AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 29, 2001
REGISTRATION NO. 333-61726
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 1 AMENDING FORM S-1 TO
FORM S-3
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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3155 PORTER DRIVE
PALO ALTO, CA 94304
(650) 475-3100
(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.
3155 PORTER DRIVE
PALO ALTO, CA 94304
(650) 475-3100
(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 PRICE REGISTRATION FEE
Common Stock, par value $.01 per share...... up to 10,000,000(1) (2) $31,914,894(3) $7,979
Common Stock, par value $.01 per share(4)... 350,000 $3.15(5) $ 1,102,500 $ 276
Total:.................................... 10,350,000 $33,017,394 $8,255(6)
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) of the Securities Act of 1933.
(2) The price per share will vary based on the volume-weighted average daily
price of the Company's common stock during the drawdown periods described in
this registration statement.
(3) This represents the maximum fair market value of shares sold to Sativum
Investments Limited under the common stock purchase agreement. The maximum
net proceeds the Company can receive is $30,000,000 less an aggregate cash
placement fee of 3% of net proceeds payable to its placement agents Pacific
Crest Securities, Inc. and Granite Financial Group, Inc.
(4) Issuable upon exercise of the warrants issued to Sativum Investments
Limited, Pacific Crest Securities, Inc. and Granite Financial Group, Inc.
(5) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933, based on the average
of the high and low prices as reported on the Nasdaq National Market on
May 18, 2001.
(6) Paid May 25, 2001
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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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STEMCELLS, INC.
10,350,000 SHARES OF COMMON STOCK
---------------
This prospectus relates to up to 10,000,000 shares of common stock that may
be issued from time to time at our discretion pursuant to a common stock
purchase agreement with Sativum Investments Limited, a British Virgin Islands
corporation, and 350,000 shares of common stock issuable upon the exercise of
warrants issued to Sativum, Pacific Crest Securities, Inc. and Granite Financial
Group, Inc. in connection with the common stock purchase agreement. See "Common
Stock Purchase Agreement" beginning on page 54.
We will receive the net sale price of any common stock that we sell to
Sativum pursuant to the common stock purchase agreement or that we issue upon
the exercise of the warrants by Sativum, Pacific Crest or Granite. Sativum,
Pacific Crest and Granite may resell those shares pursuant to this prospectus.
The price at which we will sell the shares to Sativum pursuant to the common
stock purchase agreement will be equal to 94% of the average of the volume
weighted average price of our common stock during the twenty trading days
immediately following our request to draw down an investment by Sativum under
the common stock purchase agreement.
Sativum is an "underwriter" within the meaning of the Securities Act of 1933
in connection with its sales.
Our common stock is listed on the Nasdaq National Market under the symbol
"STEM." The last reported sales price for our common stock on the Nasdaq
National Market on June 28, 2001 was $4.49 per share.
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THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JULY 2, 2001.
TABLE OF CONTENTS
PAGE
--------
Prospectus Summary..................... 2
Risk Factors........................... 6
Forward-Looking Statements............. 12
Industry and Market Data............... 12
Use of Proceeds........................ 12
Price Range of Common Stock............ 13
Dividend Policy........................ 13
Capitalization......................... 14
Selected Consolidated Financial Data... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 16
Business............................... 22
Management............................. 41
PAGE
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Related Party Transactions............. 48
Principal Stockholders................. 50
Description of Capital Stock........... 51
Common Stock Purchase Agreement........ 54
The Drawdown Procedure and the Stock
Purchases............................ 55
Selling Stockholders................... 59
Plan of Distribution................... 61
Legal Matters.......................... 64
Experts................................ 64
Where You Can Find More Information.... 64
Incorporation of Documents by
Reference............................ 64
Index to Financial Statements.......... F-1
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
RECENT DEVELOPMENTS
SALE OF MODEX SHARES
On April 30, 2001, we sold 103,577 shares in Modex Therapeutics, Ltd., a
Swiss biotherapeutics company, for a net price of 87.30 Swiss Francs per share,
which converts to approximately $50.30, for total proceeds of approximately
$5,200,000, net of commissions and fees. We no longer hold any shares of Modex.
See "Business--Corporate Collaboration."
COMMON STOCK PURCHASE AGREEMENT RELATING TO EQUITY LINE
On May 10, 2001, we entered into a common stock purchase agreement with
Sativum Investments Limited for the potential future issuance and sale of up to
$30,000,000 of our common stock, subject to restrictions and other obligations
that are described throughout this prospectus. We, at our sole discretion, may
draw down on this facility, sometimes termed an equity line, from time to time,
and Sativum is obligated to purchase shares of our common stock at a 6% discount
to a volume weighted average market price over the 20 trading days following the
drawdown notice. Our volume weighted average market price is calculated by
adding the total dollars traded in every transaction in a given trading day and
dividing that number by the total number of shares traded during that trading
day. We are limited with respect to how often we can exercise a drawdown and the
amount of each drawdown. For more details on the equity line, see "Common Stock
Purchase Agreement" elsewhere in this prospectus.
ISSUANCE OF NEW PATENTS
On June 7, 2001, we announced the issuance to us of two new patents that
further our proprietary position in our neural and pancreatic research programs.
The first patent is a process patent that covers a novel method to separate
neural stem cells for growth in culture. The second patent covers a unique model
useful for identifying stem cells for the pancreas and liver. With these new
patents, we now own or have exclusive license to 25 issued U.S. patents in the
neural stem cell field, as well as fifteen U.S. applications, including two that
have been allowed, and pending foreign counterparts.
ISSUANCE OF SHARES AND WARRANTS TO MILLENNIUM PARTNERS
On June 8, 2001, Millennium Partners, L.P. exercised an option to purchase
$2,000,000 of our common stock. At the closing on June 21, 2001, Millennium
purchased 457,750 shares of our common stock at $4.3692 per share. We received
$1,500,000 of the purchase price at the closing on June 21, 2001, and we will
receive the remaining $500,000 upon effectiveness of a registration statement
covering the shares purchased by Millennium and issuable upon exercise of the
warrants received by Millennium. Millennium also received a warrant to purchase
50,352 shares of our common stock at a price per share of $4.7664. This warrant
is callable by us at any time at $7.944 per underlying share. In addition,
Millennium received an adjustable warrant similar to the adjustable warrant
issued to Millennium on August 3, 2000. See "Description of Capital
Stock--Warrants." The registration statement of which this prospectus forms a
part does not cover the shares purchased by or issuable to Millennium.
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Our principal executive office is located at 3155 Porter Drive, Palo Alto,
California 94304 and our telephone number is (650) 475-3100. We maintain a
website on the Internet at WWW.STEMCELLSINC.COM. Our website, and the
information contained therein, is not a part of this prospectus.
3
THE OFFERING
Common stock offered......................... Up to 10,350,000 shares of common stock. None
of these shares will be offered by us.
Up to 10,000,000 of these shares may be
offered for resale by Sativum Investments
Limited. We may require Sativum to purchase
up to $30,000,000 of shares of our common
stock from time to time at our discretion at
a discount to a market-based price at the
time of each sale to Sativum. The number of
shares sold by us to Sativum and resold by
this prospectus may be significantly lower
than 10,000,000 shares. See "Common Stock
Purchase Agreement and "Risk Factors--Risks
Related to the Equity Line and Our Financial
Condition."
The remaining 350,000 shares, issuable upon
the exercise of warrants, may be offered for
resale by this prospectus by Sativum, Pacific
Crest Securities Inc., Granite Financial
Group Inc. or their transferees.
Common stock to be outstanding after this
offering..................................... Up to 36,808,211 shares of common stock,
assuming that 10,350,000 shares are issued
under the common stock purchase agreement and
the warrants. We are not permitted to issue
more than 3,922,606 shares pursuant to the
common stock purchase agreement without
stockholder approval, which we have not yet
sought or received. In calculating the number
of shares of common stock, we did not include
4,133,926 shares issuable upon exercise of
options outstanding as of March 31, 2001,
warrants or shares issuable upon conversion
of our 6% cumulative convertible preferred
stock. See "Capitalization."
Use of proceeds.............................. We will not receive any of the proceeds of
the resale of shares by Sativum, Pacific
Crest or Granite. We will, however, receive
proceeds from sales of shares to Sativum
under the common stock purchase agreement and
upon exercise of warrants by Sativum, Pacific
Crest or Granite, and we intend to use these
net proceeds for general corporate purposes.
See "Use of Proceeds."
Nasdaq National market symbol................ STEM
4
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables summarize 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.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
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1998 1999 2000 2000 2001
---------- ---------- -------- -------- --------
(IN THOUSANDS, EXCEPT INCOME PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue from collaborative agreements and grants............ $ 8,803 $ 5,022 $ 74 $ -- $ 100
Gain on sale of investment.................................. -- -- 1,428 -- 2,550
Research and development expenses........................... 17,659 9,984 5,979 907 1,644
ECT wind-down expenses...................................... -- 6,048 3,327 234 --
Net income (loss)........................................... $(12,628) $(15,709) $(11,125) $(1,794) $ 269
AS OF AS OF
DECEMBER 31, MARCH 31,
2000 2001
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(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities............ $ 6,069 $ 4,499
Restricted investments...................................... 16,356 8,413
Total assets................................................ 29,795 21,507
Long-term debt, including capitalized leases................ 2,605 2,521
Stockholders' equity........................................ 22,982 15,462
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 Rhode Island to California. The results shown for the year
ended December 31, 1999 and 2000 includes $6,047,806 and $3,327,360,
respectively, in expenses related to the restructuring. For more information on
this restructuring see "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, in connection with our investment in Modex Therapeutics, Ltd.,
a Swiss biotechnology company that completed an initial public offering on
June 23, 2000, we realized a $1,427,686 gain and recognized an increase in value
related to our remaining holdings of $16,356,334 as of December 31, 2000. During
the three months ended March 31, 2001, we realized a gain of $2,550,000 in
connection with further sales of Modex shares. After a subsequent sale on
April 30, 2001, we no longer hold any shares of Modex. For more information on
Modex, see "Recent Developments" 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.
5
RISK FACTORS
THE OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE
MAKING AN INVESTMENT DECISION REGARDING STEMCELLS, INC.OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED IF ANY
OF THESE RISKS ACTUALLY OCCUR. CONSEQUENTIALLY, THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE, RESULTING IN THE LOSS OF ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
OUR TECHNOLOGY IS AT AN EARLY STAGE OF DISCOVERY AND DEVELOPMENT, AND WE MAY
FAIL TO DEVELOP ANY COMMERCIALLY ACCEPTABLE 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 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:
- survive and persist in the desired location;
- provide the intended therapeutic benefits;
- properly integrate into existing tissue in the desired manner; or
- achieve therapeutic benefits equal to or better than the standard of
treatment at the time of testing.
In addition, our products 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 pre-clinical or clinical research. If 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, because 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 PAYMENT OBLIGATIONS RESULTING FROM REAL PROPERTY OWNED OR LEASED BY
US IN RHODE ISLAND, WHICH DIVERTS FUNDING FROM OUR STEM CELL RESEARCH AND
DEVELOPMENT.
Prior to our reorganization in 1999 and the consolidation of our business in
California, we carried out our encapsulated cell therapy programs in Lincoln,
Rhode Island, where we also had our administrative offices. Although we have
vacated the Rhode Island facilities, we remain obligated to make lease payments
and operating costs of approximately $1,200,000 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, which we
own. 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. In
March 2001, our landlord approved a sublease of part of the premises.
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
6
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, and we may fail to obtain any
such agreement on terms acceptable to us. 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 expire. Furthermore, these
arrangements may require us to grant certain rights to third parties, including
exclusive marketing rights to one or more products, may require us to issue
securities to our collaborators or may contain other terms that are burdensome
to us. 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 HAVE A HISTORY OF OPERATING LOSSES AND WE MAY FAIL TO OBTAIN REVENUES OR
BECOME PROFITABLE.
We have incurred $130,229,646 in operating losses through March 31, 2001 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 currently 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.
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 and 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. 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 because patent
applications are secret until patents are issued in the United States or until
the applications are published in foreign countries, and because publication of
discoveries in the scientific or patent literature often lags behind actual
discoveries. 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.
7
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.
IF OTHERS ARE FIRST TO DISCOVER AND PATENT THE STEM CELLS WE ARE SEEKING TO
DISCOVER, WE COULD BE BLOCKED FROM FURTHER WORK ON THOSE STEM CELLS.
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 for us or our collaborators to be the first to discover any stem
cell that we are seeking to discover. Failure to be the first could prevent us
from commercializing all of our research and development affected by that
patent.
WE MAY BE UNABLE TO OBTAIN NECESSARY LICENSES TO THIRD PARTY PATENTS AND
OTHER RIGHTS.
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. 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 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 these 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 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 the ones we are developing, 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
8
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 IS SUBJECT TO AND RESTRICTED BY 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 and restricted by 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 U.S. 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 some of our therapies
to gain a seven year period of marketing exclusivity for those therapies. The
U.S. Congress in the past has 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 some 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 personnel, rather than permanent employees, in
key management and scientific positions. 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 that
we do not otherwise have and that 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. 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.
HEALTH CARE 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,
9
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 U.S. 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 also expect that there will
continue to be a number of federal and state proposals to implement government
control over health care costs. Efforts at health care 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 health care goods and services may take in response to
health care reform proposals or legislation. We cannot predict the effect
government control and other health care reforms may have on our business.
RISKS RELATED TO THE EQUITY LINE AND OUR FINANCIAL CONDITION
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. 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.
If we are unable to draw down on the equity line or choose not to do so, we
intend to pursue our needed capital resources through equity and debt
financings, corporate alliances, grants and collaborative research arrangements.
We may fail to obtain the necessary capital resources from any such sources when
needed or on terms acceptable to us. 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
are prohibited from entering into other stand-by equity based credit facilities
during the term of the common stock purchase agreement.
WE MAY BE UNABLE TO ACCESS ALL OR PART OF OUR EQUITY LINE.
If the trading volume and/or price of our common stock falls below
established levels, then we will not be able to draw down all of the
$30 million committed by Sativum pursuant to the equity line. In addition, we
may choose not to draw down some or all of the equity line. If we do not receive
stockholder approval to issue more than 3,922,606 shares under the equity line,
we also will not be able to access some of the funds in the equity line.
Furthermore, if our common stock is delisted from the Nasdaq National Market, or
if we experience a material adverse change to our business, operations,
properties or financial condition that is not cured within 30 days of the
change, the common stock purchase agreement will terminate. If we are unable to
meet the conditions to a drawdown in the common stock purchase agreement, we
will not be able to draw down any funds until those conditions are met. See
"Common Stock Purchase Agreement."
10
OUR COMMON STOCK PURCHASE AGREEMENT WITH SATIVUM AND THE ISSUANCE OF SHARES
TO SATIVUM THEREUNDER MAY CAUSE SIGNIFICANT DILUTION TO OUR STOCKHOLDERS OR
CONTRIBUTE TO A PERCEIVED RISK OF DILUTION.
The resale by Sativum of the common stock that it purchases from us will
increase the number of our publicly traded shares, which could depress the
market price of our common stock. Moreover, because all the shares we sell to
Sativum will be available for immediate resale, the prospect of our sales to
Sativum could depress the market price for our common stock. The shares of our
common stock issuable to Sativum under the equity line will be sold at a 6%
discount to the volume-weighted average daily price of our common stock during
the applicable drawdown period, and the proceeds paid to us upon each drawdown
will be net of an aggregate 3% placement fee to our placement agents, Pacific
Crest Securities Inc. and Granite Financial Group, Inc., so we will be required
to issue more shares than would be necessary at a market price to receive a
given amount of cash proceeds. If we require Sativum to purchase our common
stock at a time when our stock price is low, our existing common stockholders
will experience substantial dilution. The perceived risk of dilution may cause
some stockholders to sell their shares or encourage short sales, which may
contribute to a downward movement in the market price of our common stock.
IF OUR COMMON STOCK PRICE DROPS SIGNIFICANTLY, WE MAY BE DELISTED FROM THE
NASDAQ NATIONAL MARKET, WHICH COULD ELIMINATE THE TRADING MARKET FOR OUR COMMON
STOCK.
Our common stock is quoted on the Nasdaq National Market. In order to
continue to be included in the Nasdaq National Market, a company must meet
Nasdaq's maintenance criteria. The maintenance criteria most applicable to us
requires a minimum bid price of $1.00 per share, $4,000,000 in net tangible
assets and $5,000,000 market value of the public float. The public float
excludes shares held directly or indirectly by any of our officers, directors
and holders of 10% or more of our outstanding common stock. As of March 31,
2001, we had approximately $15.4 million of net tangible assets. As of May 24,
2001, the market value of our public float was approximately $71.6 million, and
the lowest bid price of our common stock since March 31, 2001 was $1.47. We
cannot assure you that we will continue to meet these listing criteria. The
issuance by us of shares of common stock to Sativum, or the subsequent resale by
Sativum of those shares, in either case at a discount to the market price, may
cause the trading price of our common stock to fall to a level below the Nasdaq
minimum bid price requirement. Failure to meet these maintenance criteria may
result in the delisting of our common stock from the Nasdaq National Market. If
our common stock is delisted and in order to have our common stock relisted on
the Nasdaq National Market, we would be required to meet the criteria for
initial listing, which are more stringent than the maintenance criteria.
Accordingly, we cannot assure you that if we were delisted we would be able to
have our common stock relisted on the Nasdaq National Market.
If our common stock were delisted from the Nasdaq National Market, we would
not be able to draw down any additional funds on the equity line, and we also
may be required to pay damages to other holders of our common stock under
agreements we previously entered into with them in connection with equity
financings. Finally, if our common stock were removed from listing on the Nasdaq
National Market, it might become more difficult for us to raise funds through
the sale of our common stock or securities convertible into our common stock.
11
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 of the proceeds from the sale of shares offered by
Sativum under this prospectus. However, we will receive the net sale price of
any common stock we sell to Sativum under the terms of the common stock purchase
agreement described in this prospectus. We intend to use the net proceeds from
any sales to Sativum primarily for general corporate purposes. Our management
will have significant flexibility and discretion in applying the net proceeds
received by us. Pending any use, we will invest the net proceeds of any common
stock sold to Sativum in short-term, investment grade, interest-bearing
securities.
12
PRICE RANGE OF COMMON STOCK
Our common stock is quoted on the Nasdaq National Market under the symbol
"STEM." The following table sets forth the high and low sale prices of our
common stock for the periods indicated on the Nasdaq National Market.
COMMON STOCK PRICE
-------------------
HIGH LOW
-------- --------
First Quarter 1999...................................... $ 1.78 $1.16
Second Quarter 1999..................................... $ 1.37 $0.53
Third Quarter 1999...................................... $ 2.38 $0.69
Fourth Quarter 1999..................................... $ 1.62 $1.00
First Quarter 2000...................................... $20.00 $1.38
Second Quarter 2000..................................... $ 8.06 $2.00
Third Quarter 2000...................................... $11.67 $3.53
Fourth Quarter 2000..................................... $ 6.75 $2.25
First Quarter 2001...................................... $ 3.75 $1.72
Second Quarter 2001 (through June 28)................... $ 6.15 $1.47
There were approximately 287 record holders of our common stock as of
April 25, 2001. On June 28, 2001, the reported last sale price on the Nasdaq
National Market for our common stock was $4.49 per share.
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 within the next five years. 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.
13
CAPITALIZATION
The following table presents our consolidated capitalization as of
March 31, 2001. This table excludes:
- 4,133,926 shares of common stock issuable upon the exercise of outstanding
stock options and warrants as follows:
a) as of March 31, 2001, 3,164,618 shares of common stock issuable upon the
exercise of stock options pursuant to our stock option plans at a
weighted average price of $4.11 per share.
b) 622,469 shares of common stock issuable upon the exercise of warrants
held by Millennium Partners, at an exercise price of $0.01 per share.
c) 171,839 shares of common stock issuable upon the exercise of warrants
held by Millennium Partners at a weighted average exercise price of
$4.89 per share.
d) 100,000 shares of common stock issuable upon the exercise of warrants
granted to May Davis Group, Inc. and four of its affiliates at an
exercise price of $5.0375 per share.
e) 75,000 shares of common stock issuable upon the exercise of warrants at
$6.58 per share held by holders of our 6% cumulative convertible
preferred stock.
- 457,750 shares of common stock sold to Millennium Partners on June 21,
2001 and shares issuable upon exercise of an adjustable warrant issued to
Millennium on June 21, 2001.
- The right of the holders of our 6% cumulative convertible preferred stock
to convert their shares of preferred stock into 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
MARCH 31,
2001
-------------
(UNAUDITED)
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, 21,458,211 shares issued.................... 214,612
Additional paid-in-capital................................ 137,608,696
Accumulated deficit....................................... (130,229,646)
Accumulated other comprehensive income.................... 8,412,650
Deferred compensation..................................... (2,044,609)
-------------
Total stockholders' equity.............................. $ 15,461,703
=============
14
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, 1996, 1997, 1998, 1999 and 2000 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 March 31, 2001, and for the three months ended March 31, 2000 and
2001 are derived from our unaudited financial statements. In the opinion of our
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 three months ended
March 31, 2001 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2001 or any other future period.
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED DECEMBER 31, (UNAUDITED)
---------------------------------------------------- ---------------------
1996 1997 1998 1999 2000 2000 2001
-------- -------- -------- -------- -------- --------- ---------
(IN THOUSANDS, EXCEPT INCOME PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue from collaborative agreements
and grants............................ $ 7,104 $ 10,617 $ 8,803 $ 5,022 $ 74 $ -- $ 100
Gain on sale of investment.............. -- -- -- -- 1,428 -- 2,550
-------- -------- -------- -------- -------- ------- --------
Research and development expenses....... 17,130 18,604 17,659 9,984 5,979 907 1,644
Acquired research and development....... -- 8,344 -- -- -- -- --
ECT wind-down and corporate relocation
expenses.............................. -- -- -- 6,048 3,327 234 --
Net income (loss)....................... $(13,759) $(18,114) $(12,628) $(15,709) $(11,125) $(1,794) $ 269
Basic and diluted net income (loss) per
share applicable to common
stockholders before cumulative effect
of a change in accounting principle... $ (0.89) $ (1.08) $ (0.69) $ (0.84) $ (0.57) $ (0.09) $ 0.01
Cumulative effect of a change in
accounting principle.................. -- -- -- -- (0.01) -- --
-------- -------- -------- -------- -------- ------- --------
Net income (loss) per share applicable
to common stockholders................ $ (0.89) $ (1.08) $ (0.69) $ (0.84) $ (0.58) $ (0.09) $ 0.01
Shares used in computing basic net
income (loss) per share............... 15,430 16,704 18,291 18,706 20,068 19,330 20,989
Shares used in computing diluted income
(loss) per share...................... 15,430 16,704 18,291 18,706 20,068 19,330 22,405
AS OF
AS OF DECEMBER 31, MARCH 31,
---------------------------------------------------- ---------
1996 1997 1998 1999 2000 2001
-------- -------- -------- -------- -------- ---------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities..... $42,607 $29,050 $17,386 $ 4,760 $ 6,069 $ 4,499
Restricted investments............................... -- -- -- -- 16,356 8,413
Total assets......................................... 58,397 44,301 32,866 15,781 29,795 21,507
Long-term debt, including capitalized leases......... 8,223 4,108 3,762 2,937 2,605 2,521
Redeemable common stock.............................. 8,159 5,583 5,249 5,249 -- --
Stockholders' equity................................. 34,747 28,900 17,897 3,506 22,982 15,462
15
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 THREE MONTHS ENDED MARCH 31, 2001 AND 2000 AND THE YEARS
ENDED DECEMBER 31, 2000, 1999 AND 1998 SHOULD BE READ IN CONJUNCTION WITH THE
"SELECTED CONSOLIDATED FINANCIAL DATA" SECTION OF THIS PROSPECTUS AND OUR
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO THOSE STATEMENTS AND OTHER
FINANCIAL INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. THE FORWARD-LOOKING
STATEMENTS IN THIS DISCUSSION REGARDING OUR EXPECTATIONS REGARDING OUR FUTURE
PERFORMANCE, LIQUIDITY AND CAPITAL RESOURCES AND OTHER NON-HISTORICAL STATEMENTS
IN THIS DISCUSSION INVOLVE NUMEROUS RISKS AND UNCERTAINTIES AS DESCRIBED IN THE
"RISK FACTORS" SECTION OF THIS PROSPECTUS. OUR ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD-LOOKING STATEMENTS.
RESULTS OF OPERATIONS
OVERVIEW
Since our inception in 1988, we have been primarily engaged in research and
development of human therapeutic products. At the beginning of 1999, 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 California. As a result of a restructuring in the
second half of 1999, our sole focus is now on our stem cell technology. The year
2000 was a year of transition, in which we completed the consolidation and
restructuring of our operations. Comparisons with results of operations prior to
2000 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 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, sale of marketable
securities and the initiation or termination of research collaborations, in
addition to the winding-down of terminated research and development programs
referred to above.
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
For the three months ended March 31, 2001, revenues from grants totaled
$100,000. There was no such revenue for the three months ended March 31, 2000.
On January 9, 2001, we sold 22,616 Modex shares for a net price of 182.00
Swiss francs per share, which converts to $112.76 per share, for total proceeds
and a realized gain of $2,550,000.
16
Research and development expenses totaled $1,644,257 for the three months
ended March 31, 2001, compared with $906,632 for the same period in 2000. The
increase of $737,625 or 81% from 2000 to 2001 was primarily attributable to the
related costs of an increase in personnel from 11 full time employees to 19 full
time employees to facilitate the expansion of our research programs and initiate
development and the cost of leasing a larger facility.
General and administrative expenses were $996,862 for the three months ended
March 31, 2001, compared with $657,714 for the same period in 2000. The increase
of $339,148, or 52%, from 2000 to 2001 was primarily attributable to the related
costs of an increase in personnel from 5 full time employees to 8 full time
employees, which included the hiring of senior management personnel as part of
the restructuring and consolidation of our operations in California and the cost
of leasing a larger facility.
Wind-down expenses related to our ECT research, our Rhode Island operations
and the transfer of our headquarters to California for the three months ended
March 31, 2000 were $234,386. In December 2000, we created a reserve of
$1,780,578 related to the carrying costs for the Rhode Island facilities through
2001. At March 31, 2001 the reserve was $1,381,946.
Interest income for the three months ended March 31, 2001 and 2000 was
$79,041 and $73,332 respectively. Interest expense of $64,460 for the three
months ended March 31, 2001 was booked against the wind-down reserve created in
2000 for the whole of 2001, as the expense was part of the bond payments related
to the Rhode Island facilities. Interest expense for the same period in 2000 was
$68,858. The decrease in 2001 was attributable to lower outstanding debt and
capital lease balances in 2001 compared to 2000.
Other income for the three months ended March 31, 2001 was $180,389, which
was a refund from the Citizens Bank of Rhode Island for an overpayment of
property taxes in prior years.
Net income for the three months ended March 31, 2001 was $268,541 or $0.01
per share, as compared to net loss of $1,794,258, or $0.09 per share, for the
comparable period in 2000. The decrease in net loss of $2,062,800 or 115% from
the same period in 2000 was primarily attributable to a realized gain of
$2,550,230 from the sale of a portion of our Modex investment, offset by an
increase in expenses attributable to an increase in personnel and the costs
associated with our move to a larger facility.
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Revenues totaled $74,000, $5,022,000 and $8,803,000 for the years ending
December 31, 2000, 1999 and 1998, respectively. Revenues for 2000 are from
Neurotech, S.A. in return for the assignment of our intellectual property assets
relating to Encapsulated Cell Technology. Revenues for 1999 and 1998 were from
collaborative agreements, earned primarily from a Development, Marketing and
License Agreement with AstraZeneca Group plc, which was signed in March 1995.
The decrease in revenues from 1998 to 1999 to 2000 resulted primarily from the
June 1999 termination of the Astra agreement.
Research and development expenses totaled $5,979,000 in 2000, as compared to
$9,984,000 in 1999 and $17,659,000 in 1998. The decrease of $4,005,000, or 40%,
from 1999 to 2000 and the decrease of $7,675,000 or 43%, from 1998 to 1999, was
primarily attributable to the wind-down of research activities relating to our
encapsulated cell technology, precipitated by termination of the Astra
Agreement.
General and administrative expenses were $3,361,000 in 2000, compared with
$4,927,000 in 1999 and $4,603,000 in 1998. The decrease of $1,566,000 or 32%,
from 1999 to 2000 was primarily attributable to the relocation of our
headquarters to a smaller facility as well as a reduction of personnel.
17
Wind-down expenses related to our ECT research, our Rhode Island operations
and the transfer of our headquarters to California totaled $3,327,000 and
$6,048,000 for 2000 and 1999, respectively. No such expenses were incurred in
1998. 1999 expenses included accruals of approximately $1.6 million for employee
severance costs, $1.9 million in losses and reserves for the write-down of
related patents and fixed assets, $1.2 million for our costs of settlement of a
1989 funding agreement with RIPSAT, $700,000 of estimated additional carrying
costs through June 30, 2000, and other related expenses totaling $760,000.
During 2000, we incurred approximately $290,000 of costs in excess of the
amounts accrued as of December 31, 1999 for the carrying costs, including lease
payments, property taxes and utilities, through the expected June 30, 2000
disposition of the Rhode Island facilities. During the third and fourth quarters
of 2000 we incurred additional $1.3 million in carrying costs for the Rhode
Island facilities, because we were unable to dispose of them as we had expected.
We have created a reserve of $1,780,000 related to the carrying costs for the
Rhode Island facilities through 2001. In February 2001, we subleased portions of
the facilities and are actively seeking to sublease, assign or sell our
remaining interests in the properties. However, there can be no assurance that
we will be able to dispose of these facilities in a reasonable time, if at all.
Interest income for the years ended December 31, 2000, 1999 and 1998 totaled
$303,000, $564,000 and $1,254,000, respectively. The average cash and investment
balances were $5,668,000, $10,663,000 and $21,795,000 in 2000, 1999 and 1998,
respectively. The decrease in interest income from 1998 to 1999 to 2000 was
attributable to lower average balances.
In 2000, interest expense was $273,000, compared to $335,000 in 1999 and
$472,000 in 1998. The decrease from 1998 to 1999 to 2000 was attributable to
lower outstanding debt and capital lease balances.
During the second quarter 2000 we realized a $1,427,000 gain in connection
with the sale of a portion of our investment in Modex. Modex
Therapeutics, Ltd., a Swiss biotechnology company that completed an initial
public offering on June 23, 2000, and is publicly traded on the Swiss Neue
Market exchange.
The net loss in 2000, 1999 and 1998 was $11,125,000, $15,709,000, and
$12,628,000, respectively. The loss per share was $0.58, $.84 and $.69 in 2000,
1999 and 1998, respectively. The decrease from 1999 to 2000 is primarily
attributable to the wind-down of our encapsulated cell technology research and
our Rhode Island operations and offset by the elimination of revenue from the
Astra Agreement. The increase from 1998 to 1999 is primarily attributable to the
elimination of revenue from the Astra Agreement, which was terminated in
June 1999, as well as expenses related to the wind-down of our encapsulated cell
technology research and our other Rhode Island operations, the transfer of our
corporate headquarters to California and an accrual for the our estimate of the
costs of settlement of a funding agreement with RIPSAT.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through the sale of our
common and preferred stock, the issuance of long-term debt and capitalized lease
obligations, revenues from collaborative agreements, research grants, sales of
marketable securities and interest income.
We had unrestricted cash and cash equivalents totaling $4,499,000 at
March 31, 2001. Cash equivalents are invested in money market funds.
Our liquidity and capital resources were, in the past, significantly
affected by our relationships with corporate partners, which were related to our
former encapsulated cell technology, or ECT. These relationships are now
terminated, and we have not yet established corporate partnerships with respect
to our stem cell technology.
18
In the third quarter of 1999, we announced restructuring plans to wind down
operations relating to our ECT and to focus our resources on the research and
development of our platform of proprietary stem cell technologies. We terminated
approximately 68 full time employees and, in October 1999, relocated our
corporate headquarters to California. As part of our restructuring of operations
and relocation of corporate headquarters to California, we identified a
significant amount of excess fixed assets. In December 1999, we completed the
disposition of those excess fixed assets, from which we received more than
$746,000.
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.
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.
