<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 8, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
AASTROM BIOSCIENCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MICHIGAN 2834 94-3096597
(PRIMARY STANDARD (IRS EMPLOYER
(STATE OR OTHER INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
JURISDICTION OF CODE NUMBER)
INCORPORATION OR ---------------
ORGANIZATION) 24 FRANK LLOYD WRIGHT DRIVE
P.O. BOX 376
ANN ARBOR, MICHIGAN 48106
(313) 930-5555
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
R. DOUGLAS ARMSTRONG, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AASTROM BIOSCIENCES, INC.
24 FRANK LLOYD WRIGHT DRIVE
P.O. BOX 376
ANN ARBOR, MICHIGAN 48106
(313) 930-5555
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
T. KNOX BELL, ESQ. RICHARD R. PLUMRIDGE, ESQ.
DOUGLAS J. REIN, ESQ. BROBECK PHLEGER & HARRISON LLP
DAVID R. YOUNG, ESQ. 1633 BROADWAY
GRAY CARY WARE & FREIDENRICH NEW YORK, NEW YORK 10019
A PROFESSIONAL CORPORATION (212) 581-1600
4365 EXECUTIVE DRIVE, SUITE 1600
SAN DIEGO, CALIFORNIA 92121
(619) 677-1400
---------------
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. [_]
If this Form is to be 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 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. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM
TITLE OF EACH CLASS OF AMOUNT PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, No Par Val-
ue...................... 1,500,000 $7.125 $10,687,500 $3,239
</TABLE>
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the registration fee.
(2) Computed pursuant to Rule 457(c) based upon the average high and low sale
prices reported on the Nasdaq National Market on October 3, 1997.
---------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (SUBJECT TO COMPLETION)
DATED OCTOBER 8, 1997
1,500,000 SHARES
[Logo] ASTROM
BIOSCIENCES INC
====================
COMMON STOCK
All of the shares of Common Stock, no par value per share (the "Common
Stock"), offered hereby are being sold by Aastrom Biosciences, Inc. ("Aastrom"
or the "Company").
The Common Stock is traded on the Nasdaq National Market under the symbol
"ASTM." On October 3, 1997, the last reported sale price of the Common Stock on
the Nasdaq National Market was $7.00 per share. See "Price Range of Common
Stock."
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 6 OF THIS PROSPECTUS.
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.......................... $ $ $
- --------------------------------------------------------------------------------
Total.............................. $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The shares of Common Stock offered hereby are being offered, on an all or
none basis, directly by the Company principally to selected institutional
investors. Cowen & Company (the "Placement Agent") has been retained to
act, on a best efforts basis, on behalf of the Company in connection with
the arrangement of this transaction. The Company has agreed (i) to pay the
Placement Agent a fee in connection with the arrangement of this financing,
and (ii) to indemnify the Placement Agent against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Plan of Distribution."
(2) The termination date of this offering is , 1997, subject to extension
at the discretion of the Placement Agent to , 1997, and thereafter by
the mutual agreement of the Company and the Placement Agent. Prior to the
closing of this offering, all investor funds will be placed in escrow with
, as escrow agent (the "Escrow Agent"), in an escrow account
established for the benefit of the investors. Upon receipt of notice from
the Escrow Agent that investors have deposited the requisite funds in the
escrow account for the purchase of the shares of Common Stock offered
hereby, the Company will deposit with The Depository Trust Company the
shares of Common Stock to be credited to the accounts of the investors and
will collect the investor funds from the Escrow Agent. In the event that
investor funds are not received in the full amount necessary to satisfy the
requirements of this offering, all funds deposited in the escrow account
will be returned promptly to the investors. See "Plan of Distribution."
(3)Before deducting expenses payable by the Company, estimated to be $350,000.
COWEN & COMPANY
, 1997
<PAGE>
[COLOR PHOTOGRAPH OF A PROTOTYPE OF THE AASTROM CPS WITH A CLINICIAN
INNOCULATING CELLS]
A prototype of the Aastrom CPS is currently being used in clinical trials
and ongoing development activities are directed at completing production level
components of the Aastrom CPS. The Company may not market the Aastrom CPS
unless and until FDA and other necessary regulatory approvals are received.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Prospective investors should carefully consider
the information set forth under the heading "Risk Factors."
THE COMPANY
Aastrom Biosciences, Inc. is developing proprietary process technologies and
devices for a range of cell therapy applications, including stem cell therapies
and selected emerging therapies such as immunotherapy, solid tissue repair and
ex vivo gene therapy. The Company's lead product under development, the Aastrom
Cell Production System (the "Aastrom CPS"), consists of a clinical cell culture
system with single-use cassettes and reagents for use in the rapidly growing
cell therapy market. The Company is currently conducting pre-pivotal trials at
multiple sites in the United States and Europe of the Aastrom CPS for use in
stem cell therapy in preparation for pivotal trials in the United States and
potential marketing in Europe. The Company believes that the Aastrom CPS method
will be a cost-effective, less invasive and less time consuming alternative to
currently available stem cell collection methods and may enhance the clinical
utility of umbilical cord blood ("UCB") transplants by expanding the number of
cells available for transplant. For stem cell therapy, the Company has entered
into a strategic collaboration for the marketing, distribution and customer
service of the Aastrom CPS with Cobe BCT, Inc., a subsidiary of Gambro AB and a
leading provider of blood cell processing products.
The Aastrom CPS is designed as a platform product which implements the
Company's pioneering stem cell replication technology. The Company also
believes that the Aastrom CPS can be modified to produce a wide variety of
other cell types for selected emerging therapies being developed by other
companies and institutions. The Company intends to develop additional strategic
collaborations for the development of the Aastrom CPS in certain of these other
cell therapy market segments. In ex vivo gene therapy, the Company is also
developing the Aastrom Gene Loader, which is being designed to address the
production of gene-modified cells.
Stem cell therapy is a rapidly growing form of cell therapy used to restore
blood and immune system function to cancer patients following chemotherapy or
radiation therapy. According to an industry source, approximately 32,000 stem
cell therapy procedures were completed worldwide in 1995, and, according to
another industry source, the number of such procedures utilizing donor-derived
and patient-derived cells has been growing annually by approximately 15% and
20%, respectively. Other novel applications of stem cell therapy are under
development by third parties, which include the treatment of autoimmune
diseases and augmenting recipient acceptance of organ transplants. Current stem
cell collection methods, including bone marrow harvest and peripheral blood
progenitor cell mobilization, are costly, invasive and time-consuming for both
medical personnel and patients. Technologies which facilitate a more readily
available source of cells may contribute to additional growth in cell therapy
procedures. UCB is emerging as a new source of cells for stem cell therapy,
offering additional market opportunity, although the more widespread use of UCB
transplants has been restricted by cell quantity limitations, which the Company
believes may ultimately be addressed by the Aastrom CPS.
The Company believes that the Aastrom CPS will offer significant advantages
over traditional stem cell collection methods. The Aastrom CPS is intended to
be used to produce cells used for therapy from a small starting volume of bone
marrow cells. Compared with current methods of harvest and infusion, the
Aastrom CPS is expected to involve two patient care episodes rather than
approximately eight to 21 care episodes and less than three hours of patient
procedure time rather than approximately 16 to 39 hours of patient procedure
time. The Aastrom CPS may also permit higher and more frequent doses of
chemotherapy to be administered to cancer patients by enabling the production
of multiple doses of cells from patient samples taken at the initial
collection. Further, in an evaluation of seven tumor-contaminated bone marrow
samples that were expanded with the Aastrom CPS process, the presence of breast
cancer cells in each sample was either substantially reduced or was no longer
detectable. The Company believes that the combination of passive depletion
during culture with the lower starting volume of tumor cells may result in a
tumor-free or tumor-reduced cell product for transplant.
3
<PAGE>
Aastrom is currently conducting a pre-pivotal stem cell therapy clinical
trial in patients with Stage II, III and IV breast cancer at four U.S. sites.
This clinical trial is designed to demonstrate that cells produced using the
Aastrom CPS can provide hematopoietic recovery in accordance with trial
endpoints in such patients who have received myeloablative chemotherapy.
Pending a positive outcome of this and other related trials, the Company
intends to seek FDA approval to begin a multi-center pivotal trial for use of
the Aastrom CPS in stem cell therapy. It is anticipated that the results of
this pivotal trial will be used to support the Company's Pre-Market Approval
("PMA") submission to the FDA. The Company has also initiated two clinical
sites in Europe. The Company may not market the Aastrom CPS in the United
States for stem cell therapy unless and until FDA and other necessary
regulatory approvals are received and in Europe until CE Mark Registration is
obtained.
For UCB transplants, the Aastrom CPS is intended to be used to enable
production of more effective therapeutic doses of cells, which would otherwise
not be available with the small volume of UCB typically available. The Company
has initiated, under an IDE received from the FDA, a multiple-site U.S.
clinical trial for UCB expansion and transplantation in adult and pediatric
patients.
The Company's business strategy is to: (i) establish a consumable-based
business model; (ii) focus initially on the currently-reimbursed stem cell
therapy market; (iii) leverage Aastrom's cell production technology across
multiple cell therapy market opportunities; and (iv) establish multiple
strategic collaborations.
For stem cell therapy, Aastrom has entered into a strategic collaboration
with Cobe BCT to be the Company's exclusive worldwide marketing, distribution
and service provider for the Aastrom CPS. In 1993, the Company entered into a
series of agreements, pursuant to which Cobe BCT purchased an aggregate of
$20,000,000 of the Company's equity securities and acquired the worldwide
distribution rights to the Aastrom CPS for stem cell therapy. Under the terms
of the collaboration, Aastrom retains manufacturing rights and 58% to 62% of
all revenue generated by Cobe BCT's sale of the Aastrom CPS, subject to the
Company's obligation to make certain royalty payments. Aastrom also retains all
marketing and distribution rights to the Aastrom CPS for other cell types and
ex vivo gene therapy applications, including stem cells.
