
encapsulated cell technology. As part of the agreement with Cognetix, the
Company purchased $250,000 of Cognetix preferred stock and, subject to certain
milestones, was obligated to purchase as much as $1,500,000 of additional
Cognetix stock over the next year. In July 1997, the Company loaned $250,000 to
Cognetix which was repaid with interest in October 1997. In October 1998, the
Company sold the $250,000 of preferred stock back to Cognetix for $298,914. The
Company is under no obligation to provide funding under this agreement.
In 1996, the Company signed certain collaborative development and licensing
agreements with Genentech, Inc. Under the terms of one of those agreements,
Genentech purchased 829,171 shares of redeemable common stock for $8.3 million
to fund development of products to treat Parkinson's disease. Genentech had the
right, at its discretion, to terminate the Parkinson's program at specified
milestones in the program. The Agreement also provided that if the Parkinson's
program were terminated and the funds the Company received from the sale of
stock to Genentech pursuant to the Parkinson's agreement exceeded the expenses
incurred by the Company in connection with such program by more than
$1 million, Genentech had the right to require the Company to repurchase from
Genentech shares of the Company's common stock having a value equal to the over
funding, based
F-21
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
16. RESEARCH AGREEMENTS (CONTINUED)
upon the share price paid by Genentech. As such, the common stock purchased by
Genentech has been classified as redeemable common stock until the funds are
expended on the program. On May 21, 1998, Genentech exercised its right to
terminate the collaboration and negotiations ensued with respect to the amount
of redeemable common stock to be redeemed in accordance with the agreement and
the method of such redemption. In March 2000 the Company announced the
settlement of this matter with Genentech and at that time the redeemable common
stock was reclassified to common stock. The Company is under no obligation to
provide additional funding to Genentech, Inc.
In March 1995, the Company signed a collaborative research and development
agreement with AstraZeneca for the development and marketing of certain
encapsulated-cell products to treat pain. AstraZeneca made an initial,
nonrefundable payment of $5,000,000, included in revenue from collaborative
agreements in 1995, a milestone payment of $3,000,000 in 1997 and was to remit
up to an additional $13,000,000 subject to achievement of certain development
milestones. Under the agreement, the Company was obligated to conduct certain
research and development pursuant to a four-year research plan agreed upon by
the parties. Over the term of the research plan, the Company originally expected
to receive annual payments of $5 million to $7 million from AstraZeneca, which
was to approximate the research and development costs incurred by the Company
under the plan. Subject to the successful development of such products and
obtaining necessary regulatory approvals, AstraZeneca was obligated to conduct
all clinical trials of products arising from the collaboration and to seek
approval for their sale and use. AstraZeneca had the exclusive worldwide right
to market products covered by the agreement. Until the later of either the
expiration of all patents included in the licensed technology or a specified
fixed term, the Company was entitled to a royalty on the worldwide net sales of
such products in return for the marketing license granted to AstraZeneca and the
Company's obligation to manufacture and supply products. AstraZeneca had the
right to terminate the original agreement beginning April 1, 1998. On June 24,
1999, AstraZeneca informed the Company of the results of AstraZeneca's analysis
of the double-blind, placebo-controlled trial of the Company's encapsulated
bovine cell implant for the treatment of severe, chronic pain in cancer
patients. AstraZeneca determined that, based on criteria it established, the
results from the 85-patient trial did not meet the minimum statistical
significance for efficacy established as a basis for continuing worldwide trials
for the therapy. AstraZeneca therefore indicated that it did not intend to
continue the trials of the bovine cell-containing implant therapy and executed
its right to terminate the agreement. The Company has no additional funding
obligations with AstraZeneca.
The Company has entered into other collaborative research agreements whereby
the Company funds specific research programs. Pursuant to such agreements, the
Company is typically granted rights to the related intellectual property or an
option to obtain such rights on terms to be agreed, in exchange for research
funding and specified royalties on any resulting product revenue. The Company's
principal academic collaborations had been with Brown University and
Dr. Aebischer and Centre Hospitalier Universitaire Vaudois in Switzerland.
However, with the termination of the Company's encapsulated cell technology
program and its new focus on the stem cell field, its principal academic
collaborations are now with Scripps Institute and the Oregon Health Science
University. Research and development expenses incurred under these
collaborations amounted to approximately $868,000, $1,259,000, and $1,326,000
for the years ended December 31, 1999, 1998 and 1997, respectively. The Company
has no other significant collaborative research funding obligations.
F-22
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
17. INCOME TAXES
Due to net losses incurred by the Company in each year since inception, no
provision for income taxes has been recorded. At December 31, 1999, the Company
had tax net operating loss carry forwards of $96,195,000 and research and
development tax credit carry forwards of $4,035,000 which expire at various
times through 2019. Due to the "change in ownership" provisions of the Tax
Reform Act of 1986, the Company's utilization of its net operating loss carry
forwards and tax credits may be subject to annual limitation in future periods.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
Deferred tax assets:
Capitalized research and development costs................ $ 4,331,000 $ 28,124,000
Net operating losses...................................... 38,478,000 10,786,000
Research and development credits.......................... 4,035,000 3,646,000
Other..................................................... 928,000 235,000
------------ ------------
47,772,000 42,791,000
Deferred tax liabilities:
Patents................................................... (246,000) (1,537,000)
------------ ------------
47,526,000 41,254,000
Valuation allowance....................................... (47,526,000) (41,254,000)
------------ ------------
Net deferred tax assets..................................... $ -- $ --
============ ============
Since there is uncertainty relating to the ultimate use of the loss carry
forwards and tax credits, a valuation allowance has been recognized at
December 31, 1999 and 1998, to fully offset the Company's deferred tax assets.
The valuation allowance increased $6,272,000 in 1999, due primarily to the
increases in net operating loss carry forwards and tax credits offset by
reduction in capitalized research and development costs.
18. EMPLOYEE RETIREMENT PLAN
The Company has a qualified defined contribution plan covering substantially
all employees. Participants are allowed to contribute a fixed percentage of
their annual compensation to the plan and the Company may match a percentage of
that contribution. The Company matches 50% of employee contributions, up to 6%
of employee compensation, with the Company's common stock. The related expense
was $103,000, $146,000, and $169,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
19. CONTINGENCIES
The Company is routinely involved in arbitration, litigation and other
matters as part of the ordinary course of its business. While the resolution of
any matter may have an impact on the Company's financial results for a
particular reporting period, management believes the ultimate
F-23
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
19. CONTINGENCIES (CONTINUED)
disposition of these matters will not have a materially adverse effect on the
Company's consolidated financial position or results of operations.
20. SUBSEQUENT EVENTS
On April 13, 2000, the Company completed arrangements to sell 1,500 shares
of 6% cumulative convertible preferred stock plus a warrant for 75,000 shares of
the Company's common stock to two members of its Board of Directors for
$1,500,000, on terms more favorable than it was then able to obtain from outside
investors. (SEE NOTE 3--"SALE OF 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK.")
F-24
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 DECEMBER 31, 1999
(UNAUDITED) (NOTE 1)
------------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 7,247,077 $ 4,760,064
Technology sale receivable................................ 200,000 3,000,000
Other current assets...................................... 768,521 1,210,791
------------- -------------
Total current assets.................................... 8,215,598 8,970,855
Restricted Investments.................................... 27,204,333 --
Property held for sale.................................... 3,203,491 3,203,491
Property, plant and equipment, net........................ 1,517,564 1,747,885
Intangible assets, net.................................... 740,543 1,108,768
Other assets.............................................. 750,000 750,000
------------- -------------
Total assets................................................ $ 41,631,529 $ 15,780,999
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 234,444 $ 631,315
Accrued expenses.......................................... 574,267 2,605,068
Current maturities of capitalized lease obligations....... 327,083 324,167
------------- -------------
Total current liabilities................................... 1,135,794 3,560,550
Capitalized lease obligations, less current maturities...... 2,692,500 2,937,083
Deposits.................................................... 26,000 26,000
Deferred rent............................................... 650,984 502,353
Redeemable stock............................................ -- 5,248,610
Stockholders' equity
Convertible Preferred Stock............................... 1,500,000 --
Common stock.............................................. 208,818 186,355
Additional paid in capital................................ 134,698,668 123,917,758
Stock Subscription Receivable............................. (1,250,004) --
Accumulated deficit....................................... (124,237,900) (119,372,710)
Accumulated other comprehensive income.................... 27,204,333 --
Deferred compensation..................................... (997,664) (1,225,000)
------------- -------------
Total stockholders' equity.............................. 37,126,251 3,506,403
------------- -------------
Total liabilities and stockholders' equity.............. $ 41,631,529 $ 15,780,999
============= =============
See accompanying notes to condensed consolidated financial statements.
F-25
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30
--------------------------------
2000 1999
-------------- ---------------
Revenue from collaborative arrangements..................... $ -- $ 5,021,707
Operating expenses:
Research and development.................................. 3,350,101 8,432,262
General and administrative................................ 2,172,137 3,195,672
Encapsulated Cell Therapy wind down and corporate
relocation.............................................. 768,733 4,078,034
------------ -------------
6,290,971 15,705,968
Loss from operations........................................ (6,290,971) (10,684,261)
Other income (expense):
Investment income......................................... 218,480 504,114
Interest expense.......................................... (209,287) (236,836)
Gain on sale of Modex shares.............................. 1,427,686 --
Loss on disposal of fixed assets.......................... (11,098) (66,777)
------------ -------------
1,425,781 200,501
------------ -------------
Net loss.................................................... $ (4,865,190) $ (10,483,760)
Deemed dividend (Note 2).................................. (265,000) --
------------ -------------
Net loss applicable to common shareholders.................. $ (5,130,190) $ (10,483,760)
============ =============
Basic and diluted net loss per common share................. $ (0.26) $ (0.56)
============ =============
Shares used in computing basic and diluted net loss per
common share.............................................. 19,682,590 18,560,675
============ =============
See accompanying notes to condensed consolidated financial statements.
F-26
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
----------- ------------
Cash flows from operating activities:
Net loss.................................................. $(4,865,190) $(10,483,760)
Gain on sale of Modex shares.............................. (1,427,686) --
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization........................... 617,447 1,603,691
Write down of fixed assets.............................. -- 800,000
Deferred stock compensation............................. 464,363 244,337
Loss on sale of fixed assets............................ -- 66,777
Net changes in operating assets and liabilities......... (3,086,775) (1,978,807)
----------- ------------
Net cash used in operating activities..................... (8,297,841) (9,747,762)
----------- ------------
Cash flows from investing activities:
Proceeds from marketable securities....................... -- 11,317,482
Purchases of marketable securities........................ -- (4,397,676)
Proceeds from sale of encapsulated cell technology........ 2,800,000 --
Purchase of property, plant and equipment, net............ (18,901) (47,210)
Proceeds from sale of Modex shares........................ 1,427,686 --
Acquisition of other assets............................... -- (138,090)
----------- ------------
Net cash provided by investing activities................. 4,208,785 6,734,505
----------- ------------
Cash flows from financing activities:
Proceeds from the exercise of stock options............... 553,586 548,225
Proceeds from issuance of common stock.................... 4,764,150 --
Proceeds from issuance of preferred stock................. 1,500,000 --
Principal payments under capitalized lease obligations and
mortgage payable........................................ (241,667) (1,710,833)
----------- ------------
Net cash provided by (used by) financing activities....... 6,576,069 (1,162,608)
----------- ------------
Net increase (decrease) in cash and cash equivalents........ 2,487,013 (4,175,865)
Cash and cash equivalents, beginning of period.............. 4,760,064 7,864,788
----------- ------------
Cash and cash equivalents, end of period.................... $ 7,247,077 $ 3,688,923
=========== ============
Non-cash item:
Stock subscription receivable............................. $ 1,250,004 --
See accompanying notes to condensed financial statements.
F-27
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000 AND 1999
NOTE 1. BASIS OF PRESENTATION
On May 23, 2000, the company's name was changed to Stem Cells, Inc. from
CytoTherapeutics, Inc. by vote of the shareholders at the Annual Meeting. The
accompanying, unaudited, condensed consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, the
accompanying financial statements include all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation of the
financial position, results of operations and cash flows for the periods
presented. Results of operations for the nine months ended September 30, 2000
are not necessarily indicative of the results that may be expected for the
entire fiscal year ending December 31, 2000.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required for complete financial statements in accordance with
generally accepted accounting principles in the United States. For the complete
financial statements, refer to the audited financial statements and footnotes
thereto as of December 31, 1999.
NOTE 2. NET LOSS PER SHARE
Net loss-per-share is computed using the weighted-average number of shares
of common stock outstanding. The value associated with the beneficial conversion
feature of certain preferred stock has been treated as a deemed dividend in the
computation of earnings per share (see Note 5 "Beneficial Conversion Value of 6%
Cumulative Convertible Preferred Stock.) Common equivalent shares from stock
options and warrants are excluded, as their effect is antidilutive.
NOTE 3. COMPREHENSIVE INCOME
For the nine months ended September 30, 2000 and 1999, total comprehensive
income/(loss) was $22,339,143 and ($10,483,760) respectively. The reported net
loss for the nine months ended September 30, 2000 and 1999 was $4,865,190 and
$10,483,760.
NOTE 4. INVESTMENTS
At September 30, 2000, the Company owned 126,193 shares of Modex
Therapeutics Ltd. ("Modex"). This Swiss biotechnology company made an initial
public offering of shares on the Swiss Exchange on June 23, 2000. Accordingly,
with an established market value, the investment is recorded as
available-for-sale at an estimated fair market value The market price of Modex
shares was 372 Swiss Francs per share on September 30, 2000, which converts to
$215.58 per share and results in an estimated fair value of $27,204,333 for the
Company's holdings. The unrealized gain was reported in other comprehensive
income. On October 31, 2000 the market price of Modex shares was 329.50 Swiss
Francs per share, which converts to $183.28 per share and results in an
estimated fair value of $23,128,598 for the Company's holdings.
COST GROSS UNREALIZED GAIN FAIR VALUE SEPTEMBER 30, 2000
- --------------------- --------------------- ------------------------------
$ 0 $27,204,333 $27,204,333
F-28
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
NOTE 5. BENEFICIAL CONVERSION VALUE OF 6% CUMULATIVE CONVERTIBLE PREFERRED
STOCK
As previously reported, the Company sold 1,500 shares of its 6% cumulative
convertible preferred stock plus a warrant for 75,000 shares of the Company's
common stock to two members of its Board of Directors for $1,500,000 on terms
more favorable to the Company than it was then able to obtain from outside
investors. The face value of the shares are convertible at the option of the
holders into common stock at $3.77 per share. The Company has valued the
beneficial conversion feature reflecting the April 13, 2000 commitment date and
the most beneficial per share discount available to the preferred shareholders.
Such value was $265,000 and is treated as a deemed dividend as of the commitment
date.
NOTE 6. SALE OF SECURITIES
On August 3, 2000, the Company completed a $4 million common stock financing
transaction with Millennium Partners, LP (the "Fund"). StemCells received
$3 million of the purchase price at the closing and will receive the remaining
$1 million upon effectiveness of a registration statement covering the shares
owned by the Fund. The Fund purchased the Company's common stock and warrants at
$4.33 per share. As set forth in an adjustable warrant issued to the Fund on the
closing date, the Fund may be entitled to receive additional shares of common
stock on eight dates beginning six months from the closing and every three
months thereafter. The adjustable warrant may be exercised at any time prior to
the thirtieth day after the last of such dates. The number of additional shares
the Fund may be entitled to on each date will be based on the number of shares
of common stock the Fund continues to hold on each date and the market price of
the Company's common stock over a period prior to each date. The exercise price
per share under the adjustable warrant is $0.01. Such warrants provide the Fund
with the opportunity to acquire additional common shares at a nominal value if
the value of the common stock that the Fund holds decreases. The Company will
have the right, under certain circumstances, to cap the number of additional
shares by purchasing part of the entitlement from the Fund at a purchase price
based on the market price of such shares. No portion of the sale proceeds was
assigned to the adjustable warrants, as the ultimate number of shares issuable
upon exercise of the warrants was not determinable and the net impact on the
Company's equity from any such allocation of proceeds would have been zero. The
Fund also received a five-year warrant to purchase up to 101,587 shares of
common stock at $4.725 per share. This warrant is callable at any time by
StemCells at $7.875 per underlying share. The calculated value of this callable
warrant using the Black-Scholes method is $376,888, which was treated as a
credit to paid in capital stockholders' equity. The Company accounts for the
sale of the stock and warrants or the exercise of warrants by adding that
portion of the proceeds equal to the par value of the new shares to common stock
and the balance, including the value of the warrants, to paid in capital. In
addition, any repurchase of the shares or warrants by the Company would also be
accounted for through paid in capital.