We continue to have outstanding obligations in regard to our former
facilities in Lincoln, Rhode Island, including lease payments and operating
costs of approximately $1,200,000 per year associated with our former research
laboratory and corporate headquarters building, and debt service payments and
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
19
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. Any unconverted
preferred stock will be converted to common stock, at the applicable conversion
price, on April 13, 2002. 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 received 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 is
entitled, pursuant to an adjustable warrant issued on August 3, 2000 in
connection with the sale of common stock to the Fund, to purchase additional
shares of common stock for $0.01 per share. The adjustments to the adjustable
warrant are calculated 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. On January 27, 2001, the Fund's adjustable warrant
became exercisable for 463,369 shares of our common stock, and the Fund
purchased all of those shares on March 30, 2001, for $4,634. On April 27, 2001,
the Fund's adjustable warrant became exercisable for an additional 622,469
shares of our common stock, and the warrant has not been exercised with respect
to those shares. The Fund also received on August 3, 2000 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 was granted an 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 paid 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 on
August 23, 2000 a warrant to purchase up to 19,900 shares of common stock at
$6.03 per share. This warrant is callable by us at any time at $10.05 per
underlying share.
On June 8, 2001, the Fund exercised its remaining option to purchase
$2 million of our common stock. At the closing on June 21, 2001, the Fund
purchased 457,750 shares of our common stock at $4.3692 per share. The Fund paid
$1,500,000 of the purchase price at the closing and will pay the remainder upon
effectiveness of a registration statement covering the shares purchased by the
Fund and issuable upon exercise of the warrants received by the Fund. The
registration statement of which this prospectus forms a part does not cover the
shares purchased by or issuable to the Fund. In connection with the closing, the
Fund received an adjustable warrant similar to the adjustable warrant issued on
August 3, 2000. The Fund also received a warrant to purchase 50,352 shares of
our common stock at a price per share of $4.7664. This warrant is callable by us
at any time at $7.944 per underlying share.
We have sold all of our shares of Modex Therapeutics, Ltd. Our final sale of
Modex shares occurred on April 30, 2001, when we realized a gain of $5,232,168
net of commissions and other fees. All other sales occurred prior to March 31,
2001. In addition, on April 30, 2001, we sold Modex our rights to future
payments under the agreement between us and Neurotech S.A. for $300,000.
20
On May 10, 2001, we entered into a common stock purchase agreement with
Sativum Investments Limited for the potential future issuance and sale of up to
$30,000,000 of our common stock, subject to restrictions and other obligations
that are described throughout this prospectus. We, at our sole discretion, may
draw down on this facility, sometimes termed an equity line, from time to time,
and Sativum is obligated to purchase shares of our common stock at a 6% discount
to a volume weighted average market price over the 20 trading days following the
drawdown notice. We are limited with respect to how often we can exercise a
drawdown and the amount of each drawdown. For more details on the equity line,
see "Common Stock Purchase Agreement" elsewhere in this prospectus.
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. 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 may, but are not required to, draw down on the equity line from time to
time as necessary and possible under the terms of the facility. We also intend
to pursue opportunities to obtain additional financing in the future through
grants and collaborative research arrangements. We are permitted under the terms
of the equity line to pursue unrelated debt and equity financing other than
other stand-by equity based credit facilities. 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 through December 2001. Our
cash requirements may vary, however, depending on numerous factors. If for some
reason we are not able to drawdown on the equity line, 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.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). The
statement requires us to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in fair value of derivatives are either offset against the change in
fair value of assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. Because we had no derivative instruments and do not currently engage
in hedging activities, the adoption of Statement No. 133 on January 1, 2001 had
no impact on our results of operations or financial position.
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.
We were formerly known as CytoTherapeutics, Inc. Until mid-1990 we had
programs in a different technology, encapsulated cell therapy, as well as stem
cell programs. We now focus exclusively on the discovery, development and
commercialization of our proprietary platform of stem cell technologies.
Effective May 2000 we changed our name to StemCells, Inc.
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 that are essential to life. When cells are
damaged or destroyed, they no longer produce, metabolize or accurately regulate
these 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
22
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 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, obtaining the cells often requires significant
surgical procedures. The challenge, therefore, has been three-fold:
- to identify the stem cells;
- to create techniques and processes that we can use to expand these rare
cells in sufficient quantities for effective transplants; and
- to establish a bank of normal human stem or progenitor cells that we can
use 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, cells modified by a cancer gene, an unpurified mixture of many different
cell types, or 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 hosts accept CNS stem cells that are transplanted
into them, and that the cells continue to migrate and 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.
We will be pursuing alliances in these key areas.
23
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 exist for many systems of the human body: the blood and immune
system; the central and peripheral nervous systems (including the brain); and
the liver, pancreas endocrine, and skin systems. These cells are responsible for
organ regeneration during normal cell replacement and, to a 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 disease, injury or genetic defect has damaged or
destroyed.
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. 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 that we sponsored that used 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
markers present on the surface of freshly obtained brain cells can successfully
isolate human central nervous system stem 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 to
therapies that are based on cells derived from cancer cells, cells modified by a
cancer gene, an unpurified mixture of cell types, or animal-derived cells. 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 to research and develop human central nervous system
stem and progenitor cell-based therapies for these diseases.
We continue to research 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 defective. Liver stem cells may be useful
in the treatment of diseases such as hepatitis, cirrhosis of the liver and liver
cancer.
24
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 loss of nervous system tissue.
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 research the isolation and
development of a series of stem and progenitor cells that would 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. The
table is qualified in its entirety by reference to the more detailed
descriptions of such programs appearing elsewhere in this prospectus. We
continually evaluate our research and product development and reallocate
resources in light of experimental results, commercial potential, availability
of third party funding, likelihood of near-term efficacy, collaboration success
or significant technology enhancement, or other relevant factors. Our research
and product development programs are in early stages of development and will
require substantial resources to commercialize.
25
RESEARCH AND PRODUCT DEVELOPMENT PROGRAMS
PROGRAM DESCRIPTION AND OBJECTIVE STAGE/STATUS(1)
- ------------------------------------------- -------------------------------------------------------
HUMAN NEURAL STEM CELL PRECLINICAL
Repair or replace damaged central nervous - Demonstrated IN VITRO the ability to
system tissue (including spinal cord, initiate and expand stem cell-containing
degenerated retinas and tissue affected by human neural cultures and specialization
certain genetic disorders) into three types of central nervous system
cells
- 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 islet - Identified markers on the surface of cells
tissue to isolate and culture islet stem cells of
the pancreas
- Commenced small animal testing
LIVER STEM CELL RESEARCH
Repair or replace damaged liver tissue - Demonstrated the production of hepatocytes
including tissue resulting from certain from purified mouse hematopoietic stem
metabolic genetic diseases cells
- Identified IN VITRO culture assay for
growth of human 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
Currently, 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. We believe that therapies using stem
cells represent a fundamentally new approach to the treatment of diseases caused
by lost or damaged tissue. We 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
NeuroSpheres first invented these cultures. Further, NeuroSpheres granted us
exclusive, worldwide licenses, encompassing all uses, to numerous inventions
26
and associated patents and patent applications. These inventions and associated
patents and patent applications are subsequently noted in the section entitled
"License Agreements and Sponsored Research Agreements--NeuroSpheres, Ltd."
In 1997, our scientists invented a reproducible method for growing human
central nervous system, 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, or CNS. 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. The US Patent and Trademark Office has since allowed a patent on
those methods. We are expanding our preclinical efforts toward the goal of
selecting the proper indications to pursue.
In December 1998, we announced that the U.S. Patent and Trademark Office had
granted patent No. 5,851,832. This patent covered 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 U.S. 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 U.S. 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
using 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. The unmodified cells are normal human CNS stem cells and, therefore,
may be especially suitable for transplantation. In addition, the cells may
provide a safer and more effective alternative to therapies 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 took purified and expanded
stem cells and transplanted them into the normal brains of immunodeficient mouse
hosts, where they took hold and grew into neurons and glial cells.
27
Throughout 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.
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. In addition, this technology could 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
Nora Sarvetnick, Ph.D., of The Scripps Research Institute, in collaboration
with some of our senior researchers, has conducted our discovery program
directed to the identification, isolation and culturing of the pancreas stem and
progenitor cells. It is our intention to bring the research on stem and
progenitor cells of the pancreas in house. We expect that Dr. Sarvetnick will
continue to consult with us.
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.
28
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. Dr. Sarvetnick and her research team
identified these novel markers 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
using this technology.
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. In addition, we 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 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. Further, we 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.
Failing to meet this criteria caused AstraZeneca to terminate the collaboration
in June 1999.
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
California. We subleased a portion of our former corporate headquarters building
and our pilot manufacturing and cell processing facility in Rhode Island are
actively seeking to sublease, assign or sell our interest in the remainder.
29
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
transferred these rights to royalties and other payments to Modex. 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.
SUBSIDIARY
STEMCELLS CALIFORNIA, INC.
On September 26, 1997, we acquired by merger the California corporation
StemCells, Inc., currently StemCells California, Inc., 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 COLLABORATIONS
CORPORATE INVESTMENT
In July 1996, we, together with certain founding scientists, established
Modex Therapeutics, Ltd., a Swiss biotherapeutics company, to pursue extensions
of our former technology of ECT for certain applications outside the central
nervous system. We, along with the scientists, formed Modex, headquartered in
Lausanne, Switzerland, 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 continued to hold approximately 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. After
Modex's IPO, we owned 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 January 2, 2001 was 210.00 Swiss
francs, or approximately $130.39, per share. On January 9, 2001, we sold 22,616
Modex shares for a net price of 182.00 Swiss francs per share, which converts to
$112.76 per share, for total proceeds of approximately $2,550,000. In connection
with this sale, we agreed not to resell any more of our remaining 103,577 Modex
shares until April 12, 2001. On April 30, 2001, we sold our remaining 103,577
Modex shares for a net price of 87.30 Swiss francs per share, which converts to
approximately $50.30, for proceeds from that sale of approximately $5,200,000.
LICENSE AGREEMENTS AND SPONSORED RESEARCH AGREEMENTS
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. In
addition, we 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. It is our
intention to bring the research on stem and progenitor cells of the pancreas in
house. Dr. Nora Sarvetnick, who led the
30
research at Scripps, will continue to consult with us. Our license agreements
with Scripps are not affected by the expiration of the research agreement. They
will terminate upon expiration, revocation or invalidation of the patents
licensed to us, unless governmental regulations require a shorter term. In
addition, these license agreements are subject to early termination 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 issued 12,800
shares of common stock amounting to $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. In addition, we 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 $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.
LICENSE AGREEMENTS
We 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 possess 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.
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.
Celgene has now acquired Signal. 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. Further, 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.
31
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 developed additional intellectual property
relating to the subject matter of the license. We entered into an additional
license agreement with NeuroSpheres as of October 30, 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 made up-front payments to NeuroSpheres of 65,000
shares of our common stock in October 2000 and $50,000 in January 2001, and we
will make 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. In
addition we reimbursed Neurospheres for patent costs amounting to $341,000.
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.
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 through appropriate testing and by 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. In addition, the
carrier may be used to improve the stability and acceptance of the stem cells or
their progeny. Our stem and progenitor cell programs are still in an early stage
and, therefore, all of the issues surrounding the 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. We intend 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 possess an aggressive program of
vigorously seeking and protecting our intellectual property which we believe
might be useful in connection with our products. In addition, we believe that
our know-how will 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 possess 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
32
neural stem cell therapy area includes 25 issued U.S. patents. An additional
fifteen patent applications are pending, four of which the U.S. Patent and
Trademark Office has allowed.
We own, or have filed, the following United States Patents and patent
applications:
- U.S. Patent Number 5,968,829 (Human CNS neural stem cells)
- U.S. Patent Number 6,103,530 (Human CNS neural stem cells--culture media)
- U.S. Patent Number 6,238,922 (Use of collagenase in the preparation of
neural stem cell cultures)
- U.S. Patent Number 6,242,666 (An animal model for identifying a common
stem/progenitor to liver cells and pancreatic cells)
- Application Number WO 99/11758 (Cultures of human CNS neural stem cells)
- Application Number WO 00/36091 (An animal model for identifying a common
stem/progenitor to liver cells and pancreatic cells)
- Application Number WO98/50526 (Generation, characterization, and isolation
of neuroepithelial stem cells and lineage restricted intermediate
precursor)
- Application Number WO 00/50572 (Use of collagenase in the preparation of
neural stem cell cultures)
- Application Number WO 00/47762 (Enriched neural stem cell populations and
methods of identifying, isolating, and enriching neural stem cells)
We licensed the following United States Patents or pending patent
applications from Neurospheres Holdings Ltd.:
- U.S. Patent Number 5,851,832 (IN VITRO proliferation)
- U.S. Patent Number 5,750,376 (IN VITRO genetic modification)
- U.S. Patent Number 5,981,165 (IN VITRO production of dopaminergic cells
from mammalian central nervous system multipotent stem cell compositions)
- U.S. Patent Number 6,093,531 (Generation of hematopoietic cells from
multipotent neural stem cells)
- U.S. Patent Number 5,980,885 (Methods for inducing IN VIVO proliferation
of precursor cells)
- U.S. Patent Number 6,071,889 (Methods for IN VIVO transfer of a nucleic
acid sequence to proliferating neural cells)
- U.S. Patent Number 6,165,783 (Methods of inducing differentiation of
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 multipotent stem cell compositions)
33
- Application Number WO 96/15224 (Differentiation of mammalian central
nervous system multipotent stem cell compositions)
- Application Number WO 99/2196 (Erythropoietin-mediated neurogenesis)
- Application Number WO 99/16863 (Generation of hematopoietic cells)
- Application Number WO 98/22127 (Pretreatment with growth factors to
protect against CNS damage)
- Application Number WO 97/3560 (IN SITU manipulation of cells of the
hippocampus)
- Application Number WO 96/09543 (IN VITRO models of CNS functions and
dysfunctions)
- Application Number WO 95/13364 (IN SITU modification and manipulation of
stem cells of the CNS)
- Application Number WO 96/15226 (IN VITRO production of dopaminergic cells
from mammalian central nervous system multipotent stem cell composition)
- Application Number WO 96/15266 (Regulation of neural stem cell
proliferation).
We licensed the following United States Patents or pending patent
applications from the University of California, San Diego:
- U.S. Patent Number 5,776,948 (Method of production of neuroblasts)
- U.S. Patent Number 6,013,521 (Method of production of neuroblasts)
- U.S. Patent Number 6,020,197 (Method of production of neuroblasts)
- Application Number WO 94/16059 (Method of production of neuroblasts)
- Application Number WO 00/52143 (Methods of enriching a population of
uncultured cells).
We licensed the following United States Patents or pending patent
applications from the California Institute of Technology:
- U.S. Patent Number 5,629,159 (Immortalization and disimmortalization of
cells)
- Application Number WO 96/40877 (Immortalization and disimmortalization of
cells)
- U.S. Patent Number 5,935,811 (Neuron restrictive silencer factor proteins)
- Application Number WO 96/27665 (Neuron restrictive silencer factor
proteins)
- U.S. Patent Number 5,589,376 (Mammalian neural crest stem cells)
- U.S. Patent Number 5,824,489 (Methods for isolating mammalian multipotent
neural crest stem cells)
- Application Number WO 94/02593 (Mammalian neural crest stem cells)
- U.S. Patent Number 5,654,183 (Genetically engineered mammalian neural
crest stem cells)
- U.S. Patent Number 5,928,947 (Mammalian multipotent neural crest stem
cells)
- U.S. Patent Number 5,693,482 (IN VITRO neural crest stem cell assay)
- U.S. 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))
34
- U.S. Patent Number 5,672,499 (Methods for immortalizing multipotent neural
crest stem cells)
- U.S. Patent Number 5,849,553 (Immortalizing and disimmortalizing
multipotent neural crest stem cells)
- U.S. 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. For instance, 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 it believes may be important to the
development of its 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 neural and
pancreatic stem cells.
COMPETITION
The targeted disease states for our initial products in some instances
currently have no effective long-term therapies. We do, however, 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 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 possess 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.
In addition, we may face competition from companies that 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.
35
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 are subject to regulation by
numerous governmental authorities in the United States and other countries. The
future manufacturing and marketing of our potential products will be likewise
regulated.
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 and the Public Health Service Act, as well
as other Federal and state statutes and regulations, govern 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.
FDA APPROVAL
The steps required before our potential products may be marketed in the
United States include:
STEPS CONSIDERATIONS
- ----------------------------------------- --------------------------------------------------
1. Preclinical laboratory and animal Preclinical tests include laboratory evaluation of
tests 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 The results of the preclinical tests are submitted
application for an Investigational New to the FDA as part of an IND, and the IND becomes
Drug Exemption, or IND, which must become effective 30 days following its receipt by the
effective before human clinical trials in FDA, as long as there are no questions, requests
the U.S. may commence for delay or objections from the FDA.
36
STEPS CONSIDERATIONS
- ----------------------------------------- --------------------------------------------------
Clinical trials involve the evaluation of the
product in healthy volunteers or, in a small
3. Adequate and well-controlled human number of patients under the supervision of a
clinical trials to establish the safety qualified physician. Clinical trials are conducted
and efficacy of the product in accordance with protocols that detail the
objectives of the study, steps 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, which the FDA
determines. Each protocol is submitted to the FDA
as part of the IND. An independent Institutional
Review Board, or IRB, at the institution at which
the study is conducted must approve the protocol
for each clinical study and obtain the informed
consent of all participants. 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 subjects to test for
adverse reactions, dosage tolerance,
absorption and distribution, metabolism,
excretion and clinical pharmacology.
- Phase II studies 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
proves to be effective and safe in Phase
II evaluations, Phase III trials begin.
- Phase III trials are undertaken to
conclusively demonstrate clinical
efficacy and 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
require discontinuance at any time if significant
safety issues arise.
4. Submission to the FDA of marketing The results of the preclinical and clinical
authorization applications studies are submitted to the FDA.
37
STEPS CONSIDERATIONS
- ----------------------------------------- --------------------------------------------------
5. FDA approval of the application(s) The testing and approval process will require
prior to any commercial sale or shipment substantial time, effort and expense. A number of
of the drug. Biologic product factors, including relative risks and benefits
manufacturing establishments located in demonstrated in clinical trials, the availability
certain states also may be subject to of alternative treatments and the severity of the
separate regulatory and licensing disease affect the timing. The FDA might request
requirement additional animal studies which would also add to
the time.
After the FDA approves the initial indications and the manufacturing
facility, it might require further clinical trials to grant approval to use 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. It may also 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. However, 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. The FDA normally holds inspections at least every two years.
The FDA, as well as foreign regulatory authorities with reciprocal inspection
agreements, may periodically inspect foreign manufacturing facilities. Foreign
authorities may also inspect domestic manufacturing facilities.
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. Drug manufacturers can also seek
orphan drug status for treatments for diseases or conditions that affect more
than 200,000 individuals in the United States if the manufacturer 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 receive a seven-year period of marketing exclusivity in the
United States for that product. 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.
PROPOSED FDA REGULATIONS
Proposed regulations of the FDA and other governmental agencies would place
restrictions on researchers who have a financial interest in the outcome of
their research. Under the proposed regulations, the FDA could apply heightened
scrutiny to studies conducted by such researchers when reviewing applications to
the FDA. 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 it
might take. Restrictions exist on the testing or use of cells, whether human or
non-human.
38
OTHER REGULATIONS
In addition, we are also subject to regulations under the Occupational
Safety and Health Act, the Environmental Protection Act, the Toxic Substances
Control Act and other foreign, Federal, state and local regulations.
Outside the United States, we will be subject to regulations that govern the
import of drugs, as well as foreign regulatory requirements governing human
clinical trials and marketing approval. The requirements 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 the regulations for
the registration of pharmaceutical products in these three markets.
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
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 continuing efforts of governmental and third party payers to contain or
reduce the cost of health care have affected the revenues and profitability of
some health-care related companies. Payers are increasingly attempting to limit
both coverage and the level of reimbursement for new therapeutic products that
the FDA approves. In some cases, they are refusing to provide any coverage 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 May 23, 2001, we had 28 full-time employees, eight of whom have Ph.D.
degrees. The equivalent of 21 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. We believe our relationships with our employees are good.
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 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 that 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.
39
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.
- 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.
40
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth the name, age as of December 31, 2000, and
position of each of our executive officers, key members of management, and
directors.
NAME AGE POSITION
- ---- -------- ------------------------------------------
John J. Schwartz, Ph.D.................... 67 Director, Chairman of the Board
Martin M. McGlynn......................... 54 Director, President and Chief Executive
Officer
Mark J. Levin............................. 50 Director
Roger M. Perlmutter M.D., Ph.D............ 48 Director
Irving L. Weissman, M.D................... 61 Director
Ann Tsukamoto, Ph.D....................... 48 Vice President, Scientific Operations
Ronnda Bartel, Ph.D....................... 42 Vice President, Scientific Development
- ------------------------
- - 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.
- - MARTIN M. MCGLYNN joined us on January 15, 2001 when he was appointed
President and Chief Executive Officer of us and our wholly-owned subsidiary,
StemCells California, Inc. From 1994 until he joined us, Mr. McGlynn was
President and Chief Executive Officer of Pharmadigm, Inc., a privately held
company in Salt Lake City, Utah, engaged in research and development in the
fields of inflammation and genetic immunization. Mr. McGlynn received a
bachelor of commerce degree from University College, Dublin, Ireland in 1968,
a diploma in industrial engineering from the Irish Institute of Industrial
Engineering in 1970, and a diploma in production planning from the University
of Birmingham, England in 1971.
- - MARK J. LEVIN is a founder and has served as a director since our inception in
1988. From inception until January 1990 and from May 1990 until
February 1991, Mr. Levin served as our 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 and
Chief Executive Officer of Millennium Pharmaceuticals, Inc., a biotechnology
company. Mr. Levin is also currently on the boards of directors of Focal, Inc.
and Tularik, Inc.
- - ROGER M. PERLMUTTER, M.D., PH.D., was elected to the board of directors in
December 2000. Dr. Perlmutter is Executive Vice President, Research and
Development, of Amgen, Inc., a position he has held since January 2001. Prior
to joining Amgen, Dr. Perlmutter was Executive Vice President, Worldwide Basic
Research and Preclinical Development, Merck Research Laboratories, a division
of Merck & Co., Inc., a position he held since August 1999. He joined Merck in
February 1997 as Senior Vice President, Merck Research Laboratories, from
February 1997 to December 1998 and as Executive Vice President from
February 1999 to July 1999. Prior to joining Merck, Dr. Perlmutter was a
professor in the Departments of Immunology, Biochemistry and Medicine at the
University of Washington from January 1991 to January 1997 and served as
chairman of the Department of Immunology at the University of Washington from
May 1989 to January 1997. He also was an Investigator at the Howard Hughes
Medical Institute from July 1984 to
41
February 1997. Dr Perlmutter has been a member of the board of directors of
The Irvington Institute for Immunological Research since 1997 and of the
Institute for Systems Biology since 1999.
- - IRVING L. WEISSMAN, M.D., has served as a director since September 1997. He
has been a consultant to us since September 1997 and is the Chairman of our
Scientific Advisory Board. He is the Karel and Avice Beekhuis Professor of
Cancer Biology, Professor of Pathology and Professor of Developmental Biology
at Stanford University. Dr. Weissman is a cofounder of SyStemix, Inc., and a
former 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.
- - ANN TSUKAMOTO, PH.D., joined us in November 1997 as Senior Director,
Scientific Operations, and was appointed Vice President, Scientific Operations
in June 1998. From 1989 until she joined us, Dr. Tsukamoto was employed at
SyStemix, Inc., where she served in various research capacities before
transitioning to the position of Director of Clinical Science. At
SyStemix, Inc., Dr. Tsukamoto assisted in the launch of its clinical research
program for the hematopoietic stem cell. She received her Ph.D. degree from
the University of California, Los Angeles and did postdoctoral research with
Dr. Harold Varmus at the University of California, San Francisco.
Dr. Tsukamoto is an inventor on six issued U.S. Patents related to the human
hematopoietic stem cell. As of March 5, 2001, Dr. Tsukamoto became a member of
the Board of Directors for the Society of Regenerative Medicine and Stem Cell
Biology.
- - RONNDA BARTEL, PH.D., joined us in July 1998, as Senior Director, Cell
Development, and was appointed Vice President, Scientific Development in
April 2000. From 1995 until her employment with us, Dr. Bartel was Senior
Principal Scientist at Advanced Tissue Sciences Inc., responsible for
research, development, and manufacturing of tissue engineered human cell based
products. Dr. Bartel was awarded her Ph.D. degree in biochemistry from the
University of Kansas, Lawrence and did postdoctoral work with Dr. John
Voorhees at the University of Michigan, Ann Arbor.
BOARD COMPOSITION
Our certificate of incorporation and 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. Dr. Weissman
is in the class of directors whose term expires at our annual meeting in 2002.
Mr. McGlynn and Dr. Perlmutter are in the class of directors whose term expires
in 2003. Mr. Levin and Dr. Schwartz are in the class of directors whose term
expires in 2004. 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.
DIRECTOR COMPENSATION
We currently pay no additional remuneration to Mr. McGlynn, our president
and chief executive officer, for his service as a director.
One of our non-employee directors, Dr. Weissman, also serves us as a
compensated consultant. See "Related Party Transactions--Compensation Paid to
Dr. Weissman."
We have adopted the following methodology for compensating our directors:
upon election or appointment to an initial term on the board, we will grant a
director an option to purchase 20,000 shares at fair market value, which option
will vest ratably over 3 years. On the third anniversary date, each re-elected
director will be granted an additional option to purchase 15,000 shares at fair
market value, which option will vest ratably over 3 years. In addition, each
director will receive a retainer of $18,000 annually and the Chairman of the
board of directors will receive a retainer of $35,000 annually, each payable in
options to purchase our common stock at $.25 per share.
42
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has an audit committee and a compensation and stock
option 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. Dr. Schwartz, Dr. Perlmutter and Mr. Levin make up the
audit committee.
The duties of the compensation and stock option committee are to make
recommendations to the board and our management concerning salaries in general,
determine executive compensation, and approve incentive compensation. The
compensation and stock option committee is currently comprised of Mr. Levin and
Dr. Schwartz.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following non-employee directors served on the compensation and stock
option committee in 2000: Mr. Levin and Dr. Schwartz. In 1989, 1990 and 1991,
Mr. Levin was one of our executive officers.
We entered into a consulting services agreement with Dr. Schwartz on
July 27, 1998, as amended December 19, 1998, for strategic business advice and
counseling services, including assistance in the negotiation and consummation of
strategic collaboration transactions specified by us. Dr. Schwartz was elected
to the Board of Directors on December 19, 1998 and became a member of the
compensation and stock option committee on that date. During the fiscal year
ended December 31, 1999, we made payments to Dr. Schwartz under the consulting
services agreement and the letter agreement dated December 19, 1998 and amended
as of July 1, 1999, under which he served as a Director and Chairman of the
Board. See "Related Party Transactions." Both the consulting services agreement
and the letter agreement were terminated as of March 31, 2001.
We believe the terms of these agreements were no less favorable to us than
could have been obtained from unaffiliated third parties.
43
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by us to our Chief
Executive Officers during the fiscal years ended December 31, 2000, 1999 and
1998 and the two other most highly compensated executive officers who served in
such capacities during the fiscal year ended December 31, 2000. There were no
other persons serving as executive officers at the end of such fiscal year.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
-------------------------
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION
- -------------------------------------------------- -------- --------- --------- ---------- ------------
GEORGE W. DUNBAR, JR. ............................ 2000 186,538 50,000 36,031 --
Acting President and Chief Executive Officer(1) 1999 48,000
RICHARD M. ROSE M.D. ............................. 2000 309,632 -- -- --
Chief Executive Officer(2) 1999 279,974 -- -- 4,667(3)
1998 286,553 -- 150,000(4) 11,330(5)
ANN TSUKAMOTO, PH.D. ............................. 2000 159,054 -- -- 4,783(6)
VP, Scientific Operations
RONNDA BARTEL, PH.D. ............................. 2000 129,668 -- -- 3,245(7)
VP, Scientific Development
- --------------------------
(1) Mr. Dunbar became Acting President and Chief Executive Officer effective as
of February 1, 2000, and resigned from that position effective as of
January 15, 2001.
(2) 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.
(3) 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.
(4) 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.
(5) 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.
(6) Represents $4,783 of fair market value of the company matching contributions
of common stock to Dr. Tsukamoto.
(7) Represents $3,245 of fair market value of the company matching contributions
of common stock to Dr. Bartel.
OPTION GRANTS IN LAST YEAR
The following table provides information on option grants in 2000 to
Mr. Dunbar, the only named executive officer to be granted options in 2000.
44
OPTION GRANTS IN LAST YEAR
POTENTIAL REALIZABLE VALUE
SECURITIES PERCENT OF AT ASSUMED ANNUAL RATES OF
UNDERLYING TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM
GRANTED EMPLOYEES IN PRICE EXPIRATION ------------------------------
NAME (# OF SHARES) 2000(1) ($/SHARE)(2) DATE 0%($) 5%($) 10%($)
- ---- ------------- ------------- ------------ ---------- -------- -------- --------
George W. Dunbar, Jr....... 73,000(3) 22% 1.094 10/15/01 271,998 307,120 345,580
12,031(3) 4% 4.156 10/15/01 13,162 19,467 26,371
- ------------------------
(1) We granted options covering 330,031 shares of common stock to employees in
the fiscal year ended December 31, 2000.
(2) The exercise price may be paid by delivery of already-owned shares and tax
withholding obligations related to exercise may be paid by offset of the
underlying shares, subject to certain conditions.
(3) As of December 31, 2000, options for 85,031 shares were fully vested.
OPTION EXERCISES IN LAST YEAR AND YEAR-END OPTION VALUES
The following table provides information about option exercises in 2000 by
the named executive officers and the value of such officers' unexercised options
on December 31, 2000.
AGGREGATED OPTION EXERCISES IN 2000 AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES FISCAL YEAR-END FISCAL YEAR-END($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
Richard M. Rose, M.D...... 156,250 865,328 -- 93,750 -- --
George W. Dunbar, Jr...... 42,000 209,160 24,031 -- 11,248 --
Ann Tsukamoto, Ph.D....... -- -- 78,082 33,168 29,638 35,161
Ronnda Bartel, Ph.D....... -- -- 19,270 33,230 24,814 43,058
- ------------------------
(1) Value is based on the difference between the aggregate option exercise price
and the fair market value as of December 31, 2000. The fair market value of
the common stock is based on the closing price of the our common stock on
December 29, 2000 (the last trading day of 2000) on the Nasdaq National
Market, which was $2.50.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
Martin McGlynn joined the company as President and Chief Executive Officer
on January 15, 2001. Under the terms of an agreement between Mr. McGlynn and us,
Mr. McGlynn is entitled to an annual base salary of $275,000 per year,
reviewable annually by the board of directors, and a bonus, in the board's sole
discretion, of up to 25% of his base salary. Mr. McGlynn was granted an option
to purchase 400,000 shares of common stock with an exercise price equal to the
fair market value of the common stock on the date of his employment. One-fourth
of these options will vest on the first anniversary of his employment and the
remaining three-fourths will vest in equal monthly installments during his
second through fourth years of employment. The board may, in its sole
discretion, grant Mr. McGlynn a bonus option to purchase up to an additional
25,000 shares. The vesting under the option is subject to acceleration in the
event of certain changes of control. We also agreed to pay Mr. McGlynn a $50,000
relocation bonus and reimburse him for relocation expenses. Our agreement with
Mr. McGlynn provides that if his employment is terminated by us without cause or
by
45
Mr. McGlynn for good reason, he will be entitled to severance payments equal to
one year's base salary and he will receive healthcare benefits under our plans
for one year after termination. If Mr. McGlynn's employment is terminated as a
result of his disability, he will receive up to six months' base salary. If we
terminate Mr. McGlynn's employment for cause or if he resigns without good
reason, he will not be entitled to any severance or other benefits.
STOCK PLANS AND RELATED TRANSACTIONS
In April 2001, our board of directors adopted the 2001 Equity Incentive
Plan, subject to stockholder approval, which was obtained at our annual meeting
on May 31, 2001.
The purpose of the Plan is to advance our interests by enhancing our ability
to attract and retain executive officers, employees, directors and other persons
or entities providing services to us who are in a position to make significant
contributions to our success, and to reward participants for such contributions,
through ownership of shares of our common stock. The Plan is intended to
accomplish these goals by enabling us to grant awards in the form of options,
stock appreciation rights, restricted stock, unrestricted stock or deferred
stock, or performance awards, loans or supplemental grants or combinations
thereof, all as more fully described below. The Plan is the successor to both
our 1992 Equity Incentive Plan and our 1992 Stock Option Plan for Non-Employee
Directors. No awards may be made under either of the 1992 plans after
February 12, 2002.
The Plan is administered by our board of directors. Under the Plan, the
board may grant stock options, stock appreciation rights, restricted stock,
unrestricted stock, deferred stock, and performance awards (in cash or stock),
or combinations thereof, and may waive the terms and conditions of any award. A
total of 3,000,000 shares of common stock may be issued under the Plan.