The Company has exclusive rights to twelve issued U.S. patents, including
patents relating to production methods and composition of matter for stem and
progenitor cells and the genetic modification of stem and other cell types, as
well as patents for cell culture devices for human cells.
4
<PAGE>
THE OFFERING
Common Stock offered...................... 1,500,000 shares
Common Stock to be outstanding after this 14,772,674 shares(1)
offering.................................
Use of proceeds........................... For the development and manufacture
of the Aastrom CPS for use in
clinical trials, expanded clinical
trials, research and development of
other product candidates, working
capital and other general corporate
purposes.
Nasdaq National Market symbol............. ASTM
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues.......... $ 784,000 $ 872,000 $ 517,000 $ 1,609,000 $ 378,000
Costs and expenses:
Research and develop-
ment.................. 2,600,000 5,627,000 4,889,000 10,075,000 13,357,000
General and administra-
tive.................. 1,153,000 1,565,000 1,558,000 2,067,000 1,953,000
----------- ----------- ----------- ----------- ------------
Total costs and ex-
penses............... 3,753,000 7,192,000 6,447,000 12,142,000 15,310,000
Other income, net....... 122,000 180,000 213,000 616,000 644,000
----------- ----------- ----------- ----------- ------------
Net loss................ $(2,847,000) $(6,140,000) $(5,717,000) $(9,917,000) $(14,288,000)
=========== =========== =========== =========== ============
Net loss per share(2)... $ (.52) $ (.82) $ (.66) $ (.98) $ (1.26)
=========== =========== =========== =========== ============
Weighted average number
of shares
outstanding(2)......... 5,480,000 7,461,000 8,644,000 10,103,000 11,315,000
=========== =========== =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------
ACTUAL AS ADJUSTED(3)
------------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term invest-
ments........................................... $ 17,007,000 $26,527,000
Working capital.................................. 15,600,000 25,120,000
Total assets..................................... 18,410,000 27,930,000
Deficit accumulated during the development stage. (41,313,000) (41,313,000)
Total shareholders' equity....................... 16,583,000 26,103,000
</TABLE>
- --------
(1) Excludes options and warrants outstanding as of June 30, 1997 to purchase
1,127,815 of Common Stock at a weighted average exercise price of $5.40 per
share. Also excludes 15,711 shares which were canceled in September 1997 in
connection with the repayment of a promissory note. See "Management--Stock
Option and Employee Benefit Plans," "Certain Transactions" and Note 4 of
Notes to Financial Statements.
(2) See Note 1 of Notes to Financial Statements for information concerning the
computation of net loss per share and shares used in computing net loss per
share.
(3) Adjusted to reflect the sale by the Company of 1,500,000 shares of Common
Stock offered hereby at an assumed public offering price of $7.00 per
share, after deduction of commissions and estimated offering expenses. See
"Use of Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should consider the following risk factors in evaluating the Company
and its business before purchasing any of the Common Stock offered hereby.
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, those discussed below.
UNCERTAINTIES RELATED TO PRODUCT DEVELOPMENT AND MARKETABILITY
The Company has not completed the development or clinical trials of any of
its cell culture technologies or product candidates and, accordingly, has not
begun to market or generate revenue from their commercialization. Furthermore,
the Company's technologies and product candidates are based on cell culture
processes and methodologies which are not widely employed. Commercialization
of the Company's lead product candidate, the Aastrom CPS, will require
substantial additional research and development by the Company as well as
substantial clinical trials. There can be no assurance that the Company will
successfully complete development of the Aastrom CPS or its other product
candidates, or successfully market its technologies or product candidates,
which lack of success would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company or its collaborators may encounter problems and delays relating
to research and development, regulatory approval and intellectual property
rights of the Company's technologies and product candidates. There can be no
assurance that the Company's research and development programs will be
successful, that its cell culture technologies and product candidates will
facilitate the ex vivo production of cells with the expected biological
activities in humans, that its technologies and product candidates, if
successfully developed, will prove to be safe and efficacious in clinical
trials, that the necessary regulatory approvals for any of the Company's
technologies or product candidates and the cells produced in such products
will be obtained or, if obtained, will be as broad as sought, that patents
will issue on the Company's patent applications or that the Company's
intellectual property protections will be adequate. The Company's product
development efforts are primarily directed toward obtaining regulatory
approval to market the Aastrom CPS as an alternative to the bone marrow
harvest and peripheral blood progenitor cell ("PBPC") stem cell collection
methods. These stem cell collection methods have been widely practiced for a
number of years, and there can be no assurance that any of the Company's
technologies or product candidates will be accepted by the marketplace as
readily as these or other competing processes and methodologies, or at all.
The failure by the Company to achieve any of the foregoing would have a
material adverse effect on the Company's business, financial condition and
results of operations.
UNCERTAINTIES RELATED TO CLINICAL TRIALS
The approval of the U.S. Food and Drug Administration (the "FDA") will be
required before any commercial sales of the Company's product candidates may
commence in the United States, and approvals from foreign regulatory
authorities will be required before international sales may commence. Prior to
obtaining necessary regulatory approvals, the Company will be required to
demonstrate the safety and efficacy of its processes and product candidates
and the cells produced by such processes and in such products for application
in the treatment of humans through extensive preclinical studies and clinical
trials. The Company is currently conducting pre-pivotal clinical trials to
demonstrate the safety and biological activity of patient-derived or UCB cells
produced in the Company's prototype of the Aastrom CPS in a limited number of
patients with breast cancer. If the results from these pre-pivotal trials are
successful, the Company intends to seek clearance from the FDA to commence
pivotal clinical trials. The results of preclinical studies and clinical
trials of the Company's product candidates, however, may not necessarily be
predictive of results that will be obtained from subsequent or more extensive
clinical trials. Further, there can be no assurance that pre-pivotal or
pivotal clinical trials of any of the Company's product candidates will
demonstrate the safety, reliability and efficacy of such products, or of the
cells produced in such products, to the extent necessary to obtain required
regulatory approvals or market acceptance.
6
<PAGE>
The ability of the Company to complete its clinical trials in a timely
manner is dependent upon many factors, including the rate of patient
enrollment. Patient enrollment is a function of many factors, including the
size of the patient population, the proximity of suitable patients to clinical
sites and the eligibility criteria for the study. The Company has experienced
delays in patient accrual in its current pre-pivotal clinical trials. Further
delays in patient accrual, in the Company's current pre-pivotal clinical
trials or in future clinical trials, could result in increased costs
associated with clinical trials or delays in receiving regulatory approvals
and commercialization, if any. Furthermore, the progress of clinical
investigations with the Aastrom CPS and the Company's other product candidates
will be monitored by the FDA, which has the authority to cease clinical
investigations, at any time, due to patient safety or other considerations.
Any of the foregoing would have a material adverse effect on the Company's
business, financial condition and results of operations. See "--Uncertainty of
Regulatory Approval; Extensive Government Regulation."
The Company's current pre-pivotal trials are designed to demonstrate
specific biological safety and activity of cells produced in the Aastrom CPS,
but is not designed to demonstrate long-term sustained engraftment of such
cells. The patients enrolled in this pre-pivotal trial will have undergone
extensive chemotherapy treatment prior to the infusion of cells produced in
the Aastrom CPS. Such treatments will have substantially weakened these
patients and may have irreparably damaged their hematopoietic systems. Due to
these and other factors, it is possible that one or more of these patients may
die or suffer severe complications during the course of the pre-pivotal trial.
Further, there can be no assurance that patients receiving cells produced with
the Company's technologies and product candidates will demonstrate long-term
engraftment in a manner comparable to cells obtained from current stem cell
therapy procedures, or at all. The failure to adequately demonstrate the
safety or efficacy of the Company's technologies and product candidates,
including long-term sustained engraftment, or the death of, or occurrence of
severe complications in, one or more patients could substantially delay, or
prevent, regulatory approval of such product candidates and have a material
adverse effect on the Company's business, financial condition and results of
operations.
MANUFACTURING AND SUPPLY UNCERTAINTIES; DEPENDENCE ON THIRD PARTIES
The Company does not operate and has no current intention to operate
manufacturing facilities for the production of its product candidates. The
Company currently arranges for the manufacture of its product candidates and
their components, including certain cytokines, serum and media, with third
parties, and expects to continue to do so in the foreseeable future. The
Company has entered into collaborative product development and supply
agreements with SeaMED Corporation ("SeaMED"), Ethox Corporation ("Ethox") and
Anchor Advanced Products Inc., Mid-State Plastics Division ("MSP"), for the
collaborative development and manufacture of certain components of the Aastrom
CPS and is dependent upon those suppliers to manufacture its products. The
Company is also dependent upon Immunex Corporation ("Immunex"), Life
Technologies, Inc. and Biowhittaker for the supply of certain cytokines, serum
and media to be used in conjunction with the Aastrom CPS. With regard to
cytokines that are not commercially available from other sources, Immunex is
currently the Company's sole supplier and few alternative supply sources
exist. Apart from SeaMED, Ethox, MSP and Immunex, the Company currently does
not have contractual commitments from any of these manufacturers or suppliers.