In the Purchase Agreement governing the August 3, 2000 sale to the Fund, the
Company granted the Fund an option to purchase up to an additional $3 million of
its common stock and a callable warrant and an adjustable warrant. The Fund can
exercise this option in whole or in part at any time prior to August 3, 2001.
The price per share of common stock to be issued upon exercise of the option
will be based on the average market price of the common stock for a five-day
period prior to the date on which the option is exercised. On August 23, 2000,
the Fund exercised $1,000,000 of its option to purchase additional common stock.
The Fund paid $750,000 of the purchase price in connection with
F-29
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
NOTE 6. SALE OF SECURITIES (CONTINUED)
the closing on August 30, 2000, and the Fund will pay the remaining $250,000
upon effectiveness of a registration statement covering the shares owned by the
Fund. The Fund purchased the Company's common stock at $5.53 per share, which
amount was based upon the average market price of the common stock for the
five-day period prior to August 23, 2000. An adjustable warrant similar to the
one issued on August 3, 2000 was issued to the Fund on August 30, 2000, but was
cancelled on November 1, 2000 by agreement of the Company and the Fund. The Fund
also received a five -year warrant to purchase up to 19,900 shares of common
stock at $6.03 per share. This warrant is callable by the Company at any time at
$10.05 per underlying share. The calculated value of this callable warrant using
the Black-Scholes method is $139,897, which the Company accounted for as a
credit to paid in capital.
The adjustable warrant contains provisions regarding the adjustment or
replacement of the warrants in the event of stock splits, mergers, tender offers
and other similar events. The adjustable warrant also limits the number of
shares that can be beneficially owned by the Fund to 9.99% of the total number
of outstanding shares of Common Stock.
NOTE 7. SUBSEQUENT EVENTS
As previously reported, in conjunction with the StemCells California merger,
the Company adopted the 1997 CytoTherapeutics, Inc. StemCells California
Research Stock Option Plan whereby an additional 2,000,000 shares of Common
Stock have been reserved. During 1997, the Company awarded options under this
plan to purchase 1.6 million shares of the Company's common stock to the Chief
Executive Officer and scientific founders of StemCells California, Inc. at an
exercise price of $5.25 per share. Under the original grants, approximately
100,000 of these options were exercisable immediately on the date of the grant,
1,031,000 of these options would vest and become exercisable only upon
achievement of specified milestones and the remaining 469,000 options would vest
over eight years. The Company agreed on October 27, 2000 with Irving Weissman,
M.D. and Fred H. Gage, Ph.D., two of the grant recipients, to amend their
options. In exchange for the revision of the options, Dr. Weissman and Dr. Gage
agreed to rescind their Conduct of Research Agreement with the Company, in all
respects, including their right under the Agreement to reacquire certain
technology under certain circumstances. Instead of vesting based on performance
milestones, Dr. Weissman's and Dr. Gage's options will vest over eight years
from the date of the original grant, on the same schedule as the option granted
to the third founder, Dr. David Anderson. 168,750 shares vested upon the
revision and the remaining 300,000 shares will vest at 50,000 shares on each
September 25 until September 25, 2005, when the final 100,000 shares will vest.
The exercise price for the revised options remains $5.25 per share. We expect to
incur a charge of approximately $1,700,000 during the fourth quarter of 2000 as
a result of these amendments.
Under a 1997 License Agreement with NeuroSpheres, Ltd., we obtained an
exclusive patent license in the field of transplantation. We entered into an
additional license agreement with NeuroSpheres as of October 31, 2000, under
which we obtained an exclusive license in the field of non-transplant uses, such
as drug discovery and drug testing, so that together the licenses are exclusive
for all uses of the technology. We will make up-front payments to NeuroSpheres
of 65,000 shares of our common stock and $50,000, and additional cash payments
when milestones are achieved in the non-transplant field, or in any products
employing NeuroSpheres patents for generating cells of the blood and immune
system
F-30
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
NOTE 7. SUBSEQUENT EVENTS (CONTINUED)
from neural stem cells. Milestone payments would total $500,000 for each product
that is approved for market.
NOTE 8. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities" ("SFAS 133"), which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133 is effective for fiscal years
beginning after June 15, 2000 and is not anticipated to have an impact on
results of operations or financial condition when adopted as we hold no
derivative financial and instruments and do not currently engage in hedging
activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB101"). SAB 101 summarizes the SEC's views in
applying generally accepted accounting principles to revenue recognition. The
adoption of SAB 101 had no significant impact on our revenue recognition policy
or results of operations.
In March 2000, the FASB issued interpretation No. 44, ("FIN44"), "Accounting
for Certain Transactions Involving Stock Compensation - an Interpretation of APB
25. "This interpretation clarifies (a) the definition of employee for purposes
of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award and
(d) the accounting for an exchange of stock compensation awards in a business
combination. This interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that this Interpretation
covers events occurring during the period after December 15, 1998, or
January 12, 2000, but before the effective date of July 1, 2000, the effects of
applying this interpretation are recognized on a prospective basis from July 1,
2000. The adoption of FIN 44 does not have a material impact on our financial
statements.
F-31
PRO FORMA FINANCIAL INFORMATION
During the third quarter of 1999, management reached a decision to exit the
Company's Encapsulated Cell Therapy (ECT) activities, dispose of the related
intellectual property, facilities and equipment and relocate the Lincoln, RI
corporate headquarters to Sunnyvale, CA. At the same time, the Company accrued
various estimated expenses associated with the exit and wind-down of the ECT
activities, disposal of the related property and relocation of the corporate
headquarters. Additional accruals were provided in December 1999 for expenses
relating to settlement of a 1989 funding arrangement with the Rhode Island
Partnership for Science and Technology resulting from the Company's move out of
Rhode Island, further adjustment to asset carrying values and estimated carrying
costs associated with the Rhode Island facilities through the expected
disposition date. In addition, during December 1999, the Company liquidated
certain ECT equipment and sold its ECT intellectual property to Neurotech, S.A.
for $3,000,000. The tabular unaudited pro forma consolidated statement of
operations presents the effects of the sale, wind-down and relocation, as if
they had occurred at January 1, 1999. The pro forma effects and adjustments were
determined based on available information and certain allocations that
management believes are reasonable. The pro forma financial information does not
purport to represent what the Company's operating results would have been had
the sale occurred at January 1, 1999 and may not be indicative of the Company's
financial position or operating results for any future date or period.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
HISTORICAL PRO FORMA
CONSOLIDATED CONSOLIDATED
12/31/1999 ADJUSTMENTS(A) 12/31/1999
------------ -------------- ------------
Revenue from collaborative agreements............. $ 5,021,707 $ (5,021,707)(1) $ --
Operating expenses:
Research and development........................ 9,984,027 (5,332,331)(2) 4,571,696
(80,000)(5)
General and administrative...................... 4,927,303 (2,309,315)(3) 2,697,988
80,000 (5)
Encapsulated Cell Therapy wind down and 6,047,806 (6,047,806)(4) --
corporate relocation..........................
------------ ------------ -----------
20,959,136 (13,689,452) 7,269,684
------------ ------------ -----------
Loss from operations.............................. (15,937,429) 8,667,745 (7,269,684)
Other income (expense):
Interest income................................. 564,006 -- 564,006
Interest expense................................ (335,203) -- (335,203)
------------ ------------ -----------
228,803 -- 228,803
============ ============ ===========
Net loss.......................................... $(15,708,626) $ 8,667,745 $(7,040,881)
============ ============ ===========
Basic and diluted net loss per share.............. $ (0.84) $ (0.46) $ (0.38)
============ ============ ===========
Shares used in computing basic and diluted net 18,705,838 18,705,838 18,705,838
loss
per share.......................................
============ ============ ===========
F-32
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NOTE A--PRO FORMA ADJUSTMENTS
(1) To eliminate Encapsulated Cell Therapy collaborative revenue arrangements.
(2) To eliminate research and development expenses, including employee
compensation ($1,566,479), external professional services ($875,818)
facilities and other supplies ($2,890,035) and various other expenses
directly relating to encapsulated cell therapy activities. These expenses
were determined based on an individual account analysis and internal
employee tracking records.
(3) To eliminate general and administrative expenses, including employee
compensation ($761,000), legal, professional and consulting fees ($963,000),
facilities costs ($306,000), amortization ($158,000) and various other
expenses ($121,000), directly relating to encapsulated cell therapy. The
expenses were determined based on an individual account analysis.
(4) To eliminate Encapsulated Cell Therapy wind-down and corporate relocation
expenses, including Rhode Island facility carrying costs, employee severance
arrangements and the related settlement of a 1989 funding arrangement with
the Rhode Island Partnership for Science and Technology. These expenses
related to the Company's decision to eliminate 68 employees, relocate all
remaining research and development and the Company's headquarters to
Sunnyvale, California as a result of a decision to exit Encapsulated Cell
Technology, and were included in wind-down expenses. The wind-down expenses
include employee severance costs of approximately $1,554,000, losses and
reserves for the write-down of related patents and fixed assets of
approximately $1,858,000, an accrual of approximately $1,172,000 of costs
relating to settlement of a 1989 funding agreement with the Rhode Island
Partnership for Science and Technology ("RIPSAT") associated with the
Company's pilot manufacturing facility, approximately $1,264,000 relating to
carrying costs, including lease payments, interest, utilities, taxes and
other related expenses associated with resolving the disposition of the
Rhode Island facilities and $200,000 of employee outplacement fees. The
RIPSAT claim related directly to funding the Company had received from
RIPSAT. When the Company reached the decision to exit its Encapsulated Cell
Technology and relocate all remaining research and the Company's corporate
headquarter's from Rhode Island to Sunnyvale, California. RIPSAT claimed the
Company had violated terms of the funding arrangement. The Company did not
agree with this claim, however, management determined it was in the
Company's best interest to settle the issue. As a result, the costs
associated with the settlement were included in the wind-down amount.
(5) To allocate facilities cost to general and administrative expense from
conversion of the former research and development facility in Sunnyvale, CA
to the Company's Corporate headquarters.
F-33
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses payable by the
Registrant in connection with the sale of the securities being registered. All
amounts shown are estimates except the SEC registration fee and the NASDAQ
listing fee.
SEC registration fee........................................ $ 6,956.16
NASDAQ listing fee.......................................... 17,500
Printing and engraving expenses............................. 50,000
Legal fees and expenses..................................... 150,000
Accounting fees and expenses................................ *
Blue sky fees and expenses.................................. 750
Transfer agent and registrar fees........................... 2,500
Miscellaneous............................................... 10,000
----------
Total....................................................... $
==========
- ------------------------
* To be provided by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, other than
an action by or in the right of the corporation, by reason of the fact that the
person is or was a director, officer, employee or agent of the corporation or is
or was serving at the corporation's request as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by the person in
connection with the action, suit or proceeding if the person acted in good faith
and in a manner the person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful. The power to indemnify applies to actions brought by or in the right
of the corporation as well, but only to the extent of expenses, including
attorneys' fees but excluding judgments, fines and amounts paid in settlement,
actually and reasonably incurred by the person in connection with the defense or
settlement of the action or suit and with the further limitation that in these
actions no indemnification shall be made in the event of any adjudication of
negligence or misconduct in the performance of his duties to the corporation,
unless a court believes that in light of all the circumstances indemnification
should apply.
Section Ten of our Restated Certificate of Incorporation provides that we
shall, to the maximum extent legally permitted, indemnify and upon request
advance expenses to each person who is or was a party or is threatened to be
made a party to any threatened, pending or completed action, suit proceeding, or
claim (civil, criminal, administrative or investigative) by reason of the fact
that he is or was, or has agreed to become, a director or officer of the
Company, or is or was serving, or has agreed to serve, at the request of the
Company, as a director, officer, partner, employee, agent or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprises, provided, however, that the Company is not required to
indemnify or advance expenses to any person in connection with any action, suit,
proceeding, claim or counterclaim initiated by or on behalf of such person. The
indemnification provided for in Section Ten is expressly not exclusive of any
other rights to
II-1
which those seeking indemnification may be entitled under any by-law, agreement
or vote of directors or stockholders or otherwise, and shall inure to the
benefit of the heirs and legal representatives of such persons.
Section 145(g) of the Delaware General Corporation Law provides that the
Company shall have the power to purchase and maintain insurance on behalf of its
officers, directors, employees and agents, against any liability asserted
against and incurred by such persons in any such capacity.
We have obtained insurance covering our directors and officers against
certain liabilities.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a corporation may eliminate or limit the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provisions shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation Law
of the State of Delaware, or (iv) for any transaction from which the director
derived an improper personal benefit. No such provision shall eliminate or limit
the liability of a director for any act or omission occurring prior to the date
when such provision becomes effective.
Pursuant to the Delaware General Corporation Law, Section Nine of the
Company's Restated Certificate of Incorporation eliminates a director's personal
liability for monetary damages for breach of fiduciary duty as a director,
except in circumstances involving a breach of the director's duty of loyalty to
StemCells, Inc. or its shareholders, acts or omissions not in good faith,
intentional misconduct, knowing violations of the law, self-dealing or the
unlawful payment of dividends or repurchase of stock.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The shares of capital stock and other securities issued in the following
transactions were offered and sold in reliance upon the following exemptions:
(i) in the case of the transactions described in (a) below, Section 4(2) of a
the Securities Act or Regulation D promulgated thereunder relative to sales by
an issuer not involving a public offering; and (ii) in the case of the
transactions (b) below, Section 3(b) of the Securities Act and Rule 701
promulgated thereunder relative to sales pursuant to certain compensatory
benefits plans.
(a) On April 13, 2000, the Registrant sold 1,500 shares of 6% cumulative
convertible preferred stock plus warrants for a total of 75,000 shares of the
Registrant's common stock to two members of its Board of Directors for
$1,500,000, on terms more favorable than it was then able to obtain from outside
investors. The sale was made in reliance on Rule 506 of Regulation D promulgated
under the Securities Act of 1933, as amended. The shares of preferred stock are
convertible at the option of the holders into common stock at $3.77 per share
(based on the face value of the shares). The holders of the preferred stock have
liquidation rights equal to their original investments plus accrued but unpaid
dividends. The investors would be entitled to make additional investments in the
Company on the same terms as those on which the Registrant completes offerings
of its securities with third parties within 6 months, if any such offerings are
completed. They have waived that right with respect to the common stock
transactions described in Note 7, Subsequent Events. If offerings totaling at
least $6 million are not completed during the 6 months, the investors have the
right to acquire up to a total of 1,126 additional shares of convertible
preferred stock, the face value of which is convertible to common stock at $6.33
per share. Any unconverted preferred stock is converted, at the applicable
conversion price, on April 13, 2002 in the case of the original stock and two
years after the first acquisition of any of the additional 1,126 shares, if any
are acquired. The warrants, which are exercisable at $6.58 per share, expire on
April 13, 2005.
II-2
On August 3, 2000, the Registrant completed a $4 million common stock
financing transaction with Millennium Partners, LP, or the Fund. The sale was
made in reliance on Rule 506 of Regulation D promulgated under the Securities
Act of 1933, as amended. The Registrant received $3 million of the purchase
price at the closing and will receive the remaining $1 million upon
effectiveness of a registration statement covering the shares owned by the Fund.