Employees, including executive officers, directors and other persons or entities
providing services to us or its subsidiaries who are in a position to make a
significant contribution to our success are eligible to receive awards under the
Plan.
The exercise price of an incentive stock option ("ISO") granted under the
Plan or an option intended to qualify as performance-based compensation under
Section 162(m) of the Code shall not be less than 100% of the fair market value
of the stock at the time of grant. The board determines the exercise price of a
non-ISO granted under the Plan. No stock options may be granted under the Plan
after March 28, 2011, but stock options previously granted may extend beyond
that date. The exercise price may be paid in cash or by check. Subject to
certain additional limitations, the board may also permit the exercise price to
be paid by tendering shares of stock, by delivery of a promissory note, by
delivery to us of an undertaking by a broker to deliver promptly sufficient
funds to pay the exercise price, or a combination of the foregoing.
Stock appreciation rights ("SARs") may be granted either alone or in tandem
with stock option grants. Each SAR entitles the holder on exercise to receive an
amount in cash or stock or a combination thereof (such form to be determined by
the board) determined in whole or in part by reference to appreciation in the
fair market value of a share of Stock. SARs may be based solely on appreciation
in the fair market value of stock or on a comparison of such appreciation with
some other measure of market growth.
The Plan provides for awards of nontransferable shares of restricted stock
subject to forfeiture, as well as unrestricted shares of stock. Shares of
restricted stock may not be sold, transferred, pledged, assigned, or otherwise
alienated or hypothecated until the end of the applicable period and the
satisfaction of any other conditions or restrictions established by the board.
Except as the Plan otherwise specifically provides, if a participant ceases to
be an employee or ceases to continue the consulting or other similar
relationship engaged in by such participant with us for any reason other than
death during the restricted period, then the restricted stock must be offered to
us for purchase for the amount of cash paid for the restricted stock, or
forfeited to us if no cash was paid. The Plan also
46
provides for deferred grants entitling the recipient to receive shares of stock
in the future at such times and on such conditions as the board may specify.
The Plan provides for performance awards entitling the recipient to receive
without payment cash or stock or a combination thereof following the attainment
of performance goals determined by the board. In the case of any performance
award intended to qualify for the performance-based remuneration exception
described in Section 162(m) of the Code, the board will in writing pre-establish
specific performance goals that are based upon any one or more operational,
result or event-specific goals.
The Plan provides that the board has full authority to decide whether to
make a loan to a participant in connection with the purchase of stock under an
award or with the payment of any applicable income tax recognized as a result of
an award. The Plan also provides that, in connection with any award, the board
may provide for and grant a cash award with certain limitations as to the amount
of the supplemental grant.
Except as otherwise provided by the board, if a participant dies, options
and SARs exercisable immediately prior to death may be exercised by the
participant's executor, administrator or transferee during a period of one year
following such death (or for the remainder of their original term, if less).
Options and SARs not exercisable at a participant's death terminate. In the case
of termination for reasons other than death, options and SARs remain
exercisable, to the extent they were exercisable immediately prior to
termination, for three months (or for the remainder of their original term, if
less); provided that if in the Board's judgment the reason for the award
holder's termination casts discredit on us sufficient to justify immediate
termination of the award, then such award will immediately terminate.
In the case of certain mergers, consolidations or other transactions in
which we are acquired or is liquidated and there is a surviving or acquiring
corporation, the Plan permits the board to arrange for the assumption of awards
outstanding under the Plan or the grant to participants of replacement awards by
that corporation. All outstanding awards not assumed by the surviving or
acquiring corporation shall become exercisable immediately prior to the
consummation of such merger, consolidation or other transaction and upon such
consummation all outstanding awards that have not been assumed or replaced will
terminate.
The board may amend the Plan or any outstanding award at any time, provided
that no such amendment will, without the approval of our stockholders,
effectuate a change for which shareholder approval is required in order for the
Plan to continue to qualify for the award of ISOs under Section 422 of the Code
or for the award of performance-based compensation under Section 162(m) of the
Code.
The future benefits or amounts that would be received under the Plan by the
executive officers and the non-executive officer employees are discretionary and
are therefore not determinable at this time.
The 2001 Equity Incentive Plan became effective as of May 31, 2001.
47
RELATED PARTY TRANSACTIONS
COMPENSATION PAID TO DR. SCHWARTZ
Dr. Schwartz, a member and Chairman of the board of directors, was retained
in July 1998 under a consulting services agreement to serve as a consultant to
us rendering strategic business advice and counseling services, including
assistance in the negotiation and consummation of strategic collaboration
transactions specified by us. The consulting services agreement provided for
compensation to Dr. Schwartz in the amount of $50,000 in cash for services
rendered during the period of September 27, 1997 through July 26, 1998, plus a
fully vested option to purchase 20,000 shares of our common stock at $1.281, the
fair market value of our common stock at the time of the grant. For services
rendered during the term of the consulting services agreement, Dr. Schwartz was
entitled to total cash compensation of $120,000, an option to purchase 76,000
shares of our common stock with an exercise price equal to the closing bid price
for the shares on July 27, 1998, and an option to purchase 48,000 shares of our
common stock at the then current fair market value of our common stock on
July 27, 1999, vesting at a rate of 2,000 shares per month. In addition, the
consulting services agreement provided that in the event that, at a time when
Dr. Schwartz was not a member of the board of directors but the consulting
services agreement was still in effect, Dr. Schwartz materially participated in
the negotiation and consummation of a strategic collaboration transaction
specified by us, he would have been be entitled to receive additional
compensation equal to 3% of the transaction consideration, payable half in cash
and half in the form of an option or warrant to purchase shares of our common
stock at $.20 per share, the number of shares being calculated based on the fair
market value of our common stock ten days prior to the first public announcement
of the consummation of, the execution of a letter of intent for, or the
existence of discussions concerning the collaboration transaction. There have
been no such strategic collaboration transactions that would have given rise to
additional compensation.
On December 19, 1998, Dr. Schwartz became a member of the board of directors
and its Chairman and his compensation for services in this capacity was provided
for under the terms of a letter agreement, which also incorporated certain
compensation provided for under the consulting services agreement. Under the
letter agreement, as amended July 1, 1999, Dr. Schwartz in his capacity as
Chairman was entitled to receive $132,000 in cash per year, plus $1,500 per
board or committee meeting and $500 per telephonic meeting. He also received an
option to acquire 40,000 shares of our common stock under the 1992 Equity
Incentive Plan, with an exercise price equal to the fair market value on the
date of the grant. The time requirement for his position was set at thirty
business days per quarter. Dr. Schwartz canceled both the letter agreement and
the consulting services agreement as of March 31, 2001. He currently continues
to serve in his position as Chairman and member of the board of directors under
the terms of the compensation policy recently approved by the directors. See
"Management--Director Compensation."
COMPENSATION PAID TO DR. WEISSMAN
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 our 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 or in the event of certain changes of control. We
recorded compensation expense of $823,759 during the fourth quarter of 2000 as a
result of this change in the vested portion of the option. The deferred
compensation
48
expense associated with the unvested portion of the grants was recorded as
$669,116. We plan to revalue the options using the Black-Scholes method on a
quarterly basis and recognize additional compensation expense accordingly. We
also agreed in September 1997 to nominate Dr. Weissman for a position on the
board of directors. Dr. Weissman's consulting agreement contains
confidentiality, noncompetition, and assignment of invention provisions and is
for a term of fifteen years, subject to earlier termination by us for cause or
frustration of purpose and earlier termination by Dr. Weissman for good reason.
Dr. Weissman initially received 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 was reimbursed for reasonable expenses he
incurred in attending such meetings. In October 2000, we agreed with
Dr. Weissman that we would pay him the same compensation paid to other members
of the board. See "Management--Director Compensation."
PREFERRED STOCK ISSUED TO DR. WEISSMAN AND MR. LEVIN
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 at $6.58 per
share to each of Dr. Weissman and Mr. Levin, each a director, 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. Any unconverted preferred stock will be converted
into common stock on April 13, 2002. The warrants expire on April 13, 2005.
49
PRINCIPAL STOCKHOLDERS
The following table shows information regarding the beneficial ownership of
our capital stock as of April 30, 2001 for:
- each person or group of affiliated persons known by us to own beneficially
more than 5% of the outstanding shares of common stock and 6% cumulative
convertible preferred stock;
- 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.,
3155 Porter Drive, Palo Alto, CA 94304.
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 capital stock subject to
options or warrants held by that person that are currently exercisable or will
become exercisable within 60 days of April 30, 2001, but we have not deemed
these shares to be outstanding for computing the percentage ownership of any
other person. 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 and 6% cumulative convertible
preferred stock shown as beneficially owned by that stockholder. Except as
stated below in note 7, beneficial ownership percentage is based on 21,458,211
shares of our common stock and 1,500 shares of our 6% cumulative convertible
preferred stock outstanding on March 31, 2001.
PERCENTAGE PERCENTAGE
SHARES OF OF CLASS OF SHARES OF OF CLASS OF
COMMON STOCK COMMON STOCK PREFERRED STOCK PREFERRED STOCK
NAME OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED BENEFICIALLY OWNED BENEFICIALLY OWNED BENEFICIALLY OWNED
- --------------------------- ------------------ ------------------ ------------------ ------------------
Mark J. Levin............... 190,300(2) * 750 50%
Martin M. McGlynn........... -- -- -- --
Roger Perlmutter, M.D.,
Ph.D...................... 3,519(3) * -- --
John J. Schwartz, Ph.D...... 194,917(4) * -- --
Irving Weissman, M.D........ 133,685(5) * 750 50%
All directors and executive
officers as a group (7
persons).................. 653,749(6) 3.0% 1,500 100%
Millennium Partners, LP..... 2,878,862(7) 11.8% -- --
- --------------------------
* Less than one percent.
(1) The address of all such persons, except Millenium Partners, LP, is c/o the
Company, 3155 Porter Drive, Palo Alto, California 94304. The address of
Millenium Partners, LP is 551 Fifth Avenue, New York, New York 10176.
(2) Includes 41,296 shares of common stock issuable upon exercise of stock
options and a warrant to purchase 37,500 shares.
(3) All shares issuable upon exercise of stock options.
(4) Includes 194,917 shares issuable upon exercise of stock options.
(5) Includes 38,234 shares issuable upon exercise of stock options and 44,660
shares issuable upon exercise of warrants. Includes 50,791 shares owned by
trusts for the benefit of Dr. Weissman's children as to which he disclaims
beneficial ownership.
(6) Includes options to purchase 387,780 shares and warrants to purchase 185,129
shares.
(7) Includes 794,308 shares issuable upon the exercise of warrants. Also
includes 457,750 shares issued on June 21, 2001 upon exercise of an option
granted on August 3, 2000 to purchase up to $2 million of our common stock.
These shares were deemed outstanding only for purposes of calculating the
percentage of beneficial ownership of Millennium and not for any other
stockholder, for whom the percentage of beneficial ownership was based on
shares outstanding as of March 31, 2001. Information on Millennium's
beneficial ownership is based on a Schedule 13G filed by Millennium on
February 27, 2001.
50
DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
As of March 31, 2001, the total amount of our authorized capital stock
consisted of 45,000,000 shares of common stock, $.01 par value per share, and
1,000,000 shares of authorized preferred stock, $.01 par value per share, 2,626
of which has been designated as 6% cumulative preferred stock, 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 March 31, 2001, we had outstanding 21,458,211 shares of
common stock and 1,500 shares of 6% cumulative convertible preferred stock.
As of March 31, 2001, we had 287 stockholders of record with respect to our
common stock, and we had outstanding options and warrants to purchase 3,461,105
shares of our common stock, of which 871,386 were 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 our 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
51
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 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 a registration
rights agreement, dated April 13, 2000, by and between us and Irving Weissman
and Mark Levin. The 6% cumulative convertible preferred stock was issued
pursuant to a securities purchase agreement, dated April 13, 2000, by and
between us and Irving Weissman and Mark Levin. 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
Our warrants were issued at various times since April 13, 2000 to eight
different parties as described below.
As of April 13, 2000, we issued to each of Irving Weissman and Mark Levin,
each a director, 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. 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. See "Related Party Transactions--Preferred Stock Issued to
Dr. Weissman and Mr. Levin."
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 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. On
January 27, 2001, Millennium's August 3, 2000 adjustable warrant became
exercisable for
52
463,369 shares of our common stock, and Millennium purchased all of those shares
for $4,634 on March 30, 2001. On April 27, 2001, the adjustable warrant became
exercisable for an additional 622,469 shares of our common stock, and the
warrant has not been exercised with respect to those shares. On June 21, 2001,
Millennium received an additional adjustable warrant similar to the adjustable
warrant issued to Millennium on August 3, 2000. It is not currently exercisable
for shares of our common stock but may be adjusted in the future to permit
purchases of our common stock at $0.01 per share.
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. On June 21, 2001, Millennium
received an additional warrant to purchase 50,352 shares of our common stock at
a price per share of $4.7664. This warrant is callable by us at any time at
$7.944 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.
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 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.
On May 10, 2001, in connection with our execution of a common stock purchase
agreement with Sativum Investments Limited, we issued three three-year warrants
to purchase an aggregate of 350,000 shares of our common stock at $2.38 per
share to Sativum (250,000 shares), Pacific Crest Securities Inc. (75,000 shares)
and Granite Financial Group, Inc. (25,000 shares). The shares underlying these
warrants are being registered for sale by the registration statement of which
this prospectus forms a part. The exercise price and number of shares are
subject to adjustment for subdivisions, combinations, stock dividends and
reorganizations.
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,
53
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.
COMMON STOCK PURCHASE AGREEMENT
On May 10, 2001, we entered into a common stock purchase agreement with
Sativum Investments Limited, a British Virgin Islands corporation, for the
future issuance and purchase of shares of our common stock. This common stock
purchase agreement establishes what is sometimes termed an equity line.
In general, under the equity line, Sativum has committed to provide us up to
$30,000,000 as we request it over a 30-month period in return for newly issued
common stock. Once every 22 trading days on the Nasdaq National Market, we may
request a drawdown. The amount we can draw down at each request must be at least
$100,000. The maximum amount we can actually draw down for each request is also
limited to 6% of the weighted average price of our common stock for the 60
calendar days prior to the date of our request multiplied by the total trading
volume of our common stock for the 60 calendar days prior to our request. We are
under no obligation to issue any shares to Sativum or to request a drawdown
during any period.
Each 20-day trading period following a drawdown request is divided into two
10 trading day settlement periods. We are entitled to receive funds and must
deliver shares to Sativum on the 12th day and the 22nd day following the
delivery of a drawdown notice. Our requested drawdown amount will be reduced by
1/20 for each day during the 20 trading day period that the volume-weighted
average stock price falls below a threshold price set by us or for each day on
which trading of our shares on Nasdaq is suspended or the registration statement
of which this prospectus forms a part is suspended. We then use the formulas in
the common stock purchase agreement to determine the number of shares that we
will issue to Sativum in return for the actual drawdown amount. The formulas for
determining the actual drawdown amounts, the number of shares that we issue to
Sativum and the price per share paid by Sativum are described in detail
beginning on page 56. The aggregate total of all drawdowns under the equity line
cannot exceed $30,000,000.
The price per share dollar amount that Sativum pays for our common stock for
each drawdown includes a 6% discount to the average daily market price of our
common stock for each day during the 20 day trading period after our drawdown
request, weighted by trading volume during each such trading day. The actual
drawdown amount will be reduced by a fee, equal to 3% of net proceeds, payable
to the placement agent, Pacific Crest Securities, Inc., which introduced Sativum
to us. Pacific Crest has agreed to contribute one-third of each of its drawdown
fees to Granite Financial Group, Inc.
We are required to comply with Nasdaq's issuer designation requirements. One
of those requirements prevents us from issuing, pursuant to the common stock
purchase agreement, more than 3,922,606 shares, or 19.9% of our outstanding
common stock on May 10, 2001 minus the shares underlying the warrants, unless
and until we receive the approval of our stockholders. If necessary, we will
seek stockholder approval at or prior to our 2002 or 2003 annual meeting of
stockholders in case we opt to issue shares of common stock pursuant to the
common stock purchase agreement in excess of that amount. Additionally, the
common stock purchase agreement does not permit us to draw funds if the issuance
of shares of common stock to Sativum pursuant to the drawdown would exceed 9.9%
of our outstanding common stock held by Sativum on the drawdown exercise date.
In such cases, we will not be permitted to issue the shares otherwise issuable
pursuant to the qdrawdown that exceed that amount of shares, and Sativum will
not be obligated to purchase those shares. Shares sold by Sativum
54
from time to time will reduce its beneficial ownership of our common stock and
accordingly permit us to sell additional shares to Sativum under the common
stock purchase agreement.
We are prohibited by the common stock purchase agreement from entering into
any other stand-by equity based credit facilities during the term of the common
stock purchase agreement. We are not prohibited, however, from entering into
other equity or debt financing arrangements.
In connection with the common stock purchase agreement, we issued to Sativum
at the initial closing a warrant certificate to purchase up to 250,000 shares of
our common stock. The warrant expires on May 10, 2004. The exercise price of the
warrant is $2.3805. Simultaneous with the issuance of the warrant to Sativum, we
issued a warrant to Pacific Crest for the purchase of up to 75,000 shares of our
common stock and to Granite Financial Group, Inc. for the purchase of up to
25,000 shares of our common stock, on the same terms as Sativum's warrant. The
shares underlying these warrants are being registered by the registration
statement of which this prospectus forms a part.
THE DRAWDOWN PROCEDURE AND THE STOCK PURCHASES
We may request a drawdown by faxing to Sativum a drawdown notice, stating
the amount of the drawdown that we wish to exercise and the minimum threshold
price at which we are willing to sell the shares.
DOLLAR AMOUNT OF THE DRAWDOWN
No drawdown can be less than $100,000 or more than 6% of the weighted
average price of our common stock for the sixty calendar days prior to the date
of our request, multiplied by the total trading volume of our common stock for
the 60 calendar days prior to our request. A sample calculation of the maximum
drawdown amount is described on page 56.
The actual dollar amount of the drawdown will be reduced by 1/20 for every
day during the 20 trading days after our drawdown request that:
- the volume weighted average price is less than the minimum threshold price
we designate;
- the common stock is suspended for more than three hours, in the aggregate,
or if any trading day is shortened because of a public holiday; or
- if sales of previously drawn down shares pursuant to the registration
statement of which this prospectus is a part are suspended by us because
of certain potentially material events for more than three hours, in the
aggregate.
If any of the above three conditions is met for one or more trading days
during the 20 trading day period, the actual dollar amount of our drawdown will
be lower than we requested in our notice. The volume weighted average price of
any trading day during a pricing period that meets any of the conditions above
will have no effect on the pricing of the shares purchased with respect to the
other days during that pricing period.
NUMBER OF SHARES
The volume-weighted average price of our shares on each of the 20 trading
days immediately following the drawdown notice, except for days excluded in any
of the three bullets above, is used to determine the number of shares that we
will issue in return for the money provided by Sativum. We will not know the
number of shares we will be issuing in a drawdown at the time of delivery of our
drawdown notice. If our stock price falls during the 20 trading days after the
notice, the number of shares will proportionately rise, except that we will not
be required to issue shares below the threshold price that we will have set in
the notice.
55
The number of shares of common stock that we will issue with respect to each
trading day during a drawdown will be determined by the following formula:
- 1/20th of the dollar amount contained in our drawdown notice divided by
- 94% of the volume-weighted average price of our common stock for that day.
The 94% reflects Sativum's 6% discount. The sum of these 20 daily calculations
produces the number of common shares that we will issue, unless trading one or
more days is excluded as explained above, in which case that day is ignored in
the calculation.
SAMPLE CALCULATION OF STOCK PURCHASES
The following is an example of the calculation of a single drawdown and the
number of shares we would issue to Sativum in connection with that drawdown
based on the assumptions noted in the discussion below.
SAMPLE MAXIMUM DRAWDOWN AMOUNT CALCULATION
For purposes of this example, suppose that we provide a drawdown notice to
Sativum, and that we set the threshold price at $1.90 per share based on the
volume weighted average price before applying the 6% discount. Suppose further
that the total trading volume for the 60 calendar days prior to our drawdown
notice is 5,335,700 shares and that the average of the volume-weighted average
daily prices of our common stock for the 60 calendar days prior to the notice is
$2.18. Using these hypothetical numbers, which by way of example only are the
actual volume and price numbers for our common stock for the 60 calendar days
ended May 18, 2001, the maximum amount of the drawdown is as follows:
- the total trading volume for the 60 calendar days prior to our drawdown
notice, 5,335,700, multiplied by
- the average of the volume-weighted average daily prices of our common
stock for the 60 calendar days prior to the drawdown notice, $2.18,
multiplied by
- 6%
equals $697,910.
The maximum amount we can request in a drawdown notice under the formula and
using these hypothetical numbers, is therefore capped at $697,910.
SAMPLE CALCULATION OF NUMBER OF SHARES
Assuming we requested the maximum drawdown amount reflected by the
hypothetical numbers above, and assuming that the volume-weighted average daily
prices for our common stock for the twenty trading days following our drawdown
notice as set forth in the table below, the number of shares to be issued based
on any trading day during the drawdown period can be calculated as follows:
- 1/20 of the requested drawdown amount of $697,910 divided by
- 94% of the volume-weighted average daily price.
For example, for the fourth trading day in the example in the table below,
the calculation is as follows: 1/20 of $697,910 is $34,895. Divide $34,895 by
94% of the volume-weighted average daily price for that day of $1.90 per share,
to get 19,538 shares. Perform this share calculation for each of the 20
measuring days during the drawdown period, excluding any days on which the
volume-weighted average daily price is below the $1.90 threshold price, or on
which trading of our common stock or the
56
effectiveness of the registration statement of which this prospectus forms a
part is suspended. Add the results to determine the number of shares to be
issued.
After excluding the first three days of the period because they are below
the threshold price, the actual dollar amount of our drawdown in this example
would be $593,223, $244,268 of which would be settled on day 12 for the first
settlement period, and $348,955 of which would be settled on day 22 for the
second settlement period. The total number of shares that we would issue to
Sativum for this drawdown request would be 264,445 shares, so long as those
shares, together with all other shares held by Sativum, do not exceed 9.9% of
our then outstanding common stock. Of these total shares issued with respect to
this hypothetical drawdown, 128,612 shares would be issued on day 12 for the
first settlement period and 135,833 shares would be issued on day 22 for the
second settlement period. Sativum would pay an average of $2.24 per share for
these shares.
HYPOTHETICAL DRAWDOWN PRICING PERIOD(1)
VOLUME WEIGHTED
AVERAGE PRICE DAILY INVESTMENT
TRADING DAY (VWAP) 94% OF VWAP AMOUNT NUMBER OF SHARES SOLD
- --------------------- ---------------------- ---------------------- ---------------------- ----------------------
1 $1.87 $1.76 (2) (2)
2 $1.84 $1.73 (2) (2)
3 $1.82 $1.71 (2) (2)
4 $1.90 $1.79 $34,895 19,538
5 $1.92 $1.81 $34,895 19,316
6 $1.94 $1.83 $34,895 19,114
7 $1.94 $1.82 $34,895 19,136
8 $2.11 $1.99 $34,895 17,567
9 $2.11 $1.98 $34,895 17,624
10 $2.28 $2.14 $34,895 16,317
11 $2.31 $2.17 $34,895 16,046
12 $2.42 $2.27 $34,895 15,352
13 $2.96 $2.78 $34,895 12,551
14 $2.77 $2.60 $34,895 13,399
15 $2.64 $2.48 $34,895 14,075
16 $2.52 $2.37 $34,895 14,735
17 $2.91 $2.73 $34,895 12,762
18 $2.87 $2.69 $34,895 12,948
19 $3.02 $2.84 $34,895 12,298
20 $3.18 $2.99 $34,895 11,667
---------------------- ----------------------
Total $593,223 264,445
(1) We have used the volume-weighted average share prices of our common stock
during the twenty trading days ended May 18, 2001 for illustrative purposes
only. Our use of these numbers should not be interpreted as a forecast of
share prices, an indicator of the prices at which we may choose to utilize
the equity line or the expected or historical volatility of our common
stock, whether during or outside a drawdown period. Due to rounding,
division of the figures in the above table may not exactly equal the shares
presented.
(2) Excluded because the volume-weighted average daily price is below the
threshold specified in our hypothetical drawdown notice.
We would receive the amount of our adjusted drawdown, $593,223, less an
aggregate 3% cash fee paid to the placement agent, Pacific Crest, of $17,797,
for net proceeds to us of approximately $575,426. Pacific Crest would contribute
one-third, or $5,932, of this hypothetical placement fee to
57
Granite. The delivery of the requisite number of shares and payment of the
drawdown will take place electronically and, if we choose, through an escrow
agent, Epstein, Becker & Green, P.C. of New York.
NECESSARY CONDITIONS BEFORE SATIVUM IS OBLIGATED TO PURCHASE OUR SHARES
The following conditions must be satisfied before Sativum is obligated to
purchase any common shares following a drawdown request:
- a registration statement for the resale of the shares by Sativum must be
declared effective by the Securities and Exchange Commission and must
remain effective and available as of the drawdown settlement date;
- trading in our common shares must not have been suspended by the
Securities and Exchange Commission or the Nasdaq National Market, nor
shall minimum prices have been established on securities whose trades are
reported on the Nasdaq National Market;
- we must not have merged or consolidated with or into another company or
transferred all or substantially all of our assets to another company,
unless the acquiring company has agreed to honor the common stock purchase
agreement;
- no statute, rule, regulation, executive order, decree, ruling or
injunction may be in effect which prohibits consummation of the
transactions contemplated by the common stock purchase agreement; and
- no event which is materially adverse to our business, operations,
properties or financial condition shall have occurred.
A further condition is that we may not issue more than 19.9% of our common
shares issued and outstanding on May 10, 2001 pursuant to the common stock
purchase agreement on the associated warrants, without our first obtaining
approval from our stockholders for the excess issuance. In addition, the common
stock purchase agreement provides that Sativum is not permitted to purchase
shares of our common stock pursuant to a drawdown to the extent that the
purchase of those shares would result in Sativum's beneficially owning more than
9.9% of our common stock following the purchase. Accordingly, each drawdown will
be limited to an amount that will cause Sativum's beneficial ownership as of the
date of the purchase to exceed 9.9%. However, shares sold by Sativum from time
to time will reduce its beneficial ownership of our common stock and accordingly
permit us to sell additional shares to Sativum under the common stock purchase
agreement.
COSTS OF CLOSING THE TRANSACTION
We paid $50,000 to cover the fees and expenses of Sativum's counsel and
other administrative costs. Pacific Crest Securities, Inc. also received a
$25,000 placement fee. Neither Pacific Crest nor Granite is obligated to
purchase any of our shares pursuant to the common stock purchase agreement.
LIQUIDATED DAMAGES
We will be required to pay liquidated damages to Sativum if we fail to
deliver shares within 5 trading days after a settlement date. We will also be
required to pay liquidated damages to Sativum if the effectiveness of this
registration statement is suspended during, or within 5 days after, a drawdown
pricing period. In the latter case, we will be required to compensate Sativum
for any net decline in the price of our shares greater than 20% following the
suspension to the extent Sativum sold shares at the reduced price within 5 days
after the end of the suspension period.
58
TERMINATION OF THE COMMON STOCK PURCHASE AGREEMENT
The equity line established by the common stock purchase agreement will
terminate 30 months from the effective date of the registration statement of
which this prospectus forms a part. The equity line shall also terminate if we
file for protection from creditors, if our common stock is delisted from The
Nasdaq National Market and not promptly relisted on Nasdaq, Nasdaq SmallCap
Market, the American Stock Exchange or the New York Stock Exchange. We may
terminate the agreement if Sativum fails to perform its obligations to purchase
shares with respect to a drawdown.
INDEMNIFICATION OF SATIVUM AND PACIFIC CREST
Sativum is entitled to customary indemnification from us for any losses or
liabilities suffered by it as a result of material misstatements or omissions
from the common stock purchase agreement, registration statement and this
prospectus as supplemented from time to time, except as they relate to
information supplied by Sativum to us for inclusion in the registration
statement and prospectus. Pacific Crest is also entitled to customary
indemnification from us from any losses or liabilities suffered by it in
connection with its role as placement agent.
SELLING STOCKHOLDERS
OVERVIEW
Shares of our common stock registered for resale under this prospectus
constitute 48.2% of our issued and outstanding common shares as of March 31,
2001. However, we may not sell more than 3,922,606 shares of common stock, or
19.9% of our issued and outstanding common stock as of May 10, 2001, minus the
shares underlying the warrants, unless and until we receive the approval of our
stockholders as required pursuant to Nasdaq's issuer designation requirements.
The number of shares we are registering is based in part on our good faith
estimate of the maximum number of shares we may issue to Sativum under the
common stock purchase agreement. We are under no obligation to issue any shares
to Sativum under the common stock purchase agreement. Accordingly, the number of
shares we are registering for issuance under the common stock purchase agreement
may be higher than the number we actually issue under the common stock purchase
agreement.
SATIVUM INVESTMENTS LIMITED
Sativum Investments Limited is engaged in the business of investing in
publicly traded equity securities for its own account. Sativum's principal
offices are located at Harbour House, 2nd Floor, Road Town, Tortolla, British
Virgin Islands. Investment decisions for Sativum are made by its board of
directors. Sativum has informed us that it does not currently own any of our
securities as of the date of this prospectus. Other than its obligation to
purchase common shares under the common stock purchase agreement, it has no
other commitments or arrangements to purchase or sell any of our securities.
Sativum is prohibited by the common stock purchase agreement from engaging in
short sales of our common stock, as defined in applicable securities
regulations. There are no business relationships between Sativum and us other
than as contemplated by the common stock purchase agreement.
PACIFIC CREST SECURITIES, INC. AND GRANITE FINANCIAL GROUP, INC.
Pacific Crest Securities, Inc., a registered broker-dealer, has acted as
placement agent in connection with the equity line. Pacific Crest introduced us
to Sativum and assisted us with structuring the equity line with Sativum.
Pacific Crest's duties as placement agent were undertaken on a reasonable best
efforts basis only. It made no commitment to purchase shares from us and did not
ensure us of the successful placement of any securities.
59
Other than the warrant to purchase 75,000 shares of common stock granted to
Pacific Crest as a placement fee, Pacific Crest has informed us that it does not
currently own any of our securities. Other than the warrant to purchase 25,000
shares of common stock, Granite Financial Group, Inc., also a placement agent
and a registered broker-dealer, has informed us that it does not currently own
any of our securities.
Sativum, Pacific Crest and Granite have not held any positions as officers
or had material relationships with us or any of our affiliates within the past
three years other than as a result of the ownership of our common stock. If, in
the future, any of their relationships with us changes, we will amend or
supplement this prospectus to update this disclosure.
60
PLAN OF DISTRIBUTION
GENERAL
Sativum Investments Limited, is offering the common shares for its account
as statutory underwriter, and not for our account. We will not receive any
proceeds from the sale of common shares by Sativum. Sativum may be offering for
sale up to 10,000,000 common shares pursuant to this prospectus which it may
acquire pursuant to the terms of the stock purchase agreement more fully
described under the section of this prospectus entitled "The Common Stock
Purchase Agreement." Sativum is a statutory underwriter within the meaning of
the Securities Act of 1933 in connection with such sales of common shares and
will be acting as an underwriter in its resales of the common shares under this
prospectus. Sativum has, prior to any sales, agreed not to effect any offers or
sales of the common shares in any manner other than as specified in the
prospectus and not to purchase or induce others to purchase common shares in
violation of any applicable state and federal securities laws, rules and
regulations and the rules and regulations of The Nasdaq National Market. Sativum
has agreed not to engage in short sales of our common stock, as defined in
applicable securities regulations, during the term of the common stock purchase
agreement. We will pay the costs of registering the shares under this
prospectus, including legal fees.
To permit Sativum to resell the shares of common stock issued to it under
the stock purchase agreement, we agreed to register those shares and to maintain
that registration. To that end, we have agreed with Sativum that we will prepare
and file such amendments and supplements to the registration statement and the
prospectus as may be necessary in accordance with the Securities Act and the
rules and regulations promulgated thereunder, to keep it effective so long as
any of the shares are "registrable securities," as defined in our registration
rights agreement with Sativum. Registrable securities include all shares sold to
Sativum pursuant to the common stock purchase agreement that:
- have not been sold pursuant to the registration statement of which this
prospectus forms a part;
- have not been sold pursuant to Rule 144 under the Securities Act;
- have not been otherwise transferred to persons who may trade the shares
without restriction under the Securities Act, as evidenced by share
certificates not bearing a restrictive legend; or
- may not be sold, in the opinion of our counsel, without restriction under
the Securities Act.