There can be no assurance that the Company's supply of such key cytokines,
components and other materials will not become limited, be interrupted or
become restricted to certain geographic regions. Additionally, there can be no
assurance that the Company will not require additional cytokines, components
and other materials to manufacture, use or market its product candidates, or
that necessary key components will be available for use on a sustained basis,
if at all, by the Company in the markets in which it intends to sell its
products. There can also be no assurance that the Company will be able to
obtain alternative components and materials from other manufacturers of
acceptable quality, or on terms or in quantities acceptable to the Company or
that the Company will not require additional cytokines, components and other
materials to manufacture or use its product candidates. In the event that any
of the Company's key manufacturers or suppliers fail to perform their
respective obligations or the Company's supply of such cytokines, components
or other materials become limited or interrupted, the Company would not be
able to market its product candidates on a timely and cost-competitive basis,
if at all, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
7
<PAGE>
Certain of the compounds used by the Company in its current stem cell
expansion process involve the use of animal-derived products. The availability
of these compounds for clinical and commercial use may become limited by
suppliers or restricted by regulatory authorities, which may impose a
potential competitive disadvantage for the Company's products compared to
competing products and procedures. There can be no assurance that the Company
will not experience delays or disadvantages related to the future availability
of such materials. Any restriction on the use of such materials could have a
material adverse effect on the Company's business, financial condition and
results of operations, and there can be no assurance that the Company will be
able to develop or obtain alternative compounds.
Like SeaMED, Ethox and MSP, other suppliers would need to meet FDA
manufacturing requirements and undergo rigorous facility and process
validation tests required by federal and state regulatory authorities. Any
significant delays in the completion and validation of such facilities could
have a material adverse effect on the ability of the Company to complete
clinical trials and to market its products on a timely and profitable basis,
which in turn would have a material adverse effect on the Company's business,
financial condition and results of operations.
There can also be no assurance that the Company will be able to continue its
present arrangements with its suppliers, supplement existing relationships or
establish new relationships or that the Company will be able to identify and
obtain the ancillary materials that are necessary to develop its product
candidates in the future. The Company's dependence upon third parties for the
supply and manufacture of such items could adversely affect the Company's
ability to develop and deliver commercially feasible products on a timely and
competitive basis.
HISTORY OF OPERATING LOSSES; ANTICIPATION OF FUTURE LOSSES
The Company is a development stage company and there can be no assurance
that its product applications for cell therapy will be successful. The Company
has not yet completed the development and clinical trials of any of its
product candidates and, accordingly, has not yet begun to generate revenues
from the commercialization of any of its product candidates. Aastrom was
incorporated in 1989 and has experienced substantial operating losses since
inception. As of June 30, 1997, the Company has incurred net operating losses
totaling approximately $41.3 million. Such losses have resulted principally
from costs incurred in the research and development of the Company's cell
culture technologies and the Aastrom CPS, general and administrative expenses,
and the prosecution of patent applications. The Company expects to incur
significant and increasing operating losses for at least the next several
years, primarily owing to the expansion of its research and development
programs, including preclinical studies and clinical trials. The amount of
future losses and when, if ever, the Company will achieve profitability, are
uncertain. The Company's ability to achieve profitability will depend, among
other things, on successfully completing the development of its product
candidates, obtaining regulatory approvals, establishing manufacturing, sales
and marketing arrangements with third parties, and raising sufficient funds to
finance its activities. No assurance can be given that the Company's product
development efforts will be successful, that required regulatory approvals
will be obtained, that any of the Company's product candidates will be
manufactured at a competitive cost and will be of acceptable quality, or that
the Company will be able to achieve profitability or that profitability, if
achieved, can be sustained.
LIMITED SALES AND MARKETING CAPABILITIES; DEPENDENCE ON COLLABORATIVE
RELATIONSHIPS
The Company has limited internal sales, marketing and distribution
capabilities. If any of the Company's product candidates are successfully
developed and the necessary regulatory approvals are obtained, the Company
intends to market such products through collaborative relationships with
companies that have established sales, marketing and distribution
capabilities. The Company has established a strategic alliance with Cobe
Laboratories, Inc. and Cobe BCT, Inc. (collectively, "Cobe") for the worldwide
distribution of the Aastrom CPS for stem cell therapy and related uses. Cobe
has the right to terminate its Distribution Agreement with the Company upon
twelve months notice upon a change of control of the Company, other than to
Cobe, or at any time after December 31, 1997, if Cobe determines that
commercialization of the Aastrom CPS for stem cell therapy on or prior to
December 31, 1998 is unlikely. See "--Consequences of Cobe Relationship."
8
<PAGE>
The amount and timing of resources that Cobe commits to its strategic
alliance activities with the Company are, to a significant extent, outside of
the control of the Company. There can be no assurance that Cobe will pursue
the marketing and distribution of the Company's products, continue to perform
its obligations under its agreements with the Company or that the Company's
strategic alliance with Cobe will result in the successful commercialization
and distribution of the Company's technologies and product candidates. There
can also be no assurance that Cobe will be successful in its efforts to market
and distribute the Company's products for stem cell therapy. The suspension or
termination of the Company's strategic alliance with Cobe or the failure of
the strategic alliance to be successful would have a material adverse effect
on the Company's business, financial condition and results of operations.
Subject to the contractual requirements of the Cobe relationship, the
Company will seek to enter into other agreements relating to the development
and marketing of product candidates and in connection with such agreements may
rely upon corporate partners to conduct clinical trials, seek regulatory
approvals for, manufacture and market its potential products. There can be no
assurance that the Company will be able to establish collaborative
relationships for the development or marketing of the Company's product
candidates on acceptable terms, if at all, or, if such relationships are
established, that they will be successful or sustained on a long-term basis.
The inability of the Company to establish such collaborative relationships may
require the Company to curtail its development or marketing activities with
regard to its potential products which would have a material adverse effect on
the Company's business, financial condition and results of operations.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
To date, Aastrom has funded its operations primarily through the sale of
equity securities and corporate collaborations. The Company anticipates that
the net proceeds of this offering, together with the Company's available cash
and expected interest income thereon, will be sufficient to finance the
development and manufacture of the Aastrom CPS for use in clinical trials,
expanded clinical trials, other research and development and working capital
and other corporate requirements until late 1998. This estimate is based on
certain assumptions which could be negatively impacted by the matters
discussed under this heading and elsewhere under the caption "Risk Factors."
In order to grow and expand its business, and to introduce its product
candidates into the marketplace, the Company will need, among other things, to
raise additional funds. The development of the Company's products for the
expansion of additional cell types will require the Company to raise
additional funds or to seek collaborative partners, or both, to finance
related research and development activities.
The Company's future capital requirements will depend upon many factors,
including, but not limited to, continued scientific progress in its research
and development programs, costs and timing of conducting clinical trials and
seeking regulatory approvals and patent prosecutions, competing technological
and market developments, possible changes in existing collaborative
relationships, the ability of the Company to establish additional
collaborative relationships, and effective commercialization activities and
facilities expansions if and as required. Because of the Company's potential
long-term funding requirements, it may attempt to access the public or private
equity markets if and whenever conditions are favorable, even if it does not
have an immediate need for additional capital at that time. There can be no
assurance that any such additional funding will be available to the Company on
reasonable terms, or at all. If adequate funds are not available, the Company
may be required to delay or terminate research and development programs,
curtail capital expenditures, and reduce business development and other
operating activities. If the Company is not successful in finding, entering
into and maintaining arrangements with collaborative partners, its development
efforts could be delayed. Furthermore, there can be no assurance that the
Company will be able to implement collaborative development agreements under
acceptable terms, if at all. Any of the foregoing capital constraints would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
UNCERTAINTY OF REGULATORY APPROVAL; EXTENSIVE GOVERNMENT REGULATION
The Company's research and development activities, preclinical studies,
clinical trials, and the anticipated manufacturing and marketing of its
product candidates are subject to extensive regulation by the FDA and other
regulatory authorities in the United States. These activities are also
regulated in other countries where the
9
<PAGE>
Company intends to test and market its product candidates. The approval of the
FDA will be required before any commercial sales of the Company's product
candidates may commence in the United States. Additionally, the Company will be
required to obtain approvals from foreign regulatory authorities before
international sales may commence.
The Company's products are potentially subject to regulation as medical
devices under the Federal Food, Drug, and Cosmetic Act, or as biological
products under the Public Health Service Act, or both. Different regulatory
requirements may apply to the Company's products depending on how they are
categorized by the FDA under these laws. To date, the FDA has indicated that it
intends to regulate the Aastrom CPS for stem cell therapy as a Class III
medical device through the Center for Biologics Evaluation and Research.
However, there can be no assurance that the FDA will ultimately regulate the
Aastrom CPS for stem cell therapy as a medical device or that regulatory
approval for such product will be obtained in a timely fashion or at all.
Further, it is unclear whether the FDA will separately regulate the cell
therapies derived from the Aastrom CPS. The FDA is in the process of developing
its requirements with respect to somatic cell therapy and gene cell therapy
products, and recently proposed a new type of license for autologous cells
manipulated ex vivo and intended for structural repair or reconstruction;
autologous cells are cells obtained from, and administered to, the same
patient. This proposal may indicate that the FDA will impose a similar approval
requirement on other types of autologous cellular therapies, such as autologous
cells for stem cell therapy. Any such additional regulatory or approval
requirement could significantly delay the introduction of the Company's product
candidates to the market, and have a material adverse effect on the Company's
business, financial condition and results of operations. Until the FDA issues
definitive regulations covering the Company's product candidates, the
regulatory guidelines or requirements for approval of such product candidates
will continue to be subject to significant uncertainty.
Before marketing, the Aastrom CPS or other product candidates developed by
the Company must undergo an extensive regulatory approval process. The
regulatory process, which includes preclinical studies and clinical trials to
establish safety and efficacy, takes many years and requires the expenditure of
substantial resources. Data obtained from preclinical and clinical activities
are susceptible to varying interpretations which could delay, limit or prevent
FDA approval. In addition, delays or rejections may be encountered based upon
changes in FDA policy for medical product approvals during the period of
product development and FDA regulatory review of applications submitted by the
Company for product approval. Similar delays may also be encountered in foreign
countries. There can be no assurance that, even after the expenditures of
substantial time and financial resources, regulatory approval will be obtained
for any products developed by the Company. Moreover, if regulatory approval of
a product is obtained, such approval may be subject to limitations on the
indicated uses for which it may be marketed. Further, even if such regulatory
approval is obtained, a marketed product, its manufacturer and its
manufacturing facilities are subject to continual review and periodic
inspections by the FDA, and later discovery of previously unknown problems with
a product, manufacturer or facility may result in restrictions on such product
or manufacturer, including a withdrawal of the product from the market. Failure
to comply with the applicable regulatory requirements can, among other things,
result in fines, suspensions of regulatory approvals, product recalls,
operating restrictions and criminal prosecution. Further, additional government
regulation may be established which could prevent or delay regulatory approval
of the Company's products.