The Fund purchased the Registrant's common stock at $4.33 per share. The Fund
may be entitled, pursuant to an adjustable warrant issued in connection with the
sale of common stock to the Fund, to receive additional shares of common stock
on eight dates beginning six months from the closing and every three months
thereafter. The number of additional shares the Fund may be entitled to on each
date will be based on the number of shares of common stock the Fund continues to
hold on each date and the market price of the Registrant's common stock over a
period prior to each date. The Registrant will have the right, under certain
circumstances, to cap the number of additional shares by purchasing part of the
entitlement from the Fund. The Fund also received a warrant to purchase up to
101,587 shares of common stock at $4.725 per share. This warrant is callable by
the Registrant at $7.875 per underlying share.
The Fund also has the option for twelve months to purchase up to $3 million
of additional common stock. On August 23, 2000, the Fund exercised $1,000,000 of
that option to purchase Registrant's common stock at $5.53 per share. The
Registrant received $750,000 of the purchase price in connection with the
closing on August 30, 2000 and will receive the remaining $250,000 upon
effectiveness of a registration statement covering the shares owned by the Fund.
At the closing on August 30, 2000, the Fund also received an adjustable warrant
similar to the one issued on August 3, 2000. This adjustable warrant was
canceled by agreement of the Registrant and the Fund on November 1, 2000. The
Fund also received a five year warrant to purchase up to 19,900 shares of the
Registrant's common stock at $6.03 per share. This warrant is callable by the
Registrant at any time at $10.05 per underlying share.
(b) On May 25, 2000 we issued 2,800 shares of unregistered Rule 144 common
stock to the California Institute of Technology.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS. The following exhibits are filed as part of this registration
statement:
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
3.1* Restated Certificate of Incorporation of the Registrant
3.2++ Amended and Restated By-Laws of the Registrant.
4.1* Specimen Common Stock Certificate.
4.2++++ Form of Warrant Certificate issued to a certain purchaser of
the Registrant's Common Stock in April 1995.
4.3X Warrant to Purchase Common Stock--Mark Angelo
4.4X Warrant to Purchase Common Stock--Robert Farrell
4.5X Warrant to Purchase Common Stock--Joseph Donahue
4.6X Warrant to Purchase Common Stock--Hunter Singer
4.7X Warrant to Purchase Common Stock--May Davis
4.8X Common Stock Purchase Warrant
4.9X Callable Warrant
II-3
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
10.1* Amendment to Registration Rights dated as of February 14,
1992 among the Registrant and certain of its stockholders.
10.2* Form of at-will Employment Agreement between the Registrant
and most of its employees.
10.3* Form of Agreement for Consulting Services between the
Registrant and members of its Scientific Advisory Board.
10.4* Form of Nondisclosure Agreement between the Registrant and
its Contractors.
10.5* Master Lease and Warrant Agreement dated April 23, 1991
between the Registrant and PacifiCorp Credit, Inc.
10.6* 1988 Stock Option Plan.
10.7* 1992 Equity Incentive Plan.
10.8* 1992 Stock Option Plan for Non-Employee Directors.
10.9**!!!! 1992 Employee Stock Purchase Plan.
10.12++ Research Agreement dated as of March 16, 1994 between
NeuroSpheres, Ltd. and Registrant.
10.13++ Term Loan Agreement dated as of September 30, 1994 between
The First National Bank of Boston and Registrant.
10.14++ Lease Agreement between the Registrant and Rhode Island
Industrial Facilities Corporation, dated as of August 1,
1992.
10.15++ First Amendment to Lease Agreement between Registrant and
The Rhode Island Industrial Facilities Corporation dated as
of September 15, 1994.
10.17**++++ Development, Marketing and License Agreement, dated as of
March 30, 1995 between Registrant and Astra AB.
10.18++++ Form of Unit Purchase Agreement to be executed by the
purchasers of the Common Stock and Warrants offered in April
1995.
10.19+++ Form of Common Stock Purchase Agreement to be executed among
the Registrant and certain purchasers of the Registrant's
Common Stock.
10.22### Lease Agreement dated as of November 21, 1997 by and between
Hub RI Properties Trust, as Landlord, and CytoTherapeutics,
Inc., as Tenant.
10.24!! CTI individual stockholders option agreement dated as of
July 10, 1996 among the Company and the individuals listed
therein.
10.25!! CTI Valoria option agreement dated of July 10, 1996 between
the Company and the Societe Financiere Valoria SA.
10.26!!! Term Loan Agreement dated as of October 22, 1996 between The
First National Bank of Boston and the Registrant.
10.27*** Agreement and Plan of Merger dated as of August 13, 1997
among StemCells, Inc., the Registrant and CTI Acquisition
Corp.
10.28*** Consulting Agreement dated as of September 25, 1997 between
Dr. Irving Weissman and the Registrant.
II-4
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
10.29### Letter Agreement among each of Dr. Irving Weissman and Dr.
Fred H. Gage and the Registrant.
10.32**** StemCells, Inc. 1996 Stock Option Plan.
10.33**** 1997 StemCells Research Stock Option Plan (the "1997 Plan")
10.34**** Form of Performance-Based Incentive Option Agreement issued
under the 1997 Plan.
10.35### Employment Agreement dated as of September 25, 1997 between
Dr. Richard M. Rose and the Registrant.
10.38[*] Rights Agreement, dated as of July 27, 1998 between Bank
Boston, N.A. as Rights Agent and the Registrant.
10.40Section** Consulting Services Agreement dated as of July 27, 1998, as
amended December 19, 1998 between Dr. John J. Schwartz and
the Registrant.
10.41Section** Letter Agreement dated as of December 19, 1998 between John
J. Schwartz and the Registrant.
10.42Section** License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant.
10.43Section** License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant.
10.44Section** License Agreement dated as of November 20, 1998 between The
Scripps Research Institute and the Registrant.
10.45SectionSection** Purchase Agreement and License Agreement dated as of
December 29, 1999 between Neurotech S.A. and the Registrant.
10.46** License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant.
10.47** License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant.
10.48X Form of Registration Rights Agreement dated as of July 31,
2000 between StemCells, Inc. and investors.
10.49X Subscription Agreement dated as of July 31, 2000 between
StemCells, Inc. and Millennium Partners, L.P.
21X Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
- ------------------------
++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-1, File No. 33-85494.
+++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-3, File No. 33-97272.
++++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-1, File No. 33-91228.
* Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, Registration Statement on Form S-1, File
No. 33-45739.
II-5
# Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
fiscal year ended December 31, 1992 and filed March 30, 1993.
** Confidential treatment requested as to certain portions. The term
"confidential treatment" and the mark "**" as used throughout the
indicated Exhibits mean that material has been omitted and separately
filed with the Commission.
## Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994 and filed on May 14, 1994.
+ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993 and filed on March 30, 1994.
! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996.
!! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 and filed on March 31, 1997.
!!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
*** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 and filed on November 14, 1997.
**** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-8, File No. 333-37313.
### Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1997 and filed on March 30, 1998.
[*] Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's current report on Form 8-K filed
on August 3, 1998.
Section Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's annual report on
Form 10-K for the fiscal year ended December 31, 1998 and filed on
March 31, 1999.
SectionSection Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's current report on
Form 8-K on January 14, 2000.
X Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Registration Statement on Form
S-1, File No. 333-45496.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and
II-6
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
(4) To file a post-effective amendment to the Registration Statement to
include any financial statements required by section 10(a)(3) of the
Securities Act.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Sunnyvale, State of
California, on the day of November, 2000.
STEMCELLS, INC.
BY: /S/ IRIS BREST*
-----------------------------------------
George W. Dunbar, Jr.
Acting Chief Executive Officer and
Acting Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on November , 2000.
SIGNATURE TITLE
--------- -----
George W. Dunbar, Jr.,
Acting President, Chief Executive Officer
(Principal Executive Officer) and Chief
Financial Officer (Principal Financial
/s/ IRIS BREST* Officer)
-------------------------------------------
John J. Schwartz, Ph. D.
/s/ IRIS BREST* Director
-------------------------------------------
Donald Kennedy, Ph. D.
/s/ IRIS BREST* Director
-------------------------------------------
Mark J. Levin
/s/ IRIS BREST* Director
-------------------------------------------
Irving Weissman, M.D.
/s/ IRIS BREST* Director
-------------------------------------------
II-8
EXHIBIT INDEX
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
3.1* Restated Certificate of Incorporation of the Registrant
3.2++ Amended and Restated By-Laws of the Registrant.
4.1* Specimen Common Stock Certificate.
4.2++++ Form of Warrant Certificate issued to a certain purchaser of
the Registrant's Common Stock in April 1995.
4.3X Warrant to Purchase Common Stock--Mark Angelo
4.4X Warrant to Purchase Common Stock--Robert Farrell
4.5X Warrant to Purchase Common Stock--Joseph Donahue
4.6X Warrant to Purchase Common Stock--Hunter Singer
4.7X Warrant to Purchase Common Stock--May Davis
4.8X Common Stock Purchase Warrant
4.9X Callable Warrant
10.1* Amendment to Registration Rights dated as of February 14,
1992 among the Registrant and certain of its stockholders.
10.2* Form of at-will Employment Agreement between the Registrant
and most of its employees.
10.3* Form of Agreement for Consulting Services between the
Registrant and members of its Scientific Advisory Board.
10.4* Form of Nondisclosure Agreement between the Registrant and
its Contractors.
10.5* Master Lease and Warrant Agreement dated April 23, 1991
between the Registrant and PacifiCorp Credit, Inc.
10.6* 1988 Stock Option Plan.
10.7* 1992 Equity Incentive Plan.
10.8* 1992 Stock Option Plan for Non-Employee Directors.
10.9**!!!! 1992 Employee Stock Purchase Plan.
10.12++ Research Agreement dated as of March 16, 1994 between
NeuroSpheres, Ltd. and Registrant.
10.13++ Term Loan Agreement dated as of September 30, 1994 between
The First National Bank of Boston and Registrant.
10.14++ Lease Agreement between the Registrant and Rhode Island
Industrial Facilities Corporation, dated as of August 1,
1992.
10.15++ First Amendment to Lease Agreement between Registrant and
The Rhode Island Industrial Facilities Corporation dated as
of September 15, 1994.
10.17**++++ Development, Marketing and License Agreement, dated as of
March 30, 1995 between Registrant and Astra AB.
10.18++++ Form of Unit Purchase Agreement to be executed by the
purchasers of the Common Stock and Warrants offered in April
1995.
10.19+++ Form of Common Stock Purchase Agreement to be executed among
the Registrant and certain purchasers of the Registrant's
Common Stock.
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
10.22### Lease Agreement dated as of November 21, 1997 by and between
Hub RI Properties Trust, as Landlord, and CytoTherapeutics,
Inc., as Tenant.
10.24!! CTI individual stockholders option agreement dated as of
July 10, 1996 among the Company and the individuals listed
therein.
10.25!! CTI Valoria option agreement dated of July 10, 1996 between
the Company and the Societe Financiere Valoria SA.
10.26!!! Term Loan Agreement dated as of October 22, 1996 between The
First National Bank of Boston and the Registrant.
10.27*** Agreement and Plan of Merger dated as of August 13, 1997
among StemCells, Inc., the Registrant and CTI Acquisition
Corp.
10.28*** Consulting Agreement dated as of September 25, 1997 between
Dr. Irving Weissman and the Registrant.
10.29### Letter Agreement among each of Dr. Irving Weissman and Dr.
Fred H. Gage and the Registrant.
10.32**** StemCells, Inc. 1996 Stock Option Plan.
10.33**** 1997 StemCells Research Stock Option Plan (the "1997 Plan")
10.34**** Form of Performance-Based Incentive Option Agreement issued
under the 1997 Plan.
10.35### Employment Agreement dated as of September 25, 1997 between
Dr. Richard M. Rose and the Registrant.
10.38[*] Rights Agreement, dated as of July 27, 1998 between Bank
Boston, N.A. as Rights Agent and the Registrant.
10.40Section** Consulting Services Agreement dated as of July 27, 1998, as
amended December 19, 1998 between Dr. John J. Schwartz and
the Registrant.
10.41Section** Letter Agreement dated as of December 19, 1998 between John
J. Schwartz and the Registrant.
10.42Section** License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant.
10.43Section** License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant.
10.44Section** License Agreement dated as of November 20, 1998 between The
Scripps Research Institute and the Registrant.
10.45SectionSection** Purchase Agreement and License Agreement dated as of
December 29, 1999 between Neurotech S.A. and the Registrant.
10.46** License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant.
10.47** License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant.
10.48X Form of Registration Rights Agreement dated as of July 31,
2000 between StemCells, Inc. and investors.
10.49X Subscription Agreement dated as of July 31, 2000 between
StemCells, Inc. and Millennium Partners, L.P.
21X Subsidiaries of the Registrant.
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
23.1 Consent of Ernst & Young LLP, Independent Auditors.
- ------------------------
++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-1, File No. 33-85494.
+++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-3, File No. 33-97272.
++++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-1, File No. 33-91228.
* Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, Registration Statement on Form S-1, File
No. 33-45739.
# Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
fiscal year ended December 31, 1992 and filed March 30, 1993.
** Confidential treatment requested as to certain portions. The term
"confidential treatment" and the mark "**" as used throughout the
indicated Exhibits mean that material has been omitted and separately
filed with the Commission.
## Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994 and filed on May 14, 1994.
+ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993 and filed on March 30, 1994.
! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996.
!! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 and filed on March 31, 1997.
!!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
*** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 and filed on November 14, 1997.
**** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-8, File No. 333-37313.
### Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1997 and filed on March 30, 1998.
[*] Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's current report on Form 8-K filed
on August 3, 1998.
Section Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's annual report on
Form 10-K for the fiscal year ended December 31, 1998 and filed on
March 31, 1999.
SectionSection Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's current report on
Form 8-K on January 14, 2000
X Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Registration Statement on Form
S-1, File No. 333-45496.
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN
COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
Right to Purchase the Specified Number of
Shares of Common Stock of StemCells, Inc
STEMCELLS, INC.
COMMON STOCK PURCHASE WARRANT, CLASS A
NO. A-1
STEMCELLS, INC., a Delaware corporation (the "Company"), hereby
certifies that, for value received, Millennium Partners, L.P. or its registered
assigns (the "Holder"), is entitled, subject to the terms set forth below, to
purchase from the Company at any time or from time to time during the Exercise
Period (such capitalized term and all other capitalized terms used herein having
the respective meanings provided herein), the Specified Number of fully paid and
nonassessable shares of Common Stock at a purchase price per share equal to the
Purchase Price. The number of such shares of Common Stock is subject to
adjustment as provided in this Warrant.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
"Adjustment Date" means any of the First Adjustment Date and each
date which occurs every 90 days after the First Adjustment Date through and
including the date which is 810 days after the Issuance Date.
"Adjustment Factor" means 1.015.
"Adjustment Shares" means the number of shares of Common Stock,
determined on each Adjustment Date in accordance with Section 1.3(a), to be
added to the Specified Number on each Adjustment Date in accordance with Section
1.3(b).
"Auditors" means Ernst & Young LLP or such other firm of
independent public accountants of recognized national standing as shall have
been engaged by the Company to audit its financial statements.
"Average Market Price" means the arithmetic average of the ten
(10) lowest Market Prices during the applicable Measurement Period.
"Cash and Cash Equivalent Balances" of any person on any date
shall be determined from such person's books maintained in accordance with
Generally Accepted Accounting Principles, and means, without duplication, the
sum of (1) the cash accrued by such person and its subsidiaries on a
consolidated basis on such date and available for use by such person and its
subsidiaries on such date and (2) all assets which would, on a consolidated
balance sheet of such person and its subsidiaries prepared as of such date in
accordance with Generally Accepted Accounting Principles, be classified as cash
or cash equivalents, less the amount thereof which secures any outstanding
indebtedness of such person or its subsidiaries.