Shares of common stock offered through this prospectus may be sold from time
to time by Sativum. Shares of common stock issuable upon exercise of the
warrants issued as of the date of the common stock purchase agreement to
Sativum, Pacific Crest Securities, Inc. and Granite Financial Group, Inc. or
their transferees, may also be sold through this prospectus. We will supplement
this prospectus to disclose the names of any transferees of warrant shares that
intend to offer common stock through this prospectus.
Sales may be made on the Nasdaq National Market, on 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 negotiated private transactions, or in a
combination of these methods. Sativum will act independently of us in making
decisions with respect to the form, timing, manner and size of each sale. We
have been informed by Sativum and Pacific Crest that there are no existing
arrangements between either of them and any stockholder, broker, dealer,
underwriter or agent relating to the distribution of this prospectus. Sativum is
an underwriter in connection with resales of its shares.
The common shares may be sold in one or more of the following manners:
- 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;
- purchases by a broker or dealer for its account under this prospectus; or
- ordinary brokerage transactions and transactions in which the broker
solicits purchases.
61
In effecting sales, brokers or dealers engaged by Sativum, Pacific Crest or
Granite may arrange for other brokers or dealers to participate. Except as
disclosed in a supplement to this prospectus, no broker-dealer will be paid more
than a customary brokerage commission in connection with any sale of the shares
of common stock by Sativum, Pacific Crest or Granite. Brokers or dealers may
receive commissions, discounts or other concessions from the selling
stockholders in amounts to be negotiated immediately prior to the sale. The
compensation to a particular broker-dealer may be in excess of customary
commissions. Profits on any resale of the shares of common stock as a principal
by such broker-dealers and any commissions received by such broker-dealers may
be deemed to be underwriting discounts and commissions under the Securities Act.
Any broker-dealer participating in such transactions as agent may receive
commissions from Sativum, Pacific Crest and Granite, if they act as agent for
the purchaser of such shares of common stock, from such purchaser.
Broker-dealers who acquire common shares as principal may thereafter resell
such shares of common stock from time to time in transactions, which may involve
crosses and block transactions and which may involve sales to and through other
broker-dealers, including transactions of the nature described above, in the
over-the-counter market, in negotiated transactions or otherwise at market
prices prevailing at the time of sale or at negotiated prices, and in connection
with such resales may pay to or receive from the purchasers of such shares of
common stock commissions computed as described above. Brokers or dealers who
acquire common shares as principal and any other participating brokers or
dealers may be deemed to be underwriters in connection with resales of the
shares of common stock.
In addition, any shares of common stock covered by this prospectus which
qualify for sale pursuant to Rule 144 may be sold under Rule 144 rather than
pursuant to this prospectus. However, since Sativum is an underwriter, Rule 144
of the Securities Act is not available to Sativum to sell its shares. We will
not receive any of the proceeds from the sale of these shares of common stock,
although we have paid the expenses of preparing this prospectus and the related
registration statement of which it is a part and have reimbursed Sativum $50,000
for its legal and administrative costs.
Sativum, Pacific Crest and Granite are subject to the applicable provisions
of the Exchange Act, including without limitation Rule 10b-5 thereunder. Under
applicable rules and regulations under the Exchange Act, any person engaged in a
distribution of the shares of common stock may not simultaneously purchase such
securities for a period beginning when such person becomes a distribution
participant and ending upon such person's completion of participation in a
distribution. In addition, in connection with the transactions in the shares of
common stock, Sativum, Pacific Crest and Granite will be subject to applicable
provisions of the Exchange Act and the rules and regulations under that Act,
including, without limitation, the rules set forth above. These restrictions may
affect the marketability of the shares of common stock.
Sativum, Pacific Crest and Granite will pay all commissions and its own
expenses, if any, associated with the sale of the shares of common stock, other
than the expenses associated with preparing this prospectus and the registration
statement of which it is a part.
UNDERWRITING COMPENSATION AND EXPENSES
The underwriting compensation for Sativum will depend on the amount of
financing that we are able to obtain under the stock purchase agreement, up to a
maximum of $1,914,894 if we are able to obtain the entire $30,000,000 in
financing. Sativum will purchase shares under the stock purchase agreement at a
price equal to 94% of the volume-weighted average daily price of our common
stock reported on the Nasdaq National Market for each day in the pricing period
with respect to each drawdown request.
At the time of the initial closing under the common stock purchase
agreement, we also issued to Sativum a warrant to purchase 250,000 shares of our
common stock at an exercise price of $2.38 per share. The warrant expires May
10, 2004.
62
In addition, we are obligated to pay Pacific Crest, as compensation for its
services as Sativum's placement agent, a cash fee equal to 3% of the net
proceeds received from Sativum under the common stock purchase agreement for
draw downs under the equity line. The compensation to Pacific Crest will depend
on the amount of financing that we obtain under the common stock purchase
agreement, up to a maximum of $900,000 if we obtain the entire $30,000,000 in
financing. Pacific Crest has agreed to contribute one-third of all drawdown fees
to Granite Financial Group, Inc. We also issued to Pacific Crest a warrant to
purchase 75,000 shares of our common stock and to Granite a warrant to purchase
25,000 shares of our common stock. Each warrant has an exercise price of $2.38
per share and expires May 10, 2004.
LIMITED GRANT OF REGISTRATION RIGHTS
We granted registration rights to Sativum to enable it to sell the common
stock it purchases under the common stock purchase agreement. In connection with
any such registration, we will have no obligation:
- to assist or cooperate with Sativum in the offering or disposition of such
shares;
- to indemnify or hold harmless the holders of any such shares, other than
Sativum, or any underwriter designated by such holders;
- to obtain a commitment from an underwriter relative to the sale of any
such shares; or
- to include such shares within any underwritten offering we do.
We will assume no obligation or responsibility whatsoever to determine a
method of disposition for such shares or to otherwise include such shares within
the confines of any registered offering other than the registration statement of
which this prospectus is a part.
We will use commercially reasonable efforts to file, during any period
during which we are required to do so under our registration rights agreement
with Sativum, one or more post-effective amendments to the registration
statement of which this prospectus is a part to describe any material
information with respect to the plan of distribution not previously disclosed in
this prospectus or any material change to such information in this prospectus.
This obligation may include, to the extent required under the Securities Act of
1933, that a supplemental prospectus be filed, disclosing
- the name of any broker-dealers;
- the number of common shares involved;
- the price at which the common shares are to be sold;
- the commissions paid or discounts or concessions allowed to
broker-dealers, where applicable;
- that broker-dealers did not conduct any investigation to verify the
information set out or incorporated by reference in this prospectus, as
supplemented; and
- any other facts material to the transaction.
Our registration rights agreement with Sativum permits us to restrict the
resale of the shares Sativum has purchased from us under the common stock
purchase agreement for a period of time sufficient to permit us to amend or
supplement this prospectus to include material information. If we restrict
Sativum during any pricing period or the five consecutive business days after a
pricing period and our stock price declines during the restricted period, we are
required to pay to Sativum cash to compensate Sativum for its inability to sell
shares during the restricted period. The amount we would be required to pay
would be the difference between the average daily volume weighed average price
of the common stock during the pricing period and the price at which the shares
were eventually sold, provided the sales are made within 5 business days of the
end of the restricted period and the difference in price is greater than 20% of
the average purchase price paid by Sativum during the relevant pricing period.
63
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, 2000 and 1999, and for each of the three
years in the period ended December 31, 2000, as set forth in their report. We
have included these 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-3 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.
INCORPORATION OF DOCUMENTS BY REFERENCE
The SEC allows us to incorporate by reference the information we file with
it, which means that we can disclose information important to you by referring
you to those documents. The information incorporated by reference is considered
to be a part of this prospectus, and information that we later file with the SEC
will automatically update and supersede this information. Accordingly, we
incorporate by reference the following documents we filed with the SEC pursuant
to Section 13 of the Securities Exchange Act of 1934:
- our Annual Report on Form 10-K for the year ended December 31, 2000 (filed
April 2, 2001, as amended April 30, 2001);
- our Quarterly Report on Form 10-Q for the quarter ended March 31, 2001
(filed May 9, 2001);
- our Proxy Statement for the Annual Meeting of Stockholders held on
May 31, 2001 (filed April 30, 2001);
- our Current Reports on Form 8-K dated May 8, 2001 (filed May 8, 2001) and
May 14, 2001 (dated May 14, 2001);
- the description of our common stock contained in the registration
statement on Form 8-A filed with the SEC pursuant to Section 12 of the
Securities Exchange Act of 1934 and all amendments thereto and reports
filed for the purpose of updating such description; and
64
- all documents filed by us with the SEC pursuant to the Securities Exchange
Act of 1934 after the date of this prospectus and before the offering of
common stock is completed (other than portions of such documents described
in paragraphs (i), (k) and (l) of Item 402 of Regulation S-K promulgated
by the SEC.
These documents are or will be available for inspection or copying at the
locations identified above under the caption "Where You Can Find More
Information." We will provide without charge to each person to whom this
prospectus is delivered, upon written or oral request, a copy of any and all of
the documents that have been incorporated by reference in this prospectus (other
than exhibits to those documents). You should direct requests for documents to:
StemCells, Inc.
3155 Porter Drive
Palo Alto, CA 94304
Attention: Investor Relations
Telephone number: (650) 475-3100
65
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets at December 31, 2000 and 1999... F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998.......................... F-4
Consolidated Statements of Changes in Redeemable Common
Stock and Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998.......................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................... F-8
Notes to Consolidated Financial Statements.................. F-9
Condensed Consolidated Balance Sheets at March 31, 2001
(unaudited)............................................... F-27
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2001 and March 31, 2000
(unaudited)............................................... F-28
Condensed Statements of Cash Flows for the three months
ended March 31, 2001 and March 31, 2000 (unaudited)....... F-29
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... F-30
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders and Board of Directors
StemCells, Inc.
We have audited the accompanying consolidated balance sheets of
StemCells, Inc. (formerly CytoTherapeutics, Inc.) as of December 31, 2000 and
1999, 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, 2000. 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. at December 31, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for the beneficial conversion of preferred
shares.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 23, 2001
F-2
STEMCELLS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------
2000 1999
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,068,947 $ 4,760,064
Short-term restricted investments......................... 16,356,334 --
Accrued interest receivable............................... 16,725 42,212
Technology sale receivable................................ -- 3,000,000
Debt service fund......................................... -- 609,905
Other current assets...................................... 524,509 558,674
------------- -------------
Total current assets........................................ 22,966,515 8,970,855
Property held for sale...................................... 3,203,491 3,203,491
Property, plant and equipment, net.......................... 1,451,061 1,747,885
Other assets, net........................................... 2,173,912 1,858,768
------------- -------------
Total assets................................................ $ 29,794,979 $ 15,780,999
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 526,191 $ 631,315
Accrued expenses.......................................... 837,358 970,546
Accrued wind-down costs................................... 1,780,579 1,634,522
Current maturities of capital lease obligations........... 332,083 324,167
------------- -------------
Total current liabilities................................... 3,476,211 3,560,550
Capital lease obligations, less current maturities.......... 2,605,000 2,937,083
Deposits.................................................... 26,000 26,000
Deferred rent............................................... 705,746 502,353
Commitments
Redeemable common stock, $.01 par value; 524,337 shares
issued and outstanding at December 31, 1999, none at
December 31, 2000......................................... -- 5,248,610
Stockholders' equity:
Convertible Preferred Stock, $.01 par value; 1,000,000
shares authorized, 2,626 designated as 6% Cumulative
Convertible Preferred Stock 1,500 shares issued and
outstanding at December 31, 2000, none at December 31,
1999.................................................... 1,500,000 --
Common stock, $.01 par value; 45,000,000 shares
authorized; 20,956,887 and 18,635,565 shares issued and
outstanding at December 31, 2000 and 1999,
respectively............................................ 209,569 186,355
Additional paid-in capital................................ 138,150,067 123,917,758
Accumulated deficit....................................... (130,498,187) (119,372,710)
Accumulated other comprehensive income.................... 16,356,334 --
Deferred compensation..................................... (2,735,761) (1,225,000)
------------- -------------
Total stockholders' equity.................................. 22,982,022 3,506,403
------------- -------------
Total liabilities and stockholders' equity.................. $ 29,794,979 $ 15,780,999
============= =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
STEMCELLS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenue from collaborative and licensing
agreements........................................ $ 74,300 $ 5,021,707 $ 8,803,163
Operating expenses:
Research and development.......................... 5,979,007 9,984,027 17,658,530
General and administrative........................ 3,361,231 4,927,303 4,602,758
Encapsulated Cell Therapy wind-down and corporate
relocation...................................... 3,327,360 6,047,806 --
------------ ------------ ------------
12,667,598 20,959,136 22,261,288
------------ ------------ ------------
Loss from operations................................ (12,593,298) (15,937,429) (13,458,125)
Other income (expense):
Interest income................................... 303,746 564,006 1,253,781
Interest expense.................................. (272,513) (335,203) (472,400)
Gain on sale of Investment........................ 1,427,686 -- --
Other income...................................... 8,902 -- 48,914
------------ ------------ ------------
1,467,821 228,803 830,295
------------ ------------ ------------
Net loss............................................ $(11,125,477) $(15,708,626) $(12,627,830)
Deemed dividend to preferred shareholders........... (265,000) -- --
------------ ------------ ------------
Net loss applicable to common shareholders before a
cumulative effect of a change in accounting
principle......................................... $(11,390,477) $(15,708,626) $(12,627,830)
Cumulative effect of a change in accounting
principle due to deemed dividend.................. $ (216,000) $ -- $ --
------------ ------------ ------------
Net loss applicable to common shareholders.......... $(11,606,477) $(15,708,626) $(12,627,830)
============ ============ ============
Basic and diluted net loss per share applicable to
common shareholders before cumulative effect...... $ (.57) $ (.84) $ (.69)
Cumulative effect of a change in accounting
principle......................................... $ (.01) -- --
------------ ------------ ------------
Basic and diluted net loss per share applicable to
common shareholders............................... $ (.58) $ (.84) $ (.69)
Shares used in computing basic and diluted net loss
per share......................................... 20,067,760 18,705,838 18,290,548
============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
STEMCELLS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY
REDEEMABLE ACCUMULATED
COMMON STOCK COMMON STOCK ADDITIONAL OTHER
--------------------- --------------------- PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS)
-------- ---------- ---------- -------- ------------ ------------- --------------
Balances, December 31, 1997........ 557,754 $5,583,110 17,526,220 $175,262 $121,472,844 $ (91,036,254) $(8,877)
Issuance of common stock under the
stock purchase plan.............. -- -- 43,542 436 83,622
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............ -- -- -- -- -- -- 3,679
Net loss........................... -- -- -- -- -- (12,627,830) --
Comprehensive loss.................
------- ---------- ---------- -------- ------------ ------------- -------
Balances, December 31, 1998........ 524,337 5,248,610 17,800,323 178,003 122,861,606 (103,664,084) (5,198)
TOTAL
DEFERRED STOCKHOLDERS'
COMPENSATION EQUITY
------------- -------------
Balances, December 31, 1997........ $(1,702,820) $ 28,900,155
Issuance of common stock under the
stock purchase plan.............. 84,058
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................ 229,901 551,009
Change in unrealized losses on
marketable securities............ -- 3,679
Net loss........................... -- (12,627,830)
------------
Comprehensive loss................. (12,624,151)
----------- ------------
Balances, December 31, 1998........ (1,472,919) 17,897,408
F-5
STEMCELLS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY (CONTINUED)
REDEEMABLE ACCUMULATED
COMMON STOCK COMMON STOCK ADDITIONAL OTHER
--------------------- --------------------- PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS)
-------- ---------- ---------- -------- ------------ ------------- --------------
Balances, December 31, 1998........ 524,337 $5,248,610 17,800,323 $178,003 $122,861,606 $(103,664,084) $(5,198)
Issuance of common stock........... -- -- 196,213 $ 1,962 $ 318,221 -- --
Issuance of common stock under the
stock purchase plan.............. -- -- 57,398 574 41,619
Common stock issued pursuant to
employee benefit plan............ -- -- 90,798 908 102,502 -- --
Exercise of stock options.......... -- -- 490,833 4,908 513,534 -- --
Deferred compensation--amortization
and cancellations................ -- -- -- -- 80,276 -- --
Change in unrealized losses on
marketable securities............ -- -- -- -- -- -- 5,198
Net loss........................... -- -- -- -- -- (15,708,626) --
Comprehensive loss.................
------- ---------- ---------- -------- ------------ ------------- -------
Balances, December 31, 1999........ 524,337 5,248,610 18,635,565 186,355 123,917,758 (119,372,710) --
TOTAL
DEFERRED STOCKHOLDERS'
COMPENSATION EQUITY
------------- -------------
Balances, December 31, 1998........ $(1,472,919) $ 17,897,408
Issuance of common stock........... -- $ 320,183
Issuance of common stock under the
stock purchase plan.............. 42,193
Common stock issued pursuant to
employee benefit plan............ -- 103,410
Exercise of stock options.......... -- 518,442
Deferred compensation--amortization
and cancellations................ 247,919 328,195
Change in unrealized losses on
marketable securities............ -- 5,198
Net loss........................... -- (15,708,626)
Comprehensive loss................. (15,703,428)
----------- ------------
Balances, December 31, 1999........ (1,225,000) 3,506,403
F-6
STEMCELLS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY (CONTINUED)
REDEEMABLE
COMMON
STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- --------------------- --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- ----------- -------- ---------- ---------- -------- ------------
Balances, December 31, 1999... 524,337 $ 5,248,610 -- -- 18,635,565 $186,355 $123,917,758
Issuance of common stock to
Millennium Partners LP,
net of issuance costs of
$598,563.................. -- -- -- -- 1,104,435 $ 11,044 $ 4,390,393
Issuance of common stock
related to license
agreements.................. -- -- -- -- 77,800 $ 778 $ 364,222
Common stock issued pursuant
to employee benefit plan.... -- -- -- -- 6,672 $ 68 $ 27,112
Exercise of employee stock
options................... -- -- -- -- 608,078 $ 6,081 $ 651,828
Redeemable common stock
conversion.................. (524,337) $(5,248,610) -- -- 524,337 $ 5,243 $ 5,243,367
Issuance of preferred stock... -- -- 1,500 $1,500,000 -- -- --
Deferred
compensation--amortization
and cancellations........... -- -- -- -- -- -- $ 3,555,387
Unrealized gain on short-term
restricted investments...... -- -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- --
Comprehensive Income........
-------- ----------- ----- ---------- ---------- -------- ------------
Balances, December 31, 2000... -- -- 1,500 $1,500,000 20,956,887 $209,569 $138,150,067
======== =========== ===== ========== ========== ======== ============
ACCUMULATED
OTHER TOTAL
ACCUMULATED COMPREHENSIVE DEFERRED STOCKHOLDERS'
DEFICIT INCOME (LOSS) COMPENSATION EQUITY
------------- -------------- ------------- -------------
Balances, December 31, 1999... $(119,372,710) $ -- $(1,225,000) $ 3,506,403
Issuance of common stock to
Millennium Partners LP,
net of issuance costs of
$598,563.................. -- -- -- $ 4,401,437
Issuance of common stock
related to license
agreements.................. -- -- -- $ 365,000
Common stock issued pursuant
to employee benefit plan.... -- -- -- $ 27,180
Exercise of employee stock
options................... -- -- -- $ 657,909
Redeemable common stock
conversion.................. -- -- -- $ 5,248,610
Issuance of preferred stock... -- -- -- $ 1,500,000
Deferred
compensation--amortization
and cancellations........... -- -- $(1,510,760) $ 2,044,627
Unrealized gain on short-term
restricted investments...... -- $16,356,334 -- $ 16,356,334
Net loss...................... $ (11,125,477) -- -- $(11,125,477)
------------
Comprehensive Income........ $ 5,230,858
------------- ----------- ----------- ------------
Balances, December 31, 2000... $(130,498,187) $16,356,334 $(2,735,761) $ 22,982,022
============= =========== =========== ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-7
STEMCELLS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(11,125,477) $(15,708,626) $(12,627,830)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 738,593 1,717,975 2,244,146
Acquired research and development....................... -- -- 551,009
Amortization of deferred compensation................... 2,044,627 328,195 --
Fair market adjustment for property held for sale....... 300,000
Other non-cash charges.................................. 320,183 410,173
Gain on investment...................................... (1,427,686) -- --
Loss on sale of property, plant and equipment........... -- 1,117,286 --
Loss on sale of intangibles............................. -- 440,486 --
Changes in operating assets and liabilities:
Accrued interest receivable........................... 25,488 164,397 346,577
Technology receivable................................. 3,000,000 -- --
Other current assets.................................. 315,213 283,000 (265,665)
Accounts payable and accrued expenses................. (92,255) 1,344,142 (2,378,613)
Deferred rent......................................... 203,393 279,680 --
Deferred revenue...................................... -- (2,500,000) 2,483,856
------------ ------------ ------------
Net cash used in operating activities....................... (6,318,104) (11,913,282) (9,236,347)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Investments........................... 1,427,686 -- --
Purchases of marketable securities.......................... (4,397,676) (18,982,387)
Proceeds from sales of marketable securities................ 13,923,813 22,573,625
Purchases of property, plant and equipment.................. (151,212) (192,747) (2,153,525)
Proceeds on sale of fixed assets............................ -- 746,448 --
Acquisition of other assets................................. (886,751) (558,311) (400,219)
Disposal of other assets.................................... -- 440,486 --
------------ ------------ ------------
Net cash provided by investing activities................... 389,723 9,962,013 1,037,494
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock...................... 4,401,437 145,603 227,931
Proceeds from the exercise of stock options................. 685,089 518,442 1,364
Common stock issued for agreements.......................... 365,000 -- --
Proceeds from issuance of preferred stock................... 1,500,000 -- --
Proceeds from debt financings............................... -- -- 1,259,300
Change in debt service fund................................. 609,905 -- --
Repayments of debt and lease obligations.................... (324,167) (1,817,500) (1,366,655)
------------ ------------ ------------
Net cash provided by (used in) financing activities......... 7,237,264 (1,153,455) 121,940
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents............ 1,308,883 (3,104,724) (8,076,913)
Cash and cash equivalents at beginning of year.............. 4,760,064 7,864,788 15,941,701
------------ ------------ ------------
Cash and cash equivalents at end of the year................ $ 6,068,947 $ 4,760,064 $ 7,864,788
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid............................................... $ 272,513 $ 335,203 $ 444,047
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-8
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. NATURE OF BUSINESS
StemCells, Inc. (the "Company") is a biopharmaceutical company that operates
in one segment, engaged in the development of novel stem cell therapies designed
to treat human diseases and disorders. 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.
As of December 31, 2000, the Company had cash and cash equivalents of
approximately $6.1 million and a restricted short-term equity investment of
approximately $16.4 million in Modex Therapeutics, a Swiss Biotherapeutics
company. Since inception, the Company has incurred annual losses and negative
cash flows from operations and has an accumulated deficit of approximately
$130.5 million at December 31, 2000. The Company has not derived any revenues
from the sale of any products, and does not expect to receive revenues from
product sales for at least several years. As a result, the Company is dependent
upon external financing from equity and debt offerings and revenues from
collaborative research arrangements with corporate sponsors to finance its
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 the Company.
As noted above, the Company has a restricted investment in Modex
Therapeutics, a Swiss Biotherapeutics company with a fair market value of
approximately $16.4 million at December 31, 2000. On January 9, 2001, the
Company sold 22,616 shares of Modex common stock for total proceeds of
approximately $2.5 million. The Company is restricted from selling any of the
remaining 103,577 shares until April 12, 2001. The value of the Company's
holdings is subject to market risk and foreign currency fluctuation and could
decrease significantly. The Company is currently in discussions with Modex to
sell the remaining shares during 2001. If the Company decided to sell the Modex
shares, due to relatively small trading volume in Modex shares and the
relatively large size of the Company holdings, or other factors, the Company may
not be able to sell its Modex shares at their market value or at all, and the
Company may have to sell these shares at a significant discount to the market
price.
If the Company is unable to obtain the necessary proceeds from the sale of
Modex shares, significant reductions in spending and the delay or cancellation
of planned activities may be necessary. In such event, the Company intends to
implement expense reduction plans in a timely manner to enable the Company to
meet its operating cash requirements through December 31, 2001.
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
accounting principles generally accepted in the United States, that 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.
F-9
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS AND INVESTMENTS
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
preservation while obtaining a reasonable rate of return.
The Company determines the appropriate classification of 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.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income (loss) and other
comprehensive income (loss). The only component of other comprehensive income
(loss) is unrealized gains and losses on our available-for-sale securities.
Comprehensive income (loss) has been disclosed in the statement of changes in
redeemable common stock and stockholders' Equity.
PROPERTY, PLANT AND EQUIPMENT
As a result of the Company's decision to exit the encapsulated cell
technology and relocate its corporate headquarters to Sunnyvale, California,
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.
Property, plant and equipment, including that held under capital lease
obligations, is stated at cost and depreciated using the straight-line method
over the estimated life of the respective asset, or the lease term if shorter,
as follows:
Building and improvements................................... 3 - 15 years
Machinery and equipment..................................... 3 - 10 years
Furniture and fixtures...................................... 3 - 10 years
PATENT AND LICENSE 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 charged to
expense at the time such patents are deemed to have no continuing value. At
December 31, 2000 and 1999, total costs capitalized were $638,000 and $718,000
and the related accumulated amortization were $9,000 and $9,000, respectively.
Patent expense totaled $305,000, $539,000, and $3,000 in 2000, 1999 and 1998,
respectively.
In December 1999 the Company sold its Encapsulated Cell Technology ("ECT")
to Neurotech, S.A. for an initial payment of $3,000,000, which was paid in 2000,
royalties on future product sales, and a portion of certain Neurotech revenues
from third parties in return for the assignment to Neurotech
F-10
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. In year 2000 the Company received $74,300 representing
a portion of revenues received by Neurotech from third parties.
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, and is remeasured during the vesting period. 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.
LONG LIVED ASSETS
The Company routinely evaluates the carrying value of its long-lived assets.
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that assets may be impaired and the
undiscounted cash flows estimated to be generated by the assets are less than
the carrying amount of those assets. If an impairment exists, the charge to
operations is measured as the excess of the carrying amount over the fair value
of the assets.
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
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 RECOGNITION
Revenues from collaborative agreements are recognized as earned upon either
the incurring of reimbursable expenses directly related to the particular
research plan or the completion 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. StemCells recognizes
non-refundable upfront license fees and certain other related fees on a
straight-line basis over the development period. Fees associated with
substantive at risk, performance milestones are recognized as revenue upon their
completion, as defined in the respective agreements.
F-11
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133." The Company is required to adopt SFAS 133 effective
January 1, 2001. Because the Company does we does not hold any derivative
instruments and does not engage in hedging activities, management does not
believe the adoption of SFAS 133 will have an impact on our financial position
or results of operations.
In November 2000, the FASB issued Emerging Issues Task Force Issue No.
00-27, "Application of EITF Issue No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, to Certain Convertible Instruments" ("EITF 00-27") which is
effective retroactively to September 1999 for all such instruments. EITF 00-27
clarifies the accounting for instruments with beneficial conversion features or
contingently adjustable conversion ratios. According to the new accounting
principle, the beneficial conversion features should be calculated by first
allocating the proceeds received from the financing among the convertible
instrument and the detachable warrants and then, measuring the beneficial
conversion feature between the stated conversion price of the convertible
instrument and the effective conversion price based on the allocated proceeds.
Previously, the beneficial conversion feature calculation was based on the
difference between the stated conversion price of the convertible instrument and
the fair value of the Company's stock price on the closing date of the
financing. As a result of the new accounting principle, the Company modified the
calculation of the beneficial conversion features associated with its 6%
cumulative convertible preferred stock.
The Company has presented the effect of adopting the new accounting
principle as a cumulative effect of a change in accounting principle as allowed
for in EITF 00-27. Accordingly, the Company has recognized an additional
$216,000 of deemed dividend on preferred stock.
RESEARCH AND DEVELOPMENT COSTS
The Company expenses all research and development costs as incurred.
NET LOSS PER SHARE
Basic and diluted net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during the period,
less shares subject to repurchase. The Company has excluded outstanding stock
options and warrants, and shares subject to repurchase from the calculation of
diluted loss per common share because all such securities are anti-dilutive for
all applicable periods presented.
3. 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
F-12
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
3. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
(CONTINUED)
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 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. The Company terminated legal, professional and consulting
contractual arrangements in support of ECT research. The Company had used these
legal, professional and consulting contractual arrangements to meet regulatory
requirements in support of its research work, to support contractual
arrangements with clinical sites, to provide assistance at clinical sites in
administrating therapy and documenting activities, and to assist in compliance
with FDA and other regulations regarding its clinical trials. ECT related patent
law work was also terminated. The Company also engaged professional consultants
in connection with the determination to exit its ECT activities and restructure
its operations, which concluded with the exit from ECT activities and relocation
of its corporate headquarters to California. The Company reduced its workforce
by approximately 58 employees who had been focused on ECT programs and 10
administrative employees. 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 $3,327,360 and $6,047,806, for the year ended
December 31, 2000 and 1999, respectively. No such expenses were incurred in
1998. These expenses relate to the wind-down of our encapsulated cell technology
research and other Rhode Island operations and the transfer of the corporate
headquarters to Sunnyvale, California. Expenses for the year 2000, includes an
accrual for the estimated lease and facility costs related to the facilities in
Rhode Island through 2001. Expenses for the year 1999 also includes an accrual
for the estimate of the costs of settlement of a 1989 funding agreement with the
Rhode Island Partnership for Science and Technology ("RIPSAT").
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 for the estimated lease payments and
operating costs of the Rhode Island facilities through an expected disposal date
of June 30, 2000. In 2000 the Company settled with RIPSAT, paid $1.2 million and
paid 0.4 million related to Rhode Island facilities. The Company did not sublet
the Rhode Island facilities in 2000 and therefore made a change in estimate to
accrue additional expenses of $3.3 million to cover operating lease payments,
utilities, taxes, insurance, maintenance, interest and other non-employee
expenses through 2001. At December 31, 2000 the remaining wind-down reserve
totaled $1.7 million.
F-13
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
3. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
(CONTINUED)
A description of wind-down expenses, including the amounts and periods of
recognition, are as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 2000
----------------- -----------------
Employee severance costs.................... $1,554,000
Impairment losses(1):
Fixed assets.............................. 800,000
ECT patents............................... 260,000
----------
1,060,000
Rhode Island facilities carrying costs(2):
Corporate headquarters.................... 702,000 $3,327,000
PILOT MANUFACTURING PLANT................. 562,000
----------
1,264,000 3,327,000
EMPLOYEE OUTPLACEMENT....................... 200,000
RIPSAT settlement(3)........................ 1,172,000
Loss on sale of assets(4):
Fixed assets.............................. 318,000
ECT patents............................... 180,000
----------
498,000
Write-down of pilot plant(5)................ 300,000
----------
$6,048,000 $3,327,000
========== ==========
- ------------------------
(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 (December 31, 2001)
(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).
(5) The write-down of the pilot plant was based on an independent property
appraisal.
F-14
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
3. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
(CONTINUED)
Property held for sale at December 31, 2000 and 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 in 1999. The
balance reflected the $300,000 write-down included as part of the additional
wind-down expenses recognized 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.
4. STEMCELLS CALIFORNIA, INC.
In September 1997, a merger of a wholly owned subsidiary of the company and
StemCells California, Inc. was completed. 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. The Company 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. 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 468,750 options would vest over eight
years. In connection with the 468,750 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.
Effective October 31, 2000, the Company agreed with Drs. Weissman and Gage
to revise their 468,750 milestone-vesting stock options to time-based vesting,
on the same schedule as Dr. Anderson's option. Under each of the revised
options, 168,750 shares vested immediately, and the remaining 300,000 shares
will vest at 50,000 per year on September 25, until September 25, 2005, when the
final 100,000 shares will vest. The exercise price remains $5.25 per share. The
Company recorded $1,647,000 as compensation expense for the fair market value of
the vested portion of such options in an amount determined using the
Black-Scholes method. The deferred compensation expense associated with the
unvested portion of the grants was determined to be approximately $1,338,000. As
part of the revision of the options, Drs. Weissman and Gage relinquished all
rights under an agreement. These individuals had the right to license the
non-brain stem cell technology in exchange for a payment to the Company equal to
all prior funding for such research plus royalty payments. We plan to revalue
the options using the Black-Scholes method on a quarterly basis and recognize
additional compensation expense accordingly.