The Company believes that the Aastrom CPS will be regulated in Europe as a
Class IIb medical device, under the authority of the new Medical Device
Directives ("MDD") being implemented by European Union ("EU") member countries.
In order for the Company to market its products in Europe, it must obtain a CE
Mark from a Notified Body to certify that the Company and its operations comply
with certain minimum quality standards and compliance procedures, or,
alternatively, that its manufactured products meet a more limited set of
requirements. There can be no assurance that the Company and its suppliers will
be able to meet these minimum requirements, or, if met, that the Company and
its suppliers will be able to maintain such compliance. The result of such non-
compliance would have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance,
however, that the Aastrom CPS will be regulated in Europe as a Class IIb
medical device, and, if the Aastrom CPS is not so regulated, the Company could
be forced to obtain additional regulatory approvals and could be subjected to
additional regulatory requirements and uncertainty, which would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Government Regulation."
10
<PAGE>
CONSEQUENCES OF COBE RELATIONSHIP
Cobe is the largest single shareholder of the Company, beneficially owning
approximately 22% of the outstanding Common Stock following the completion of
this offering. In addition, Cobe has certain preemptive rights to maintain its
relative percentage ownership and voting interest in the Company, pursuant to
which Cobe has the option of purchasing shares in this offering to maintain
its beneficial ownership at approximately 24% of the outstanding shares of
Common Stock. Cobe also has an option, until February 2000, to purchase from
the Company an amount of Common Stock equal to 30% of the Company's fully
diluted shares after the exercise of such option, at a purchase price equal to
120% of the public market trading price of the Company's Common Stock. If such
option is exercised, Cobe would significantly increase its ownership interest
in the Company and, as a consequence of such share ownership, obtain effective
control of the Company. Such effective control would include the ability to
influence the outcome of shareholder votes, including votes concerning the
election of directors, the amendment of provisions of the Company's Restated
Articles of Incorporation or Bylaws, and the approval of mergers and other
significant transactions. Cobe also has been granted a "right of first
negotiation" in the event that the Company determines to sell all, or any
material portion, of its assets to another company or to merge with another
company. Furthermore, the Company has agreed to use reasonable and good faith
efforts to cause a nominee designated by Cobe to be elected to the Board of
Directors for as long as Cobe owns at least 15% of the outstanding Common
Stock. In addition, Edward C. Wood, Jr., the President of Cobe BCT, is a
director of the Company. The agreements establishing the Company's
relationship with Cobe provide the Company with an option (the "Put Option")
to require Cobe to purchase the lesser of 20%, or $5,000,000, in an initial
public offering ("IPO") or a private offering meeting certain minimum
requirements. In the event that the Company exercises the Put Option, Cobe
then has the option to purchase up to 40% of that offering. While the Put
Option was not exercised by the Company in connection with the IPO, Cobe
voluntarily elected to purchase an additional 714,200 shares of Common Stock
in the IPO, for an aggregate purchase price of approximately $5,000,000. The
Put Option does not apply to any public offerings, including this offering.
The Company and Cobe are evaluating whether or not the Put Option remains in
effect as to any future private offerings of the Company's equity securities.
The existence of the foregoing rights or the exercise of such control by Cobe
could have the effect of delaying, deterring or preventing certain takeovers
or changes in control of the management of the Company, including transactions
in which shareholders might otherwise receive a premium for their shares over
then current market prices. See "Description of Capital Stock--Rights of
Cobe."
COMPETITION AND TECHNOLOGICAL CHANGE
The Company is engaged in the development of medical products and processes
which will face competition in a marketplace characterized by rapid
technological change. Many of the Company's competitors have significantly
greater resources than the Company, and have developed and may develop product
candidates and processes that directly compete with the Company's products.
Moreover, competitors that are able to achieve patent protection, obtain
regulatory approvals and commence commercial sales of their products before
the Company, and competitors that have already done so, may enjoy a
significant competitive advantage. The Company's product development efforts
are primarily directed toward obtaining regulatory approval to market the
Aastrom CPS for stem cell therapy. That market is currently dominated by the
bone marrow harvest and PBPC collection methods. The Company's clinical data,
although early, suggests that cells expanded in the Aastrom CPS using its
current process will enable hematopoietic recovery within the time frames
currently achieved by bone marrow harvest, however, neutrophil and platelet
recovery times may be slower than with PBPC collection methods. The Company is
evaluating techniques and methods to optimize the cells produced in the
Aastrom CPS to reduce the recovery time of neutrophils and platelets in
patients. There can be no assurance that if such procedure optimization does
not lead to recovery times equal to or faster than those of PBPC collection
methods, such outcome would not have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, the bone marrow harvest and PBPC collection methods have been widely
practiced for a number of years and, recently, the patient costs associated
with these procedures have begun to decline. There can be no assurance that
the Aastrom CPS method, if approved for marketing, will prove to be
competitive with these established collection methods on the basis of
hematopoietic recovery time, cost or otherwise. The Company also is aware of
certain other products manufactured or under development by competitors that
are used for the prevention or treatment of certain diseases and health
conditions which the
11
<PAGE>
Company has targeted for product development. In particular, the Company is
aware that competitors such as Amgen, Inc., CellPro, Incorporated, Novartis,
A.G., Baxter Healthcare Corp. and Rhone-Poulenc Rorer Inc. ("RPR") are in
advanced stages of development of technologies and products for use in stem
cell therapy and other market applications currently being pursued by the
Company. In addition, Cobe, a significant shareholder of the Company, is a
market leader in the blood cell processing products industry and, accordingly,
a potential competitor of the Company. There can be no assurance that
developments by others will not render the Company's product candidates or
technologies obsolete or noncompetitive, that the Company will be able to keep
pace with new technological developments or that the Company's product
candidates will be able to supplant established products and methodologies in
the therapeutic areas that are targeted by the Company. The foregoing factors
could have a material adverse effect on the Company's business, financial
condition and results of operations.
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
Aastrom's success depends in part on its ability, and the ability of its
licensors, to obtain patent protection for its products and processes,
preserve its trade secrets, defend and enforce its rights against infringement
and operate without infringing the proprietary rights of third parties, both
in the United States and in other countries. The validity and breadth of
claims in medical technology patents involve complex legal and factual
questions and, therefore, may be highly uncertain. No assurance can be given
that any patents based on pending patent applications or any future patent
applications of the Company or its licensors will be issued, that the scope of
any patent protection will exclude competitors or provide competitive
advantages to the Company, that any of the patents that have been or may be
issued to the Company or its licensors will be held valid if subsequently
challenged or that others will not claim rights in or ownership of the patents
and other proprietary rights held or licensed by the Company. Furthermore,
there can be no assurance that others have not developed or will not develop
similar products, duplicate any of the Company's products or design around any
patents that have been or may be issued to the Company or its licensors. Since
patent applications in the United States are maintained in secrecy until
patents issue, the Company also cannot be certain that others did not first
file applications for inventions covered by the Company's and its licensors'
pending patent applications, nor can the Company be certain that it will not
infringe any patents that may issue to others on such applications. The
Company relies on certain licenses granted by the University of Michigan and
Dr. Cremonese for the majority of its patent rights. If the Company breaches
such agreements or otherwise fails to comply with such agreements, or if such
agreements expire or are otherwise terminated, the Company may lose its rights
under the patents held by the University of Michigan and Dr. Cremonese, which
would have a material adverse effect on the Company's business, financial
condition and results of operation. See "Business--Patents and Proprietary
Rights--Research and License Agreements." The Company also relies on trade
secrets and unpatentable know-how which it seeks to protect, in part, by
confidentiality agreements with its employees, consultants, suppliers and
licensees. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or
that the Company's trade secrets or unpatentable know-how will not otherwise
become known or be independently developed by competitors.
The Company's success will also depend in part on its ability to develop
commercially viable products without infringing the proprietary rights of
others. The Company has not conducted freedom of use patent searches and no
assurance can be given that patents do not exist or could not be filed which
would have an adverse effect on the Company's ability to market its products
or maintain its competitive position with respect to its products. If the
Company's technology components, devices, designs, products, processes or
other subject matter are claimed under other existing United States or foreign
patents or are otherwise protected by third party proprietary rights, the
Company may be subject to infringement actions. In such event, the Company may
challenge the validity of such patents or other proprietary rights or be
required to obtain licenses from such companies in order to develop,
manufacture or market its products. There can be no assurance that the Company
would be able to obtain such licenses or that such licenses, if available,
could be obtained on commercially reasonable terms. Furthermore, the failure
to either develop a commercially viable alternative or obtain such licenses
could result in delays in marketing the Company's proposed products or the
inability to proceed with the development, manufacture or sale of products
requiring such licenses, which could have a material adverse
12
<PAGE>
effect on the Company's business, financial condition and results of
operations. If the Company is required to defend itself against charges of
patent infringement or to protect its own proprietary rights against third
parties, substantial costs will be incurred regardless of whether the Company
is successful. Such proceedings are typically protracted with no certainty of
success. An adverse outcome could subject the Company to significant
liabilities to third parties, and force the Company to curtail or cease its
development and sale of its products and processes. See "Business--Patents and
Proprietary Rights."