"Callable Warrant" means the Callable Warrant, issued by the
Company pursuant to the Subscription Agreement.
"Class A Warrant Shares" means those shares of Common Stock
issued upon exercise of this Warrant (subject to equitable adjustment from time
to time on terms reasonably acceptable to the Holder for stock splits, stock
dividends, combinations, recapitalizations, reclassifications, distributions,
Tender Offers and similar events occurring after the Issuance Date).
"Commission" means the Securities and Exchange Commission.
"Common Shares Held" as of any date means the sum of (1) the
number of Initial Shares which are then held by the Holder plus (2) the number
of Class A Warrant Shares which are then held by the Holder plus (3) the number
of shares of Common Stock which are issuable upon exercise of this Warrant
immediately prior to the determination of the number of Adjustment Shares
pursuant to Section 1.3(a).
"Common Stock" means the Company's Common Stock, $.01 par value
per share, as authorized on the date hereof, and any other securities into which
or for which the Common Stock may be converted or exchanged pursuant to a plan
of recapitalization, reorganization, merger, sale of assets or otherwise.
"Company" shall include StemCells, Inc., a Delaware corporation,
and any corporation that shall succeed to or assume the obligations of
StemCells, Inc. hereunder in accordance with the terms hereof.
"Control Notice" means a notice given by the Company to the
Holder, in accordance with Section 1.5(b), (i) stating that a Share Limitation
Event has occurred by reason of events which are not solely within the control
of the Company and (ii) enclosing an executed copy of an Auditors'
Determination.
"Exercise Period" means the period commencing on the First
Adjustment Date and ending thirty (30) days following the Last Adjustment Date.
"First Adjustment Date" means the date which is 180 days after
the Issuance Date.
2
"Generally Accepted Accounting Principles" for any person means
the generally accepted accounting principles and practices applied by such
person from time to time in the preparation of its audited financial statements.
"Holder Repurchase Price" means, for each share of Common Stock
which may not be issued upon exercise of this Warrant by reason of the
Shareholder Approval Rule in accordance with Section 1.4 (c), 120% of the
greater of: (x) the arithmetic average of the Market Price on each of the five
consecutive Trading Days immediately prior to and including the expiration of
the 75-day period referred to in Section 1.4(c) or the Repurchase Date referred
to in Section 1.4(b), as the case may be, (y) the arithmetic average of the
Market Price on each of the five consecutive Trading Days immediately prior to
the repurchase date pursuant to Section 1.4(c) or Section 1.4(b) and (z) if
determined prior to the First Adjustment Date, the price per share paid by the
Holder for the shares of Common Stock purchased on the Issuance Date pursuant to
the Subscription Agreement or, if determined on or after the First Adjustment
Date, the most recent Adjustment Price (subject to equitable adjustment from
time to time on terms reasonably acceptable to the Holder for stock splits,
stock dividends, combinations, recapitalizations, reclassifications,
distributions, Tender Offers and similar events occurring after the Issuance
Date).
"Initial Shares" means those shares of Common Stock purchased by
the Holder on the Issuance Date pursuant to the Subscription Agreement (subject
to equitable adjustment from time to time on terms reasonably acceptable to the
Holder for stock splits, stock dividends, combinations, recapitalizations,
reclassifications, distributions, Tender Offers and similar events occurring
after the Issuance Date), excluding shares issuable pursuant to the Callable
Warrant, minus 289,086 (subject to equitable adjustment from time to time on
terms reasonably acceptable to the Holder for stock splits, stock dividends,
combinations, recapitalizations, reclassifications, distributions, Tender Offers
and similar events occurring after the Issuance Date).
"Issuance Date" means the first date of original issuance of this
Warrant.
"Market Price" of the Common Stock on any date means the closing
bid price for one share of Common Stock on such date on the first applicable
among the following: (a) the national securities exchange on which the shares of
Common Stock are listed which constitutes the principal securities market for
the Common Stock, (b) the Nasdaq, if the Nasdaq constitutes the principal market
for the Common Stock on such date, or (c) the Nasdaq SmallCap, if the Nasdaq
SmallCap constitutes the principal securities market for the Common Stock on
such date, in any such case as reported by Bloomberg, LP.; provided, however,
that if during any Measurement Period or other period during which the Market
Price is being determined:
(i) The Company shall declare or pay a dividend or make
a distribution to all holders of the outstanding Common Stock in
shares of Common Stock or fix any record date for any such
action, then the Market Price for each day in such Measurement
Period or such other period which day is prior to the earlier of
(1) the date fixed for the determination of stockholders entitled
to receive such dividend or other distribution and (2) the date
on which ex-dividend trading in the Common Stock with respect to
such dividend or distribution begins shall be reduced by
multiplying the Market Price (determined without regard to
3
this proviso) for each such day in such Measurement Period or
such other period by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding at the close of
business on the earlier of (1) the record date fixed for such
determination and (2) the date on which ex-dividend trading in
the Common Stock with respect to such dividend or distribution
begins and the denominator of which shall be the sum of such
number of shares and the total number of shares constituting such
dividend or other distribution;
(ii) The Company shall issue rights or warrants to all
holders of its outstanding shares of Common Stock, or fix a
record date for such issuance, which rights or warrants entitle
such holders (for a period expiring within forty-five (45) days
after the date fixed for the determination of stockholders
entitled to receive such rights or warrants) to subscribe for or
purchase shares of Common Stock at a price per share less than
the Market Price (determined without regard to this proviso) for
any day in such Measurement Period or such other period which day
is prior to the end of such 45-day period, then the Market Price
for each such day shall be reduced so that the same shall equal
the price determined by multiplying the Market Price (determined
without regard to this proviso) by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding
at the close of business on the record date fixed for the
determination of stockholders entitled to receive such rights or
warrants plus the number of shares which the aggregate offering
price of the total number of shares so offered would purchase at
such Market Price, and the denominator of which shall be the
number of shares of Common Stock outstanding on the close of
business on such record date plus the total number of additional
shares of Common Stock so offered for subscription or purchase.
In determining whether any rights or warrants entitle the holders
to subscribe for or purchase shares of Common Stock at less than
the Market Price (determined without regard to this proviso), and
in determining the aggregate offering price of such shares of
Common Stock, there shall be taken into account any consideration
received for such rights or warrants, the value of such
consideration, if other than cash, to be determined in good faith
by a resolution of the Board of Directors of the Company;
(iii) The outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock or a
record date for any such subdivision shall be fixed, then the
Market Price of the Common Stock for each day in such Measurement
Period or such other period which day is prior to the earlier of
(1) the day upon which such subdivision becomes effective and (2)
the date on which ex-dividend trading in the Common Stock with
respect to such subdivision begins shall be proportionately
reduced, and conversely, in case the outstanding shares of Common
Stock shall be combined into a smaller number of shares of Common
Stock, the Market Price for each day in such Measurement Period
or such other period which day is prior to the earlier of (1) the
date on which such combination becomes effective and (2) the date
on which trading in the Common Stock on a basis which gives
effect to such combination begins, shall be proportionately
increased;
4
(iv) The Company shall, by dividend or otherwise,
distribute to all holders of its Common Stock shares of any class
of capital stock of the Company (other than any dividends or
distributions to which clause (i) of this proviso applies) or
evidences of its indebtedness, cash or other assets (including
securities, but excluding any rights or warrants referred to in
clause (ii) of this proviso and dividends and distributions paid
exclusively in cash and excluding any capital stock, evidences of
indebtedness, cash or assets distributed upon a merger or
consolidation) (the foregoing hereinafter in this clause (iv) of
this proviso called the "Securities"), or fix a record date for
any such distribution, then, in each such case, the Market Price
for each day in such Measurement Period or such other period
which day is prior to the earlier of (1) the record date for such
distribution and (2) the date on which ex-dividend trading in the
Common Stock with respect to such distribution begins shall be
reduced so that the same shall be equal to the price determined
by multiplying the Market Price (determined without regard to
this proviso) by a fraction, the numerator of which shall be the
Market Price (determined without regard to this proviso) for such
date less the fair market value (as determined in good faith by
resolution of the Board of Directors of the Company) on such date
of the portion of the Securities so distributed or to be
distributed applicable to one share of Common Stock and the
denominator of which shall be the Market Price (determined
without regard to this proviso) for such date. If the Board of
Directors of the Company determines the fair market value of any
distribution for purposes of this clause (iv) by reference to the
actual or when issued trading market for any Securities
comprising all or part of such distribution, it must in doing so
consider the prices in such market on the same day for which an
adjustment in the Market Price is being determined.
For purposes of this clause (iv) and clauses (i) and (ii)
of this proviso, any dividend or distribution to which this
clause (iv) is applicable that also includes shares of Common
Stock, or rights or warrants to subscribe for or purchase shares
of Common Stock to which clause (i) or (ii) of this proviso
applies (or both), shall be deemed instead to be (1) a dividend
or distribution of the evidences of indebtedness, assets, shares
of capital stock, rights or warrants other than such shares of
Common Stock or rights or warrants to which clause (i) or (ii) of
this proviso applies (and any Market Price reduction required by
this clause (iv) with respect to such dividend or distribution
shall then be made) immediately followed by (2) a dividend or
distribution of such shares of Common Stock or such rights or
warrants (and any further Market Price reduction required by
clauses (i) and (ii) of this proviso with respect to such
dividend or distribution shall then be made), except that any
shares of Common Stock included in such dividend or distribution
shall not be deemed "outstanding at the close of business on the
date fixed for such determination" within the meaning of clause
(i) of this proviso;
(v) The Company or any subsidiary of the Company shall
(x) by dividend or otherwise, distribute to all holders of its
Common Stock cash in (or fix any record date for any such
distribution), or (y) repurchase or reacquire
5
shares of its Common Stock for, in either case, an aggregate
amount that, combined with (1) the aggregate amount of any other
such distributions to all holders of its Common Stock made
exclusively in cash after the Issuance Date and within the 12
months preceding the date of payment of such distribution, and in
respect of which no adjustment pursuant to this clause (v) has
been made, (2) the aggregate amount of any cash plus the fair
market value (as determined in good faith by a resolution of the
Board of Directors of the Company) of consideration paid in
respect of any repurchase or other reacquisition by the Company
or any subsidiary of the Company of any shares of Common Stock
made after the Issuance Date and within the 12 months preceding
the date of payment of such distribution or making of such
repurchase or reacquisition, as the case may be, and in respect
of which no adjustment pursuant to this clause (v) has been made,
and (3) the aggregate of any cash plus the fair market value (as
determined in good faith by a resolution of the Board of
Directors of the Company) of consideration payable in respect of
any Tender Offer by the Company or any of its subsidiaries for
all or any portion of the Common Stock concluded within the 12
months preceding the date of payment of such distribution or
completion of such repurchase or reacquisition, as the case may
be, and in respect of which no adjustment pursuant to clause (vi)
of this proviso has been made (such aggregate amount combined
with the amounts in clauses (1), (2) and (3) above being the
"Combined Amount"), exceeds 10% of the product of the Market
Price (determined without regard to this proviso) for any day in
such Measurement Period or such other period which day is prior
to the earlier of (A) the record date with respect to such
distribution and (B) the date on which ex-dividend trading in the
Common Stock with respect to such distribution begins or the date
of such repurchase or reacquisition, as the case may be, times
the number of shares of Common Stock outstanding on such date,
then, and in each such case, the Market Price for each such day
shall be reduced so that the same shall equal the price
determined by multiplying the Market Price (determined without
regard to this proviso) for such day by a fraction (i) the
numerator of which shall be equal to the Market Price (determined
without regard to this proviso) for such day less an amount equal
to the quotient of (x) the excess of such Combined Amount over
such 10% and (y) the number of shares of Common Stock outstanding
on such day and (ii) the denominator of which shall be equal to
the Market Price (determined without regard to this proviso) for
such day; or
(vi) A Tender Offer made by the Company or any of its
subsidiaries for all or any portion of the Common Stock shall
expire and such Tender Offer (as amended upon the expiration
thereof) shall require the payment to stockholders (based on the
acceptance (up to any maximum specified in the terms of the
Tender Offer) of Purchased Shares (as defined below)) of an
aggregate consideration having a fair market value (as determined
in good faith by resolution of the Board of Directors of the
Company) that combined together with (1) the aggregate of the
cash plus the fair market value (as determined in good faith by a
resolution of the Board of Directors of the Company), as of the
expiration of such Tender Offer, of consideration payable in
respect of any other
6
Tender Offers, by the Company or any of its subsidiaries for all
or any portion of the Common Stock expiring within the 12 months
preceding the expiration of such Tender Offer and in respect of
which no adjustment pursuant to this clause (vi) has been made,
(2) the aggregate amount of any cash plus the fair market value
(as determined in good faith by a resolution of the Board of
Directors of the Company) of consideration paid in respect of any
repurchase or other reacquisition by the Company or any
subsidiary of the Company of any shares of Common Stock made
after the Issuance Date and within the 12 months preceding the
expiration of such Tender Offer and in respect of which no
adjustment pursuant to clause (v) of this proviso has been made,
and (3) the aggregate amount of any distributions to all holders
of Common Stock made exclusively in cash within 12 months
preceding the expiration of such Tender Offer and in respect of
which no adjustment pursuant to clause (v) of this proviso has
been made, exceeds 10% of the product of the Market Price
(determined without regard to this proviso) for any day in such
period times the number of shares of Common Stock outstanding on
such day, then, and in each such case, the Market Price for such
day shall be reduced so that the same shall equal the price
determined by multiplying the Market Price (determined without
regard to this proviso) for such day by a fraction, the numerator
of which shall be the number of shares of Common Stock
outstanding on such day multiplied by the Market Price
(determined without regard to this proviso) for such day and the
denominator of which shall be the sum of (x) the fair market
value (determined as aforesaid) of the aggregate consideration
payable to stockholders based on the acceptance (up to any
maximum specified in the terms of the Tender Offer) of all shares
validly tendered and not withdrawn as of the last time tenders
could have been made pursuant to such Tender Offer (the
"Expiration Time") (the shares deemed so accepted, up to any such
maximum, being referred to as the "Purchased Shares") and (y) the
product of the number of shares of Common Stock outstanding (less
any Purchased Shares) on such day times the Market Price
(determined without regard to this proviso) of the Common Stock
on the Trading Day next succeeding the Expiration Time. If the
application of this clause (vi) to any Tender Offer would result
in an increase in the Market Price (determined without regard to
this proviso) for any trade, no adjustment shall be made for such
Tender Offer under this clause (vi) for such day.
"Measurement Period" means, with respect to any Adjustment Date,
the period of 30 consecutive Trading Days ending on the Trading Day prior to
such Adjustment Date.
"Nasdaq" means the Nasdaq National Market.
"Nasdaq SmallCap" means the Nasdaq SmallCap Market.
"1934 Act" means the Securities Exchange Act of 1934, as amended.
"1933 Act" means the Securities Act of 1933, as amended.
7
"Other Securities" refers to any stock (other than Common Stock)
and other securities of the Company or any other person (corporate or otherwise)
which the Holder at any time shall be entitled to receive, or shall have
received, on the exercise of this Warrant, in lieu of or in addition to Common
Stock, or which at any time shall be issuable or shall have been issued in
exchange for or in replacement of Common Stock or Other Securities pursuant to
Section 4.
"Purchase Price" means the greater of (x) $.01 per share or (y)
the par value per share of the Common Stock.
"Purchased Securities" as of any date means (1) the Initial
Shares which are then held by the Holder, (2) the Class A Warrant Shares which
are then held by the Holder and (3) this Warrant.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the date hereof, by and between the Company and the
original Holder of this Warrant, as amended from time to time in accordance with
its terms.
"Registration Statement" shall have the meaning provided in the
Registration Rights Agreement.
"Repurchase Date" means the date of repurchase by the Company of
the Securities pursuant to Section 1.4.