F-15
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
5. INVESTMENTS
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 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 from that date.
At December 31, 2000 the Company owned 126,193 shares of Modex. Modex
completed 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 a fair market value of $16,356,334 as at
December 31, 2000. The unrealized gain was reported as other comprehensive
income in the statement of stockholders' equity.
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.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Building and improvements............................ $ 703,095 $ 665,890
Machinery and equipment.............................. 1,766,448 1,691,136
Furniture and fixtures............................... 188,736 219,260
---------- ----------
2,658,279 2,576,286
Less accumulated depreciation and amortization....... (1,207,218) (828,401)
---------- ----------
$1,451,061 $1,747,885
========== ==========
Depreciation expense was $451,000, $1,436,000, and $1,720,000 for the years
ending December 31, 2000, 1999 and 1998, respectively.
As part of restructuring our operations, sale of our encapsulated cell
technology ("ECT"), and relocation of our corporate headquarters to Sunnyvale,
California, we identified fixed assets associated with the ECT or otherwise no
longer needed. In December of 1999, we disposed of these excess fixed assets,
realizing proceeds of approximately $746,000. These assets had a net book value
of approximately $1,063,000 after a write-down of 800,000, which was based on an
estimate of expected sale proceeds.
Certain property, plant and equipment have been acquired under capital lease
obligations. These assets totaled $5,827,000 at December 31, 2000 and 1999,
respectively, with related accumulated amortization of $2,747,000 at
December 31, 2000 and 1999, respectively. As a result of the Company's
F-16
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
6. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
decision to exit ECT and relocate to Sunnyvale, California, this property has
been classified as held for sale.
7. OTHER ASSETS
Other assets are as follows:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Patents, net......................................... $ 629,203 $ 708,823
License agreements, net.............................. 669,000 282,750
Security deposit--building lease..................... 750,000 750,000
Deposit--other....................................... 16,321 --
Deferred financing costs, net........................ 109,388 117,195
---------- ----------
$2,173,912 $1,858,768
========== ==========
At December 31, 2000 and 1999, accumulated amortization was $1,140,000 and
$857,000, respectively, for patents and license agreements.
8. ACCRUED EXPENSES
Accrued expenses are as follows:
DECEMBER 31,
-------------------
2000 1999
-------- --------
External services....................................... $219,051 $ 97,439
Employee compensation................................... 109,007 306,342
Collaborative research.................................. -- 222,140
Other................................................... 509,300 344,625
-------- --------
$837,358 $970,546
======== ========
9. 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
F-17
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
9. LEASES (CONTINUED)
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 serve reserve ("Reserve Funds") of approximately $610,000 of principal and
interest, relating to the bonds the Company has with IRBA and RIIFC. 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.
The Company entered into a fifteen-year lease for a laboratory facility in
connection with a sale and leaseback arrangement in 1997. The lease has a rent
escalation clause and accordingly, the Company is recognizing rent expense on a
straight line basis. At December 31, 2000, the Company has $705,746 in deferred
rent expense.
As of February 1, 2001, the Company entered into a 5-year lease for a 40,000
square foot facility located in the Stanford Research Park in Palo Alto, CA. The
new facility includes vivarium space, laboratories, offices, and a GMP (Good
Manufacturing Practices) suite. GMP facilities can be used to manufacture
materials for clinical trials. The rent will average approximately
$3.15 million per year over the term of the lease.
As of December 31, 2000, future minimum lease payments under operating and
capital leases and principal payments on equipment loans are as follows:
CAPITAL OPERATING SUBLEASE
LEASES LEASES INCOME
---------- ----------- ----------
2001.................................... $ 589,217 $ 3,584,061 $ 295,854
2002.................................... 519,719 2,392,988 400,658
2003.................................... 436,909 4,568,274 395,676
2004.................................... 425,713 4,677,197 416,507
2005.................................... 412,587 4,789,388 437,338
Thereafter.............................. 2,311,577 8,797,417 130,761
---------- ----------- ----------
Total minimum lease payments............ 4,695,722 $28,809,325 $2,076,794
========== ===========
Less amounts representing interest...... 1,758,639
Present value of minimum lease
payments.............................. 2,937,083
Less current maturities................. 332,083
----------
Capitalized lease obligations, less
current maturities.................... $2,605,000
==========
Rent expense for the years ended December 31, 2000, 1999 and 1998, was
$1,111,000, $947,000 and $1,052,000, respectively.
10. STOCKHOLDERS' EQUITY
SALE OF COMMON STOCK
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
F-18
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
10. STOCKHOLDERS' EQUITY (CONTINUED)
closing and received 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 in 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 the closing on
August 30, 2000, and the Fund paid 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
F-19
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
10. STOCKHOLDERS' EQUITY (CONTINUED)
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.
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 studies 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
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 currently recorded 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.
STOCK ISSUED FOR TECHNOLOGY LICENSES
Under a 1997 License Agreement with NeuroSpheres, Ltd., the Company obtained
an exclusive patent license in the field of transplantation. The Company entered
into an additional license agreement with NeuroSpheres as of October 31, 2000,
under which the Company 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. The Company made
up-front payments to NeuroSpheres of 65,000 shares of its common stock and
$50,000, and will make 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.
The Company also entered into license agreements with the California
Institute of Technology and issued 12,800 shares of common stock upon execution
of the license agreements. The Company must pay an additional $10,000 upon the
issuance of the patent licensed under the relevant agreement
COMMON STOCK 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.
F-20
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
10. STOCKHOLDERS' EQUITY (CONTINUED)
SALE OF 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK
On April 13, 2000 the Company issued 1,500 shares of 6% cumulative
convertible preferred stock plus a warrant for 75,000 shares of our 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 reflecting
the April 13, 2000 commitment date and the most beneficial per share discount
available to the preferred shareholders. Such value was $481,000 and is 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
but unpaid dividends.
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, 2000,
the Company had reserved 3,828,371 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:
2000 1999 1998
-------------------------- -------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- -------------- --------- -------------- ---------- --------------
Outstanding at January 1....... 939,335 $2.65 1,654,126 $3.62 2,446,573 $7.48
Granted........................ 2,485,090 4.08 536,078 1.08 1,174,118 1.70
Exercised...................... (540,927) 1.015 (604,362) 1.50 (11,012) .12
Canceled....................... (166,532) 4.77 (646,507) 5.31 (1,955,553) 7.08
--------- ------ --------- ----- ---------- -----
Outstanding at December 31..... 2,716,966 4.32 939,335 $2.65 1,654,126 $3.62
========= ====== ========= ===== ========== =====
Options exercisable at
December 31.................. 731,523 $4.01 594,216 $3.44 1,108,936 $4.33
========= ====== ========= ===== ========== =====
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; 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.
Additionally, the Company adopted the 1997 StemCells, Inc. StemCells California
Research Stock Option Plan (the StemCells California Research Plan) whereby an
additional 2,000,000 shares of Common Stock have
F-21
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
10. STOCKHOLDERS' EQUITY (CONTINUED)
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; approximately 100,000 of these options were
exercisable immediately, 1,031,000 of these options vest and become exercisable
only upon achievement of specified milestones and the remaining 469,000 options
vest over eight years. For the year 2000 the options have been incorporated into
the number of options granted so as to be reflected in the total of options
outstanding as of December 31, 2000
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, 2000:
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........................... 944,216 8.68 $ 2.063 370,023 $ 1.53
$5.01 - $10.00............................ 1,691,750 6.87 5.26 280,500 5.27
Greater than $10.00....................... 81,000 1.30 11.03 81,000 11.03
--------- -------
2,716,966 731,523
========= =======
Pursuant to the requirements of FAS 123, the following are the pro forma net
loss and net loss per share amounts for 2000, 1999, and 1998, 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 2000, 1999,
and 1998, consistent with the provisions of FAS 123:
2000 1999 1998
--------------------------- --------------------------- ---------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------ ------------ ------------ ------------ ------------ ------------
Net loss............. $(11,125,477) $(12,160,752) $(15,708,626) $(15,764,569) $(12,627,830) $(14,919,389)
Net loss per share... $ (.58) $ (.62) $ (.84) $ (.84) $ (.69) $ (.82)
The weighted average fair value per share of options granted during 2000,
1999 and 1998 was $4.13, $.82 and $3.40, respectively. The fair value of options
and shares issued pursuant to the stock
F-22
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
10. STOCKHOLDERS' EQUITY (CONTINUED)
purchase plan at the date of grant were estimated using the Black-Scholes model
with the following weighted average assumptions:
OPTIONS STOCK PURCHASE PLAN
------------------------------------ ---------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- --------
Expected life (years)................ 5 5 5 N/A .5 .5
Interest rate........................ 6.5% 5.5% 5.2% N/A 5.0% 4.6%
Volatility........................... 167.8 96.7% 63.5% N/A 96.7% 63.5%
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. On August 04, 1999
the board suspended the 1992 Employee Stock Purchase Plan.
The effects on 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 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
The Company issued warrants to purchase 8,952 shares of common stock in
conjunction with the StemCells California merger, warrants to purchase 31,545
shares in conjunction with various equipment leasing agreements, and warrants to
purchase 434,500 shares in connection with a public offering of common stock in
April 1995. All of these expired at various dates in 2000.
COMMON STOCK RESERVED
The Company has the following shares of common stock reserved for the
exercise of options, warrants and other contingent issuances of common stock.
Shares reserved for exercise of stock options............... 3,828,371
Shares reserved for warrants................................ 2,292,625
StemCell option conversions................................. 250,344
---------
Total....................................................... 6,371,340
=========
11. 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 $307,000 in 1998, $309,000 in 1999, and $225,739 in 2000.
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
F-23
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
11. RESEARCH AGREEMENTS (CONTINUED)
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 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 $314,000, $868,000, and $1,259,000 for
the years ended December 31, 2000, 1999 and 1998, respectively. The Company has
no other significant collaborative research funding obligations.
F-24
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
12. 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, 2000, the Company
had tax net operating loss carry forwards of $110,000,000 and research and
development tax credit carry forwards of $4,100,000, which expire in the years
2004 through 2020. Utilization of the Company's net operating loss may be
subject to substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code and similar state provisions. Such an
annual limitation could result in the expiration of the net operating loss
before utilization.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
DECEMBER 31,
---------------------------
2000 1999
------------ ------------
Deferred tax assets:
Capitalized research and development costs..... $ 6,000,000 $ 4,331,000
Net operating losses........................... 44,000,000 38,478,000
Research and development credits............... 4,260,000 4,035,000
Other.......................................... 1,020,000 928,000
------------ ------------
55,280,000 47,772,000
Deferred tax liabilities:
Unrealized gain on investment.................. (6,543,000) --
Patents........................................ (127,000) (246,000)
Valuation allowance............................ (48,610,000) (47,526,000)
------------ ------------
Net deferred tax assets.......................... $ -- $ --
============ ============
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net deferred
tax assets have been fully offset by a valuation allowance. The valuation
allowance increased by $6,272,000 during 1999, and $5,459,000 during 1998.
13. 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 $33,000, $103,000, and $146,000 for the years ended December 31, 2000, 1999
and 1998, respectively.
14. SUBSEQUENT EVENTS (UNAUDITED)
As of February 1, 2001, the Company entered into a 5-year lease for a 40,000
square foot facility located in the Stanford Research Park in Palo Alto,
California. The new facility includes animal space, laboratories, offices, and a
GMP (Good Manufacturing Practices) suite. GMP facilities can be used to
manufacture materials for clinical trials. The rent will average approximately
$3.15 million per year over the term of the lease. The Company continues to
lease the facilities in Lincoln, Rhode Island
F-25
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
14. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
obtained in connection with its former encapsulated cell technology, but has now
succeeded in subleasing parts of those facilities: the 3,000 square-foot cell
processing facility and approximately one-third of its former scientific and
administrative facility ("SAF"). The Company continues to seek to sublet the
remainder of the approximately 65,000 square foot SAF and the 21,000 square-foot
pilot manufacturing facility, or to assign or sell its interests in these
properties. There can be no assurance however, that we will be able to dispose
of these properties in a reasonable time, if at all.
In February 2001, the Company was awarded a two-year, $300,000 per year
grant from the NIH's Small Business Innovation Research (SBIR) office. The
grant, which will support joint work with virologist Dr. Jeffrey Glenn at
Stanford University, is aimed at characterizing the human cells that can be
infected by human hepatitis viruses and to develop a small animal model using
the cells that are most infectable by these viruses to develop screening assays
and identify novel drug for the disease.
On January 9, 2001, the Company sold 22,616 Modex shares for a net price of
182.00 Swiss francs per share, which converts to $112.76 per share, for total
proceeds of $2,550,000. In connection with this sale, the Company agreed not to
resell any more of its Modex shares until April 12, 2001. On March 07, 2001 the
market price of Modex stock was 145.00 Swiss francs which converts to $84.31
using exchange rates on that date, which represents an estimated fair market
value of $8,732,797 for the remaining shares. If the Company were to seek to
liquidate all or part of the remaining 103,577 Modex shares, the proceeds would
depend on the share price and foreign currency exchange rates at the time of
conversion.
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER
-----------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000:
Net revenue............................ $ -- $ -- $ -- $ 74
Operating expenses..................... 1,799 1,939 2,553 6,378
Net Loss............................... (1,794) (532) (2,539) (6,260)
Basic and diluted net loss per share
applicable to common shareholders
before cumulative effect............. $ (0.09) $ (0.04) $ (0.13) $ (0.30)
Cumulative effect of a change in
accounting principle(1).............. -- -- -- $ (0.01)
Net loss per share applicable to common
shareholders......................... $ (0.09) $ (0.04) $ (0.13) $ (0.31)
1999:
Net revenue............................ $ 2,501 $ 2,521 $ -- $ --
Operating expenses..................... 4,562 4,454 6,690 5,253
Net Loss............................... (1,932) (1,840) (6,711) (5,226)
Basic and diluted net loss per share... $ (0.10) $ (0.10) $ (0.36) $ (0.27)
F-26
STEMCELLS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001
--------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,499,158
Short-term restricted investments......................... 8,412,650
Accrued interest receivable............................... 9,706
Prepaid rent.............................................. 909,415
Other current assets...................................... 473,696
-------------
Total current assets.................................. 14,304,625
Property held for sale.................................... 3,203,491
Property, plant and equipment, net........................ 1,442,089
Other assets net.......................................... 2,556,457
-------------
Total assets................................................ $ 21,506,661
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 237,856
Accrued expenses.......................................... 785,064
Accrued wind-down costs................................... 1,380,947
Current maturities of capitalized lease obligations....... 333,333
-------------
Total current liabilities................................... 2,737,200
Capitalized lease obligations, less current maturities...... 2,521,250
Deposits.................................................... 26,000
Deferred rent............................................... 760,508
Stockholders' equity
Convertible preferred stock, $.01 par value; 1,000,000
shares authorized, 2,626 designated as 6% Cumulative
Convertible Preferred Stock 1,500 shares issued and
outstanding at March 31, 2000........................... 1,500,000
Common stock, $.01 par value; 45,000,000 shares
authorized; 21,458,211 shares issued and outstanding at
March 31, 2001.......................................... 214,612
Additional paid in capital................................ 137,608,696
Accumulated deficit....................................... (130,229,646)
Accumulated other comprehensive income.................... 8,412,650
Deferred compensation..................................... (2,044,609)
-------------
Total stockholders' equity............................ 15,461,703
-------------
Total liabilities and stockholders' equity............ $ 21,506,661
=============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
F-27
STEMCELLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2001 2000
----------- -----------
Revenue from grants......................................... $ 100,000 $ --
Operating expenses:
Research and development.................................. 1,644,257 906,632
General and administrative................................ 996,862 657,714
Wind-down expenses........................................ -- 234,386
----------- -----------
2,641,119 1,798,732
----------- -----------
Loss from operations........................................ (2,541,119) (1,798,732)
Other income (expense):
Investment income......................................... 79,041 73,332
Interest expense.......................................... -- (68,858)
Gain on sale of investments............................... 2,550,230 --
Other income.............................................. 180,389 --
----------- -----------
Total other income, net..................................... 2,809,660 4,474
----------- -----------
Net income (loss)........................................... $ 268,541 $(1,794,258)
=========== ===========
Basic Earnings Per Share
Net income (loss) per share............................... $ 0.01 $ (0.09)
Shares - basic net income (loss) per share................ 20,989,127 19,329,517
Diluted Earnings Per Share
Net income (loss) per share............................... $ 0.01 $ (0.09)
Shares - diluted income per share......................... 22,405,358 19,329,517
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-28
STEMCELLS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2001 2000
----------- -----------
Cash flows from operating activities:
Net income (loss)......................................... $ 268,541 ($1,794,258)
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Depreciation and amortization........................... 142,554 204,449
Gain on sale of investments............................. (2,550,230) --
Compensation expense relating to the grant of stock
options............................................... 128,220 43,750
Net changes in operating assets and liabilities......... (1,812,084) (1,776,812)
----------- -----------
Net cash used in operating activities..................... (3,822,999) (3,322,870)
----------- -----------
Cash flows from investing activities:
Proceeds from sale of investments......................... 2,550,230 --
Purchase of property, plant and equipment................. (114,734) (7,542)
Acquisition of other assets............................... (126,391) --
Proceeds from sales of technology......................... -- 2,800,000
----------- -----------
Net cash provided by investing activities................. 2,309,105 2,792,458
----------- -----------
Cash flows from financing activities:
Proceeds from the exercise of stock options and
warrants................................................ 26,605 352,557
Principal payments under capitalized lease obligations.... (82,500) (80,000)
----------- -----------
Net cash provided by (used by) financing activities....... (55,895) 272,557
----------- -----------
Net decrease in cash and cash equivalents................... (1,569,789) (257,855)
Cash and cash equivalents, beginning of period.............. 6,068,947 4,760,064
----------- -----------
Cash and cash equivalents, end of period.................... $ 4,499,158 $ 4,502,209
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 64,460 $ 68,858
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
F-29
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2001 AND 2000
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 three months ended March 31, 2001 are
not necessarily indicative of the results that may be expected for the entire
fiscal year ending December 31, 2001.
The balance sheet at December 31, 2000 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
accounting principles generally accepted in the United States. For the complete
financial statements, refer to the audited financial statements and footnotes
thereto as of December 31, 2000, included on form 10-K as amended.
NOTE 2. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per common share is computed using the weighted
average number of common shares outstanding during the period. Diluted net
income per share is computed using the weighted average of common and diluted
equivalent stock options and warrants outstanding during the period. We excluded
all stock options and warrants from the calculation of diluted loss per common
share for the period ended March 31, 2000, because these securities are
antidilutive during that period.
NOTE 3. COMPREHENSIVE LOSS
The only component of other comprehensive loss is unrealized gains and
losses on available for sale securities. For the three months ended March 31,
2001 and 2000, total comprehensive loss was $7,675,143 and $1,794,258
respectively.
NOTE 4. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT
PROGRAM
As previously reported, in 1999 the Company restructured its 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 relocated its remaining research and development
activities and its corporate headquarters to California, and has been seeking to
dispose of its former science and administrative and pilot manufacturing
facilities in Rhode Island. In December 2000, the company had a reserve of
$1,780,000 related to the carrying costs for the Rhode Island facilities through
2001. On February 2001, the Company subleased portions of the facilities and are
actively seeking to sublease, assign or sell our remaining interests in the
properties. However, there can be no assurance that the Company will be able to
dispose of these facilities in a reasonable time, if at all. At March 31,2001
the reserve was $1,381,000.
RESERVE AS AT 12/31/2000 PAYMENTS RESERVE AS AT 03/31/01
------------------------ -------- ----------------------
$1,780,579 $399,632 $1,380,947
F-30
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
MARCH 31, 2001 AND 2000
NOTE 5. INVESTMENTS
At March 31, 2001, the Company owned 103,577 shares of Modex Therapeutics
Ltd. ("Modex"), a Swiss biotechnology company traded on the Swiss Exchange. On
January 9, 2001, the Company sold 22,616 Modex shares for a net price of 182.00
Swiss francs per share, which converts to $112.76 per share, for total proceeds
of $2,550,000. In connection with this sale, the Company agreed not to resell
any more of its Modex shares until April 12, 2001. Accordingly, with an
established market value, the investment is recorded as available-for-sale at an
estimated fair market value. On March 31, 2001 the market price of Modex stock
was 141.00 Swiss francs, or $81.22 using exchange rates on that date, which
represented an estimated fair market value of $8,412,650 for the remaining
shares. The unrealized gain was reported in other comprehensive income. The
Company liquidated the remaining 103,577 Modex shares on April 30, 2001 for
$5,232,168 net of commissions and other fees. See note 9.
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"). The Fund purchased the
Company's common stock 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.
On the first adjustment date, January 27, 2001, the Fund became entitled to
463,369 additional shares, and it has exercised its warrant as to such shares.
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 $.01.
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. 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 the Company accounts for as stock
issuance cost that has no impact on stockholders' equity. The Company has
accounted for the sale of the stock and 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 additional paid in capital. In
addition, any repurchase of the shares by the Company would also be accounted
for through additional 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 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
F-31
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
MARCH 31, 2001 AND 2000
NOTE 6. SALE OF SECURITIES (CONTINUED)
underlying share. The calculated value of this callable warrant using the
Black-Scholes method is $139,897, which the Company accounts for as stock
issuance cost that has no impact on stockholders' equity.
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. LEASES
As of February 1, 2001, the Company entered into a 5-year lease for a 40,000
square foot facility located in the Stanford Research Park in Palo Alto,
California. The new facility includes animal space, laboratories, offices, and a
GMP (Good Manufacturing Practices) suite. GMP facilities can be used to
manufacture materials for clinical trials. The rent will average approximately
$3.2 million per year over the term of the lease. The company paid $1.2 million
upfront related to this new lease. Approximately $909,000 of this payment has
been recorded as prepaid rent and is being amortized over seven months. The
Company continues to lease the facilities in Lincoln, Rhode Island obtained in
connection with its former encapsulated cell technology, but has now succeeded
in subleasing parts of those facilities: the 3,000 square-foot cell processing
facility and approximately one-third of its former scientific and administrative
facility ("SAF"). The Company continues to seek to sublet the remainder of the
approximately 65,000 square foot SAF and the 21,000 square-foot pilot
manufacturing facility, or to assign or sell its interests in these properties.
There can be no assurance however, that we will be able to dispose of these
properties in a reasonable time, if at all.
NOTE 8. GRANT
In February 2001, the Company was awarded a two-year, $300,000 per year
grant from the NIH's Small Business Innovation Research (SBIR) office. The
grant, which will support joint work with virologist Dr. Jeffrey Glenn at
Stanford University, is aimed at characterizing the human cells that can be
infected by human hepatitis viruses and to develop a small animal model using
the cells that are most infectable by these viruses to develop screening assays
and identify novel drug for the disease. The company received and recognized as
revenue $100,000 from a prior SBIR grant relating to the neural program.
NOTE 9. SUBSEQUENT EVENTS
On April 30, 2001, StemCells sold its remaining 103,577 shares of Modex
Therapeutics at 87.3 Swiss francs per share, or $50.51 per share at the exchange
rate on that date, for total proceeds of $5,232,168 net of commissions and other
fees. In addition, on April 30, 2001, in consideration for $300,000 received
from Modex and the assistance of Modex in executing the sale of StemCells
holding of Modex shares, StemCells agreed to assign to Modex the rights
concerning future payments under the Asset Purchase and License Agreement
between StemCells, Inc. and Neurotech SA, by which Neurotech SA purchased the
Company's former encapsulated cell therapy technology.
F-32
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
MARCH 31, 2001 AND 2000
NOTE 9. SUBSEQUENT EVENTS (CONTINUED)
On April 27, 2001, the Company reached an agreement to terminate as of May
15, 2001, without cost, its lease on part of its former Sunnyvale headquarters.
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENT
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"). The Statement requires the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
fair value of derivatives are either offset against the change in fair value of
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. As the
Company had no derivative instruments and does not currently engage in hedging
activities, the adoption of Statement No. 133 on January 1, 2001 had no impact
on StemCells results, operations or financial statement.
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.
SEC registration fee........................................ $ 7,979
Printing and engraving expenses............................. $ 30,000
Legal fees and expenses..................................... $ 35,000
Accounting fees and expenses................................ $ 15,000
Miscellaneous............................................... $ 50,000
--------
Total....................................................... $137,979
========
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 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.
II-1
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), (b) and (d) 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 (c) 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. Any unconverted preferred stock is converted, at the applicable
conversion price, on April 13, 2002. The warrants, which are exercisable at
$6.58 per share, expire on April 13, 2005.
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 received 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
II-2
Fund. On January 27, 2001, Millennium's August 3, 2000 adjustable warrant became
exercisable for 463,369 shares of our common stock, and Millennium purchased all
of those shares for $4,634 on March 30, 2001. On April 27, 2001, the adjustable
warrant became exercisable for an additional 622,469 shares of our common stock,
and the warrant has not been exercised with respect to those shares. 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 received 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.
On June 8, 2001, the Fund exercised its remaining option to purchase
$2 million of additional common stock. At the closing on June 21, 2001, the Fund
purchased 457,750 shares of common stock at $4.3692 per share. The Fund paid
$1,500,000 of the purchase price at the closing and will pay the remainder upon
effectiveness of a registration statement covering the shares purchased by the
Fund and issuable upon exercise of the warrants received by the Fund. This
registration statement does not cover the shares purchased by or issuable to the
Fund. In connection with the closing, the Fund received an adjustable warrant
similar to the adjustable warrant issued on August 3, 2000. The Fund also
received a five-year warrant to purchase 50,352 shares of additional common
stock at a price per share of $4.7664. This warrant is callable by the
Registrant at any time at $7.944 per underlying share.
(b) We entered into a license agreement with NeuroSpheres, Ltd. on
October 30, 2000 expanding our rights to the intellectual property covered by
the license agreement. See "Business--License Agreements and Sponsored Research
Agreements--Neurospheres, Ltd." Under that license agreement, on October 30,
2000, we issued 65,000 shares of our common stock to NeuroSpheres and we agreed
to file a registration statement covering the resale of those shares by
NeuroSpheres.
(c) On May 25, 2000 we issued 2,800 shares of unregistered Rule 144 common
stock to the California Institute of Technology.
(d) On May 10, 2001, we entered into a common stock purchase agreement with
Sativum Investments Limited, for the potential future issuance and sale of up to
$30,000,000 million of our common stock, subject to restrictions and other
obligations that are described throughout this prospectus. We, at our sole
discretion, may draw down on this facility, sometimes termed an equity line,
from time to time, and Sativum is obligated to purchase shares of our common
stock at a 6% discount to a volume weighted average market price over the 20
trading days following the drawdown notice. Our volume weighted average market
price is calculated by adding the total dollars traded in every transaction in a
given trading day and dividing that number by the total number of shares traded
during that trading day. We are limited with respect to how often we can
exercise a drawdown and the amount of each drawdown.
II-3
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, dated July 31, 2000, issued to Millennium
Partners, L.P.
4.10XXX Registration Rights Agreement dated as of May 10, 2001
between the Company and Sativum Investments Limited.
4.11XXX Warrant, dated May 10, 2001, to Purchase Common Stock issued
to Sativum Investments Limited.
4.12XXX Warrant, dated May 10, 2001, to Purchase Common Stock issued
to Pacific Crest Securities, Inc.
4.13XXX Warrant dated May 10, 2001, to Purchase Common Stock issued
to Granite Financial Group, Inc.
4.14 Callable Warrant, dated June 21, 2001, issued to Millennium
Partners, L.P.
4.15 Common Stock Purchase Warrant, Class A, dated June 21, 2001,
issued to Millennium Partners, L.P.
5.1XXX Form of Opinion of Ropes & Gray.
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.
II-4
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
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.
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.
II-5
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
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.
10.50XXX Common Stock Purchase Agreement, dated as of May 10, 2001,
between the Company and Sativum Investments Limited.
10.51XXX Esrow Agreement, dated as of May 10, 2001, among the
Company, Sativum Investments Limited and Epstein, Becker &
Green, P.C.
10.52XX License Agreement, dated as of October 30, 2000, between the
Company and Neuro Spheres Ltd.
10.53XX Letter Agreement, dated January 2, 2001, between the Company
and Martin McGlynn.
10.54XX Lease, dated February 1, 2001, between the Board of Trustees
of Stanford University and the Company.
10.55 Registration Rights Agreement, dated as of June 21, 2001, by
and between the Company and Millennium Partners, L.P.
10.56 Subscription Agreement, dated as of June 21, 2001, by and
between the Company and Millennium Partners, L.P.
21.1X Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2XXX Consent of Ropes & Gray (included in the form of opinion
filed as Exhibit 5.1).
24.1XXX Power of Attorney pursuant to which amendments to this
registration statement may be filed (contained on page II-9
thereto).
99.2XX Side Letter, dated March 17, 2001, between the Company and
Oleh S. Hnatiuk regarding NeuroSpheres License Agreement,
dated October 30, 2000.
- ------------------------
++ 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. 333-85494.
+++ 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. 333-97272.
++++ 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. 333-91228.
II-6
* Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, Registration Statement on Form S-1, File
No. 333-45739.
# 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.
XX 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, 2000 and filed on April 2, 2001.
XXX Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Registration Statement filed on
Form S-1, File No. 333-61726.
II-7
ITEM 17. UNDERTAKINGS.
(a) 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 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.
(b) 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.
(c) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the registrant's annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of
the Securities Exchange Act of 1934) that is incorporated by reference in
the registration statement 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.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment No. 1 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Palo Alto, State of California, on the 29th day of June, 2001.
STEMCELLS, INC.
BY: /S/ MARTIN M. MCGLYNN
-----------------------------------------
Martin M. McGlynn
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to the Registration Statement has been signed by
the following persons in the capacities indicated on June 29, 2001.
SIGNATURE TITLE
--------- -----
Martin M. McGlynn,
President, Chief Executive Officer
/s/ MARTIN M. MCGLYNN (Principal Executive Officer), Director
-------------------------------------------
George Koshy,
Controller and Acting Chief Financial
Officer (Principal Financial Officer and
* Principal Accounting Officer)
-------------------------------------------
Mark J. Levin
* Director
-------------------------------------------
Roger M. Perlmutter, M.D., Ph.D.
* Director
-------------------------------------------
John J. Schwartz, Ph. D.
* Director
-------------------------------------------
Irving Weissman, M.D.
* Director
-------------------------------------------
- ------------------------
* By executing his name hereto Martin M. McGlynn is signing this document on
behalf of the persons indicated above pursuant to the power of attorney duly
executed by such persons and filed with the Securities and Exchange
Commission.
By: /s/ MARTIN M. MCGLYNN
--------------------------------------
Martin M. McGlynn
ATTORNEY-IN-FACT
II-9
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, dated July 31, 2000, issued to Millennium
Partners, L.P.
4.10XXX Registration Rights Agreement, dated as of May 10, 2001,
between the Company and Sativum Investments Limited.
4.11XXX Stock Purchase Warrant, dated May 10, 2001, issued to
Sativum Investments Limited.
4.12XXX Stock Purchase Warrant, dated May 10, 2001, issued to
Pacific Crest Securities, Inc.
4.13XXX Stock Purchase Warrant, dated May 10, 2001, issued to
Granite Financial Group, Inc.
4.14 Callable Warrant, dated June 21, 2001, issued to Millennium
Partners, L.P.
4.15 Common Stock Purchase Warrant, Class A, dated June 21, 2001,
issued to Millennium Partners, L.P.
5.1XXX Opinion of Ropes & Gray.
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.
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
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.
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.
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
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.
10.50XXX Common Stock Purchase Agreement, dated as of May 10, 2001,
between the Company and Sativum Investments Limited.
10.51XXX Esrow Agreement, dated as of May 10, 2001, among the
Company, Sativum Investments Limited and Epstein Becker &
Green, P.C.
10.52XX License Agreement, dated as of October 30, 2000, between the
Company and Neuro Spheres Ltd.
10.53XX Letter Agreement, dated January 2, 2001, between the Company
and Martin McGlynn.
10.54XX Lease, dated February 1, 2001, between the Board of Trustees
of Stanford University and the Company.
10.55 Registration Rights Agreement, dated as of June 21, 2001, by
and between the Company and Millennium Partners, L.P.
10.56 Subscription Agreement, dated as of June 21, 2001, by and
between the Company and Millennium Partners, L.P.
21.1X Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2XXX Consent of Ropes & Gray (included in the opinion filed as
Exhibit 5.1).
24.1XXX Power of Attorney pursuant to which amendments to this
registration statement may be filed (contained on page II-9
thereto).
99.2XX Side Letter, dated March 17, 2001, between the Company and
Oleh S. Hnatiuk regarding NeuroSpheres License Agreement,
dated October 30, 2000.