NO ASSURANCE OF THIRD PARTY REIMBURSEMENT
The Company's ability to successfully commercialize its product candidates
will depend in part on the extent to which payment for the Company's products
and related treatments will be available from government healthcare programs,
such as Medicare and Medicaid, as well as private health insurers, health
maintenance organizations and other third party payors. Government and other
third-party payors are increasingly attempting to contain health care costs,
in part by challenging the price of medical products and services.
Reimbursement by third-party payors depends on a number of factors, including
the payor's determination that use of the product is safe and effective, not
experimental or investigational, medically necessary, appropriate for the
specific patient and cost-effective. Since reimbursement approval is required
from each payor individually, seeking such approvals is a time-consuming and
costly process which will require the Company to provide scientific and
clinical support for the use of each of the Company's products to each payor
separately. Significant uncertainty exists as to the payment status of newly
approved medical products, and there can be no assurance that adequate third-
party payments will be available to enable the Company to establish or
maintain price levels sufficient to realize an appropriate return on its
investment in product development. If adequate payment levels are not provided
by government and third-party payors for use of the Company's products, the
market acceptance of those products will be adversely affected.
There can be no assurance that reimbursement in the United States or foreign
countries will be available for any of the Company's product candidates, that
any reimbursement granted will be maintained, or that limits on reimbursement
available from third-party payors will not reduce the demand for, or
negatively affect the price of, the Company's products. The unavailability or
inadequacy of third-party reimbursement for the Company's product candidates
would have a material adverse effect on the Company. Finally, the Company is
unable to forecast what additional legislation or regulation relating to the
healthcare industry or third-party coverage and reimbursement may be enacted
in the future, or what effect such legislation or regulation would have on the
Company's business.
HAZARDOUS MATERIALS
The Company's research and development activities involve the controlled use
of hazardous materials, chemicals and various radioactive compounds. The
Company is subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of such materials and
certain waste products. In the event of any contamination or injury from these
materials, the Company could be held liable for any damages that result and
any such liability could exceed the resources of the Company. Furthermore, the
failure to comply with current or future regulations could result in the
imposition of substantial fines against the Company, suspension of production,
alteration of its manufacturing processes or cessation of operations. There
can be no assurance that the Company will not be required to incur significant
costs to comply with any such laws and regulations in the future, or that such
laws or regulations will not have a material adverse effect on the Company's
business, financial condition and results of operations. Any failure by the
Company to control the use, disposal, removal or storage of, or to adequately
restrict the discharge of, or assist in the cleanup of, hazardous chemicals or
hazardous, infectious or toxic substances could subject the Company to
significant liabilities, including joint and several liability under certain
statutes. The imposition of such liabilities would have a material adverse
effect on the Company's business, financial condition and results of
operations.
POTENTIAL PRODUCT LIABILITY; AVAILABILITY OF INSURANCE
The Company is, and will continue to be, subject to the risk of product
liability claims alleging that the use of its products has adverse effects on
patients. This risk exists for product candidates tested in human clinical
13
<PAGE>
trials as well as products that are sold commercially, if any. Further, given
the medical conditions for which the Aastrom CPS is expected to be utilized,
any product liability claim could entail substantial compensatory and punitive
damages. The assertion of product liability claims against the Company could
result in a substantial cost to, and diversion of efforts by, the Company.
There can be no assurance that the Company would prevail in any such
litigation or that product liability claims, if made, would not result in a
recall of the Company's products or a change in the indications for which they
may be used. The Company maintains product liability insurance coverage up to
an aggregate of $5,000,000 for claims arising from the use of its product
candidates in clinical trials. There can be no assurance that the Company will
be able to maintain such insurance or obtain product liability insurance in
the future to cover any of its product candidates which are commercialized or
that such existing or any future insurance and the resources of the Company
would be sufficient to satisfy any liability resulting from product liability
claims. Consequently, a product liability claim or other claim with respect to
uninsured or underinsured liabilities could have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The success of the Company depends in large part upon the Company's ability
to attract and retain highly qualified scientific and management personnel.
The Company faces competition for such personnel from other companies,
research and academic institutions and other entities. There can be no
assurance that the Company will be successful in hiring or retaining key
personnel. See "Business--Employees" and "Management."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market following
this offering could adversely affect the prevailing market price of the Common
Stock and the Company's ability to raise capital in the future. Upon
completion of this offering, the Company will have a total of 14,772,674
shares of Common Stock outstanding, based upon the number of shares
outstanding as of September 30, 1997, all of which are eligible for sale in
the public market, subject in some cases to certain volume restrictions and
other conditions imposed by Rule 144 under the Securities Act of 1933, as
amended (the "Securities Act"). However, 5,707,252 outstanding shares of
Common Stock are subject to lock-up agreements expiring 90 days following the
date of this Prospectus. Such agreements provide that Cowen & Company may, in
its sole discretion and at any time without notice, release all or a portion
of the shares subject to these lock-up agreements. Certain existing
shareholders have rights to include shares of Common Stock owned by them in
future registrations by the Company for the sale of Common Stock or to request
that the Company register their shares under the Securities Act. See
"Description of Capital Stock--Registration Rights," "Shares Eligible for
Future Sale" and "Plan of Distribution."
CONTROL BY EXISTING MANAGEMENT AND SHAREHOLDERS
Upon completion of this offering, the Company's directors, executive
officers, and certain principal shareholders, including Cobe, affiliated with
members of the Board of Directors and their affiliates will beneficially own
approximately 32.5% of the outstanding shares of Common Stock. Accordingly,
such shareholders, acting together, may have the ability to exert significant
influence over the election of the Company's Board of Directors and other
matters submitted to the Company's shareholders for approval. The voting power
of these holders may discourage or prevent certain takeovers or changes in
control of the management of the Company unless the terms are approved by such
holders. See "Principal Shareholders."
POSSIBLE STOCK PRICE VOLATILITY
The price of the Company's Common Stock has experienced significant
volatility. The trading price of the Common Stock and the price at which the
Company may sell securities in the future could be subject to wide
fluctuations in response to announcements of clinical results, research
activities, technological innovations or new
14
<PAGE>
products by the Company or competitors, changes in government regulation,
developments concerning proprietary rights, variations in the Company's
operating results, announcements by the Company of regulatory developments,
litigation, disputes concerning patents or proprietary rights or public
concern regarding the safety, efficacy or other implications of the products
or methodologies to be developed by the Company or its collaborators or
enabled by the Company's technology, general market conditions, the liquidity
of the Company or its ability to raise additional funds, and other factors or
events. In addition, the stock market has experienced extreme fluctuations in
price and volume. This volatility has significantly affected the market prices
for securities of emerging biotechnology companies for reasons frequently
unrelated to or disproportionate to the operating performance of the specific
companies. These market fluctuations, as well as shortfalls in revenue or
earnings as compared with public market analysts' expectations, changes in
such analysts' recommendations or projections and fluctuations in the stock
markets generally may adversely affect the market price of the Common Stock.
In addition, since the Company's initial public offering in February 1997, the
average daily trading volume of the Common Stock on the Nasdaq National Market
has generally been relatively low. There can be no assurance that a more
active trading market will develop in the future.
ANTI-TAKEOVER EFFECT OF CHARTER AND BYLAW PROVISIONS AND MICHIGAN LAW
The Company's Restated Articles of Incorporation authorize the Board of
Directors to issue, without shareholder approval, 5,000,000 shares of
Preferred Stock with voting, conversion, and other rights and preferences that
could materially and adversely affect the voting power or other rights of the
holders of Common Stock. The issuance of Preferred Stock or of rights to
purchase Preferred Stock could be used to discourage an unsolicited
acquisition proposal. The Company's Bylaws contain procedural restrictions on
director nominations by shareholders and the submission of other proposals for
consideration at shareholder meetings. The possible issuance of Preferred
Stock and the procedures required for director nominations and shareholder
proposals could discourage a proxy contest, make more difficult the
acquisition of a substantial block of Common Stock, or limit the price that
investors might be willing to pay in the future for shares of Common Stock.
The Company's Restated Articles of Incorporation eliminate the right of
shareholders to act without a meeting, do not provide for cumulative voting in
the election of directors and provide that the holders of at least two-thirds
of the outstanding shares of Common Stock must approve certain transactions
resulting in a change of control of the Company. In addition, certain
provisions of Michigan law applicable to the Company could also delay or make
more difficult a merger, tender offer or proxy contest involving the Company.
See "Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION; ABSENCE OF DIVIDENDS
Purchasers of the Common Stock in this offering will experience immediate
and substantial dilution in the net tangible book value of the Common Stock.
Additional dilution is likely to occur upon the exercise of outstanding
options or warrants granted by the Company. The Company has never paid cash
dividends and does not anticipate paying any cash dividends in the foreseeable
future. See "Dilution" and "Dividend Policy."
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended, including, but not limited to, statements
regarding: uncertainties related to product development and marketability;
uncertainties related to clinical trials; manufacturing and supply
uncertainties and dependence on third parties; history of operating losses and
anticipation of future losses; limited sales and marketing capabilities and
dependence on collaborative relationships; future capital needs and
uncertainty of additional funding; uncertainty of regulatory approval and
extensive government regulation; consequences of Cobe relationship;
competition and technological change; uncertainty regarding patents and
proprietary rights; no assurance of third party reimbursement; hazardous
materials; and potential product liability and availability of insurance.
These statements are subject to risks and uncertainties, including those set
forth under this caption, and actual results could differ materially from
those expressed or implied in these statements. All forward-looking statements
included in this Prospectus are made as of the date hereof, and the Company
assumes no obligation to update any such forward-looking statement or reason
why actual results might differ.