"Repurchase Notice" means a notice given by the Company to the
Holder pursuant to Section 1.4(b) exercising the Company's right to repurchase
all of the Securities pursuant to Section 1.4(b) which states (1) the number of
shares of Common Stock (including shares issuable upon exercise of this Warrant)
which are to be repurchased, (2) the Repurchase Price and the formula for
determining the same, determined in accordance herewith and (3) the Repurchase
Date.
"Repurchase Price" means, for each share of Common Stock
repurchased pursuant to Section 1.4, the product of (x) the arithmetic average
of the Market Price on each of the five consecutive Trading Days ending on and
including the Adjustment Date following which the Repurchase Notice is given
times (y) the Adjustment Factor.
"Share Limit" means 3,902,081 shares of Common Stock (subject to
equitable adjustment from time to time on terms reasonably acceptable to the
Holder for stock splits, stock dividends, combinations, recapitalizations,
reclassifications, distributions, Tender Offers and similar events occurring
after the Issuance Date).
"Share Limitation Event" means a time at which the Company is
unable to issue all shares of Common Stock otherwise required to be issued upon
exercise of this Warrant by reason of the restrictions set forth in the
Shareholder Approval Rule and the Company has not obtained a waiver thereof.
"Shareholder Approval" shall mean the approval by a majority of
the votes cast by the holders of shares of Common Stock (in person or by proxy)
at a meeting of the stockholders of the Company (duly convened at which a quorum
was present), or a unanimous
8
written consent of holders of shares of Common Stock given without a meeting, of
the issuance by the Company of 20% or more of the Common Stock of the Company
outstanding on the Issuance Date for less than the greater of the book or market
value of such Common Stock, as and to the extent required under the Shareholder
Approval Rule.
"Shareholder Approval Rule" means Rule 4460(i)(1)(D) of Nasdaq as
in effect from time to time or any successor, replacement or similar rule or
regulation of Nasdaq or any other principal securities market on which the
Common Stock is listed for trading.
"Specified Number" means the number of shares of Common Stock for
which this Warrant is exercisable from time to time as determined in accordance
with Section 1.3.
"Subscription Agreement" means the Subscription Agreement, dated
as of July [ ], 2000, by and between the Company and the original Holder of this
Warrant, as amended from time to time in accordance with its terms.
"Tender Offer" means a tender offer or exchange offer.
"Total Common Shares" as of any date means the sum of (1) the
number of Initial Shares plus (2) the number of Class A Warrant Shares plus (3)
the number of shares of Common Stock issued pursuant to the Callable Warrant.
"Trading Day" means a day on which the principal securities
market for the Common Stock is open for general trading of securities.
1. EXERCISE OF WARRANT.
1.1 EXERCISE. Subject to the limitations on exercises in
Sections 1.2 and 1.4(a), this Warrant may be exercised by the Holder hereof at
any time or from time to time during the Exercise Period by delivery of the
subscription form annexed hereto (duly executed by the Holder) to the Company
and by making payment, in cash or by certified or official bank check payable to
the order of the Company, in the amount obtained by multiplying (i) the number
of shares of Common Stock designated by the Holder in the subscription form by
(ii) the Purchase Price. If at the request of the Company the subscription form
is delivered to the Company's transfer agent for the Common Stock, the Holder
shall provide a copy of the subscription form to the Company at the time of
exercise and the Company will confirm the exercise instructions given therein by
notice to the Company's transfer agent within one Trading Day after receiving
such subscription form. Upon each exercise of this Warrant, whether by cash or
cashless exercise, the Holder shall not be required to surrender this Warrant to
the Company unless the Holder has no further rights to purchase shares of Common
Stock hereunder. The Holder and the Company shall maintain records showing the
number of shares purchased in connection with each exercise of this Warrant and
the dates of such exercises or shall use such other method, satisfactory to the
Holder and the Company, so as to not require physical surrender of this Warrant
upon each such exercise.
(a) CASHLESS EXERCISE. Subject to the limitations on exercises in
Sections 1.2 and 1.4(a), during the Exercise Period and at any time after the
earlier to occur of the SEC Effective Date (as defined in the Registration
Rights Agreement) and the date the initial registration
9
statement filed pursuant to the Registration Rights Agreement is declared
effective by the Commission, when a registration statement covering the resale
of the Common Stock issuable hereunder and naming the Holder as a selling
stockholder thereunder is not then effective, the Holder may surrender this
Warrant to the Company together with a notice of cashless exercise, in which
event the Company shall issue to the Holder the number of shares of Common Stock
determined as follows:
X = Y [(A-B)/A]
where:
X = the number of shares of Common Stock to be issued to
the Holder.
Y = the number of shares of Common Stock with respect to
which this Warrant is being exercised.
A = the average of the closing sale prices of the Common
Stock for the five (5) trading days immediately prior to
(but not including) the date of exercise.
B = the Purchase Price.
For purposes of Rule 144 promulgated under the Securities Act, it is intended,
understood and acknowledged that the shares of Common Stock issued in a cashless
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for such shares shall be deemed to have been commenced, on
the issue date of this Warrant.
(b) In lieu of delivering physical certificates representing the
shares of Common Stock issuable upon exercise of this Warrant, provided the
Company's transfer agent is participating in the Depository Trust Company
("DTC") Fast Automated Securities Transfer ("FAST") program, upon request of the
Holder, the Company shall use its best efforts to cause its transfer agent to
electronically transmit the shares of Common Stock issuable upon exercise to the
Holder, by crediting the account of the Holder's prime broker with DTC through
its Deposit Withdrawal Agent Commission ("DWAC") system. The time periods for
delivery described above shall apply to the electronic transmittals through the
DWAC system. The Company agrees to coordinate with DTC to accomplish this
objective.
1.2 CERTAIN EXERCISE RESTRICTIONS.
(b) Notwithstanding anything to the contrary contained herein,
the number of shares of Common Stock that may be acquired by the Holder upon
exercise pursuant to the terms hereof shall not exceed a number that, when added
to the total number of shares of Common Stock deemed beneficially owned by such
Holder (other than by virtue of the ownership of securities or rights to acquire
securities that have limitations on the Holder's right to convert, exercise or
purchase similar to the limitation set forth herein), together with all shares
of Common Stock deemed beneficially owned (other than by virtue of the ownership
of securities or rights to acquire securities that have limitations on the
Holder's right to convert, exercise or
10
purchase similar to the limitation set forth herein) by the Holder's
"Affiliates" (as defined in Rule 144 of the Securities Act) ("Aggregation
Parties") that would be aggregated for purposes of determining whether a group
under Section 13(d) of the Securities Exchange Act of 1934, as amended, exists,
would exceed 9.99% of the total issued and outstanding shares of Common Stock
(the "Restricted Ownership Percentage"). Each Holder shall have the right (w) at
any time and from time to time to reduce its Restricted Ownership Percentage
immediately upon notice to the Company and (x) (subject to waiver) at any time
and from time to time, to increase its Restricted Ownership percentage
immediately in the event of the announcement as pending or planned, of a merger
or consolidation of the Company, a sale of all or substantially all of the
assets of the Company, or the acquisition by any third party (and/or such
party's Aggregation Parties) of at least 50% of the Company's outstanding Common
Stock.
(c) The Holder covenants at all times on each day (each such day
being referred to as a "Covenant Day") as follows: during the balance of such
Covenant Day and the succeeding sixty-one (61) days (the balance of such
Covenant Day and the succeeding 61 days being referred to as the "Covenant
Period") such Holder will not acquire shares of Common Stock pursuant to any
right (including exercise of this Warrant) existing at the commencement of the
Covenant Period to the extent the number of shares so acquired by such Holder
and its Aggregation Parties (ignoring all dispositions) would exceed:
(x) the Restricted Ownership Percentage of the total number of
shares of Common Stock outstanding at the commencement of
the Covenant Period,
MINUS
(y) the number of shares of Common Stock owned by such Holder
and its Aggregation Parties at the commencement of the
Covenant Period.
A new and independent covenant will be deemed to be given by the
Holder as of each moment of each Covenant Day. No covenant will terminate,
diminish or modify any other covenant. The Holder agrees to comply with each
such covenant.
The Company's obligation to issue shares of Common Stock which
would exceed such limits shall be suspended to the extent necessary until such
time, if any, as shares of Common Stock may be issued in compliance with such
restrictions.
11
1.3 DETERMINATION OF SPECIFIED NUMBER. (a) On each Adjustment
Date, the number of Adjustment Shares shall be computed as follows:
IF CP LESS THAN OR EQUAL TO ICP, and
IF CP < $2.25 and
IF CP GREATER THAN OR EQUAL TO MPP, then
CS = PPSH x 1.015, and
BSH = CS - FSH, and
if the Company elects to pay Holder B$ = BSH x CP,
AS = CS - BSH - PPSH
or else AS = CS - PPSH
but IF CP < MPP, then
CS = (MPP x PPSH x (1.015)/CP
BSH = CS - FSH, and
if the Company elects to pay Holder B$ = BSH x CP,
AS = CS - BSH - PPSH
or else AS = CS -PPSH.
IF CP < ICP and IF CP GREATER THAN OR EQUAL TO $2.25 and
IF CP GREATER THAN OR EQUAL TO MPP, then
AS = PPSH x .015
or else AS = [(MPP x PPSH x 1.015)/CP] - PPSH
IF CP > ICP, then AS=0
12
where:
AS = Adjustment Shares
CS = Initially calculated Adjustment Shares
I$ = $4,000,000
ICP = $4.33125
BSH = Buyout Shares: The number of shares for which the
Company may, in lieu of having the Specified Number
increase by the applicable number of Adjustment
Shares, elect to pay cash to the Holder in the
amount of the Buyout.
FSH = Floor Shares (the number of shares that are not
subject to the Company's election to buyout). The
initial value of FSH shall be set to FSH =
1,777,778. FSH shall be recalculated at each
Adjustment Date by multiplying the value of FSH as
of the immediately preceding Adjustment Date by
(1 - (SHX/PPSH))
B$ = Buyout Amount.
SHX = the number of Warrant shares exercised during the
current Adjustment Period.
CP = the Average Market Price as of the then-current
Adjustment Date.
PPSH = the number of Common Shares Held as of the
immediately preceding Adjustment Date.
MPP = the lesser of ICP or the lowest Average Market
Price as of any prior Adjustment Date (or ICP on
the first Adjustment Date).
As indicated above, if as of any Adjustment Date the Average
Market Price is below $2.25 (as such number shall be appropriately adjusted for
any stock splits, recapitalizations or similar events), the Company may, in lieu
of having the increase in the Specified Number include the number of Buyout
Shares, elect to pay cash to the Holder in an amount equal to the Buyout Amount
(B$). Such election must be made by written notice to the holders within five
(5) business days after the applicable Adjustment Date and the Company must make
payment therefor in cash (i) within sixty (60) days after the first Adjustment
Date, if applicable and (ii) within five (5) business days after any subsequent
applicable Adjustment Date.
13
(b) Prior to the First Adjustment Date, the Specified Number
shall equal zero. For each Adjustment Date on which the number of Adjustment
Shares determined in accordance with Section 1.3(a) is a positive number,
(1) on the First Adjustment Date, the Specified Number shall
equal the number of Adjustment Shares; and
(2) on each subsequent Adjustment Date, the Specified Number
shall equal (x) the Specified Number determined on the immediately
preceding Adjustment Date plus (y) the number of Adjustment Shares
determined on the current Adjustment Date less (z) the number of shares of
Common Stock for which this Warrant was exercised during the most recently
completed Quarterly Period.
(c) The number of Adjustment Shares may not be a negative
number. For each Adjustment Date on which the number of Adjustment Shares
determined in accordance with Section 1.2(a) is zero or would otherwise be a
negative number, the Holder shall not be obligated to transfer any shares of
Common Stock to the Company.
(d) On each Adjustment Date or within three Trading Days
thereafter, the Holder shall give an Adjustment Notice in the form attached
hereto to the Company accompanied by the spreadsheet referred to Section 1.3(e)
used to calculate the Adjustment Shares. If the Holder fails to give an
Adjustment Notice within three Trading Days after any Adjustment Date, the
Company may notify the Holder of such failure and, if the Holder does not
deliver such Adjustment Notice within three Trading Days after such notice of
failure is given to the Holder, the Company shall give such Adjustment Notice to
the Holder. Absent manifest error, the Adjustment Notice and such spreadsheet
shall be binding on the Company and the Holder for purposes of making the
determinations required by this Section 1.3. The Company and the Holder shall
use their best efforts to promptly correct any error in any Adjustment Notice.
(e) A spreadsheet illustrating the application of the forgoing
is annexed hereto and made a part hereof; such spreadsheet shall be used in
calculating Adjustment Shares pursuant to this Section 1.3.
1.4 MAXIMUM SHARE LIMITATION; REPURCHASE RIGHTS. Provided that
the Common Stock is listed for trading on Nasdaq or another market having the
Shareholder Approval Rule or an equivalent rule, and provided that Shareholder
Approval or the equivalent has not been obtained, this Warrant may not be
exercised to purchase shares of Common Stock to the extent, and only to the
extent, such exercise would cause the Total Common Shares of the Holder to
exceed the Share Limit. If such conditions obtain and if an exercise in full of
this Warrant and/or the Callable Warrant would, but for the preceding sentence
and the other limitations contained in Sections 1.1 and 1.2 above, cause the
Total Common Shares to exceed the Share Limit:
(a) If (i) (at the time of the Company's exercise of its right in
this sentence) the Company shall be in compliance in all material respects with
its obligations to the Holder (including, without limitation, its obligations
under this Warrant, the Callable Warrant, the
14
Subscription Agreement and the Registration Rights Agreement), (ii) on the date
the Repurchase Notice is given and at all times until the Repurchase Date, the
Registration Statement is effective and available for use by the Holder for the
resale of all of its Shares of Common Stock previously issued or issuable and
(iii) on the date the Repurchase Notice is given and on the Repurchase Date, the
Company has available unrestricted Cash and Cash Equivalent Balances not less
than the aggregate amount to be paid to repurchase shares of Common Stock
pursuant to Section 1.4 of this Warrant and the Other Class A Warrants, then the
Company shall have the right to repurchase the shares of Common Stock issuable
pursuant to the Warrant and/or the Callable Warrant held by the Holder in
accordance with Section 1.4(b).
(b) To exercise its repurchase right, the Company shall give a
Repurchase Notice, not more frequently than once in any period of 180
consecutive days, on the Trading Day immediately following an Adjustment Date.
If the Repurchase Notice is timely given, the Company shall be obligated to
repurchase such portion of the shares issuable pursuant to this Warrant and/or
the Callable Warrant (in proportions designated by the Holder) which exceed the
Share Limit on a Repurchase Date which is not less than 20 Trading Days or more
than 30 Trading Days after the date of the Repurchase Notice, if this Warrant
and/or the Callable Warrant is to be repurchased pursuant to this Section 1.4,
the Company shall repurchase such Warrants as if such Warrants had been
exercised, to the extent of the portion of the Warrants being repurchased, on
the Repurchase Date and the shares of Common Stock issuable upon such exercise
were held directly by the Holder and were being repurchased. On the Repurchase
Date, the Company shall make payment to the Holder of the applicable Repurchase
Price multiplied by the number of shares of Common Stock to be repurchased in
immediately available funds to such account as specified by the Holder in
writing to the Company at least one Trading Day prior to the Repurchase Date,
provided that if such payment is not so made on the Repurchase Date, the Company
shall be obligated to repurchase such number of shares at a purchase price equal
to the Holder Repurchase Price per share. Notwithstanding anything to the
contrary in the foregoing provisions of this Section 1.4, prior to the
Repurchase Date, or such later date on which the Repurchase Price is paid, the
Holder shall be free to exercise this Warrant as long as such exercise does not
violate the first sentence of this Section 1.4.