- ------------------------
++ 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.
XX 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, 2000 and filed on April 2, 2001.
XXX Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Registration Statement filed on
Form S-1, File No. 333-61726.
EXHIBIT 4.14
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-3 Dated: June 21, 2001
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 50,352 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 $4.7664 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 June 21, 2006 (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) $7.944, 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 as herein provided, the
number of Warrant Shares which are then issuable and deliverable upon
3
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 (excluding those referred to in
Sections 9(a), (b) and (d)), then in each such case the Exercise Price shall be
4
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 the date of the granting of such right of subscription or
purchase, as the case may be.
6
(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 event the Company shall issue to the Holder the number of
Warrant Shares determined as follows:
7
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 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
8
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
3155 Porter Drive, Palo Alto, California 94304, 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: /s/ Martin M. McGlynn
-------------------------------------------
Name: Martin M. McGlynn
-----------------------------------------
Title: President, Chief Executive Officer
----------------------------------------
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
---------------------------------------
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In the presence of:
- --------------------------
EXHIBIT 4.15
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-3
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 or about 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.
"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 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
3
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 shares of
its Common Stock for, in either case, an aggregate amount
that,
5
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 Tender
Offers, by the Company or any of its subsidiaries for all or
any portion of
6
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.
"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
7
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 4,291,642 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 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
8
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 4350(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 June 21, 2001, 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 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
9
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 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
10
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 symbol)ICP, and
IF CP(less than symbol) $2.27 and
IF CP (greater than or equal to symbol) MPP, then
CS = PPSH x 1.015, and
BSH = CS - FSH, and
if the Company elects to pay Holder
B$ = BSH x CP,
AS = CS - BSH - PPSH
or else AS = CS - PPSH
but IF CP(less than symbol)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(less than symbol)ICP and IF CP(greater than or equal
to symbol) $2.27 and
IF CP (greater than or equal to symbol) MPP, then
AS = PPSH x .015
or else AS = [(MPP x PPSH x 1.015)/CP] -
PPSH
IF CP(greater than symbol)ICP, then AS = 0
12
where:
AS = Adjustment Shares
CS = Initially calculated Adjustment Shares
I$ = $2,000,000
ICP = $4.3692
BSH = Buyout Shares: The number of shares for
which the Company may, in lieu of having the
Specified Number increase by the applicable
number of Adjustment Shares, elect to pay
cash to the Holder in the amount of the
Buyout.
FSH = Floor Shares (the number of shares that
are not subject to the Company's election to
buyout). The initial value of FSH shall be
set to FSH = 881,168. FSH shall be
recalculated at each Adjustment Date by
multiplying the value of FSH as of the
immediately preceding Adjustment Date by (1
- (SHX/PPSH))
B$ = 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 $2.27 (as such number shall be appropriately adjusted for
any stock splits, recapitalizations or similar events), the Company may, in lieu
of having the increase in the Specified Number include the number of Buyout
Shares, elect to pay cash to the Holder in an amount equal to the Buyout Amount
(B$). 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 plus, to
the extent aggregation with the Total Common Shares is required under the
Shareholder Approval Rule, other shares of Common Stock acquired under the
subscription agreements, one dated July 31, 2000 and one dated August 30, 2000,
each between Millennium and the Company, and the warrants issued in connection
therewith 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:
14
(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 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.
15
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 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 (for clarification purposes, such liquidated damages
are independent of other Class A Warrants and relate only to this Class A
Warrant). 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
16
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 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
17
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 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
18
(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
(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.
19
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 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
20
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.
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
21
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.
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: June 21, 2001 STEMCELLS, INC.
By: /s/ Martin M. McGlynn
---------------------------------------
Name: Martin M. McGlynn
---------------------------------------
Title: President, Chief Executive Officer
------------------------------------
23
FORM OF SUBSCRIPTION
STEMCELLS, INC.
(To be signed only on exercise of Warrant)
TO: STEMCELLS, INC.
3155 Porter Drive
Palo Alto, California 94304
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:
------------------------------------------
------------------------------------------
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.
24
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.
3155 Porter Drive
Palo Alto, California 94304
Attention: Chief Financial Officer
Facsimile No: 650-475-3101
This Adjustment Notice is given pursuant to the terms of the
Common Stock Purchase Warrant, Class A, dated June 21, 2001, 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:
27
EXHIBIT 10.55
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of June 21, 2001, (this
"Agreement") is made by and between STEMCELLS, INC., a Delaware corporation (the
"Company"), and the entity named on the signature page hereto (the "Initial
Investor" or "Holder").
W I T N E S S E T H:
WHEREAS, the Initial Investor and the Company are parties to that
certain subscription agreement ("Prior Subscription Agreement") dated as of July
31, 2000, pursuant to which the Company, among other things, issued shares of
the Company's Common Stock to the Buyer and granted the Buyer the option
("Option") to purchase additional shares of Common Stock pursuant to Section 5
of the Prior Subscription Agreement; and
WHEREAS, in connection with the Initial Investor's exercise of such
Option on June 8, 2001, the Initial Investor and the Company entered into a
Subscription Agreement, dated as of June 21, 2001 (the "Subscription
Agreement"), pursuant to which the Company has agreed, upon the terms and
subject to the conditions of the Subscription Agreement, to issue and sell to
the Initial Investor shares (the "Common Shares") of Common Stock, $.01 par
value (the "Common Stock"), of the Company, and to issue a Callable Warrant (the
"Callable Warrant") and a Common Stock Purchase Warrant, Class A (the "Class A
Warrant") (collectively, the "Warrants") to purchase shares (the "Warrant
Shares") of Common Stock; and
WHEREAS, to induce the Initial Investor to execute and deliver the
Subscription Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"1933 Act"), and applicable state securities laws with respect to the Common
Shares and the Warrant Shares;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Initial Investor hereby agree as follows:
1. DEFINITIONS.
(a) As used in this Agreement, the following terms shall have
the following meanings:
"Investor" or "Investors" means the Initial Investor and any
transferee or assignee who agrees to become bound by the provisions of this
Agreement, or a similar agreement relating to Common Shares, Callable Warrants,
Class A Warrants or Warrant Shares, in accordance with Section 9 hereof.
"Majority Holders" means those Investors who hold a majority
in interest of the Registrable Securities.
"1934 Act" means the Securities Exchange Act of 1934, as
amended.
"Permitted Transferee" means any person (1) who is an
"accredited investor" as defined in Regulation D under the 1933 Act, and (2)
who, immediately following the assignment of rights under this Agreement holds
(x) at least 50,000 shares of Common Stock or (y) Warrants which at the time of
such transfer are exercisable for at least 50,000 shares of Common Stock, or any
combination thereof (the 50,000 share amounts referred to in this definition
being subject to equitable adjustment from time to time on terms reasonably
acceptable to the Majority Holders for (i) stock splits, (ii) stock dividends,
(iii) combinations, (iv) capital reorganizations, (v) issuance to all holders of
Common Stock of rights or warrants to purchase shares of Common Stock and (vi)
similar events relating to the Common Stock, in each such case which occur on or
after the Closing Date).
"register," "registered," and "registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the 1933 Act and pursuant to Rule 415 under the
1933 Act or any successor rule providing for offering securities on a continuous
basis ("Rule 415"), and the declaration or ordering of effectiveness of such
Registration Statement by the SEC.
"Registrable Securities" means the Common Shares and the
Warrant Shares, whether held by the Initial Investor or any other Investor. As
to any particular securities, such securities shall cease to be Registrable
Securities when they have been sold pursuant to an effective registration
statement or in compliance with Rule 144 or are eligible to be sold pursuant to
subsection (k) of Rule 144.
"Registration Period" means the period from the Closing Date
to the earlier of (i) the date which is five years after the SEC Effective Date,
(ii) the date on which each Investor may sell all of its Registrable Securities
without registration under the 1933 Act pursuant to subsection (k) of Rule 144,
without restriction on the manner of sale or the volume of securities which may
be sold in any period and without the requirement for the giving of any notice
to, or the making of any filing with, the SEC and (iii) the date on which the
Investors no longer beneficially own any Registrable Securities.
"Registration Statement" means a registration statement of the
Company under the 1933 Act, including any amendment thereto, required to be
filed by the Company pursuant to this Agreement.
"Rule 144" means Rule 144 promulgated under the 1933 Act or
any other similar rule or regulation of the SEC that may at any time permit a
holder of any securities to sell securities of the Company to the public without
registration under the 1933 Act.
"SEC" means the United States Securities and Exchange
Commission.
"SEC Effective Date" means the date the Registration Statement
is declared effective by the SEC.
"SEC Filing Date" means the date the Registration Statement is
first filed with the SEC pursuant to Section 2(a).
2
(b) Capitalized terms defined in the introductory paragraph or
the recitals to this Agreement shall have the respective meanings therein
provided. Capitalized terms used herein and not otherwise defined herein shall
have the respective meanings set forth in the Subscription Agreement.
2. REGISTRATION.
(a) Mandatory Registration. (1) The Company shall prepare and,
on or prior to the date which is 45 days after the Closing Date, file with the
SEC a Registration Statement on Form S-1 (or Form S-3, if the Company is
eligible to use such form), which, on the date of filing with the SEC, covers
the resale by the Initial Investor of a number of shares of Common Stock at
least equal to the greater of (A) 900,000 shares of Common Stock or (B) the sum
of (x) the number of Common Shares PLUS (y) the number of Warrant Shares
issuable upon the exercise in full of the Callable Warrant PLUS (z) the number
of Warrant Shares equal to 175% of the number of shares of Common Stock issuable
upon the exercise of the Class A Warrant, determined as if the First Adjustment
Date (as defined in the Class A Warrant) occurred on the Closing Date and the
Class A Warrant was otherwise exercised in full for cash in accordance with the
terms thereof on the Trading Day prior to the SEC Filing Date (in each case
determined without regard to the limitations on beneficial ownership contained
in the Warrants). If at any time the number of shares of Common Stock included
in the Registration Statement required to be filed as provided in the first
sentence of this Section 2(a) shall be insufficient to cover all of the number
of Warrant Shares issuable upon exercise of the unexercised portion of the
Warrants, then promptly, but in no event later than 30 days after such
insufficiency shall occur (or, if later, 30 days after the date upon which the
Company first becomes eligible to file a Registration Statement therefor if such
ineligibility resulted from the indeterminate number of shares of Common Stock),
the Company shall file with the SEC an additional Registration Statement on Form
S-1 (or Form S-3, if the Company is eligible to use such form) (which shall not
constitute a post-effective amendment to the Registration Statement filed
pursuant to the first sentence of this Section 2(a)), covering such number of
shares of Common Stock as shall be sufficient to permit such exercise. The
Company shall use its best efforts to have such additional Registration
Statement declared effective as soon as possible thereafter, and in any event by
the 90th day following notice that such Registration Statement is required. For
all purposes of this Agreement such additional Registration Statement shall be
deemed to be the Registration Statement required to be filed by the Company
pursuant to Section 2(a) of this Agreement, and the Company and the Investors
shall have the same rights and obligations with respect to such additional
Registration Statement as they shall have with respect to the initial
Registration Statement required to be filed by the Company pursuant to this
Section 2(a). Without the written consent of the Majority Holders, the
Registration Statement shall not include securities to be sold for the account
of any selling security holder other than the Investors and the holders of the
registration rights described in Schedule 11(a).
(2) Prior to the SEC Effective Date or during any time
subsequent to the SEC Effective Date when the Registration Statement for any
reason is not available for use by any Investor for the resale of any
Registrable Securities hereunder, the Company shall not file any other
registration statement or any amendment thereto with the SEC under the 1933 Act
or request the acceleration of the effectiveness of any other registration
statement previously filed with the SEC, other than any registration statement
registering securities issued (v) to holders of
3
registration rights described in Schedule 11(a), (w) pursuant to compensation
plans for employees, directors, officers, advisers or consultants of the Company
and in accordance with the terms of such plans, (x) upon exercise of conversion,
exchange, purchase or similar rights issued, granted or given by the Company and
outstanding as of the date of this Agreement and disclosed in the SEC Reports or
the Subscription Agreement, (y) pursuant to a public offering underwritten on a
firm commitment basis registered under the 1933 Act or (z) as part of a
transaction involving a strategic alliance, acquisition of stock or assets,
merger, collaboration, joint venture, partnership or other 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 the Company's
business, so long as in each case of this clause (z) the Board of Directors of
the Company by resolution duly adopted (and a copy of which shall be furnished
to the Investor promptly after adoption) duly approves such transaction in
accordance with its duties under applicable law (each of the forgoing
transactions a "Board Approved Transaction").
(b) Certain Offerings. If any offering pursuant to a
Registration Statement pursuant to Section 2(d) hereof involves an underwritten
offering, Investors who hold a majority in interest of the Registrable
Securities subject to such underwritten offering shall have the right to select
one legal counsel. The Investors who hold the Registrable Securities to be
included in such underwriting shall pay all underwriting discounts and
commissions and other fees and expenses of any investment banker or bankers and
manager or managers (other than fees and expenses relating to registration of
Registrable Securities under federal or state securities laws, which are payable
by the Company pursuant to Section 5 hereof) with respect to their Registrable
Securities and the fees and expenses of such legal counsel so selected by the
Investors.
(c) Certain Payments. If: (1) the initial Registration
Statement is not filed on or prior to the 45th day following the Closing Date
(if the Company files such Registration Statement without affording the Holder
the opportunity to review and comment on the same as required by Section 3(h)
hereof, the Company shall not be deemed to have satisfied this clause (1)), or
(2) the initial Registration Statement filed hereunder is not declared effective
by the Commission on or prior to the 90th day following the Closing Date (the
"Effectiveness Required Date"), or (3) after a Registration Statement is filed
with and declared effective by the SEC, such Registration Statement ceases to be
effective as to a material portion of the Registrable Securities at any time
prior to the expiration of the Registration Period without being succeeded
within ten business days by an amendment to such Registration Statement or by a
subsequent Registration Statement filed with and declared effective by the SEC,
or (4) the Common Stock shall be delisted or suspended from trading on the
Nasdaq National Market or on any exchange or other principal market for the
Common Stock for more than three (3) business days (which need not be
consecutive days), or (5) the exercise rights of the Holders pursuant to the
Warrants are suspended for any reason, or (6) an amendment to a Registration
Statement is not filed by the Company with the SEC within ten business days of
the SEC's notifying the Company that such amendment is required in order for
such Registration Statement to be declared effective (any such failure or breach
being referred to as an "Event," and for purposes of clauses (1), (2) and (5)
the date on which such Event occurs, for purposes of clauses (3) and (6) the
date upon which
4
such 10 day period is exceeded, or for purposes of clause (4) the date on which
such three business day period is exceeded, being referred to as "Event Date"),
then, on the Event Date and each monthly anniversary thereof until the
applicable Event is cured, the Company shall pay to each Holder 1.5% of the
purchase price paid by such Holder pursuant to the Purchase Agreement, in cash,
("Delay Payments"). If the Company fails to pay any Delay Payments pursuant to
this Section in full within seven (7) 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 the date such Delay Payments are due until such amounts, plus all
such interest thereon, are paid in full. The Delay Payments pursuant to the
terms hereof shall apply on a pro-rata basis for any portion of a month prior to
the cure of an Event. The Delay Payments shall not preclude the Holder from
seeking appropriate additional damages and remedies for any such Events.
(d) Piggy-Back Registrations. If at any time the Company shall
determine to prepare and file with the SEC a registration statement relating to
an offering for its own account or the account of others under the 1933 Act of
any of its equity securities, other than a registration statement registering
securities issued (1) pursuant to compensation plans for employees, directors,
officers, advisers or consultants of the Company and in accordance with the
terms of such plans or (2) as part of a Board Approved Transaction, the Company
shall send to each Investor who is entitled to registration rights under this
Agreement written notice of such determination and, if within five (5) business
days after receipt of such notice, an Investor shall so request in writing, the
Company shall include in such Registration Statement all or any part of the
Registrable Securities the Investor requests to be registered, except that if,
in connection with any underwritten public offering for the account of the
Company, the managing underwriter(s) thereof shall impose a limitation on the
number of shares of Common Stock which may be included in the Registration
Statement because, in such underwriter(s)' judgment, such limitation is
necessary to effect an orderly public distribution, then the Company shall be
obligated to include in such Registration Statement only such limited portion of
the Registrable Securities with respect to which the Investor has requested
inclusion hereunder. Any exclusion of Registrable Securities shall be made pro
rata among the Investors seeking to include Registrable Securities, in
proportion to the number of Registrable Securities sought to be included by such
Investors; provided, however, that the Company shall not exclude any Registrable
Securities unless the Company has first excluded all outstanding securities the
holders of which are not entitled by right to inclusion of securities in such
Registration Statement; and provided further, however, that, after giving effect
to the immediately preceding proviso, any exclusion of Registrable Securities
shall be made pro rata with holders of other securities having the right to
include such securities in the Registration Statement, based on the number of
securities for which registration is requested except to the extent such pro
rata exclusion of such other securities is prohibited under any written
agreement entered into by the Company with the holder of such other securities
prior to the date of this Agreement, in which case such other securities shall
be excluded, if at all, in accordance with the terms of such agreement. No right
to registration of Registrable Securities under this Section 2(d) shall be
construed to limit any registration required under Section 2(a) hereof. The
obligations of the Company under this Section 2(d) may be waived as to all
Investors by the Majority Holders and as to a particular Investor by such
Investor and shall expire after the Company has afforded the opportunity for the
Investor(s) to exercise registration rights under this Section 2(d) for two
registrations; provided, however, that any Investor who shall have had any
Registrable Securities excluded from any Registration
5
Statement in accordance with this Section 2(d) shall be entitled to include in
an additional Registration Statement filed by the Company the Registrable
Securities so excluded. Notwithstanding any other provision of this Agreement,
if the Registration Statement required to be filed pursuant to Section 2(a) of
this Agreement shall have been ordered effective by the SEC and the Company
shall have maintained the effectiveness of such Registration Statement as
required by this Agreement and if the Company shall otherwise have complied in
all material respects with its obligations under this Agreement, then the
Company shall not be obligated to register any Registrable Securities on such
Registration Statement referred to in this Section 2(d).
(e) Eligibility for Form S-3. The Company shall file all
reports required to be filed by the Company with the SEC in a timely manner so
as to obtain and/or maintain eligibility for the use of Form S-3.
3. OBLIGATIONS OF THE COMPANY. In connection with the registration of
the Registrable Securities, the Company shall:
(a) prepare promptly, and file with the SEC not later than 45
days after the Closing Date, a Registration Statement with respect to the number
of Registrable Securities provided in Section 2(a), and thereafter to use its
best efforts to cause each Registration Statement relating to Registrable
Securities to become effective as soon as possible after such filing but in any
event on or prior to the Effectiveness Required Date, and keep the Registration
Statement effective pursuant to Rule 415 at all times during the Registration
Period; submit to the SEC, within three Business Days after the Company learns
that no review of the Registration Statement will be made by the staff of the
SEC or that the staff of the SEC has no further comments on the Registration
Statement, as the case may be, a request for acceleration of effectiveness of
the Registration Statement to a time and date not later than 48 hours after the
submission of such request; notify the Investors of the effectiveness of the
Registration Statement on the date the Registration Statement is declared
effective; and the Company represents and warrants to, and covenants and agrees
with, the Investors that the Registration Statement (including any amendments or
supplements thereto and prospectuses contained therein), at the time it is first
filed with the SEC, at the time it is ordered effective by the SEC and at all
times during which it is required to be effective hereunder other than any
period after which the Company notifies the Investors pursuant to Section 3(f)
until the time when the Investors may again sell Registrable Securities pursuant
to the Registration Statement (and each such amendment and supplement at the
time it is filed with the SEC and at all times during which it is available for
use in connection with the offer and sale of the Registrable Securities) shall
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein, or necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading;
(b) prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration Statement effective at all times during the
Registration Period, and, during the Registration Period, comply with the
provisions of the 1933 Act with respect to the disposition of all Registrable
Securities of the Company covered by the Registration Statement until such time
as
6
all of such Registrable Securities have been disposed of in accordance with the
intended methods of disposition by the seller or sellers thereof as set forth in
the Registration Statement;
(c) furnish to each Investor whose Registrable Securities are
included in the Registration Statement and its legal counsel, (1) promptly after
the same is prepared and publicly distributed, filed with the SEC or received by
the Company, one copy of the Registration Statement and any amendment thereto,
each preliminary prospectus and prospectus and each amendment or supplement
thereto, each letter written by or on behalf of the Company to the SEC or the
staff of the SEC and each item of correspondence from the SEC or the staff of
the SEC relating to such Registration Statement, and (2) such number of copies
of a prospectus, including a preliminary prospectus, and all amendments and
supplements thereto and such other documents, as such Investor may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Investor; notwithstanding the foregoing, prior to such disclosure
and review, the Company shall notify the Holders if any portion of such
documents contains material non-public information, in which case the Holders
may decline to review such documents or portions thereof (the "Right to Decline
Review");
(d) use commercially reasonable efforts to (i) register and
qualify the Registrable Securities covered by the Registration Statement under
such securities or blue sky laws of such jurisdictions as the Investors who hold
a majority in interest of the Registrable Securities being offered reasonably
request, (ii) prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements to such registrations and
qualifications as may be necessary to maintain the effectiveness thereof at all
times until the end of the Registration Period, (iii) take such other actions as
may be necessary to maintain such registrations and qualifications in effect at
all times during the Registration Period and (iv) take all other actions
reasonably necessary or advisable to qualify the Registrable Securities for sale
in such jurisdictions; provided, however, that the Company shall not be required
in connection therewith or as a condition thereto (I) to qualify to do business
in any jurisdiction where it would not otherwise be required to qualify but for
this Section 3(d), (II) to subject itself to general taxation in any such
jurisdiction, (III) to file a general consent to service of process in any such
jurisdiction, (IV) to provide any undertakings that cause more than nominal
expense or burden to the Company or (V) to make any change in its Certificate of
Incorporation or by-laws, which in each case the Board of Directors of the
Company determines in good faith to be contrary to the best interests of the
Company and its stockholders;
(e) in the event that the Registrable Securities are being
offered in an underwritten offering pursuant to Section 2(d), enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, including, without limitation, customary indemnification and contribution
obligations, with the underwriters of such offering;
(f) as promptly as practicable after becoming aware of such
event or circumstance, notify each Investor of any event or circumstance of
which the Company has knowledge, as a result of which the prospectus included in
the Registration Statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and use its commercially reasonable
efforts promptly to prepare a supplement or amendment to the Registration
Statement to correct such untrue
7
statement or omission, file such supplement or amendment with the SEC at such
time as shall permit the Investors to sell Registrable Securities pursuant to
the Registration Statement as promptly as practicable, and deliver a number of
copies of such supplement or amendment to each Investor as such Investor may
reasonably request;
(g) as promptly as practicable after becoming aware of such
event, notify each Investor who holds Registrable Securities being sold (or, in
the event of an underwritten offering, the managing underwriters) of the
issuance by the SEC of any stop order or other suspension of effectiveness of
the Registration Statement at the earliest possible time;
(h) not less than five Business Days prior to the filing of
the Registration Statement or any related prospectus or any amendment or
supplement thereto (including any document that would be incorporated or deemed
to be incorporated therein by reference), the Company shall, (i) furnish to the
Holders and their counsel copies of all such documents proposed to be filed,
which documents (other than those incorporated or deemed to be incorporated by
reference) will be subject to the review of such Holders and their counsel
(subject to the Right to Decline Review), and (ii) cause its officers and
directors, counsel and independent certified public accountants to respond to
such inquiries as shall be necessary, in the reasonable opinion of respective
counsel to such to conduct a reasonable investigation within the meaning of the
1933 Act. The Company shall not file the Registration Statement or any such
prospectus or any amendments or supplements thereto to which the Holders of a
majority of the Registrable Securities and their counsel shall reasonably object
in good faith.
(i) make generally available to its security holders as soon
as practical, but not later than ninety (90) days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 under the 1933 Act) covering a twelve-month period beginning not later
than the first day of the Company's fiscal quarter next following the effective
date of the Registration Statement;
(j) [Omitted];
(k) make available for inspection by any Investor, and any
attorney, accountant or other agent retained by any such Investor (collectively,
the "Inspectors"), all pertinent financial and other records, pertinent
corporate documents and properties of the Company (collectively, the "Records"),
as shall be reasonably necessary to enable each Investor to exercise its due
diligence responsibility, and cause the Company's officers, directors and
employees to supply all information which any Inspector may reasonably request
for purposes of such due diligence; provided, however, that each Inspector shall
hold in confidence and shall not make any disclosure (except to an Investor) of
any Record or other information which the Company determines in good faith to be
confidential, and of which determination the Inspectors are so notified, unless
(i) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (ii) the release of such
Records is ordered pursuant to a subpoena or other order from a court or
government body of competent jurisdiction or (iii) the information in such
Records has been made generally available to the public other than by disclosure
in violation of this or any other agreement. The Company shall not be required
to disclose any confidential information in such Records to any Inspector until
and unless such Inspector shall have entered into confidentiality agreements (in
form and substance satisfactory
8
to the Company) with the Company with respect thereto, substantially in the form
of this Section 3(k). Each Investor agrees that it shall, upon learning that
disclosure of such Records is sought in or by a court or governmental body of
competent jurisdiction or through other means, give prompt notice to the Company
and allow the Company, at the Company's own expense, to undertake appropriate
action to prevent disclosure of, or to obtain a protective order for, the
Records deemed confidential. The Company shall hold in confidence and shall not
make any disclosure of information concerning an Investor provided to the
Company pursuant to Section 4(e) hereof unless (i) disclosure of such
information is necessary to comply with federal or state securities laws or
applicable rules and regulations of Nasdaq or other market or exchange, (ii) the
disclosure of such information is necessary to avoid or correct a misstatement
or omission in any Registration Statement, (iii) the release of such information
is ordered pursuant to a subpoena or other order from a court or governmental
body of competent jurisdiction or (iv) such information has been made generally
available to the public other than by disclosure in violation of this or, to the
knowledge of the Company, any other agreement. Each party agrees that it shall,
upon learning that disclosure of such information concerning another party is
sought in or by a court or governmental body of competent jurisdiction or
through other means, give prompt notice to such other party and allow such other
party, at such other party's own expense, to undertake appropriate action to
prevent disclosure of, or to obtain a protective order for, such information;
(l) use its commercially reasonable efforts (i) to cause all
the Registrable Securities covered by the Registration Statement to be listed on
the Nasdaq National Market or such other principal securities market on which
securities of the same class or series issued by the Company are then listed or
traded or (ii) if securities of the same class or series as the Registrable
Securities are not then listed on the Nasdaq National Market or any such other
securities market, to cause all of the Registrable Securities covered by the
Registration Statement to be listed on the New York Stock Exchange, the American
Stock Exchange or the Nasdaq SmallCap Market;
(m) provide a transfer agent and registrar, which may be a
single entity, for the Registrable Securities not later than the effective date
of the Registration Statement;
(n) cooperate with the Investors who hold Registrable
Securities being offered to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legends) representing Registrable
Securities to be offered pursuant to the Registration Statement and enable such
certificates to be in such denominations or amounts, as the case may be, as the
Investors may reasonably request and registered in such names as the Investors
may request; and, within three Business Days after a Registration Statement
which includes Registrable Securities is ordered effective by the SEC, the
Company shall deliver to the transfer agent for the Registrable Securities (with
copies to the Investors whose Registrable Securities are included in such
Registration Statement) an instruction substantially in the form attached hereto
as EXHIBIT 1 and shall cause legal counsel selected by the Company to deliver to
the Investors an opinion of such counsel in the form attached hereto as EXHIBIT
2 (with a copy to the Company's transfer agent);
(o) during the period the Company is required to maintain
effectiveness of the Registration Statement pursuant to Section 3(a), the
Company shall not bid for or purchase any Common Stock or any right to purchase
Common Stock or attempt to induce any person to
9
purchase any such security or right if such bid, purchase or attempt would in
any way limit the right of the Investors to sell Registrable Securities by
reason of the limitations set forth in Regulation M under the 1934 Act; and
(p) take all other reasonable actions requested by the
Majority Holders necessary to expedite and facilitate disposition by the
Investors of the Registrable Securities pursuant to the Registration Statement.
4. OBLIGATIONS OF THE INVESTORS. In connection with the registration of
the Registrable Securities, the Investors shall have the following obligations:
(a) It shall be a condition precedent to the obligations of
the Company to complete the registration pursuant to this Agreement with respect
to the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities.
(b) Each Investor by such Investor's acceptance of the
Registrable Securities agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statement hereunder, unless such Investor has notified the Company
in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement;
(c) In the event Investors holding a majority in interest of
the Registrable Securities being registered determine to engage the services of
an underwriter, each Investor agrees to enter into and perform such Investor's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of the Registrable Securities, unless such Investor has notified the
Company in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement;
(d) Each Investor agrees that, upon receipt of any notice from
the Company of the happening of any event of the kind described in Section 3(f)
or 3(g), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession of the prospectus covering such
Registrable Securities current at the time of receipt of such notice;
(e) No Investor may participate in any underwritten
registration hereunder unless such Investor (i) agrees to sell such Investor's
Registrable Securities on the basis provided in any underwriting arrangements
approved by the Investors entitled hereunder to approve such
10
arrangements, (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements and (iii) agrees to
pay its pro rata share of all underwriting discounts and commissions and other
fees and expenses of investment bankers and any manager or managers of such
underwriting and legal expenses of the underwriters applicable with respect to
its Registrable Securities, in each case to the extent not payable by the
Company pursuant to the terms of this Agreement; and
(f) Each Investor agrees to take all reasonable actions
necessary to comply with the prospectus delivery requirements of the 1933 Act
applicable to its sales of Registrable Securities and to assist the Company in
carrying out its obligations hereunder.
5. EXPENSES OF REGISTRATION. All reasonable expenses (other than
underwriting discounts and commissions and other fees and expenses of investment
bankers engaged by Investors and other than brokerage commissions), incurred in
connection with registrations, filings or qualifications pursuant to Sections 2
and 3, including, without limitation, all registration, listing and
qualifications fees, printers and accounting fees and the fees and disbursements
of counsel for the Company and one legal counsel for the Investors (in addition
to the payment of the Initial Investor's expenses to the extent provided in the
Subscription Agreement), shall be borne by the Company.
6. INDEMNIFICATION. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Investor who holds such Registrable Securities, the
directors, if any, of such Investor, the officers, if any, of such Investor,
each person, if any, who controls any Investor within the meaning of the 1933
Act or the 1934 Act, any underwriter (as defined in the 1933 Act) for the
Investors, the directors, if any, of such underwriter and the officers, if any,
of such underwriter, and each person, if any, who controls any such underwriter
within the meaning of the 1933 Act or the 1934 Act (each, an "Indemnified
Person"), against any losses, claims, damages, liabilities or expenses (joint or
several) incurred (collectively, "Claims") to which any of them may become
subject under the 1933 Act, the 1934 Act or otherwise, insofar as such Claims
(or actions or proceedings, whether commenced or threatened, in respect thereof)
arise out of or are based upon any of the following statements or omissions in
or violations with respect to the Registration Statement, or any post-effective
amendment thereof, or any prospectus included therein: (i) any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement or any post-effective amendment thereof or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus if used prior to the effective date of such Registration
Statement, or contained in the final prospectus (as amended or supplemented, if
the Company files any amendment thereof or supplement thereto with the SEC) or
the omission or alleged omission to state therein any material fact necessary to
make the statements made therein, in light of the circumstances under which the
statements therein were made, not misleading or (iii) any violation or alleged
violation by the Company of the 1933 Act, the 1934 Act, any state securities law
or any rule or regulation under the 1933 Act, the 1934 Act
11
or any state securities law (the matters in the foregoing clauses (i) through
(iii) being, collectively, "Violations"). Subject to the restrictions set forth
in Section 6(d) with respect to the number of legal counsel, the Company shall
reimburse the Investors and the other Indemnified Persons, promptly as such
expenses are incurred and are due and payable, for any legal fees or other
reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(a): (I) shall
not apply to a Claim arising out of or based upon a Violation which occurs in
reliance upon and in conformity with information furnished in writing to the
Company by any Indemnified Person or underwriter for such Indemnified Person
expressly for use in connection with the preparation of the Registration
Statement, the prospectus or any such amendment thereof or supplement thereto,
if such prospectus was timely made available by the Company pursuant to Section
3(c) hereof; (II) with respect to any preliminary prospectus shall not inure to
the benefit of any Indemnified Person if the untrue statement or omission of
material fact contained in the preliminary prospectus was corrected in the
prospectus, as then amended or supplemented, if such prospectus was timely made
available by the Company pursuant to Section 3(c) hereof; and (III) shall not
apply to amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of the Company, which consent shall not be
unreasonably withheld. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of the Indemnified Person
and shall survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9.