15
<PAGE>
THE COMPANY
Aastrom was incorporated in Michigan in March 1989 under the name Ann Arbor
Stromal, Inc. In 1991, the Company changed its name to Aastrom Biosciences,
Inc. The Company's principal executive offices are located at 24 Frank Lloyd
Wright Drive, P.O. Box 376, Ann Arbor, Michigan 48106, and its telephone
number is (313) 930-5555. Aastrom(TM) and the Company's stylized logo are
trademarks of the Company. Leukine and Neupogen are registered trademarks of
Immunex Corporation and Amgen, Inc., respectively.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,500,000 shares of
Common Stock offered hereby are estimated to be $9,520,000 at an assumed
public offering price of $7.00 per share and after deducting commissions and
estimated offering expenses payable by the Company.
The Company currently intends to use approximately $5,000,000 of the net
proceeds from the offering to fund product and clinical development activities
for the Aastrom CPS, including pre-pivotal and pivotal clinical trials, and
approximately $3,000,000 for other research activities, with the remaining
amount being used for working capital and other general corporate purposes,
including scheduled repayments of obligations under equipment leases. The
Company has $189,000 of outstanding equipment lease commitments as of June 30,
1997, with final payments due between December 1997 and May 1999 that bear
interest ranging from 9.7% to 12.1%.
Based on its current operating plan, the Company anticipates that the net
proceeds of this offering, together with the Company's available cash and
expected interest income thereon, should be sufficient to finance the
development and manufacture of the Aastrom CPS for use in clinical trials,
expanded clinical trials, other research and development and working capital
and other corporate requirements until late 1998. This estimate is based on
certain assumptions which could be negatively impacted by the matters
discussed in "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." Pending such uses, the net proceeds will be invested in short-
term, interest bearing investment grade securities.
PRICE RANGE OF COMMON STOCK
The Company effected an initial public offering of its Common Stock during
February 1997 at a price of $7.00 per share. Commencing on February 4, 1997,
the Company's Common Stock has been quoted on the Nasdaq National Market under
the symbol "ASTM." The following table sets forth, for the periods indicated,
the high and low sale prices per share of the Common Stock as reported on the
Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
YEAR ENDED JUNE 30, 1997
3rd Quarter (from February 4, 1997).................. $ 7 5/8 $ 5 3/4
4th Quarter.......................................... 8 1/2 3 1/2
YEAR ENDING JUNE 30, 1998
1st Quarter.......................................... 9 15/16 3 1/4
2nd Quarter (through October 3, 1997)................ 8 6 7/8
</TABLE>
On October 3, 1997, the last reported sale price of the Common Stock on the
Nasdaq National Market was $7.00 per share. As of August 31, 1997, there were
approximately 140 shareholders of record of the Common Stock.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate paying such cash dividends in the foreseeable
future. The Company currently anticipates that it will retain all future
earnings, if any, for use in the development of its business.
16
<PAGE>
DILUTION
The Company's net tangible book value at June 30, 1997 was approximately
$16,583,000, or $1.25 per share. Net tangible book value per share represents
the amount of the Company's shareholders' equity, less intangible assets,
divided by 13,275,208, the number of shares of Common Stock outstanding as of
June 30, 1997.
After giving effect to the sale of 1,500,000 shares of Common Stock in this
offering at an assumed public offering price of $7.00 per share and after
deducting commissions and estimated offering expenses payable by the Company,
the net tangible book value of the Company as of June 30, 1997 would have been
$26,103,000, or $1.77 per share. This represents an immediate increase in net
tangible book value of $.52 per share to existing shareholders and an
immediate dilution in net tangible book value of $5.23 per share to purchasers
of Common Stock in this offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed public offering price per share........................ $7.00
Net tangible book value per share as of June 30, 1997........ $1.25
Increase per share attributable to new investors............. .52
-----
Net tangible book value per share after this offering.......... 1.77
-----
Dilution per share to new investors............................ $5.23
=====
</TABLE>
The foregoing excludes (i) options and warrants outstanding as of June 30,
1997 to purchase 1,127,815 shares of Common Stock at a weighted average
exercise price of $5.40 per share, (ii) 6,216 shares that were issued
subsequent to June 30, 1997 upon the exercise of stock options, and (iii)
6,961 shares that were issued subsequent to June 30, 1997 under the Company's
1996 Employee Stock Purchase Plan. The foregoing includes 15,711 shares that
were canceled in September 1997 in connection with the repayment of a
promissory note. In the event such options and warrants are exercised,
investors may experience further dilution. See "Management--Stock Option and
Employee Benefit Plans," "Certain Transactions" and Note 4 of Notes to
Financial Statements.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
June 30, 1997, and (ii) as adjusted to reflect the receipt of the estimated
net proceeds from the Company's sale of 1,500,000 shares of Common Stock
pursuant to this offering, at an assumed public offering price of $7.00 per
share. See "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Long-term portion of capital lease obligations(1).. $ 65,000 $ 65,000
Shareholders' equity(2):
Preferred stock, no par value: 5,000,000 shares
authorized, no shares issued and outstanding,
actual and as adjusted.......................... -- --
Common stock, no par value: 40,000,000 shares
authorized; 13,275,208 issued and outstanding,
actual, and 14,775,208 issued and outstanding,
as adjusted; in each case net of shareholder
notes and other................................. 57,896,000 67,416,000
Deficit accumulated during the development stage... (41,313,000) (41,313,000)
------------ ------------
Total shareholders' equity......................... 16,583,000 26,103,000
------------ ------------
Total capitalization............................. $ 16,648,000 $ 26,168,000
============ ============
</TABLE>
- --------
(1)See Note 7 of Notes to Financial Statements.
(2) Excludes options and warrants outstanding as of June 30, 1997 to purchase
1,127,815 shares of Common Stock at a weighted average exercise price of
$5.40 per share, (ii) 6,216 shares that were issued subsequent to June 30,
1997 upon the exercise of stock options, and (iii) 6,961 shares that were
issued subsequent to June 30, 1997 under the Company's 1996 Employee Stock
Purchase Plan. Includes 15,711 shares that were canceled in September 1997
in connection with the repayment of a promissory note. See "Management--
Stock Option and Employee Benefit Plans," "Certain Transactions" and Note
4 of Notes to Financial Statements.
18
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data for the fiscal years ended June 30, 1995,
1996 and 1997 and for the period from Inception to June 30, 1997 and the
balance sheet data at June 30, 1996 and 1997, are derived from, and are
qualified by reference to, the audited financial statements included elsewhere
in the Prospectus and should be read in conjunction with those financial
statements and notes thereto. The statement of operations data for the fiscal
years ended June 30, 1993 and 1994, and the balance sheet data at June 30,
1993, 1994 and 1995, are derived from audited financial statements not
included herein. The data set forth below are qualified by reference to, and
should be read in conjunction with, the financial statements and notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, INCEPTION TO
------------------------------------------------------------------ JUNE 30,
<S> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997 1997
----------- ----------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
DATA:
Revenues:
Research and develop-
ment agreements....... $ -- $ 49,000 $ 396,000 $ 1,342,000 $ 230,000 $ 2,017,000
Grants................. 784,000 823,000 121,000 267,000 148,000 2,143,000
----------- ----------- ------------ ------------ ------------ ------------
Total revenues........ 784,000 872,000 517,000 1,609,000 378,000 4,160,000
Costs and expenses:
Research and develop-
ment.................. 2,600,000 5,627,000 4,889,000 10,075,000 13,357,000 38,432,000
General and administra-
tive.................. 1,153,000 1,565,000 1,558,000 2,067,000 1,953,000 9,042,000
----------- ----------- ------------ ------------ ------------ ------------
Total costs and ex-
penses............... 3,753,000 7,192,000 6,447,000 12,142,000 15,310,000 47,474,000
----------- ----------- ------------ ------------ ------------ ------------
Loss from operations.... (2,969,000) (6,320,000) (5,930,000) (10,533,000) (14,932,000) (43,314,000)
----------- ----------- ------------ ------------ ------------ ------------
Other income (expense):
Interest income........ 148,000 245,000 279,000 678,000 676,000 2,252,000
Interest expense....... (26,000) (65,000) (66,000) (62,000) (32,000) (251,000)
----------- ----------- ------------ ------------ ------------ ------------
Net loss................ $(2,847,000) $(6,140,000) $ (5,717,000) $ (9,917,000) $(14,288,000) $(41,313,000)
=========== =========== ============ ============ ============ ============
Net loss per share(1)... $ (.52) $ (.82) $ (.66) $ (.98) $ (1.26)
=========== =========== ============ ============ ============
Weighted average number
of shares
outstanding(1)......... 5,480,000 7,461,000 8,644,000 10,103,000 11,315,000
=========== =========== ============ ============ ============
<CAPTION>
JUNE 30,
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997
----------- ----------- ------------ ------------ ------------
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term invest-
ments................. $ 3,085,000 $ 6,730,000 $ 11,068,000 $ 10,967,000 $ 17,007,000
Working capital........ 2,744,000 6,187,000 10,319,000 9,851,000 15,600,000
Total assets........... 4,156,000 8,227,000 12,551,000 12,673,000 18,410,000
Long-term capital lease
obligations........... 311,000 425,000 412,000 189,000 65,000
Deficit accumulated
during the development
stage................. (5,251,000) (11,391,000) (17,108,000) (27,025,000) (41,313,000)
Total shareholders' eq-
uity.................. 3,268,000 6,985,000 11,186,000 10,850,000 16,583,000
</TABLE>
--------
(1) See Note 1 of Notes to Financial Statements for information concerning the
computation of net loss per share and shares used in computing net loss
per share.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since its inception, the Company has been in the development stage and
engaged in research and product development, conducted both on its own behalf
and in connection with various collaborative research and development
agreements with other entities. The Company does not expect to generate
positive cash flows from operations for at least the next several years and,
until product sales commence, the Company expects that its revenue sources
will continue to be limited to grant revenue, research funding and milestone
payments and licensing fees from potential future corporate collaborators. The
timing and amount of such future cash payments and revenues, if any, will be
subject to significant fluctuations, based in part on the success of the
Company's research activities, the receipt of necessary regulatory approvals,
the timing of the achievement of certain other milestones and the extent to
which associated costs are reimbursed under grant or other arrangements.