(c) If the Company does not timely give a Repurchase Notice
pursuant to subsection (b) above, the Company shall have the option by written
notice to the Holder, and the Holder shall have the right to require the Company
by written notice, to seek the Shareholder Approval applicable to an issuance of
shares in excess of the Share Limit ("Excess Shares") as soon as possible, but
in any event, not later than the 75th day after such election or the Holder's
demand, and if the Company shall have failed to receive Shareholder Approval
within five (5) Business Days of such 75th day, the Company shall, on such fifth
Business Day, pay cash to such Holder in an amount equal to the Holder
Repurchase Price multiplied by the number of Excess Shares. If the Company fails
to pay the Holder Repurchase Price in full pursuant to this Section 1.4 within
seven days after the date payable, the Company will pay interest thereon at a
rate of 18% per annum or such lesser maximum amount that is permitted to be paid
by applicable law, to the Holder, accruing daily from such fifth Business Day
until such amount, plus all such interest thereon, is paid in full.
2. DELIVERY OF STOCK CERTIFICATES, ETC., ON EXERCISE. (a) As
soon as practicable after the exercise of this Warrant, and in any event within
three Trading Days
15
thereafter, the Company at its expense (including the payment by it of any
applicable issue or stamp taxes) will cause to be issued in the name of and
delivered to the Holder hereof, or as the Holder (upon payment by the Holder of
any applicable transfer taxes) may direct, a certificate or certificates for the
number of fully paid and nonassessable shares of Common Stock (or Other
Securities) to which the Holder shall be entitled on such exercise, in such
denominations as may be requested by the Holder, plus, in lieu of any fractional
share to which the Holder would otherwise be entitled, cash equal to such
fraction multiplied by the then current fair market value (as reasonably
determined by the Company) of one full share, together with any other stock or
other securities and property (including cash, where applicable) to which the
Holder is entitled upon such exercise pursuant to Section 1 or otherwise. Upon
exercise of this Warrant as provided herein, the Company's obligation to issue
and deliver the certificates for Common Stock shall be absolute and
unconditional, irrespective of the absence of any action by the Holder to
enforce the same, any waiver or consent with respect to any provision thereof,
the recovery of any judgment against any person or any action to enforce the
same, any failure or delay in the enforcement of any other obligation of the
Company to the Holder, or any setoff, counterclaim, recoupment, limitation or
termination, or any breach or alleged breach by the Holder or any other person
of any obligation to the Company, and irrespective of any other circumstance
which might otherwise limit such obligation of the Company to the Holder in
connection with such exercise. If the Company fails to issue and deliver the
certificates for the Common Stock to the Holder pursuant to the first sentence
of this paragraph as and when required to do so, in addition to any other
liabilities the Company may have hereunder and under applicable law, the Company
shall pay or reimburse the Holder on demand for all out-of-pocket expenses
including, without limitation, reasonable fees and expenses of legal counsel
incurred by the Holder as a result of such failure.
(b) If the Company fails to deliver to the Holder a certificate
or certificates representing the shares of Common Stock pursuant to Section 2(a)
by the third Trading Day after each date of exercise of this Warrant, the
Company shall pay to the Holder, in cash, as liquidated damages and not as a
penalty, $5,000 for each day after such third Trading Day until such
certificates are delivered. The payment and acceptance of any cash penalty shall
not preclude the Holder from proceeding under the next paragraph 2(c); provided
that any amounts actually paid to the Holder under this paragraph 2(b) herein
shall be deducted (but not below zero) from the amount otherwise recoverable
under paragraph 2(c) below.
(c) In addition to any other rights available to the Holder, but
subject to paragraph 2(b) above, if the Company fails to deliver to the Holder a
certificate or certificates representing shares of Common Stock pursuant to
Section 2(a) by the third Trading Day after the date of exercise of this
Warrant, and if after such third Trading Day the Holder purchases (in an open
market transaction or otherwise) shares of Common Stock to deliver in
satisfaction of a sale by the Holder of the shares of Common Stock which the
Holder anticipated receiving upon such exercise (a "Buy-In"), then the Company
shall pay (1) in cash to the Holder the amount by which (x) the Holder's total
purchase price (including brokerage commissions, if any) for the shares of
Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the
number of shares of Common Stock that the Company was required to deliver
pursuant to Section 2(a) to deliver to the Holder in connection with the
exercise at issue by (B) the Market Price at the time of the sale giving rise to
such purchase obligation and (2) deliver to the Holder the number of shares of
Common Stock that would have been issued had the Company timely complied with
its
16
exercise and delivery obligations under Section 2(a). For example, if the Holder
purchases Common Stock having a total purchase price of $11,000 to cover a
Buy-In with respect to an attempted exercise of shares of Common Stock with a
Market Price on the date of exercise totaled $10,000, under clause (A) of the
immediately preceding sentence the Company shall be required to pay the Holder
$1,000. The Holder shall provide the Company written notice and appropriate
documentation indicating the amounts payable to the Holder in respect of the
Buy-In.
3. ADJUSTMENT FOR DIVIDENDS IN OTHER STOCK, PROPERTY, ETC.;
RECLASSIFICATION, ETC. In case at any time or from time to time after the
Issuance Date, all the holders of Common Stock (or Other Securities) shall have
received, or (on or after the record date fixed for the determination of
stockholders eligible to receive) shall have become entitled to receive, without
payment therefor,
(b) other or additional stock or other securities or property
(other than cash) by way of dividend, or
(c) any cash (excluding cash dividends payable solely out of
earnings or earned surplus of the Company), or
(d) other or additional stock or other securities or property
(including cash) by way of spin-off, split-up, reclassification,
recapitalization, combination of shares or similar corporate rearrangement,
other than additional shares of Common Stock (or Other Securities) issued as a
stock dividend or in a stock-split (adjustments in respect of which are provided
for in Section 5), then and in each such case the Holder shall be entitled to
receive, at the same time as holders of Common Stock, the amount of stock and
other securities and property (including cash in the cases referred to in
subdivisions (b) and (c) of this Section 3) which the Holder would have received
if on the date thereof the Holder had been the holder of record of the Specified
Number, after giving effect to all adjustments called for during such period by
Section 4. Notwithstanding anything in this Section 3 to the contrary, no
adjustments pursuant to this Section 3 shall actually be made until the
cumulative effect of the adjustments called for by this Section 3 since the date
of the last adjustment actually made would change the amount of stock or other
securities and property which the Holder would hold by more than 1%.
4. EXERCISE UPON REORGANIZATION, CONSOLIDATION, MERGER, ETC. In
case of any (1) merger or consolidation of the Company with or into another
person, or (2) sale by the Company of more than one-half of the assets of the
Company (on a book value basis) in one or a series of related transactions, or
(3) tender or other offer or exchange (whether by the Company or another person)
pursuant to which holders of Common Stock are permitted to tender or exchange
their shares for other securities, stock, cash or property of the Company or
another Person; then the Holder shall have the right thereafter to (A) exercise
this Warrant for the shares of stock and other securities, cash and property
receivable upon or deemed to be held by holders of Common Stock following such
merger, consolidation or sale, and the Holder shall be entitled upon such event
or series of related events to receive such amount of securities, cash and
property as the Common Stock for which this Warrant could have been exercised
immediately prior to such merger, consolidation or sale would have been
entitled, (B) in the case of a merger
17
or consolidation, (x) require the surviving entity to issue to the Holder a
warrant entitling the Holder to acquire shares of such entity's common stock,
which warrant shall have terms identical (including with respect to exercise) to
the terms of this Warrant and shall be entitled to all of the rights and
privileges set forth herein and the agreements pursuant to which this Warrant
was issued (including, without limitation, as such rights relate to the
acquisition, transferability, registration and listing of such shares of stock
other securities issuable upon exercise thereof), or (C) in the event of an
exchange or tender offer or other transaction contemplated by clause (3) of this
Section, tender or exchange this Warrant for such securities, stock, cash and
other property receivable upon or deemed to be held by holders of Common Stock
that have tendered or exchanged their shares of Common Stock following such
tender or exchange, and the Holder shall be entitled upon such exchange or
tender to receive such amount of securities, cash and property as the shares of
Common Stock for which this Warrant could have been exercised immediately prior
to such tender or exchange would have been entitled as would have been issued.
In the case of clause (B), the exercise price applicable for the newly issued
warrant shall be based upon the amount of securities, cash and property that
each share of Common Stock would receive in such transaction and the Purchase
Price immediately prior to the effectiveness or closing date for such
transaction. The terms of any such merger, sale, consolidation, tender or
exchange shall include such terms so as continue to give the Holder the right to
receive the securities, cash and property set forth in this Section upon any
conversion or redemption following such event. This provision shall similarly
apply to successive such events.
5. ADJUSTMENT FOR EXTRAORDINARY EVENTS. In the event that after
the Issuance Date the Company shall (i) issue additional shares of Common Stock
as a dividend or other distribution on outstanding Common Stock, (ii) subdivide
or reclassify its outstanding share of Common Stock, or (iii) combine its
outstanding share of Common Stock into a smaller number of shares of Common
Stock, then, in each event, the Specified Number shall, simultaneously with the
happening of such event, be adjusted by multiplying the Specified Number in
effect immediately prior to such event by a fraction, the numerator of which
shall be the number of shares of Common Stock outstanding immediately after such
event and the denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to such event, and the product so obtained shall
thereafter be the Specified Number then in effect. The Specified Number, as so
adjusted, shall be readjusted in the same manner upon the happening of any
successive event or events described in this Section 5.
6. FURTHER ASSURANCES. Subject to the terms hereof, the Company
will take all action that may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
stock, free from all taxes, liens and charges with respect to the issue thereof,
on the exercise of all or any portion of this Warrant from time to time
outstanding.
7. NOTICES OF RECORD DATE, ETC. In the event of
(a) any taking by the Company of a record of the holders of any
class of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend on, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, or
18
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
transfer of all or substantially all of the assets of the Company to or
consolidation or merger of the Company with or into any other person (other than
a wholly-owned subsidiary of the Company), or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
then and in each such event the Company will mail or cause to be mailed to the
Holder, at least ten days prior to such record date, a notice specifying (i) the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and character of such dividend,
distribution or right, (ii) the date on which any such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up is to take place, and the time, if any is
to be fixed, as of which the holders of record of Common Stock (or Other
Securities) shall be entitled to exchange their shares of Common Stock (or Other
Securities) for securities or other property deliverable on such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up, and (iii) the amount and character of
any stock or other securities, or rights or options with respect thereto,
proposed to be issued or granted, the date of such proposed issue or grant and
the persons or class of persons to whom such proposed issue or grant is to be
offered or made. Such notice shall also state that the action in question or the
record date is subject to the effectiveness of a registration statement under
the 1933 Act, or a favorable vote of stockholders, if either is required. Such
notice shall be mailed at least ten days prior to the date specified in such
notice on which any such action is to be taken or the record date, whichever is
earlier.
8. RESERVATION OF STOCK, ETC., ISSUABLE ON EXERCISE OF
WARRANTS. The Company will at all times reserve and keep available out of its
authorized but unissued shares of capital stock, solely for issuance and
delivery on the exercise of this Warrant, a sufficient number of shares of
Common Stock (or Other Securities) to effect the full exercise of this Warrant
and the exercise, conversion or exchange of any other warrant or security of the
Company exercisable for, convertible into, exchangeable for or otherwise
entitling the holder to acquire shares of Common Stock (or Other Securities),
and if at any time the number of authorized but unissued shares of Common Stock
(or Other Securities) shall not be sufficient to effect such exercise,
conversion or exchange, the Company shall take such action as may be necessary
to increase its authorized but unissued shares of Common Stock (or Other
Securities) to such number as shall be sufficient for such purposes.
9. TRANSFER OF WARRANT. This Warrant shall inure to the benefit
of the successors to and assigns of the Holder. This Warrant and all rights
hereunder, in whole or in part, are registrable at the office or agency of the
Company referred to below by the Holder hereof in person or by his duly
authorized attorney, upon surrender of this Warrant properly endorsed.
10. REGISTER OF WARRANTS. The Company shall maintain, at the
principal office of the Company (or such other office as it may designate by
notice to the Holder hereof), a register in which the Company shall record the
name and address of the person in whose name this Warrant has been issued, as
well as the name and address of each successor and prior owner
19
of such Warrant. The Company shall be entitled to treat the person in whose name
this Warrant is so registered as the sole and absolute owner of this Warrant for
all purposes.
11. EXCHANGE OF WARRANT. This Warrant is exchangeable, upon the
surrender hereof by the Holder hereof at the office or agency of the Company
referred to in Section 10, for one or more new Warrants of like tenor
representing in the aggregate the right to subscribe for and purchase the number
of shares of Common Stock which may be subscribed for and purchased hereunder,
each of such new Warrants to represent the right to subscribe for and purchase
such number of shares as shall be designated by said Holder hereof at the time
of such surrender.
12. REPLACEMENT OF WARRANT. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of this Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
13. WARRANT AGENT. The Company may, by written notice to the
Holder, appoint the transfer agent and registrar for the Common Stock as the
Company's agent for the purpose of issuing shares of Common Stock (or Other
Securities) on the exercise of this Warrant pursuant to Section 1, and the
Company may, by notice to the Holder, appoint an agent having an office in the
United States of America for the purpose of exchanging this Warrant pursuant to
Section 11 and replacing this Warrant pursuant to Section 12, or either of the
foregoing, and thereafter any such exchange or replacement, as the case may be,
shall be made at such office by such agent.
14. REMEDIES. The Company stipulates that the remedies at law of
the Holder in the event of any default or threatened default by the Company in
the performance of or compliance with any of the terms of this Warrant are not
and will not be adequate, and that such terms may be specifically enforced by a
decree for the specific performance of any agreement contained herein or by an
injunction against a violation of any of the terms hereof or otherwise.
15. NO RIGHTS OR LIABILITIES AS A STOCKHOLDER. This Warrant
shall not entitle the Holder hereof to any voting rights or other rights as a
stockholder of the Company. No provision of this Warrant, in the absence of
affirmative action by the Holder hereof to purchase Common Stock, and no mere
enumeration herein of the rights or privileges of the Holder hereof, shall give
rise to any liability of the Holder for the Purchase Price or as a stockholder
of the Company, whether such liability is asserted by the Company or by
creditors of the Company.
16. NOTICES, ETC. All notices and other communications from the
Company to the registered Holder or from the registered Holder to the Company
shall be delivered personally (which shall include telephone line facsimile
transmission with answer back confirmation) or by courier and shall be effective
upon receipt, addressed to each party at the address or telephone line facsimile
transmission number for each party set forth in the Subscription Agreement or at
such other address or telephone line facsimile transmission number as a party
shall have provided to the other party in accordance with this provision.
20
17. TRANSFER RESTRICTIONS. By acceptance of this Warrant, the
Holder represents to the Company that this Warrant is being acquired for the
Holder's own account and for the purpose of investment and not with a view to,
or for sale in connection with, the distribution thereof, nor with any present
intention of distributing or selling this Warrant or the Common Stock issuable
upon exercise of this Warrant. The Holder acknowledges and agrees that this
Warrant and, except as otherwise provided in the Registration Rights Agreement,
the shares of Common Stock issuable upon exercise of this Warrant (if any) have
not been (and at the time of acquisition by the Holder, will not have been or
will not be), registered under the 1933 Act or under the securities laws of any
state, in reliance upon certain exemptive provisions of such statutes. The
Holder further recognizes and acknowledges that (a) because this Warrant and,
except as provided in the Registration Rights Agreement, the Common Stock
issuable upon exercise of this Warrant (if any) are unregistered, they may not
be eligible for resale, and may only be resold in the future pursuant to an
effective registration statement under the 1933 Act and any applicable state
securities laws, or pursuant to a valid exemption from such registration
requirements and (b) this Warrant and the Common Stock issuable upon the
exercise hereof are subject to the transfer restrictions and other terms,
conditions and obligations set forth in the Registration Rights Agreement and in
the Subscription Agreement. Unless the shares of Common Stock issuable upon
exercise of this Warrant have theretofore been registered for resale under the
1933 Act, the Company may require, as a condition to the issuance of Common
Stock upon the exercise of this Warrant a confirmation as of the date of
exercise of the Holder's representations pursuant to this Section 17.