(b) In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees to indemnify and hold
harmless, to the same extent and in the same manner set forth in Section 6(a),
the Company, each of its directors, each of its officers who signs the
Registration Statement, each person, if any, who controls the Company within the
meaning of the 1933 Act or the 1934 Act, any underwriter and any other
stockholder selling securities pursuant to the Registration Statement or any of
its directors or officers or any person who controls such stockholder or
underwriter within the meaning of the 1933 Act or the 1934 Act (collectively and
together with an Indemnified Person, an "Indemnified Party"), against any Claim
to which any of them may become subject, under the 1933 Act, the 1934 Act or
otherwise, insofar as such Claim arises out of or is based upon any Violation,
in each case to the extent (and only to the extent) that such Violation occurs
in reliance upon and in conformity with written information furnished to the
Company by such Investor expressly for use in connection with such Registration
Statement or any post-effective amendment thereof, or any prospectus included
therein; and such Investor will reimburse any legal or other expenses reasonably
incurred by any Indemnified Party, promptly as such expenses are incurred and
are due and payable, in connection with investigating or defending any such
Claim; provided, however, that the indemnity agreement contained in this Section
6(b) shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of such Investor, which
consent shall not be unreasonably withheld; provided, further, however, that the
Investor shall be liable under this Section 6(b) for only that amount of a Claim
as does not exceed the amount of the proceeds to such Investor from the sale of
Registrable Securities pursuant to such Registration Statement. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of such Indemnified Party and shall survive the transfer of the
Registrable Securities by the Investors pursuant to Section 9. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this
12
Section 6(b) with respect to any preliminary prospectus shall not inure to the
benefit of any Indemnified Party if the untrue statement or omission of material
fact contained in the preliminary prospectus was corrected on a timely basis in
the prospectus, as then amended or supplemented.
(c) The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as provided
above, with respect to information so furnished in writing by such persons
expressly for inclusion in the Registration Statement.
(d) Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 6 of notice of the commencement of any
action (including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel selected by the indemnifying party
but reasonably acceptable to the Indemnified Person or the Indemnified Party, as
the case may be; provided, however, that an Indemnified Person or Indemnified
Party shall have the right to retain its own counsel with the fees and expenses
to be paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential differing interests between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding. In such event, the Company shall pay for only one
separate legal counsel for the Investors; such legal counsel shall be selected
by the Investors holding a majority in interest of the Registrable Securities
included in the Registration Statement to which the Claim relates. The failure
to deliver written notice to the indemnifying party within a reasonable time of
the commencement of any such action shall not relieve such indemnifying party of
any liability to the Indemnified Person or Indemnified Party under this Section
6, except to the extent that the indemnifying party is prejudiced in its ability
to defend such action. The indemnification required by this Section 6 shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
7. CONTRIBUTION. To the extent any indemnification by an indemnifying
party is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under Section 6 to the fullest extent permitted by law; provided,
however, that (a) no contribution shall be made under circumstances where the
maker would not have been liable for indemnification under the fault standards
set forth in Section 6, (b) no seller of Registrable Securities guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any seller of Registrable Securities
who was not guilty of such fraudulent misrepresentation and (c) contribution by
any seller of Registrable Securities shall be limited in amount to the amount by
which the net amount of proceeds received by such seller from the sale of such
Registrable Securities exceeds the purchase price paid by such seller for such
Registrable Securities.
13
8. REPORTS UNDER 1934 ACT. With a view to making available to the
Investors the benefits of Rule 144, the Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act; and
(c) furnish to each Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144 and the
1934 Act or describing any failure to so comply, (ii) a copy of the most recent
annual or quarterly report of the Company and such other reports and documents
so filed by the Company and (iii) such other information as may be reasonably
requested to permit the Investors to sell such securities pursuant to Rule 144
without registration.
9. ASSIGNMENT OF THE REGISTRATION RIGHTS. The rights to have the
Company register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the Investors to any Permitted Transferee only if: (a)
the Investor agrees in writing with such Permitted Transferee to assign such
rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment, (b) except as otherwise provided in the
Subscription Agreement, the Company is, within a reasonable time after such
transfer or assignment, furnished with written notice of (i) the name and
address of such Permitted Transferee and (ii) the securities with respect to
which such registration rights are being transferred or assigned, (c)
immediately following such transfer or assignment the further disposition of
such securities by such Permitted Transferee is restricted under the 1933 Act
and applicable state securities laws, and (d) at or before the time the Company
receives the written notice contemplated by clause (b) of this sentence (or such
later time within ten Business Days after the Company approves a Proposed
Transferee pursuant to the Subscription Agreement) such Permitted Transferee
agrees in writing with the Company to be bound by all of the provisions
contained herein and in the Subscription Agreement. In connection with any such
transfer the Company shall, at the cost and expense of the Permitted Transferee,
promptly after such assignment take such actions as shall be reasonably
acceptable to the Initial Investor and such Permitted Transferee to assure that
the Registration Statement and related prospectus are available for use by such
Permitted Transferee for sales of the Registrable Securities in respect of which
the rights to registration have been so assigned; provided, however, that the
Company shall not be required to breach any other obligation hereunder in taking
such actions. In connection with any such assignment, each Investor shall have
the right to assign to such Permitted Transferee such Investor's rights under
the Subscription Agreement by notice of such assignment to the Company.
Following such notice of assignment of rights under the Subscription Agreement,
the Company shall be obligated to such Permitted Transferee to perform all of
its covenants under the Subscription Agreement as if such Permitted Transferee
were the Buyer under the Subscription Agreement.
10. AMENDMENT OF REGISTRATION RIGHTS. Any provision of this
Agreement may be amended only with the written consent of the Majority Holders
and the Company and, subject to the penultimate sentence of Section 2(d), the
observance by the Company of any provision of
14
this Agreement may be waived (either generally or in a particular instance and
either retroactively or prospectively) only with the written consent of the
Majority Holders. Any amendment or waiver effected in accordance with this
Section 10 shall be binding upon each Investor and the Company.
11. MISCELLANEOUS.
(a) Neither the Company nor any of its subsidiaries has
entered, as of the date hereof, nor shall the Company or any of its
subsidiaries, on or after the date of this Agreement, enter into any agreement
with respect to its securities that is inconsistent with the rights granted to
the Holders in this Agreement or otherwise conflicts with the provisions hereof.
Except as and to the extent specified in Schedule 11(a) hereto, neither the
Company nor any of its subsidiaries has previously entered into any agreement
granting any registration rights with respect to any of its securities to any
Person.
(b) Except as and to the extent specified in Schedule 11(a)
hereto and except with the written consent of the Majority Holders, neither the
Company nor any of its security holders (other than the Holders in such capacity
pursuant hereto) may include securities of the Company in the Registration
Statement other than the Registrable Securities, and the Company shall not after
the date hereof enter into any agreement providing any such right to be so
included to any of its security holders.
(c) A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(d) Notices required or permitted to be given hereunder shall
be in writing and shall be deemed to be sufficiently given when personally
delivered (by hand, by courier, by telephone line facsimile transmission (with
answer back confirmation) or other means) (i) if to the Company, at 3155 Porter
Drive, Palo Alto, California 94304, Attention: Chief Executive Officer,
facsimile number (650) 475-3101 with a copy to Ropes & Gray, One International
Place, Boston, Massachusetts, 02110, Attention: Geoffrey B. Davis, Esq.,
(facsimile number (617) 951-7050), (ii) if to the Initial Investor, at 666 Fifth
Avenue, New York, New York 10103, facsimile number (212) 841-6302, and (iii) if
to any other Investor, at such address as such Investor shall have provided in
writing to the Company, or at such other address as each such party furnishes by
notice given in accordance with this Section 11(b), and shall be effective upon
receipt.
(e) Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
(f) This Agreement shall be enforced, governed by and
construed in accordance with the laws of the State of New York applicable to
agreements made and to be performed entirely within such State. In the event
that any provision of this Agreement is invalid or
15
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of law. Any
provision hereof which may prove invalid or unenforceable under any law shall
not affect the validity or enforceability of any other provision hereof. Each
party hereby consents to the exclusive jurisdiction and venue of the federal and
state courts located in New York, New York in any action or proceeding arising
hereunder and to service of process by certified mail, return receipt requested
(which shall constitute "personal service").
(g) This Agreement constitutes the entire agreement among the
parties hereto with respect to the subject matter hereof. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
(h) Subject to the requirements of Section 9 hereof, this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of each of the parties hereto.
(i) All pronouns and any variations thereof refer to the
masculine, feminine or neuter, singular or plural, as the context may require.
(j) The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(k) [Omitted]
(l) Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
(m) The language used in this Agreement will be deemed to be
the language chosen by the parties to express their mutual intent, and no rules
of strict construction will be applied against any party.
(n) This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same agreement. This Agreement, once executed by a party,
may be delivered to the other party hereto by telephone line facsimile
transmission of a copy of this Agreement bearing the signature of the party so
delivering this Agreement.
16
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed by their respective officers thereunto duly
authorized as of day and year first above written.
STEMCELLS, INC.
By: /s/ Martin M. McGlynn
------------------------------------
Name: Martin M. McGlynn
Title: President, Chief Executive Officer
THE INITIAL INVESTOR: MILLENNIUM PARTNERS, L.P.
By: /s/ Terry Feeny
------------------------------------
Name: Terry Feeny
Title: Chief Financial Officer
17
EXHIBIT 1
TO
REGISTRATION
RIGHTS AGREEMENT
[Company Letterhead]
[Date]
[TRANSFER AGENT'S NAME AND ADDRESS]
Ladies and Gentlemen:
This letter shall serve as our irrevocable authorization and direction
to you (1) to transfer or re-register the certificates for the shares of Common
Stock, $.01 par value (the "Common Stock"), of STEMCELLS, INC., a Delaware
corporation (the "Company"), represented by certificate numbers _______ and
_______ for an aggregate of _______ shares (the "Outstanding Shares") of Common
Stock presently registered in the name of [Name of Investors] upon surrender of
such certificate(s) to you, notwithstanding the legend appearing on such
certificates, and (2) to issue shares (the "Warrant Shares") of Common Stock to
or upon the order of the holder from time to time on exercise of the Callable
Warrant, Common Stock Purchase Warrants, Class A (collectively, the "Warrants")
exercisable for Common Stock issued by the Company upon receipt by you of a
subscription form from such holder in the form enclosed herewith. The transfer
or re-registration of the certificates for the Outstanding Shares by you should
be made at such time as you are requested to do so by the record holder of the
Outstanding Shares. The certificate issued upon such transfer or re-registration
should be registered in such name as requested by the holder of record of the
certificate surrendered to you and should not bear any legend which would
restrict the transfer of the shares represented thereby. In addition, you are
hereby directed to remove any stop-transfer instruction relating to the
Outstanding Shares. Certificates for the Warrant Shares should not bear any
restrictive legend and should not be subject to any stop-transfer restriction.
Contemporaneously with the delivery of this letter, the Company is
delivering to you the following:
(a) a list showing the name and address of each holder of
record of the Warrants and the date of issuance, Warrant number, and, in the
case of the Callable Warrant, the initial fixed number of shares issuable upon
exercise thereof;
(b) the form of subscription relating to the exercise of the
Warrants; and
(c) an opinion of Iris Brest, Vice President and General
Counsel of the Company, as to registration of the Outstanding Shares and the
Warrant Shares for resale under the Securities Act of 1933, as amended.
Should you have any questions concerning this matter, please contact
me.
Very truly yours,
STEMCELLS, INC.
By:
---------------------------------------------
Name:
Title:
Enclosures
cc: [Names of Investors]
EXHIBIT 2
TO
REGISTRATION
RIGHTS AGREEMENT
[SEC Effective Date]
[Names and Addresses of Investors]
STEMCELLS, INC.
SHARES OF COMMON STOCK
Ladies and Gentlemen:
I am Vice President and General Counsel of STEMCELLS, INC., a Delaware
corporation (the "Company"), and I understand that the Company has sold to
[Names of Investors] (the "Holders") an aggregate of ________ shares (the
"Common Shares") of the Company's Common Stock, $.01 par value (the "Common
Stock"), and issued to the Holders a Callable Warrant, a Common Stock Purchase
Warrant, Class A (collectively, the "Warrants"). The Common Shares were sold,
and the Warrants were issued, to the Holders pursuant to a Subscription
Agreement, dated as of June 21, 2001, by and between Millennium Partners, L.P.
(the "Initial Investor") and the Company (the "Subscription Agreement").
Pursuant to the Registration Rights Agreement, dated as of June 21, 2001, by and
between the Company and the Initial Investor (the "Registration Rights
Agreement") entered into in connection with the purchase by the Initial Investor
of the Common Shares, the Company agreed with each Holder, among other things,
to register for resale (1) the Common Shares and (2) the shares (the "Warrant
Shares") of Common Stock issuable upon exercise of the Warrants under the
Securities Act of 1933, as amended (the "1933 Act"), upon the terms provided in
the Registration Rights Agreement. The Common Shares and the Warrant Shares are
referred to herein collectively as the "Shares." Pursuant to the Registration
Rights Agreement, on _______, _____ the Company filed a Registration Statement
on Form ___ (File No. __________) (the "Registration Statement") with the
Securities and Exchange Commission (the "SEC") relating to the Shares, which
names the Holders as selling stockholders thereunder.
[Other introductory and scope of examination language to be inserted]
Based on the foregoing, I am of the opinion that:
(1) Since the Closing Date, the Company has timely filed with the SEC
all forms, reports and other documents required to be filed with the SEC under
the Securities 1934 Act of 1934, as amended (the "1934 Act"). All of such forms,
reports and other documents complied,
when filed, in all material respects, with all applicable requirements of the
1933 Act and the 1934 Act;
(2) The Registration Statement and the Prospectus contained therein
(other than the financial statements and financial schedules and other financial
and statistical information contained or incorporated by reference therein, as
to which I have not been requested to and do not express any opinion) comply as
to form in all material respects with the applicable requirements of the 1933
Act and the rules and regulations promulgated thereunder; and
(3) The Registration Statement has become effective under the 1933 Act,
to the best of my knowledge after due inquiry, no stop order proceedings with
respect thereto have been instituted or threatened by the SEC. The Shares have
been registered under the 1933 Act and may be resold by the respective Holders
pursuant to the Registration Statement.
I have participated in the preparation of the Registration Statement
and the Prospectus, including review and discussions with officers and other
representatives of the Company, representatives of the independent public
accountants for the Company, and your representatives at which the contents of
the Registration Statement and the Prospectus contained therein and related
matters were discussed, and, although I am not passing upon and do not assume
any responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus contained therein, on
the basis of the foregoing, nothing has come to my attention that leads me to
believe either that the Registration Statement at the time the Registration
Statement became effective contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the Prospectus contained in
the Registration Statement, as of its date, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading (it being understood that I have not
been requested to and do not express any view with respect to the financial
statements and schedules and other financial and statistical data included or
incorporated by reference in the Registration Statement or the Prospectus
contained therein).
Paragraph (3) of this opinion may be relied upon by ____________,
Transfer Agent and Registrar (the "Transfer Agent"), as if addressed to the
Transfer Agent.
Very truly yours,
cc: [TRANSFER AGENT]
================================================================================
EXHIBIT 10.56
SUBSCRIPTION AGREEMENT
DATED AS OF JUNE 21, 2001
BY AND BETWEEN
STEMCELLS, INC.
AND
MILLENNIUM PARTNERS, L.P.
------------------
COMMON STOCK, CALLABLE WARRANTS
AND
COMMON STOCK PURCHASE WARRANTS
================================================================================
THIS SUBSCRIPTION AGREEMENT, dated as of June 21, 2001, (this
"Agreement") by and between STEMCELLS, INC., a Delaware corporation (the
"Company"), with headquarters located at 3155 Porter Drive, Palo Alto,
California 94304, and Millennium Partners, L.P., a Cayman Islands limited
partnership (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Buyer and the Company are parties to that certain
subscription agreement, dated as of July 31, 2000 (the "Prior Subscription
Agreement"), pursuant to which the Company, among other things, issued shares of
the Company's Common Stock to the Buyer and granted the Buyer the option
("Option") to purchase additional shares of Common Stock pursuant to Section 5
of the Prior Subscription Agreement;
WHEREAS, on June 8, 2001, the Buyer exercised all of its
remaining Option to purchase, upon the terms and subject to the conditions of
this Agreement and the terms of Section 5 of the Prior Subscription Agreement,
shares of Common Stock, $.01 par value (the "Common Stock"), of the Company
having an aggregate purchase price of Two Million Dollars ($2,000,000); and
WHEREAS, the Company and the Buyer are executing and
delivering this Agreement in reliance upon the exemption from securities
registration afforded by Rule 506 of Regulation D as promulgated by the
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "1933 Act");
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE.
(a) SUBSCRIPTION. The Buyer hereby agrees to purchase from the Company, and the
Company hereby agrees to sell to the Buyer, the number of shares (the "Common
Shares") of Common Stock set forth on the signature page of this Agreement at
the price per share and for the aggregate purchase price set forth on the
signature page of this Agreement (the "Purchase Price"). The Purchase Price
shall be payable in United States dollars. In connection with the purchase of
the Common Shares by the Buyer, the Company shall issue to the Buyer, at the
closing on the Closing Date (as defined herein), (1) Callable Warrants in the
form attached hereto as ANNEX I (the "Callable Warrants") to purchase the number
of shares of Common Stock set forth therein (subject to adjustment as provided
in the Callable Warrants) and (2) Common Stock Purchase Warrants, Class A, in
the form attached hereto as ANNEX II (the "Class A Warrants") to purchase the
number of shares of Common Stock set forth therein (subject to adjustment as
provided in the Class A Warrants). The Callable Warrants and the Class A
Warrants are referred to herein collectively as the "Warrants." The shares of
Common Stock issuable upon exercise of the Warrants are referred to herein as
the "Warrant Shares." The Common Shares and the Warrant Shares are referred to
herein collectively as the "Shares." The Shares and the Warrants are referred to
herein collectively as the "Securities."
(b) THE CLOSING.
(1) TIMING. Subject to the fulfillment or waiver of the
conditions set forth in Section 6 hereof, the purchase and sale of the Common
Shares and Warrants shall take place at a closing (the "CLOSING") on the date
hereof or such other date as the Buyer and the Company may agree upon (the
"Closing Date") at the offices of Kleinberg, Kaplan, Wolff & Cohen, P.C.
(2) FORM AND TIMING OF PAYMENT. The Buyer shall pay the
Purchase Price for the Common Shares by delivering (A) 75% of the Purchase Price
to the Company on the Closing Date and (B) 25% of the Purchase Price to the
Company on the date on which the Registration Statement (as defined in the
registration rights agreement, dated as of June 21, 2001, between the Company
and the Buyer (the "Registration Rights Agreement")) becomes effective (or such
later date which is two (2) business days after Buyer receives written notice of
the date of such effectiveness). Upon Closing, the Company shall deliver (A)
instructions to its registrar and transfer agent regarding the issuance of the
certificates for all the Common Shares and shall cause its registrar and
transfer agent to deliver such certificates to Buyer as soon as possible after
Closing and (B) the Warrants, registered in the corporate securities records of
the Company and on the certificates in the name of the Buyer or its nominee, to
the Buyer (or Kleinberg, Kaplan, Wolff & Cohen, P.C. on behalf of the Buyer).
(c) METHOD OF PAYMENT. Payment of the Purchase Price for the Common Shares shall
be made in U.S. Dollars by wire transfer of funds to an account designated by
the Company.
As used in this Agreement, the term "Business Day"
means any day other than a Saturday, Sunday or other day on which commercial
banks in the City of New York are authorized or required by law to remain
closed.
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.
The Buyer represents and warrants to, and covenants and agrees
with, the Company as follows:
(a) ACCREDITED BUYER STATUS; SOPHISTICATED BUYER. The Buyer is
an "accredited investor" as that term is defined in Rule 501(a) of
Regulation D under the 1933 Act. The Buyer has such knowledge and
experience in financial and business matters that it is capable of
evaluating the merits and risks of investment in the Common Shares, the
Warrants and Warrant Shares.
(b) INFORMATION. The Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and
operations of the Company which have been requested and materials
relating to the offer and sale of the Common Shares, the Warrants and
Warrant Shares which have been requested by the Buyer. The Buyer and
its advisors, if any, have been afforded the opportunity to ask
questions of the Company. Neither such inquiries nor any other due
diligence investigations conducted by the Buyer or its advisors, if
any, or its representatives shall modify, amend or affect the Buyer's
right to rely on the Company's representations and warranties contained
in Section 3 below. The Buyer understands that its investment in the
Common Shares, the Warrants and
2
Warrant Shares involves a high degree of risk. The Buyer has sought
such accounting, legal and tax advice as it has considered necessary to
make an informed investment decision with respect to its acquisition of
the Common Shares, the Warrants and Warrant Shares.
(c) LEGENDS. The Company shall issue certificates for the
Common Shares, the Warrants and Warrant Shares to the Buyer without any
legend except as described herein. The Buyer covenants that, in
connection with any transfer of Shares by the Buyer pursuant to the
registration statement contemplated by the Registration Rights
Agreement, it will comply with the applicable prospectus delivery
requirements of the 1933 Act, provided that copies of a current
prospectus relating to such effective registration statement are or
have been supplied to the Buyer.
(d) AUTHORIZATION; ENFORCEMENT. Each of this Agreement and the
Registration Rights Agreement has been duly and validly authorized,
executed and delivered on behalf of the Buyer and is a valid and
binding agreement of the Buyer enforceable against the Buyer in
accordance with its terms, subject as to enforceability to general
principles of equity and to applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation and other similar laws relating
to, or affecting generally, the enforcement of applicable creditors'
rights and remedies. The Buyer has the requisite corporate power and
authority to enter into and perform its obligations under this
Agreement and the Registration Rights Agreement and each other
agreement entered into by the parties hereto in connection with the
transactions contemplated by this Agreement.
(e) NO CONFLICTS. The execution, delivery and performance of
this Agreement and the Registration Rights Agreement by the Buyer and
the consummation by the Buyer of the transactions contemplated hereby
and thereby will not result in a violation of the certificate of
incorporation, by-laws or other documents of organization of the Buyer.
(f) INVESTMENT REPRESENTATION. The Buyer is purchasing the
Common Shares and the Warrants for its own account and not with a view
to distribution in violation of any securities laws. The Buyer has been
advised and understands that neither the Common Shares, the Warrants
nor the Warrant Shares issuable upon exercise thereof have been
registered under the 1933 Act or under the "blue sky" laws of any
jurisdiction and may be resold only if registered pursuant to the
provisions of the 1933 Act or if an exemption from registration is
available, except under circumstances where neither such registration
nor such an exemption is required by law. The Buyer has been advised
and understands that the Company, in issuing the Common Shares and the
Warrant, is relying upon, among other things, the representations and
warranties of the Buyer contained in this Section 3 in concluding that
such issuance is a "private offering" and is exempt from the
registration provisions of the 1933 Act.
3
(g) RULE 144. The Buyer understands that there is no public
trading market for the Warrants and that none is expected to develop.
The Buyer understands that the Common Shares, the Warrants and the
Warrant Shares received upon conversion or exercise thereof must be
held indefinitely unless and until registered under the 1933 Act or an
exemption from registration is available. The Buyer is aware of the
provisions of Rule 144 promulgated under the 1933 Act.
(h) RELIANCE BY THE COMPANY. The Buyer understands that the
Common Shares and the Warrants are being offered and sold in reliance
on a transactional exemption from the registration requirements of
Federal and state securities laws and that the Company is relying upon
the truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of the Buyer set forth herein in
order to determine the applicability of such exemptions and the
suitability of the Buyer to acquire the Common Shares and the Warrants.
3. COMPANY REPRESENTATIONS, WARRANTIES, ETC.
The Company represents and warrants to, and covenants and
agrees with, the Buyer that, except as set forth in the schedules attached
hereto:
(a) ORGANIZATION AND QUALIFICATION; MATERIAL ADVERSE EFFECT.
The Company is a corporation duly incorporated and existing in good
standing under the laws of the State of Delaware and has the requisite
corporate power to own its properties and to carry on its business as
now being conducted. The Company does not have any Subsidiary other
than StemCells California, Inc. (the "SUBSIDIARY". The Subsidiary is
duly organized, and validly existing and in good standing under the
laws of its jurisdiction of formation. Except where specifically
indicated to the contrary, all references in this Agreement to
Subsidiary shall be deemed to refer to the Subsidiary of the Company.
The Company is duly qualified as a foreign corporation to do business
and is in good standing in every jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary other than those in which the failure so to qualify would not
have a Material Adverse Effect. "MATERIAL ADVERSE EFFECT" means any
adverse effect on the business, operations, properties, prospects or
financial condition of the Company and its Subsidiary, which is (either
alone or together with all other adverse effects) material to the
Company and its Subsidiary, taken as a whole, and any material adverse
effect on the transactions contemplated under this Agreement, the
Certificate, and the Registration Rights Agreement, or any other
agreement or document contemplated hereby or thereby.
(b) AUTHORIZATION; ENFORCEMENT. (i) The Company has all
requisite corporate power and authority to enter into and perform this
Agreement, the Registration Rights Agreement and the Warrants
("TRANSACTION DOCUMENTS") and to issue the Common Shares and the
Warrants in accordance with the terms
4
hereof, (ii) the execution and delivery of this Agreement, the
Registration Rights Agreement, and the Warrants by the Company and the
consummation by it of the transactions contemplated hereby and thereby,
including the issuance of the Common Shares and the Warrants, have been
duly authorized by all necessary corporate action, and no further
consent or authorization of the Company or its Board of Directors (or
any committee or subcommittee thereof) or stockholders is required,
(iii) this Agreement, the Registration Rights Agreement, and the
Warrants have been duly executed and delivered by the Company, (iv)
this Agreement, the Registration Rights Agreement, and the Warrants
constitute valid and binding obligations of the Company enforceable
against the Company in accordance with their terms, except (A) as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of creditors' rights and remedies
or by other equitable principles of general application, and (B) to the
extent the indemnification provisions contained in this Agreement and
the Registration Rights Agreement may be limited by applicable federal
or state securities laws and (v) the Common Shares, the Warrants, and
the Warrant Shares issuable upon the exercise thereof have been duly
authorized and, upon issuance thereof and payment therefor in
accordance with the terms of this Agreement, the Common Shares, the
Warrants, and the Warrant Shares issuable upon the exercise thereof
will be validly issued, fully paid and non-assessable, free and clear
of any and all liens, claims and encumbrances.
(c) CAPITALIZATION. As of the date hereof, the authorized
capital stock of the Company consists of (i) 45,000,000 shares of
Common Stock, of which, as of May 31, 2001, 21,470,385 shares were
issued and outstanding, and, as of the date hereof, 6,748,502 shares
are issuable and reserved for issuance pursuant to the Company's stock
option and purchase plans and committed pursuant to pending
acquisitions, and, as of the date hereof, other than pursuant to the
Prior Subscription Agreement and the Warrants issued in connection
therewith and the Warrants issued to the Buyer on August 30, 2000,
approximately 947,300 shares are issuable pursuant to securities (other
than options and purchase plans referred to above), exercisable or
exchangeable for, or convertible into, shares of Common Stock, and
approximately 1,369,600 shares are reserved for issuance pursuant to
such securities and (ii) 1,000,000 shares of preferred stock, of which,
as of the date hereof, (A) 2,626 shares are currently designated as 6%
Cumulative Convertible Preferred Stock, 1,500 shares of which are
issued and outstanding and (B) 450,000 shares are designated as Junior
Preferred Shares, none of which are issued or outstanding. All of such
outstanding shares have been, or upon issuance will be, validly issued,
fully paid and nonassessable. As of the date hereof, except as
disclosed in SCHEDULE 3(c) or pursuant to the Prior Subscription
Agreement and Warrants issued pursuant thereto, (i) no shares of the
Company's capital stock are subject to preemptive rights or any other
similar rights or any liens or encumbrances suffered or permitted by
the Company, (ii) there are no outstanding debt securities, (iii) there
are no outstanding options, warrants, scrip, rights to subscribe to,
calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, any shares of capital stock of
the
5
Company or its Subsidiary, or contracts, commitments, understandings or
arrangements by which the Company or its Subsidiary is or may become
bound to issue additional shares of capital stock of the Company or its
Subsidiary or options, warrants, scrip, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities
or rights convertible into, any shares of capital stock of the Company
or its Subsidiary, (iv) there are no agreements or arrangements under
which the Company or its Subsidiary is obligated to register the sale
of any of their securities under the Securities Act of 1933, as amended
("Securities Act" or "1933 Act") (except the Registration Rights
Agreement and except as set forth on SCHEDULE 3(c)), (v) there are no
outstanding securities of the Company or its Subsidiary which contain
any redemption or similar provisions, and there are no contracts,
commitments, understandings or arrangements by which the Company or its
Subsidiary is or may become bound to redeem a security of the Company
or its Subsidiary, (vi) there are no securities or instruments
containing anti-dilution or similar provisions that will be triggered
by the issuance of the Common Shares or the Warrants as described in
this Agreement or the Warrants and (vii) the Company does not have any
stock appreciation rights or "phantom stock" plans or agreements or any
similar plan or agreement. The Company has furnished to the Buyer true
and correct copies of the Company's Certificate of Incorporation, as
amended and as in effect on the date hereof (the "CERTIFICATE OF
INCORPORATION"), and the Company's By-laws, as in effect on the date
hereof (the "BY-LAWS").
(d) NO CONFLICTS. The execution, delivery and performance of
the Transaction Documents by the Company and the consummation by the
Company of the transactions contemplated hereby and thereby and the
issuance of Common Shares, the Warrants, and the Warrant Shares
underlying the Warrants will not (i) result in a violation of the
Certificate of Incorporation, any certificate of designations,
preferences and rights of any outstanding series of preferred stock of
the Company or the By-laws; (ii) conflict with, or constitute a default
(or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument
to which the Company or its Subsidiary is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree
(including United States federal and state securities laws and
regulations and the rules and regulations of the Nasdaq National Market
(the "PRINCIPAL MARKET") or other principal securities exchange or
trading market on which the Common Stock is traded or listed)
applicable to the Company or its Subsidiary or by which any property or
asset of the Company or its Subsidiary is bound or affected. Neither
the Company nor its Subsidiary is in violation of any term of, or in
default under, (x) its certificate of incorporation, any certificate of
designations, preferences and rights of any outstanding series of
preferred stock or By-laws or their organizational charter or by-laws,
respectively, (y) any material contract, agreement, mortgage,
indebtedness, indenture, instrument, or (z) any judgment, decree or
order or any statute, rule or regulation applicable to the Company or
its Subsidiary, the non-compliance with which (in the cases of (y) and
(z)) would cause a Material Adverse Effect. Except as specifically
contemplated by this
6
Agreement and as required under the 1933 Act or state "blue sky" laws,
the Company is not required to obtain any consent, authorization or
order of, or make any filing or registration with, any court,
governmental agency or any regulatory or self-regulatory agency in
order for it to execute, deliver or perform any of its obligations
under, or contemplated by, the Transaction Documents or the issuance of
the Common Shares and the Warrants in accordance with the terms hereof
or thereof. All consents, authorizations, orders, filings and
registrations which the Company is required to obtain pursuant to the
preceding sentence have been obtained or effected on or prior to the
date hereof, or in the case of post-sale filings, will be made promptly
after the date hereof. The Company complies with and is not in
violation of the listing requirements of the Principal Market as in
effect on the date hereof in all material respects and on the Closing
Date and is not aware of any existing facts which provide a basis for
delisting or suspension of the Common Stock by the Principal Market.
(e) SEC DOCUMENTS; FINANCIAL STATEMENTS. Since December 31,
1998, the Company has filed all reports, schedules, forms, statements
and other documents required to be filed by it with the SEC pursuant to
the reporting requirements of the Securities Exchange Act of 1934, as
amended (the "1934 Act") (all of the foregoing filed prior to the date
hereof and all exhibits included therein and financial statements and
schedules thereto and documents incorporated by reference therein being
hereinafter referred to as the "SEC DOCUMENTS"). As of their respective
dates, the SEC Documents complied in all material respects with the
requirements of the 1934 Act and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of the
SEC Documents, at the time they were filed with the SEC, contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading. As of their respective dates, the financial
statements of the Company included in the SEC Documents complied as to
form in all material respects with applicable accounting requirements
and the published rules and regulations of the SEC with respect
thereto. Such financial statements have been prepared in accordance
with generally accepted accounting principles, consistently applied,
during the periods involved (except (i) as may be otherwise indicated
in such financial statements or the notes thereto, or (ii) in the case
of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present
in all material respects the financial position of the Company as of
the dates thereof and the results of its operations and cash flows for
the periods then ended (subject, in the case of unaudited statements,
to normal year-end audit adjustments). Neither the Company nor its
Subsidiary or any of their officers, directors, employees or agents
have provided the Buyer with any material, nonpublic information which
was not publicly disclosed prior to the date hereof.