Substantially all of the Company's revenues from product sales, if any, will
be subject to the Company's obligation to make aggregate royalty payments of
up to 5% to certain licensors of its technology. Further, under the Company's
Distribution Agreement with Cobe, Cobe will perform marketing and distribution
activities and in exchange will receive approximately 38% to 42% of the
Company's product sales in the area of stem cell therapy, subject to
negotiated discounts and volume-based adjustments. Research and development
expenses may fluctuate due to the timing of expenditures for the varying
stages of the Company's research and clinical development programs. Research
and development expenses will increase as product development programs and
applications of the Company's products progress through research and
development stages. Under the Company's License Agreement with Immunex, annual
renewal fees of $1,000,000 are payable in each of the next three fiscal years.
Under the Company's Distribution Agreement with Cobe, regulatory approval
activities for the Company's products for stem cell therapies outside of the
United States will be conducted, and paid for, by Cobe. As a result of these
and other factors, the Company's results of operations have fluctuated and are
expected to continue to fluctuate significantly from year to year and from
quarter to quarter and therefore may not be comparable to or indicative of the
result of operations for any future periods.
Over the past several years, the Company's net loss has primarily increased,
consistent with the growth in the Company's scope and size of operations. In
the near term, the Company plans additional moderate growth in employee
headcount necessary to address increasing requirements in the areas of product
development, research, clinical and regulatory affairs, quality systems and
administration. Assuming capital is available to finance such growth, the
Company's operating expenses will continue to increase as a result. At least
until such time as the Company enters into arrangements providing research and
development funding or initiates product sales, the net loss will continue to
increase as well. The Company has never been profitable and does not
anticipate having net income for at least the next several years. Through June
30, 1997, the Company had an accumulated deficit of $41,313,000. There can be
no assurance that the Company will be able to achieve profitability on a
sustained basis, if at all.
This Prospectus contains, in addition to historical information, forward-
looking statements that involve risks and uncertainties. The Company's actual
results could differ materially from the results discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include those discussed under this caption, as well as those discussed under
the caption "Risk Factors" and elsewhere in this Prospectus.
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
Total revenues were $378,000 in 1997, $1,609,000 in 1996 and $517,000 in
1995. Grant revenues decreased to $148,000 in 1997 from $267,000 in 1996 and
were $121,000 in 1995, reflecting the timing of grant awards and related
research activities, to the extent that such associated costs are reimbursed
under the grants. Grant revenues accounted for 39%, 17% and 23% of total
revenues for the years ended June 30, 1997, 1996 and 1995, respectively, and
are recorded on a cost-reimbursement basis. Revenues from research and
development agreements totaled $230,000 in 1997, $1,342,000 in 1996 and
$396,000 in 1995, reflecting research funding received by the Company under
its collaboration with RPR which commenced in September 1995 and ended in
20
<PAGE>
September 1996. Revenues from RPR accounted for 52%, 83% and 48% of such
revenue in 1997, 1996 and 1995, respectively.
Total costs and expenses were $15,310,000 in 1997, $12,142,000 in 1996 and
$6,447,000 in 1995. The increases in costs and expenses in 1997 and 1996 are
primarily the result of increases in research and development expense to
$13,357,000 in 1997 from $10,075,000 in 1996 and $4,889,000 in 1995. Research
and development expense includes charges of $1,000,000 and $1,500,000 for the
years ended June 30, 1997 and 1996, respectively, representing license fee
payments pursuant to the Company's supply agreement with Immunex. The increase
in research and development expense reflects an increase in research, clinical
development and product development activities. General and administrative
expenses were $1,953,000 in 1997, $2,067,000 in 1996 and $1,558,000 in 1995.
General and administrative expenses, which decreased slightly in 1997 compared
to 1996, are expected to increase as a result of increasing finance, legal and
other administrative and marketing expenses in support of the Company's
increasing product development and research activities.
Interest income was $676,000 in 1997, $678,000 in 1996 and $279,000 in 1995.
The fluctuations in interest income are due primarily to corresponding changes
in the levels of cash, cash equivalents and short-term investments for such
periods. Interest expense was $32,000 in 1997, $62,000 in 1996 and $66,000 in
1995, reflecting decreasing amounts outstanding under capital leases during
these periods.
The Company's net loss was $14,288,000 in 1997, $9,917,000 in 1996 and
$5,717,000 in 1995. The Company expects to report substantial net losses for
at least the next several years.
The Company has not generated any profits to date and therefore has not paid
any federal income taxes since inception. At June 30, 1997, the Company's
federal tax net operating loss and tax credit carryforwards were $40,420,000
and $971,000, respectively, which will expire from 2004 through 2012, if not
utilized. The Company underwent an ownership change in October 1993, which has
resulted in a limitation under which the Company can utilize a portion of its
federal net operating loss carryforward amounting to $1,153,000 per year. As
of June 1997, the portion of the Company's net operating loss that remains
subject to this limitation is $2,490,000 and therefore is not expected to
ultimately effect the Company's ability to utilize this benefit. If certain
changes in ownership should occur again in the future, the Company's ability
to utilize its net operating loss and tax credit carryforwards may become
subject to further annual limitation.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
public and private sales of its equity securities, which, from inception
through June 30, 1997, have totaled approximately $57,906,000, and, to a
lesser degree, through grant funding, payments received under research
agreements and collaborations, interest earned on cash, cash equivalents, and
short-term investments, and funding under equipment leasing agreements. These
financing sources have historically allowed the Company to maintain adequate
levels of cash and other liquid investments. Under the Company's primary
equipment leasing agreement, the lessor is granted a security interest in all
of the Company's property and assets.
The Company's combined cash, cash equivalents and short-term investments
totaled $17,007,000 at June 30, 1997, an increase of $6,040,000 from June 30,
1996. The primary uses of cash, cash equivalents and short-term investments
during the year ended June 30, 1997 included $13,214,000 to finance the
Company's operations and working capital requirements, $424,000 in capital
equipment additions and $223,000 in scheduled debt payments. On February 7,
1997, the Company completed an underwritten initial public offering of
3,000,000 shares of its Common Stock at an offering price of $7.00 per share.
On March 5, 1997, the underwriters elected to purchase an additional 250,000
shares of Common Stock pursuant to the underwriters' over-allotment option at
a price of $7.00 per share. Proceeds from the offering, net of underwriters'
commissions and expenses, were $19,885,000. The Company plans to continue its
policy of investing excess funds in short-term, investment-grade, interest-
bearing instruments.
21
<PAGE>
The Company's future cash requirements will depend on many factors,
including continued scientific progress in its research and development
programs, the scope and results of clinical trials, the time and costs
involved in obtaining regulatory approvals, the costs involved in filing,
prosecuting and enforcing patents, competing technological and market
developments and the cost of product commercialization. The Company does not
expect to generate a positive cash flow from operations for at least the next
several years due to the expected increase in spending for research and
development programs and the expected cost of commercializing its product
candidates. The Company intends to seek additional funding through research
and development agreements with suitable corporate collaborators, grants and
through public or private financing transactions. The Company anticipates that
the net proceeds of this offering, together with the Company's available cash
and expected interest income thereon, will be sufficient to finance the
development and manufacture of the Aastrom CPS for use in clinical trials,
expanded clinical trials, other research and development and working capital
and other corporate requirements until late 1998. This estimate is based on
certain assumptions which could be negatively impacted by the matters
discussed under this heading and elsewhere under the caption "Risk Factors."
The Company expects that its primary sources of capital for the foreseeable
future will be through collaborative arrangements and through the public or
private sale of its debt or equity securities. There can be no assurance that
such collaborative arrangements, or any public or private financing, will be
available on acceptable terms, if at all, or can be sustained. Several factors
will affect the Company's ability to raise additional funding, including, but
not limited to, market volatility of the Company's Common Stock and economic
conditions affecting the public markets generally or some portion or all of
the technology sector. If adequate funds are not available, the Company may be
required to delay, reduce the scope of, or eliminate one or more of its
research and development programs, which may have a material adverse effect on
the Company's business. See "Risks Factors--Future Capital Needs; Uncertainty
of Additional Funding" and Notes to Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENT
During March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"),
which amends the standards for computing earnings per share previously set
forth in Accounting Principles Board Opinion No. 15, "Earnings per Share"
("APB 15"). SFAS 128, which will be adopted by the Company for the period
ending December 31, 1997, will not have a material effect on the computation
of the Company's historical net loss per share amounts.
22
<PAGE>
BUSINESS
OVERVIEW
Aastrom is developing proprietary process technologies and devices for a
range of cell therapy applications, including stem cell therapies and selected
emerging therapies such as immunotherapy, solid tissue repair and ex vivo gene
therapy. The Company's lead product under development, the Aastrom Cell
Production System (the "Aastrom CPS"), consists of a clinical cell culture
system with single-use cassettes and reagents for use in the rapidly growing
cell therapy market. The Company is currently conducting "pre-pivotal" trials
at multiple sites in the United States and Europe of the Aastrom CPS for use
in stem cell therapy in preparation for pivotal trials in the United States
and potential marketing in Europe. The Company believes that the Aastrom CPS
procedure will be a cost-effective, less invasive and less time consuming
alternative to currently available stem cell collection methods and may
enhance the clinical utility of umbilical cord blood ("UCB") transplants by
expanding the number of cells available for transplant. For stem cell therapy,
the Company has entered into a strategic collaboration for the marketing,
distribution and customer service of the Aastrom CPS with Cobe BCT, Inc., a
subsidiary of Gambro AB and a leading provider of blood cell processing
products.