18. LEGEND. Except to the extent required by the Subscription
Agreement, each certificate for shares issued upon exercise of this Warrant
shall be free of any restrictive legend.
19. ATTORNEYS' FEES. In any litigation, arbitration or court
proceeding between the Company and Holder relating hereto, the prevailing party
shall be entitled to attorneys' fees and expenses and all costs of proceedings
incurred in enforcing this Warrant; provided that the prevailing party may only
recover attorney's fees and expenses aggregating up to 35% of the amount sought
in good faith to be recovered.
20. AMENDMENT; WAIVER. This Warrant and any terms hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought.
21. MISCELLANEOUS. The corporate laws of the State of Delaware
shall govern all issues concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Warrant shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. The Company
and the Holder hereby irrevocably submit to the exclusive jurisdiction of the
state and federal courts sitting in the City of New York, borough of Manhattan,
for the adjudication of any dispute hereunder or in connection herewith or with
any transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, or that
such suit, action or proceeding is improper. Each of the Company and the Holder
hereby irrevocably waives
21
personal service of process and consents to process being served in any such
suit, action or proceeding by certified mail, return receipt requested, and
agrees that such service shall constitute good and sufficient service of process
and notice thereof. Nothing contained herein shall be deemed to limit in any way
any right to serve process in any manner permitted by law.
22
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed on its behalf by one of its officers thereunto duly authorized.
Dated: July 31, 2000 STEMCELLS, INC.
By:
-----------------------------
Title:
--------------------------
23
FORM OF SUBSCRIPTION
STEMCELLS, INC.
(To be signed only on exercise of Warrant)
TO: STEMCELLS, INC.
525 Del Rey Avenue
Suite C
Sunnyvale, California 94086
Attention: Chief Financial Officer
1. The undersigned Holder of the attached original, executed
Warrant hereby elects to exercise its purchase right under such Warrant with
respect to ______________ shares of Common Stock, as defined in the Warrant, of
StemCells, Inc., a Delaware corporation (the "Company").
2. The undersigned Holder elects to pay the aggregate purchase
price for such shares of Common Stock (the "Exercise Shares") (i) by lawful
money of the United States or the enclosed certified or official bank check
payable in United States dollars to the order of the Company in the amount of
$___________, or (ii) by wire transfer of United States funds to the account of
the Company in the amount of $____________, which transfer has been made before
or simultaneously with the delivery of this Form of Subscription pursuant to the
instructions of the Company.
3. The undersigned Holder represents and warrants that it is an
accredited investor as defined under Rule 501(a) promulgated under the
Securities Act of 1933, as amended.
4. Please issue a stock certificate or certificates
representing the appropriate number of shares of Common Stock in the name of the
undersigned or in such other name as is specified below:
Name:
------------------------------------
Address:
---------------------------------
---------------------------------
24
5. The undersigned Holder hereby represents to the Company that
the exercise of the Warrant elected hereby does not violate Section 1.2 of the
Warrant.
Dated: , HOLDER:
----------------- -----
-------------------------------------
By:
----------------------------------
(Signature must conform to name
of Holder as specified on the
face of the Warrant)
Name:
Title:
Address:
-----------------------------
-------------------------------------
25
ADJUSTMENT NOTICE
TO: STEMCELLS, INC.
525 Del Ray Avenue
Suite C
Sunnyvale, California 94086
Attention: Chief Financial Officer
Facsimile No: 408-731-8674
This Adjustment Notice is given pursuant to the terms of the
Common Stock Purchase Warrant, Class A, dated July 31, 2000, issued by
STEMCELLS, INC., a Delaware corporation (the "Warrant"). Capitalized terms used
herein and not otherwise defined herein have the respective meanings provided in
the Warrant. Attached hereto is a copy of the spreadsheet used pursuant to
Section 1.3(e) of the Warrant to prepare this notice. The undersigned Holder
hereby notifies the Company as follows:
(1) Adjustment Date:
-------------------------
(2) Computation of number of Adjustment Shares ("AS")
pursuant to Section 1.3(a):
(a) Common Shares Held as of prior Adjustment Date:
(b) To determine the Average Market Price, the ten
lowest Market Prices during the 30 Trading Days
during the Measurement Period were as follows:
Date Price ($) Date Price ($)
---- --------- ---- ---------
(c) Lowest Average Market Price as of any previous
Adjustment Date: $ .
---------
(d) Adjustment Shares:
------------
(3) Specified Number on preceding Adjustment
Date:
------------
(4) Shares issued upon exercises during last Quarterly
Period:
-----------
(5) Specified Number on Adjustment Date:
-------------
26
NAME OF HOLDER:
Date:
---------------------- ----------------------------------
By:
-------------------------------
Name:
Title:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN
COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
STEMCELLS, INC.
CALLABLE WARRANT
Warrant No. CW-1 Dated: July 31, 2000
STEMCELLS, INC., a Delaware corporation (the "Company"),
hereby certifies that, for value received, MILLENNIUM PARTNERS, L.P., or its
registered assigns ("Holder"), is entitled, subject to the terms set forth
below, to purchase from the Company a total of 101,587 shares of common stock,
$.01 par value per share (the "Common Stock"), of the Company (each such share,
a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise
price equal to $4.7250 per share (as adjusted from time to time as provided in
Section 9, the "Exercise Price"), at any time and from time to time from and
after the date hereof and through and including July 31, 2005 (the "Expiration
Date"), and subject to the following terms and conditions:
1. REGISTRATION OF WARRANT. The Company shall register this
Warrant, upon records to be maintained by the Company for that purpose (the
"Warrant Register"), in the name of the record Holder hereof from time to time.
The Company may deem and treat the registered Holder of this Warrant as the
absolute owner hereof for the purpose of any exercise hereof or any distribution
to the Holder, and for all other purposes, and the Company shall not be affected
by notice to the contrary.
2. REGISTRATION OF TRANSFERS AND EXCHANGES.
(a) The Company shall register the transfer of
any portion of this Warrant in the Warrant Register, upon surrender of this
Warrant, with the Form of Assignment attached hereto duly completed and signed,
to the Transfer Agent or to the Company at the office specified in or pursuant
to Section 3(b). Upon any such registration or transfer, a new warrant to
purchase Common Stock, in substantially the form of this Warrant (any such new
warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred
shall be issued to the transferee and a New Warrant evidencing the remaining
portion of this Warrant not so
transferred, if any, shall be issued to the transferring Holder. The acceptance
of the New Warrant by the transferee thereof shall be deemed the acceptance of
such transferee of all of the rights and obligations of a holder of a Warrant.
(b) This Warrant is exchangeable, upon the
surrender hereof by the Holder to the office of the Company specified in or
pursuant to Section 3(b) for one or more New Warrants, evidencing in the
aggregate the right to purchase the number of Warrant Shares which may then be
purchased hereunder. Any such New Warrant will be dated the date of such
exchange.
3. DURATION, EXERCISE AND REDEMPTION OF WARRANTS.
(a) This Warrant shall be exercisable by the
registered Holder on any business day before 5:00 P.M., New York City time, at
any time and from time to time on or after the date hereof to and including the
Expiration Date. At 5:00 P.M., New York City time on the Expiration Date, the
portion of this Warrant not exercised prior thereto shall be and become void and
of no value.
(b) Subject to Sections 2(b), 5 and 10, upon
surrender of this Warrant, with the Form of Election to Purchase attached hereto
duly completed and signed, to the Company at its address for notice set forth in
Section 13 and upon payment of the Exercise Price multiplied by the number of
Warrant Shares that the Holder intends to purchase hereunder, in the manner
provided hereunder, all as specified by the Holder in the Form of Election to
Purchase, the Company shall promptly (but in no event later than 3 business days
after the Date of Exercise (as defined herein)) issue or cause to be issued and
cause to be delivered to or upon the written order of the Holder and in such
name or names as the Holder may designate, a certificate for the Warrant Shares
issuable upon such exercise, free of restrictive legends except (i) either in
the event that a registration statement covering the resale of the Warrant
Shares and naming the Holder as a selling stockholder thereunder is not then
effective or the Warrant Shares are not freely transferable without volume
restrictions pursuant to Rule 144(k) promulgated under the Securities Act of
1933, as amended (the "Securities Act"), or (ii) if this Warrant shall have been
issued pursuant to a written agreement between the original Holder and the
Company, as required by such agreement. Any person so designated by the Holder
to receive Warrant Shares shall be deemed to have become holder of record of
such Warrant Shares as of the Date of Exercise of this Warrant.
A "Date of Exercise" means the date on which the
Company shall have received (i) this Warrant (or any New Warrant, as
applicable), with the Form of Election to Purchase attached hereto (or attached
to such New Warrant) appropriately completed and duly signed, and (ii) payment
of the Exercise Price for the number of Warrant Shares so indicated by the
holder hereof to be purchased.
(c) This Warrant shall be exercisable, either in
its entirety or, from time to time, for a portion of the number of Warrant
Shares. If less than all of the Warrant Shares which may be purchased under this
Warrant are exercised at any time, the Company shall issue or cause to be
issued, at its expense, a New Warrant evidencing the right to purchase the
remaining number of Warrant Shares for which no exercise has been evidenced by
this Warrant.
2
(d) In lieu of delivering physical certificates
representing the Warrant Shares issuable upon conversion of this Warrant,
provided the Company's transfer agent is participating in the Depository Trust
Company ("DTC") Fast Automated Securities Transfer ("FAST") program, upon
request of the Holder, the Company shall use its best efforts to cause its
transfer agent to electronically transmit the Warrant Shares issuable upon
exercise to the Holder, by crediting the account of the Holder's prime broker
with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system. The
time periods for delivery described above shall apply to the electronic
transmittals through the DWAC system. The Company agrees to coordinate with DTC
to accomplish this objective.
(e) Commencing at any time after the date of the
issuance of this Warrant, the Company shall have the right, upon fifteen (15)
days notice to the Holder, to cancel this Warrant in full effective on such 15th
day (the "Cancellation Date"). The Holder may exercise this Warrant at any time
prior to the Cancellation Date. On the Cancellation Date, the Company shall pay
in full and complete satisfaction of its obligations under the remaining portion
of this Warrant to the Holder an amount in cash equal to (i) the number of
shares of Common Stock then issuable hereunder multiplied by (ii) $7.875, as
such number shall be appropriately adjusted for stock splits, recapitalizations
and similar events minus the applicable Exercise Price as of the Cancellation
Date, and the Holder shall surrender this Warrant to the Company for
cancellation.
4. REGISTRATION RIGHTS. This Warrant and the Holder hereof are
entitled to the benefits of, and subject to the terms and condition of and
obligations under, that certain Registration Rights Agreement dated the date
hereof between the Company and the original Holder (the "Registration Rights
Agreement").
5. Intentionally left blank.
6. PAYMENT OF TAXES. The Company will pay all documentary
stamp taxes attributable to the issuance of Warrant Shares upon the exercise of
this Warrant; provided, however, that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the
registration of any certificates for Warrant Shares or Warrants in a name other
than that of the Holder. The Holder shall be responsible for all other tax
liability that may arise as a result of holding or transferring this Warrant or
receiving Warrant Shares upon exercise hereof.
7. REPLACEMENT OF WARRANT. If this Warrant is mutilated, lost,
stolen or destroyed, the Company shall issue or cause to be issued in exchange
and substitution for and upon cancellation hereof, or in lieu of and
substitution for this Warrant, a New Warrant, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and
indemnity, if requested, satisfactory to it. Applicants for a New Warrant under
such circumstances shall also comply with such other reasonable regulations and
procedures and pay such other reasonable charges as the Company may prescribe.
8. RESERVATION OF WARRANT SHARES. The Company covenants that
it will at all times reserve and keep available out of the aggregate of its
authorized but unissued Common Stock, solely for the purpose of enabling it to
issue Warrant Shares upon exercise of this Warrant
3
as herein provided, the number of Warrant Shares which are then issuable and
deliverable upon the exercise of this entire Warrant, free from preemptive
rights or any other actual contingent purchase rights of persons other than the
Holder (taking into account the adjustments and restrictions of Section 9). The
Company covenants that all Warrant Shares that shall be so issuable and
deliverable shall, upon issuance and the payment of the applicable Exercise
Price in accordance with the terms hereof, be duly and validly authorized,
issued and fully paid and nonassessable.
9. CERTAIN ADJUSTMENTS. The Exercise Price and number of
Warrant Shares issuable upon exercise of this Warrant are subject to adjustment
from time to time as set forth in this Section. Upon each such adjustment of the
Exercise Price pursuant to this Section, the Holder shall thereafter prior to
the Expiration Date be entitled to purchase, at the Exercise Price resulting
from such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.
(a) If the Company, at any time while this
Warrant is outstanding, (i) shall pay a stock dividend or otherwise make a
distribution or distributions on shares of its Common Stock or on any other
class of capital stock payable in shares of Common Stock (except dividends or
distributions paid on preferred or other senior stock), (ii) subdivide
outstanding shares of Common Stock into a larger number of shares, or (iii)
combine outstanding shares of Common Stock into a smaller number of shares, the
Exercise Price shall be multiplied by a fraction of which the numerator shall be
the number of shares of Common Stock (excluding treasury shares, if any)
outstanding before such event and of which the denominator shall be the number
of shares of Common Stock (excluding treasury shares, if any) outstanding after
such event. Any adjustment made pursuant to this Section shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision or combination, and shall
apply to successive subdivisions and combinations.
(b) In case of any reclassification of the
Common Stock or any compulsory share exchange pursuant to which the Common Stock
is converted into other securities, cash or property, then the Holder shall have
the right thereafter to exercise this Warrant only into the shares of stock and
other securities and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification or share exchange, and the Holder
shall be entitled upon such event to receive such amount of securities or
property as such Holder would have been entitled to receive if such Holder had
exercised this Warrant immediately prior to such reclassification or share
exchange (net of the applicable Exercise Price). The terms of any such
reclassification or share exchange shall include such terms so as to continue to
give to the Holder the right to receive the securities or property set forth in
this Section 9(b) upon any exercise following any such reclassification or share
exchange.
(c) If the Company, at any time while this
Warrant is outstanding, shall distribute to all holders of Common Stock (and not
to holders of this Warrant) evidences of its indebtedness or assets or rights or
warrants to subscribe for or purchase any security
4
(excluding those referred to in Sections 9(a), (b) and (d)), then in each such
case the Exercise Price shall be determined by multiplying the Exercise Price in
effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which the
denominator shall be the Exercise Price determined as of the record date
mentioned above, and of which the numerator shall be such Exercise Price on such
record date less the then fair market value at such record date of the portion
of such assets or evidence of indebtedness so distributed applicable to one
outstanding share of Common Stock as determined by the Company's independent
certified public accountants that regularly examine the financial statements of
the Company (an "Appraiser").
(d) If at any time the Company or any subsidiary
thereof, as applicable with respect to Common Stock Equivalents (as defined
below), shall issue shares of Common Stock or rights, warrants, options or other
securities or debt that is convertible into or exchangeable for shares of Common
Stock ("COMMON STOCK EQUIVALENTS"), entitling any person or entity to acquire
shares of Common Stock at a price per share less than the market price of the
Common Stock at the time of issuance, except with respect to a Board Approved
Transaction (as defined herein), forthwith upon such issue or sale, the Exercise
Price shall be reduced to the price (calculated to the nearest cent) determined
by multiplying the Exercise Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the sum of (i) the number of shares of
Common Stock outstanding immediately prior to such issuance, and (ii) the number
of shares of Common Stock which the aggregate consideration received (or to be
received, assuming exercise or conversion in full of such Common Stock
Equivalents) for the issuance of such additional shares of Common Stock would
purchase at the Exercise Price, and the denominator of which shall be the sum of
the number of shares of Common Stock outstanding immediately after the issuance
of such additional shares. For purposes hereof, all shares of Common Stock that
are issuable upon conversion, exercise or exchange of Common Stock Equivalents
shall be deemed outstanding immediately after the issuance of such Common Stock
Equivalents. Such adjustment shall be made whenever such Common Stock or Common
Stock Equivalents are issued. However, upon the expiration of any Common Stock
Equivalents the issuance of which resulted in an adjustment in the Exercise
Price pursuant to this Section, the Exercise Price shall immediately upon such
expiration be recomputed and effective immediately upon such expiration be
increased to the price which it would have been (but reflecting any other
adjustments in the Exercise Price made pursuant to the provisions of this
Section after the issuance of such Common Stock Equivalents) had the adjustment
of the Exercise Price made upon the issuance of such Common Stock Equivalents
been made on the basis of offering for subscription or purchase only that number
of shares of the Common Stock actually purchased upon the exercise of such
Common Stock Equivalents actually exercised. Notwithstanding anything herein to
the contrary, issuances of any stock or stock options under any bona fide
employee benefit plan or compensation arrangement of the Company, shall not be
subject to the provisions of this Section.