(f) ABSENCE OF CERTAIN CHANGES. Except as set forth in the SEC
Documents identified on Schedule 3(f) hereto, since December 31, 1998
there has been no adverse change or adverse development in the
business, properties,
7
assets, operations, financial condition, prospects, liabilities or
results of operations of the Company or its Subsidiary which has had
or, to the knowledge of the Company or its Subsidiary, is reasonably
likely to have a Material Adverse Effect. The Company has not taken any
steps, and does not currently expect to take any steps, to seek
protection pursuant to any bankruptcy law nor does the Company or its
Subsidiary have any knowledge or reason to believe that its creditors
intend to initiate involuntary bankruptcy proceedings.
(g) ABSENCE OF LITIGATION. There is no action, suit,
proceeding, inquiry or investigation before or by any court, public
board, government agency, self-regulatory organization or body pending
or, to the knowledge of the Company or its Subsidiary, threatened
against or affecting the Company, the Common Stock or any of the
Company's Subsidiary or any of the Company's or the Company's
Subsidiary's officers or directors in their capacities as such, which
individually and in the aggregate, respectively, would be reasonably
likely to result in liability to the Company in excess of $50,000 and
$100,000, respectively.
(h) ACKNOWLEDGMENT REGARDING BUYER'S PURCHASE OF SHARES. The
Company acknowledges and agrees that the Buyer is acting solely in the
capacity of arm's length purchaser with respect to the Transaction
Documents and the transactions contemplated hereby and thereby. The
Company further acknowledges that the Buyer is not acting as financial
advisor or fiduciary of the Company (or in any similar capacity) with
respect to the Transaction Documents and the transactions contemplated
hereby and thereby, and any advice given by the Buyer or any of its
respective representatives or agents in connection with the Transaction
Documents and the transactions contemplated hereby and thereby is
merely incidental to the Buyer's purchase of the Common Shares. The
Company further represents to the Buyer that the Company's decision to
enter into the Transaction Documents has been based solely on the
independent evaluation by the Company and its representatives.
(i) NO UNDISCLOSED EVENTS, LIABILITIES, DEVELOPMENTS OR
CIRCUMSTANCES. No event, liability, development or circumstance has
occurred or exists with respect to the Company or its Subsidiary or
their respective business, properties, prospects, operations or
financial condition, that would be required to be disclosed by the
Company under applicable securities laws in a registration statement
filed with the SEC relating to an issuance and sale by the Company of
its Common Stock and which has not been publicly disclosed.
(j) NO INSIDE INFORMATION. The Company has not provided and,
the Company shall not provide, the Buyer with any non-public
information, except to the extent that the Buyer exercises its right to
review a registration statement containing material non-public
information (after receiving written notice of the existence of such
content) and except in the case of the Buyer's exercising rights
pursuant to Section 4(i) of the Prior Subscription Agreement.
8
(k) NO SECURITIES ACT REGISTRATION. The sale and issuance of
the Common Shares and Warrants in accordance with terms of this
Agreement and the issuance of Warrant Shares upon exercise of the
Warrants are exempt from registration under the 1933 Act.
(l) EMPLOYEE RELATIONS. Neither the Company nor its Subsidiary
is involved in any labor dispute nor, to the knowledge of the Company
or its Subsidiary, is any such dispute threatened, the effect of which
would be reasonably likely to result in a Material Adverse Effect.
Neither the Company nor its Subsidiary is a party to a collective
bargaining agreement. The Company and its Subsidiary believe that
relations between the Company and its Subsidiary and their respective
employees are good. No executive officer (as defined in Rule 501(f) of
the 1933 Act) whose departure would be adverse to the Company has
notified the Company that such officer intends to leave the Company or
otherwise terminate such officer's employment with the Company.
(m) INTELLECTUAL PROPERTY RIGHTS. The Company and its
Subsidiary own or possess adequate rights or licenses to use all
trademarks, trade names, service marks, service mark registrations,
service names, patents, patent rights, copyrights, inventions,
licenses, approvals, governmental authorizations, trade secrets and
rights necessary to conduct their respective businesses as now
conducted. None of the Company's trademarks, trade names, service
marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, government
authorizations, trade secrets or other intellectual property rights
have expired or terminated, or are expected to expire or terminate
within two (2) years from the date of this Agreement except as would
not have a Material Adverse Effect. The Company and its Subsidiary do
not have any knowledge of any infringement by the Company or its
Subsidiary of trademark, trade name rights, patents, patent rights,
copyrights, inventions, licenses, service names, service marks, service
mark registrations, trade secret or other similar rights of others, or
of any such development of similar or identical trade secrets or
technical information by others, and no claim, action or proceeding has
been made or brought against, or to the Company's knowledge, is
threatened against, the Company or its Subsidiary regarding trademarks,
trade name rights, patents, patent rights, inventions, copyrights,
licenses, service names, service marks, service mark registrations,
trade secrets or other infringement. The Company and its Subsidiary
have taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their intellectual properties.
(n) SHAREHOLDER APPROVAL RULE. Other than pursuant to the
Prior Subscription Agreement or the August 30, 2000 Subscription
Agreement, the Company has not issued any shares of Common Stock or
shares of any series of preferred stock or other securities convertible
into, exchangeable for or otherwise entitling the holder to acquire
shares of Common Stock which may be subject to Rule 4350(i)(1)(D) of
Nasdaq as in effect from time to time or any successor, replacement or
similar provision thereof or of any other market on which the Common
Stock is listed for trading (the "Shareholder Approval Rule") and which
9
would be integrated with the sale of the Common Shares to the Buyer or
the issuance of Warrant Shares upon exercise of the Warrants for
purposes of the Shareholder Approval Rule.
(o) ENVIRONMENTAL LAWS. The Company and its Subsidiary (i) are
in compliance with any and all applicable foreign, federal, state and
local laws and regulations relating to the protection of human health
and safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) have received
all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses
and (iii) are in compliance with all terms and conditions of any such
permit, license or approval where such noncompliance or failure to
receive permits, licenses or approvals referred to in clauses (i), (ii)
or (iii) above could have, individually or in the aggregate, a Material
Adverse Effect.
(p) TITLE. The Company and its Subsidiary have good and
marketable title in fee simple to all real property and good and
marketable title to all personal property owned by them which is
material to the business of the Company and its Subsidiary, in each
case free and clear of all liens, encumbrances and defects except such
as are described in SCHEDULE 3(p) or in the SEC Documents listed in
SCHEDULE 3(p) or such as do not materially and adversely affect the
value of such property and do not interfere with the use made and
proposed to be made of such property by the Company or its Subsidiary.
Any real property and facilities held under lease by the Company or its
Subsidiary are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and
buildings by the Company and its Subsidiary.
(q) INSURANCE. The Company and its Subsidiary are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses in which the Company and its
Subsidiary are engaged. Neither the Company nor any such Subsidiary has
been refused any insurance coverage sought or applied for and neither
the Company nor any such Subsidiary has any reason to believe that it
will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that
would not materially and adversely affect the condition, financial or
otherwise, or the earnings, business or operations of the Company and
its Subsidiary taken as a whole.
(r) REGULATORY PERMITS. The Company and its Subsidiary possess
all material certificates, authorizations and permits issued by the
appropriate federal, state or foreign regulatory authorities, necessary
to conduct their respective businesses, and neither the Company nor any
such Subsidiary has received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization or
permit.
10
(s) INTERNAL ACCOUNTING CONTROLS. The Company and its
Subsidiary maintain a system of internal accounting controls sufficient
to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability, (iii) access to assets
is permitted only in accordance with management's general or specific
authorization and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(t) FOREIGN CORRUPT PRACTICES ACT. Neither the Company, nor
any director, officer, agent, employee or other person acting on behalf
of the Company or any Subsidiary has, in the course of acting for, or
on behalf of, the Company, directly or indirectly used any corporate
funds for any unlawful contribution, gift, entertainment or other
unlawful expenses relating to political activity; directly or
indirectly made any direct or indirect unlawful payment to any foreign
or domestic government official or employee from corporate funds;
violated or is in violation of any provision of the U.S. Foreign
Corrupt Practices Act of 1977, as amended, or any similar treaties of
the United States; or directly or indirectly made any bribe, rebate,
payoff, influence payment, kickback or other unlawful payment to any
foreign or domestic government or party official or employee.
(u) TAX STATUS. The Company and its Subsidiary has made or
filed all United States federal and state income and all other tax
returns, reports and declarations required by any jurisdiction to which
it is subject and (i) has paid all taxes and other governmental
assessments and charges, shown or determined to be due on such returns,
reports and declarations, except those being contested in good faith
and (ii) has set aside on its books provisions reasonably adequate for
the payment of all taxes for periods subsequent to the periods to which
such returns, reports or declarations apply. There are no unpaid taxes
claimed to be due by the taxing authority of any jurisdiction, and the
Company is not aware of any basis for any such claim.
(v) CERTAIN TRANSACTIONS. Except as set forth in the SEC
Documents filed on EDGAR at least thirty (30) Trading Days prior to the
date hereof and except for arm's length transactions pursuant to which
the Company makes payments in the ordinary course of business upon
terms no less favorable than the Company could obtain from third
parties and other than the grant of stock options disclosed on SCHEDULE
3(c), none of the officers, directors or employees of the Company is
presently a party to any transaction with the Company or its Subsidiary
(other than for services as employees, consultants, officers and
directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental
of real or personal property to or from, or otherwise requiring
payments to or from any officer, director or such employee or, to the
knowledge of the Company, any corporation,
11
partnership, trust or other entity in which any officer, director or
any such employee has a substantial interest or is an officer,
director, trustee or partner.
(w) DILUTIVE EFFECT. The Company understands and acknowledges
that the number of Common Shares issuable upon exercise of the Warrants
purchased pursuant to this Agreement will increase in certain
circumstances. The Company further acknowledges that, subject to such
limitations as are expressly set forth in the Transaction Documents,
its obligation to issue Common Shares upon exercise of the Warrants
purchased pursuant to this Agreement, is absolute and unconditional
regardless of the dilutive effect that such issuance may have on the
ownership interests of other shareholders of the Company.
(x) APPLICATION OF TAKEOVER PROTECTIONS. There are no
anti-takeover provisions contained in the Company's Certificate of
Incorporation or otherwise which will be triggered as a result of the
transactions contemplated by this Agreement, including, without
limitation, the Company's issuance of the Common Shares and the Buyer's
ownership of the Common Shares.
(y) RIGHTS PLAN. The Company confirms that no provision of the
Company's rights plan will, under any present or future circumstances,
delay, prevent or interfere with the performance of any of the
Company's obligations under the Transaction Documents and such plan
will not be "triggered" by such performance.
(z) OBLIGATIONS ABSOLUTE. Each of the Company and the Buyer
agrees that, subject only to the conditions, qualifications and
exceptions (if any) specifically set forth in the Transaction
Documents, its obligations under the Transaction Documents are
unconditional and absolute. Except to the extent (if any) specifically
set forth in the Transaction Documents, each party's obligations
thereunder are not subject to any right of set off, counterclaim, delay
or reduction.
(aa) ISSUANCE OF COMMON SHARES. The Common Shares are duly
authorized and reserved for issuance and, upon exercise of the Warrants
in accordance with the terms thereof, such Common Shares will be
validly issued, fully paid and non-assessable, free and clear of any
and all liens, claims and encumbrances, and entitled to be traded on
the Principal Market or the New York Stock Exchange or the American
Stock Exchange, or the Nasdaq small cap market (collectively with the
Principal Market, the "APPROVED MARKETS"), and the holders of such
Common Shares shall be entitled to all rights and preferences accorded
to a holder of Common Stock. As of the date of this Agreement, the
outstanding shares of Common Stock are currently listed on the
Principal Market.
(bb) BROKERS. The Company has taken no action which would give
rise to any claim by any person for brokerage commissions, finder's
fees or similar payments by the Buyer relating to this Agreement or the
transactions contemplated hereby.
12
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
(a) TRANSFER RESTRICTIONS. The Company and the Buyer
acknowledge and agree that (A) the Shares and the Warrants have not been and are
not being registered under the provisions of the 1933 Act and, except as
provided in the Registration Rights Agreement with respect to the resale of the
Shares, the Shares have not been and are not being registered for resale under
the 1933 Act, and the Securities may not be transferred unless (i) subsequently
registered for resale thereunder or (ii) the Buyer shall have delivered to the
Company an opinion of counsel, reasonably satisfactory in form, scope and
substance to the Company, to the effect that the Securities to be sold or
transferred may be sold or transferred pursuant to an exemption from such
registration (unless waived) and (B) any resale of the Securities made in
reliance on Rule 144 promulgated under the 1933 Act ("Rule 144") may be made
only in accordance with the terms of Rule 144 and further, if Rule 144 is not
applicable, any such resale of Securities under circumstances in which the
seller, or the person through whom the sale is made, may be deemed to be an
underwriter, as that term is used in the 1933 Act, may require compliance with
some other exemption under the 1933 Act or the rules and regulations of the SEC
thereunder.
(b) RESTRICTIVE LEGEND. (1) The Buyer acknowledges and agrees
that the Warrants shall bear a restrictive legend in substantially the following
form:
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended. The securities have been
acquired for investment and may not be resold, transferred or assigned
in the absence of an effective registration statement for the
securities under the Securities Act of 1933, as amended, or an opinion
of counsel that registration is not required under said Act.
(2) The Buyer further acknowledges and agrees that
until such time as the Shares have been registered for resale under the 1933 Act
as contemplated by the Registration Rights Agreement, the certificates for the
Shares may bear a restrictive legend in substantially the following form:
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended. The securities have been
acquired for investment and may not be resold, transferred or assigned
in the absence of an effective registration statement for the
securities under the Securities Act of 1933, as amended, or an opinion
of counsel that registration is not required under said Act.
(3) Once the Registration Statement required to be
filed by the Company pursuant to Section 2 of the Registration Rights Agreement
has been declared effective, thereafter (1) upon request of the Buyer the
Company will substitute certificates without restrictive legend for certificates
for all Shares issued prior to the date such Registration Statement is declared
effective by the SEC which bear such restrictive legend and remove any
stop-transfer restriction relating thereto promptly, but in no event later than
three Trading Days (as defined herein) after surrender of such certificates by
the Buyer and (2) the Company shall not place any restrictive legend on
certificates for Warrant Shares or impose any stop-transfer restriction thereon.
As used in this Agreement, "Trading Day" means a day on whichever of (x) the
national securities exchange, (y) Nasdaq or (z) the Nasdaq SmallCap Market (if
at the time
13
such market constitutes the principal securities market for the Common Stock) is
open for general trading.
(c) REGISTRATION RIGHTS AGREEMENT. The parties hereto agree to
enter into the Registration Rights Agreement in the form attached hereto as
ANNEX III on or before the Closing Date.
(d) FORM D. The Company agrees to file a Form D with respect
to the Securities as required under Regulation D and to provide a copy thereof
to the Buyer promptly after such filing. The Buyer agrees to cooperate with the
Company in connection with such filing and, upon request of the Company, to
provide all information relating to the Buyer reasonably required for such
filing.
(e) AUTHORIZATION FOR TRADING; REPORTING STATUS. On or before
the Closing Date, the Company shall, if required, file a notification for
listing of additional shares with the Nasdaq relating to the Shares and shall
provide evidence of such filing to the Buyer. So long as the Buyer beneficially
owns any of the Shares or the Warrants, the Company covenants to timely file (or
obtain extensions in respect thereof and file within the applicable grace
period) all reports required to be filed by the Company after the date hereof
pursuant to Section 13(a) or 15(d) of the Exchange Act; provided, however, that
if the Company is not required to file reports pursuant to such sections, it
will prepare and furnish to the Purchasers and make publicly available in
accordance with Rule 144(c) promulgated under the Securities Act such
information as is required for the Purchasers to sell the Securities under Rule
144 promulgated under the Securities Act.
(f) USE OF PROCEEDS. Neither the Company nor any Subsidiary
owns or has any present intention of acquiring any "margin stock" as defined in
Regulation G (12 CFR Part 207) of the Board of Governors of the Federal Reserve
System ("margin stock"). The proceeds of sale of the Shares will be used for
general working capital purposes and in the operation of the Company's business.
None of such proceeds will be used, directly or indirectly (1) to make any loan
to or investment in any other person (other than financing the Company's
subsidiaries in the ordinary course of business or in connection with an
acquisition of another corporation or business or assets of another corporation
or business) or (2) for the purpose, whether immediate, incidental or ultimate,
of purchasing or carrying any margin stock or for the purpose of maintaining,
reducing or retiring any indebtedness which was originally incurred to purchase
or carry any stock that is currently a margin stock or for any other purpose
which might constitute the transactions contemplated by this Agreement a
"purpose credit" within the meaning of such Regulation G. Neither the Company
nor any agent acting on its behalf has taken or will take any action which might
cause this Agreement or the transactions contemplated hereby to violate
Regulation G, Regulation T or any other regulation of the Board of Governors of
the Federal Reserve System or to violate the 1934 Act, in each case as in effect
now or as the same may hereafter be in effect.
(g) BLUE SKY LAWS. The Company shall take such action as shall
be necessary to qualify, or to obtain an exemption for, the Common Shares for
sale to the Buyer and the Warrants for issuance to the Buyer pursuant to this
Agreement and the Warrant Shares for issuance to the Buyer upon exercise of the
Warrants under such of the securities or "blue sky"
14
laws of jurisdictions as shall be applicable to the sale of the Common Shares
and the issuance of the Warrants pursuant to this Agreement and the issuance to
the Buyer of Warrant Shares upon exercise of the Warrants. The Company shall
furnish copies of all filings, applications, orders and grants or confirmations
of exemptions relating to such securities or "blue sky" laws.
(h) EXPENSES. The parties shall each bear their own expenses
in connection with this Agreement, the other Transaction Documents and the
transactions contemplated hereby and thereby. In addition, the Company or the
Buyer, as the case may be, shall pay on demand all expenses incurred by the
other party, including reasonable attorneys' fees and expenses, as a consequence
of, or in connection with any default or breach of any of the defaulting or
breaching party's obligations set forth in any of such agreements or instruments
and the enforcement of any right of, including the collection of any payments
due, the other party under any of such agreements or instruments, including any
action or proceeding relating to such enforcement, or any order, injunction or
other process seeking to restrain a party from paying any amount due the other
party, in which the other party prevails, provided that such reimbursable legal
fees and expenses do not exceed, in each instance, 35% of the amount sought in
good faith to be recovered.
(i) CERTAIN ISSUANCES OF SECURITIES. Unless the Company
obtains the approval of its stockholders as required by the Shareholder Approval
Rule or a waiver thereof from Nasdaq, the Company will not issue any shares of
Common Stock or shares of any series of preferred stock or other securities
convertible into, exchangeable for, or otherwise entitling the holder to
acquire, shares of Common Stock which would be subject to the requirements of
the Shareholder Approval Rule and which would be integrated with the sale of the
Common Shares and issuance of the Warrants to the Buyer or the issuance of
Warrant Shares upon exercise of the Warrants for purposes of the Shareholder
Approval Rule.
(j) CERTAIN TRADING RESTRICTIONS. The Buyer agrees that on and
after the Closing Date until the Buyer no longer holds any Securities, the Buyer
will not engage in any short sales or other hedging transactions (including
swaps, options or derivative securities) relating to the Shares; unless at the
time of any such transaction the Company is then in breach of its obligations to
have the Buyer's Securities duly registered under the Registration Rights
Agreement; and PROVIDED, HOWEVER, the Buyer may engage in such short sales
and/or hedging activity provided that (i) after the date hereof the Buyer may
not sell short a number of shares in excess of the number of Warrant Shares then
issuable upon exercise of the Callable Warrants, (ii) no such short sales shall
be at a per share price below $3.9375 (as such figure shall be appropriately
adjusted for any stock splits, recapitalizations or similar events), and (iii)
the aggregate amount of such short sales made on any one day shall not exceed 5%
of the total trading volume on such day.
(k) COMMERCIALLY REASONABLE EFFORTS. Each of the parties shall
use commercially reasonable efforts timely to satisfy each of the conditions to
the other party's obligations to sell and purchase the Common Shares set forth
in Section 7 or 8, as the case may be, of this Agreement on or before the
Closing Date.
15
5. INTENTIONALLY LEFT BLANK.
6. CLOSING DATE.
Subject to the satisfaction or waiver of the conditions set
forth in Sections 7 and 8 below, the date and time of the issuance and sale of
the Common Shares and the issuance of the Warrants shall be 12:00 noon, New York
City time, on the Closing Date.
7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL AND
ISSUE.
The Buyer understands that the Company's obligation to sell
the Common Shares and issue the Warrants to the Buyer pursuant to this Agreement
is conditioned upon the satisfaction of the following conditions precedent on or
before the Closing Date (any or all of which may be waived by the Company in its
sole discretion):
(a) The receipt by the Company of the Buyer's executed
signature page to this Agreement;
(b) Delivery by the Buyer to the Company of good funds for
payment of 75% of the Purchase Price for the Common Shares in accordance with
Section 1(b) hereof; and
(c) The accuracy in all material respects on the Closing Date
of the representations and warranties of the Buyer contained in this Agreement
as if made on the Closing Date and the performance by the Buyer on or before the
Closing Date of all covenants and agreements of the Buyer required to be
performed on or before the Closing Date, and receipt by the Company of a
certificate, dated the Closing Date, of a duly authorized signatory of the Buyer
confirming such matters and such other matters as the Company may reasonably
request.
8. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to
purchase the Common Shares and acquire the Warrants on the Closing Date is
conditioned upon the satisfaction of the following conditions precedent on or
before the Closing Date (any or all of which may be waived by the Buyer in its
sole discretion):
(a) The receipt by the Buyer of the Company's executed
signature page to this Agreement;
(b) Delivery by the Company to the Buyer (or its counsel) of
the certificates for the Common Shares, the Callable Warrants and the Class A
Warrants in accordance with this Agreement;
(c) The accuracy in all material respects on the Closing Date
of the representations and warranties of the Company contained in this Agreement
as if made on the Closing Date and the performance by the Company on or before
the Closing Date of all covenants and agreements of the Company required to be
performed on or before the Closing Date, and receipt by the Buyer of a
certificate, dated the Closing Date, of the Chief Executive
16
Officer of the Company confirming such matters and such other matters as the
Buyer may reasonably request;
(d) The receipt by the Buyer of a certificate, dated the
Closing Date, of the Secretary of the Company certifying (1) the Certificate of
Incorporation, as amended, and By-Laws of the Company as in effect on the
Closing Date and (2) all resolutions of the Board of Directors (and committees
thereof) of the Company relating to this Agreement and the transactions
contemplated hereby (which may be the same resolutions adopted for the Prior
Subscription Agreement if sufficient in the reasonable opinion of the Company's
counsel);
(e) Receipt by the Buyer on the Closing Date of an opinion of
Ropes & Gray, dated the Closing Date, in such form, scope and substance
reasonably satisfactory to the Buyer, to the effect set forth in ANNEX IV
attached hereto.
(f) From the date hereof to the Closing Date, trading in the
Company's Common Stock shall not have been suspended by the SEC and trading in
securities generally as reported by Nasdaq shall not have been suspended or
limited, and the Common Stock shall be listed on Nasdaq.
(g) No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction which prohibits
the consummation of any of the transactions contemplated by this Agreement, the
Warrants or the Registration Rights Agreement. The NASD shall not have objected
or indicated that it may object to the consummation of any of the transactions
contemplated by this Agreement.
(h) The Company and the Buyer shall have executed and
delivered the Registration Rights Agreement.
(i) The Company shall have delivered to the Buyer such other
documents relating to the transactions contemplated by this Agreement as the
Buyer or its counsel may reasonably request.
9. MISCELLANEOUS.
(a) GOVERNING LAW. 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 Agreement 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. Each party
hereby irrevocably submits 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, that
such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such party
at the
17
address in effect for notices to it under this Agreement 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.
(b) COUNTERPARTS. This Agreement may be executed in
counterparts and by the parties hereto on separate counterparts, all of which
together shall constitute one and the same instrument. A facsimile transmission
of this Agreement bearing a signature on behalf of a party hereto shall be legal
and binding on such party. Although this Agreement is dated as of the date first
set forth above, the actual date of execution and delivery of this Agreement by
each party is the date set forth below such party's signature on the signature
page hereof. Any reference in this Agreement or in any of the documents executed
and delivered by the parties hereto in connection herewith to (1) the date of
execution and delivery of this Agreement by the Buyer shall be deemed a
reference to the date set forth below the Buyer's signature on the signature
page hereof, (2) the date of execution and delivery of this Agreement by the
Company shall be deemed a reference to the date set forth below the Company's
signature on the signature page hereof and (3) the date of execution and
delivery of this Agreement or the date of execution and delivery of this
Agreement by the Buyer and the Company shall be deemed a reference to the later
of the dates set forth below the signatures of the parties on the signature page
hereof.
(c) HEADINGS, ETC. The headings, captions and footers of this
Agreement are for convenience of reference and shall not form part of, or affect
the interpretation of, this Agreement.
(d) SEVERABILITY. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement or the validity or enforceability of this Agreement
in any other jurisdiction.
(e) AMENDMENTS. No amendment, modification, waiver, discharge
or termination of any provision of this Agreement nor consent to any departure
by the Buyer or the Company therefrom shall in any event be effective unless the
same shall be in writing and signed by the party to be charged with enforcement,
and then shall be effective only in the specific instance and for the purpose
for which given. No course of dealing between the parties hereto shall operate
as an amendment of this Agreement.
(f) WAIVERS. Failure of any party to exercise any right or
remedy under this Agreement or otherwise, or delay by a party in exercising such
right or remedy, or any course of dealings between the parties, shall not
operate as a waiver thereof or an amendment hereof, nor shall any single or
partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or exercise of any other right or power.
(g) NOTICES. Any notices required or permitted to be given
under the terms of this Agreement shall be delivered personally (which shall
include telephone line facsimile transmission with answer back confirmation) or
by courier and shall be effective upon receipt, in the case of the Company
addressed to the Company at its address shown in the introductory paragraph of
this Agreement, Attention: Chief Executive Officer (telephone line facsimile
18
transmission number (650) 475-3101, with a copy to Ropes & Gray, One
International Place, Boston, Massachusetts, 02110, Attention: Geoffrey B. Davis,
Esq., (facsimile number (617) 951-7050), or, in the case of the Buyer, at its
address or telephone line facsimile transmission number shown on the signature
page of this Agreement, with a copy to Kleinberg, Kaplan, Wolff & Cohen, P.C.,
551 Fifth Avenue, New York, New York 10176, Attn: Peter J. Weisman, Esq.
(facsimile number: (212) 986-8866) or such other address or telephone line
facsimile transmission number as a party shall have provided by notice to the
other party in accordance with this provision.
(h) ASSIGNMENT. Prior to the Closing Date, the Buyer may not
assign its rights and obligations under this Agreement. Any transfer of the
Shares or the Warrants by the Buyer after the Closing Date shall be made in
accordance with Section 4. After the Closing Date, the Buyer shall have the
right to assign its rights and obligations under this Agreement in connection
with any transfer of the Securities upon execution by any transferee of an
instrument reasonably satisfactory to the Company pursuant to which the
transferee agrees with the Company to be bound as a Buyer by the terms and
conditions of this Agreement.
(i) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The respective
representations, warranties, covenants and agreements of the Buyer and the
Company contained in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement shall survive the delivery of and
payment for the Common Shares and shall remain in full force and effect
regardless of any investigation made by or on behalf of them or any person
controlling or advising any of them.
(j) ENTIRE AGREEMENT. This Agreement and its Schedules and
Annexes, together with the Prior Subscription Agreement and its Schedules and
Annexes and the documents entered into or delivered in connection therewith or
the transactions contemplated thereby set forth the entire agreement between the
parties hereto with respect to the subject matter hereof.
19
(k) [INTENTIONALLY LEFT BLANK].
(l) FURTHER ASSURANCES. Each party to this Agreement will
perform any and all acts and execute any and all documents as may be necessary
and proper under the circumstances in order to accomplish the intents and
purposes of this Agreement and to carry out its provisions.
(m) PUBLIC STATEMENTS, PRESS RELEASES, ETC. The Company and
the Buyer shall have the right to approve before issuance any press releases or
any other public statements with respect to the transactions contemplated
hereby; PROVIDED, HOWEVER, that the Company shall be entitled, without the prior
approval of the Buyer, to make any press release or other public disclosure with
respect to such transactions as is required by applicable law or Nasdaq
regulation (although the Buyer shall be consulted by the Company in connection
with any such press release or other public disclosure prior to its release and
shall be provided with a copy thereof).
(n) CONSTRUCTION. The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any party.
(o) INDEMNIFICATION. In consideration of the Buyer's execution
and delivery of this Agreement, the Registration Rights Agreement and acquiring
the Common Shares hereunder and in addition to all of the Company's other
obligations under this Agreement or the transaction documents contemplated
hereby, the Company shall defend, protect, indemnify and hold harmless the Buyer
and all of its partners, officers, directors, employees, members and direct or
indirect investors and any of the foregoing person's agents or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement) (collectively, the
"INDEMNITEES") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Indemnitee is a party to
the action for which indemnification hereunder is sought), and including
reasonable attorneys' fees and disbursements (the "INDEMNIFIED LIABILITIES"),
incurred by any Indemnitee as a result of, or arising out of, or relating to (a)
any misrepresentation or breach of any representation or warranty made by the
Company in this Agreement or the other transaction documents contemplated hereby
or any other certificate or document contemplated hereby or thereby, (b) any
breach of any covenant, agreement or obligation of the Company contained in this
Agreement or the other transaction documents contemplated herein or any other
certificate or document contemplated hereby or thereby, (c) any cause of action,
suit or claim brought or made against such Indemnitee by a third party and
arising out of or resulting from (i) the execution, delivery, performance,
breach by the Company or enforcement of this Agreement or the other transaction
documents contemplated hereby or any other certificate, instrument or document
contemplated hereby or thereby, (ii) any transaction financed or to be financed
in whole or in part, directly or indirectly, with the proceeds of the issuance
of the Shares or (iii) the status of the Buyer or holder of the Shares or
Warrants as an investor in the Company and (d) the enforcement of this Section.
Notwithstanding the foregoing, Indemnified Liabilities shall not include any
liability of any Indemnitee arising solely out of such Indemnitee's gross
negligence, willful misconduct or fraudulent action(s). To the extent that the
foregoing undertaking by the Company may be unenforceable for any reason, the
Company shall make the maximum contribution to the
20
payment and satisfaction of each of the Indemnified Liabilities which is
permissible under applicable law. Except as otherwise set forth herein, the
mechanics and procedures with respect to the rights and obligations under this
section shall be the same as those set forth in the Registration Rights
Agreement, including, without limitation, those procedures with respect to the
settlement of claims and Company's right to assume the defense of claims.
[SIGNATURE PAGE FOLLOWS]
21
IN WITNESS WHEREOF, this Agreement has been duly executed by
the Buyer and the Company by their respective officers or other representatives
thereunto duly authorized on the respective dates set forth below.
NUMBER OF SHARES: 457,750
PRICE PER SHARE: $4.3692
AGGREGATE PURCHASE PRICE: $2,000,000.00
MILLENNIUM PARTNERS, LP
By: /s/ Terry Feeny
------------------------------------
Name: Terry Feeny
Title: Chief Financial Officer
Date: As of June 21, 2001
Address: 666 Fifth Avenue
New York, New York 10103
Facsimile: (212) 841-6302
STEMCELLS, INC.
By: /s/ Martin M. McGlynn
------------------------------------
Name: Martin M. McGlynn
Title: President, Chief
Executive Officer
Date: As of June 21, 2001
22
SCHEDULES
Disclosure Schedule
ANNEXES
Annex I Form of Callable Warrant
Annex II Form of Common Stock Purchase Warrant, Class A
Annex III Form of Registration Rights Agreement
Annex IV Form of Opinion of Counsel to Be Delivered on
Closing Date
23
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
February 23, 2001 in the Registration Statement (Pre-Effective Amendment No. 1
Amending Form S-1 to Form S-3) and related Prospectus of StemCells, Inc. for the
registration of 10,350,000 shares of its common stock.
Palo Alto, California
June 28, 2001