A "Board Approved Transaction" is a transaction
involving a strategic alliance, acquisition of stock or assets, merger,
collaboration, joint venture, partnership or similar arrangement of the Company
with another corporation, partnership or other business entity (A) which is
engaged in a business similar complementary or related to the business of the
Company or (B) pursuant to which the Company issues securities with the primary
purpose to directly or indirectly acquire, license or otherwise become entitled
to use technology relevant to or useful in
5
the Company's business, so long as the Company's Board of Directors by
resolution duly adopted approves such transaction in accordance with its duties
under applicable law.
(e) In case of any (1) merger or consolidation
of the Company with or into another Person, or (2) sale by the Company of more
than one-half of the assets of the Company (on a market value basis) in one or a
series of related transactions, or (3) tender or other offer or exchange
(whether by the Company or another Person) pursuant to which holders of Common
Stock are permitted to tender or exchange their shares for other securities,
stock, cash or property of the Company or another Person; then the Holder shall
have the right thereafter to (A) exercise this Warrant for the shares of stock
and other securities, cash and property receivable upon or deemed to be held by
holders of Common Stock following such merger, consolidation or sale, and the
Holder shall be entitled upon such event or series of related events to receive
such amount of securities, cash and property as the Common Stock for which this
Warrant could have been exercised immediately prior to such merger,
consolidation or sales would have been entitled, (B) in the case of a merger or
consolidation, require the surviving entity to issue to the Holder a warrant
entitling the Holder to acquire shares of such entity's common stock, which
warrant shall have terms identical MUTATIS MUTANDIS (including with respect to
exercise) to the terms of this Warrant and shall be entitled to all of the
rights and privileges set forth herein and the agreements pursuant to which this
Warrant was issued (including, without limitation, as such rights relate to the
acquisition, transferability, registration and listing of such shares of stock
or other securities issuable upon exercise thereof), or (C) in the event of an
exchange or tender offer or other transaction contemplated by clause (3) of this
Section 9(e), tender or exchange this Warrant for such securities, stock, cash
and other property receivable upon or deemed to be held by holders of Common
Stock that have tendered or exchanged their shares of Common Stock following
such tender or exchange, and the Holder shall be entitled upon such exchange or
tender to receive such amount of securities, cash and property as the shares of
Common Stock for which this Warrant could have been exercised immediately prior
to such tender or exchange would have been entitled as would have been issued
(net of the applicable Exercise Price). In the case of clause (B), the exercise
price applicable for the newly issued warrant shall be based upon the amount of
securities, cash and property that each share of Common Stock would receive in
such transaction and the Exercise Price immediately prior to the effectiveness
or closing date for such transaction. The terms of any such merger, sale,
consolidation, tender or exchange shall include such terms so as continue to
give the Holder the right to receive the securities, cash and property set forth
in this Section upon any conversion or exercise following such event. This
provision shall similarly apply to successive such events.
(f) For the purposes of this Section 9, the
following clauses shall also be applicable:
(i) RECORD DATE. In case the Company
shall take a record of the holders of its Common Stock for the purpose of
entitling them (A) to receive a dividend or other distribution payable in Common
Stock or in securities convertible or exchangeable into shares of Common Stock,
or (B) to subscribe for or purchase Common Stock or securities convertible or
exchangeable into shares of Common Stock, then such record date shall be deemed
to be the date of the issue or sale of the shares of Common Stock deemed to have
been issued or sold upon the declaration of such dividend or the making of such
other distribution or
6
the date of the granting of such right of subscription or purchase, as the case
may be.
(ii) TREASURY SHARES. The number of
shares of Common Stock outstanding at any given time shall not include shares
owned or held by or for the account of the Company, and the disposition of any
such shares shall be considered an issue or sale of Common Stock.
(g) All calculations under this Section 9 shall
be made to the nearest cent or the nearest 1/100th of a share, as the case may
be.
(h) If (i) the Company shall declare a dividend
(or any other distribution) on its Common Stock; or (ii) the Company shall
declare a special nonrecurring cash dividend on or a redemption of its Common
Stock; or (iii) the Company shall authorize the granting to all holders of the
Common Stock rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights; or (iv) the approval of any
stockholders of the Company shall be required in connection with any
reclassification of the Common Stock, any consolidation or merger to which the
Company is a party, any sale or transfer of all or substantially all of the
assets of the Company, or any compulsory share exchange whereby the Common Stock
is converted into other securities, cash or property; or (v) the Company shall
authorize the voluntary dissolution, liquidation or winding up of the affairs of
the Company, then the Company shall cause to be mailed to each Holder at their
last addresses as they shall appear upon the Warrant Register, at least 30
calendar days prior to the applicable record or effective date hereinafter
specified, a notice stating (x) the date on which a record is to be taken for
the purpose of such dividend, distribution, redemption, grant of rights or
warrants, or if a record is not to be taken, the date as of which the holders of
Common Stock of record to be entitled to such dividend, distributions,
redemption, rights or warrants are to be determined or (y) the date on which
such reclassification, consolidation, merger, sale, transfer or share exchange
is expected to become effective or close, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities, cash or other property deliverable
upon such reclassification, consolidation, merger, sale, transfer, share
exchange, dissolution, liquidation or winding up; provided, however, that the
failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice.
10. PAYMENT OF EXERCISE PRICE. The Holder shall pay the
Exercise Price in one of the following manners:
(a) CASH EXERCISE. The Holder may deliver
immediately available funds; or
(b) CASHLESS EXERCISE. At any time after the
earlier to occur of the SEC Effective Date (as defined in the Registration
Rights Agreement) and the date the initial registration statement filed pursuant
to the Registration Rights Agreement is declared effective by the Commission,
when a registration statement covering the resale of the Warrant Shares and
naming the Holder as a selling stockholder thereunder is not then effective, the
Holder may surrender this Warrant to the Company together with a notice of
cashless exercise, in which
7
event the Company shall issue to the Holder the number of Warrant Shares
determined as follows:
X = Y [(A-B)/A]
where:
X = the number of Warrant Shares to be issued
to the Holder.
Y = the number of Warrant Shares with respect to
which this Warrant is being exercised.
A = the average of the closing sale prices of the
Common Stock for the five (5) trading days
immediately prior to (but not including) the Date of
Exercise.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is intended,
understood and acknowledged that the Warrant Shares issued in a cashless
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for the Warrant Shares shall be deemed to have been
commenced, on the issue date of this Warrant.
11. CERTAIN EXERCISE RESTRICTIONS.
(a) Notwithstanding anything to the contrary
contained herein, the number of shares of Common Stock that may be acquired by
the Holder upon exercise pursuant to the terms hereof shall not exceed a number
that, when added to the total number of shares of Common Stock deemed
beneficially owned by such Holder (other than by virtue of the ownership of
securities or rights to acquire securities that have limitations on the Holder's
right to convert, exercise or purchase similar to the limitation set forth
herein), together with all shares of Common Stock deemed beneficially owned
(other than by virtue of the ownership of securities or rights to acquire
securities that have limitation set forth herein) by the Holder's "affiliates"
(as defined in Rule 144 of the Securities Act) ("Aggregation Parties"), that
would be aggregated for purposes of determining whether a group under Section
13(d) of the Securities Exchange Act of 1934, as amended, exists would exceed
9.99% of the total issued and outstanding shares of the Common Stock (the
"Restricted Ownership Percentage"). Each Holder shall have the right (w) at any
time and from time to time to reduce its Restricted Ownership Percentage
immediately upon notice to the Company and (x) (subject to waiver) at any time
and from time to time, to increase its Restricted Ownership Percentage
immediately in the event of the announcement as pending or planned, of a merger
or consolidation of the Company, a sale of all or substantially all of the
assets of the Company or the acquisition by any third party (and/or such party's
Aggregation Parties) of at least 51% of the Company's outstanding Common Stock.
(b) The Holder covenants at all times on each
day (each such day being referred to as a "Covenant Day") as follows: during the
balance of such Covenant Day and the succeeding sixty-one (61) days (the balance
of such Covenant Day and the succeeding 61
8
days being referred to as the "Covenant Period") such Holder will not acquire
shares of Common Stock pursuant to any right (including exercise of this
Warrant) existing at the commencement of the Covenant Period to the extent the
number of shares so acquired by such Holder and its Aggregation Parties
(ignoring all dispositions) would exceed:
(x) the Restricted Ownership Percentage of the
total number of shares of Common Stock
outstanding at the commencement of the
Covenant Period;
MINUS
(y) the number of share of Common Stock owned by
such Holder and its Aggregation Parties at
the commencement of the Covenant Period.
A new and independent covenant will be deemed to be given by
the Holder as of each moment of each Covenant Day. No covenant will terminate,
diminish or modify any other covenant. The Holder agrees to comply with each
such covenant.
The Company's obligation to issue shares of Common Stock which
would exceed such limited shall be suspended to the extent necessary until such
time, if any, as shares of Common Stock may be issued in compliance with such
restrictions.
12. FRACTIONAL SHARES. The Company shall not be required to
issue or cause to be issued fractional Warrant Shares on the exercise of this
Warrant. The number of full Warrant Shares which shall be issuable upon the
exercise of this Warrant shall be computed on the basis of the aggregate number
of Warrant Shares purchasable on exercise of this Warrant so presented. If any
fraction of a Warrant Share would, except for the provisions of this Section, be
issuable on the exercise of this Warrant, the Company shall pay an amount in
cash equal to the Exercise Price multiplied by such fraction.
13. NOTICES. Any and all notices or other communications or
deliveries hereunder shall be in writing and shall be deemed given and effective
on the earliest of (i) the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile telephone number specified in this
Section prior to 6:30 p.m. (New York City time) on a business day, (ii) the
business day after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section later than 6:30 p.m. (New York City time) on any date and earlier than
11:59 p.m. (New York City time) on such date, (iii) the business day following
the date of mailing, if sent by nationally recognized overnight courier service,
or (iv) upon actual receipt by the party to whom such notice is required to be
given. The addresses for such communications shall be: (i) if to the Company, to
525 Del Rey Avenue, Suite C, Sunnyvale, California 94086, with a copy to Ropes &
Gray, One International Place, Boston, Massachusetts, 02110, Attention: Geoffrey
B. Davis, Esq., (facsimile number (617) 951-7050), or (ii) if to the Holder, to
the Holder at the address or facsimile number appearing on the Warrant Register
or such other address or facsimile number as the Holder may provide to the
Company in accordance with this Section.
9
14. WARRANT AGENT. The Company shall serve as warrant agent
under this Warrant. Upon thirty (30) days' notice to the Holder, the Company may
appoint a new warrant agent. Any corporation into which the Company or any new
warrant agent may be merged or any corporation resulting from any consolidation
to which the Company or any new warrant agent shall be a party or any
corporation to which the Company or any new warrant agent transfers
substantially all of its corporate trust or shareholders services business shall
be a successor warrant agent under this Warrant without any further act. Any
such successor warrant agent shall promptly cause notice of its succession as
warrant agent to be mailed (by first class mail, postage prepaid) to the Holder
at the Holder's last address as shown on the Warrant Register.
15. MISCELLANEOUS.
(a) This Warrant shall be binding on and inure
to the benefit of the parties hereto and their respective successors and
assigns. Subject to the Subscription Agreement and applicable securities laws,
this Warrant shall be freely transferable subject to applicable Securities Laws.
This Warrant may be amended only in writing signed by the Company and the Holder
and their successors and assigns.
(b) Subject to Section 15(a), above, nothing in
this Warrant shall be construed to give to any person or corporation other than
the Company and the Holder any legal or equitable right, remedy or cause under
this Warrant. This Warrant shall inure to the sole and exclusive benefit of the
Company and the Holder.
(c) The corporate laws of the State of Delaware
shall govern all issues concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Warrant shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. The Company
and the Holder hereby irrevocably submit to the exclusive jurisdiction of the
state and federal courts sitting in the City of New York, borough of Manhattan,
for the adjudication of any dispute hereunder or in connection herewith or with
any transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, or that
such suit, action or proceeding is improper. Each of the Company and the Holder
hereby irrevocably waives personal service of process and consents to process
being served in any such suit, action or proceeding by certified mail, return
receipt requested, and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing contained herein shall
be deemed to limit in any way any right to serve process in any manner permitted
by law.
(d) The headings herein are for convenience
only, do not constitute a part of this Warrant and shall not be deemed to limit
or affect any of the provisions hereof.
(e) In case any one or more of the provisions of
this Warrant shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Warrant shall not
in any way be affected or impaired thereby and the parties will attempt in good
faith to agree upon a valid and enforceable provision which shall be
10
a commercially reasonable substitute therefor, and upon so agreeing, shall
incorporate such substitute provision in this Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed by its authorized officer as of the date first indicated above.
STEMCELLS, INC.
By:
------------------------------------------
Name:
------------------------------------------
Title:
------------------------------------------
11
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)
To StemCells, Inc:
In accordance with the Warrant enclosed with this Form of
Election to Purchase, the undersigned hereby irrevocably elects to purchase
_____________ shares of common stock, $.01 par value per share, of STEMCELLS,
INC. (the "Common Stock") and , if such Holder is not utilizing the cashless
exercise provisions set forth in this Warrant, encloses herewith $________ in
cash, certified or official bank check or checks, which sum represents the
aggregate Exercise Price (as defined in the Warrant) for the number of shares of
Common Stock to which this Form of Election to Purchase relates, together with
any applicable taxes payable by the undersigned pursuant to the Warrant.
The undersigned requests that certificates for the shares of
Common Stock issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
----------------------------------------------
- --------------------------------------------------------------------------------
(Please print name and address)
If the number of shares of Common Stock issuable upon this
exercise shall not be all of the shares of Common Stock which the undersigned is
entitled to purchase in accordance with the enclosed Warrant, the undersigned
requests that a New Warrant (as defined in the Warrant) evidencing the right to
purchase the shares of Common Stock not issuable pursuant to the exercise
evidenced hereby be issued in the name of and delivered to:
- --------------------------------------------------------------------------------
(Please print name and address)
12
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dated: , Name of Holder:
----------- --------
(Print)
(By:)
(Name:)
(Title:)
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant)
13
FORM OF ASSIGNMENT
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto ________________________________ the right represented by the
within Warrant to purchase ____________ shares of Common Stock of StemCells,
Inc. to which the within Warrant relates and appoints ________________ attorney
to transfer said right on the books of StemCells, Inc. with full power of
substitution in the premises.
Dated:
- ---------------, ----
---------------------------------------
(Signature must conform in all respects to name
of holder as specified on the face of the
Warrant)
---------------------------------------
Address of Transferee
---------------------------------------
---------------------------------------
In the presence of:
- --------------------------
14
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 14, 2000 in Amendment No. 3 to the
Registration Statement (Form S-1 No. 333-45496) and related Prospectus of
StemCells, Inc. (formerly CytoTherapeutics, Inc.) for the registration of
3,205,486 shares of its common stock.
/s/ ERNST & YOUNG LLP
Providence, Rhode Island
November 16, 2000