The Aastrom CPS is designed as a platform product which implements the
Company's pioneering stem cell replication technology. The Company believes
that the Aastrom CPS can be modified to produce a wide variety of other cell
types for selected emerging therapies being developed by other companies and
institutions. The Company intends to develop additional strategic
collaborations for the development of the Aastrom CPS in certain of these
other cell therapy market segments. In ex vivo gene therapy, the Company is
also developing the Aastrom Gene Loader, which is being designed to address
the production of gene-modified cells.
CELL THERAPY
Cell therapy or ex vivo gene therapy involves the use of human cells to
treat a medical disorder. The most common types of cell therapy, blood and
platelet transfusions, have been widely used for many decades. More recently,
bone marrow-derived and UCB cells have been used to restore the bone marrow
and the blood and immune system cells which are damaged by chemotherapy and
radiation therapy during the treatment of many types of cancer.
Transplantation of these cells is known as stem cell therapy. Other cell
therapies have recently been used for generating skin and cartilage tissue,
and additional cell therapies are being developed by various companies and
researchers to restore immune system cells as well as bone, kidney, liver,
vascular and neuronal tissues.
Cell therapies require the collection of cells, either from the patient or a
suitably matched donor. These cells are typically processed and stored for
administration to the patient. Although cell therapy is being developed for
use in an increasing number of diseases, widespread application of new cell
therapies remains limited by the difficulties and expense associated with
current cell collection and processing procedures. The problems of current
cell collection techniques are exemplified in the area of stem cell therapy
where the patient or donor undergoes invasive, time-consuming and costly
procedures to collect the large volume of cells currently required for
effective treatment. The Company believes an alternative to collecting the
required therapeutic dose of cells is to grow these cells ex vivo from a small
starting volume. However, ex vivo cell expansion, when biologically possible,
has typically required costly techniques, facilities and operations to comply
with FDA current good manufacturing practices ("cGMP"), which are not
generally available in hospitals. As a result, cells needed for such therapies
often require specialized cell production facilities which use labor-
intensive, manual cell culture techniques.
In ex vivo gene therapy, genes are introduced into target cells in order to
selectively correct or modulate disease conditions, or to modify cells for
production of a therapeutic protein. The Company believes that the successful
practice of ex vivo gene therapy will require the development of processes and
products for the reliable, high-efficiency transfer of genes into cells and a
means to produce the necessary dose of the genetically modified cells under
cGMP conditions.
STEM CELL THERAPY
Stem cell therapy is used to treat cancer patients who undergo chemotherapy
or radiation therapy at dose levels that are toxic to the hematopoietic
system, which is comprised of the bone marrow and the cells of the
23
<PAGE>
blood and immune systems. The objective of stem cell therapy is to restore the
hematopoietic system via the infusion and subsequent engraftment of healthy
cells to replace bone marrow and result in the rapid recovery of neutrophils
and platelets that have been destroyed by chemotherapy and radiation therapy.
Stem cell therapy reduces the risk of life-threatening infections and bleeding
episodes following cancer treatments. In order to treat many cancers, high
intensity chemotherapy or radiation is often required, which may severely
destroy ("myeloablation") or partially destroy ("myelosuppression") the
patient's hematopoietic system.
Cells required for effective stem cell therapy include stem cells, to
replenish depleted bone marrow and provide a long-term ongoing source of the
multilineage progenitor cells of the blood and immune systems, and early and
late stage hematopoietic progenitor cells, to provide for rapid neutrophil and
platelet recoveries. Stromal accessory cells are believed to further augment
the growth of bone marrow. In the adult, all of these cell types originate in
the bone marrow. These cells are currently collected from the donor or patient
directly through multiple syringe aspirations under anesthesia, known as bone
marrow collection, or through blood apheresis following treatment with drugs
which cause cells to be released or mobilized from the bone marrow into the
blood. This latter technique is known as a peripheral blood progenitor cell
("PBPC") collection. See "--Current Stem Cell Collection Methods."
Recently, it has been demonstrated that the blood cells found in the
umbilical cord of newborn infants include cells effective for stem cell
therapy. This source of cells is being explored by physicians as a significant
new development in stem cell therapy, but is currently limited by difficulties
in obtaining sufficient quantities of these cells and by prolonged engraftment
times for the cells once transplanted into the patient.
Once collected, the stem cell mixture is infused intravenously and the stem
and stromal accessory cells migrate into the bone cavity where they engraft to
form a new marrow. The hematopoietic progenitor cell components of the cell
mixture provide early restoration of circulating white blood cells and
platelets. The replenished bone marrow will normally provide long-term
hematopoietic function, but complete restoration of bone marrow may take years
following myeloablative cancer therapy. When the patient's hematopoietic
system is malignant, such as in the case of leukemia, cells from a suitable
donor are generally required in order to avoid reintroducing the disease
during cell infusion. Such donor derived transplants are termed "allogeneic"
transplants. Procedures using cells derived from the patient are termed
"autologous" transplants.
STEM CELL THERAPY MARKET OPPORTUNITY
The benefits of stem cell therapy in the treatment of cancer patients have
been well established over the past two decades. Stem cell therapy, in the
form of bone marrow transplantation, was originally used in patients who had
received treatment for blood and bone marrow cancers such as leukemia, and
genetic diseases of the blood. However, because stem cell therapy has been
shown to promote the rapid recovery of hematopoietic function, it is now being
increasingly used to enable patients with other forms of cancer to receive
high dose or multicycle chemotherapy and radiation treatments. These high-
intensity therapies have a greater probability of eradicating dose-sensitive
cancers but, because of their hematopoietic toxicity, cannot generally be
given without stem cell therapy. As a result, some patients are treated with
lower and less effective doses, and fewer cycles of therapy than might
otherwise be used.
According to an industry source, approximately 32,000 stem cell therapy
procedures were completed worldwide in 1995, and, according to another
industry source, the number of such procedures utilizing donor-derived and
patient-derived cells has been growing annually by approximately 15% and 20%,
respectively. This growth has been driven by encouraging clinical results in
the treatment of dose-sensitive solid tumors, such as breast and ovarian
cancers. The Company expects that the number of stem cell therapy procedures
will continue to grow due to increased incidence and prevalence of cancer,
continued clinical demand for myelotoxic cancer treatment, and the increased
cost effectiveness of stem cell therapy treatments.
Stem cell therapy may also enhance the effectiveness of blood cell growth
factors. The timing and extent of additional cycles of chemotherapy is often
limited by the recovery of a patient's white blood cells and platelets
24
<PAGE>
because a delayed recovery of these cells can leave the patient susceptible to
life-threatening infection and bleeding episodes, and this limitation may
allow for the regrowth of residual tumor cells. Many cancer patients are
routinely treated with growth factors including G-CSF, such as Neupogen and
GM-CSF, such as Leukine, which enhance the development of mature circulating
white blood cells and platelets from the early progenitor bone-marrow derived
cells, thereby decreasing the time between cycles of therapy and the
probability of infection. However, during high dose or multicycle therapy, the
stem and progenitor cells on which these growth factors act are often
depleted. Without these cells, growth factors have a limited or negligible
effect. Stem cell therapy generally enhances the effectiveness of growth
factors by introducing target stem and progenitor cells for growth factors to
act upon such that patients generally exhibit a more rapid and consistent
hematopoietic recovery.
CURRENT STEM CELL COLLECTION METHODS
Currently, the bone marrow-derived cells required for stem cell therapy are
collected primarily either through the bone marrow harvest method or the PBPC
collection method.
Bone Marrow Harvest
A traditional bone marrow harvest is a costly and invasive surgical
procedure in which a physician removes approximately one liter of bone marrow
from a patient or donor. This volume of bone marrow is removed using needles
inserted into the cavity of the hip bone. The bone marrow harvest procedure
typically requires between two to four hours of operating room time, with the
physician often making more than 90 separate puncture sites in the hip bone to
collect the necessary amount of bone marrow. Due to the length of the
procedure and the trauma to the patient, general surgical anesthesia is
administered and the patient is often hospitalized for a day. Frequently, the
patient suffers pain from the procedure for several days after being
discharged from the hospital. Furthermore, complications resulting from the
general anesthesia or invasive nature of the procedure occur in a small
percentage of patients. Bone marrow harvest provides a reliable source of stem
and stromal accessory cells and has been the preferred source of cells in
allogeneic transplants.
PBPC Mobilization and Collection
PBPC mobilization is a technique in which bone marrow-derived cells are
harvested from a patient's or donor's circulating blood, rather than from bone
marrow. In a PBPC mobilization procedure, the patient receives multiple
injections of growth factors or cytotoxic drugs, or both, over the course of a
week or more, which cause stem and progenitor cells resident in the bone
marrow to mobilize into the circulating blood. The mobilized cells are then
collected by connecting the patient to a blood apheresis device, which draws
and returns large volumes of the patient's or donor's blood in order to
selectively remove the therapeutic volume of stem and progenitor cells. Each
collection procedure typically lasts for two to six hours and is typically
repeated on two to five consecutive days, however, procedure time has
decreased and is expected to continue to decrease as the procedure is further
optimized. Specialized laboratory testing over the period of mobilization and
cell harvesting is necessary to determine that a sufficient quantity of
desired cells has been collected, adding to the cost of the procedure. The
PBPC process has become the predominant procedure in autologous stem cell
therapy.
Procedure Considerations
Although stem cell therapy is being utilized to treat more patients for a
broader range of diseases, its availability continues to be limited by the
high costs of procuring cells, the invasive nature of traditional cell
procurement techniques, and by the technical difficulties related to those
collection procedures. The Company believes that current charges for bone
marrow harvest, processing and infusion are approximately $10,000 to $15,000
per procedure, with considerable variability between institutions. The Company
believes that current charges for PBPC collection, including mobilization and
infusion, are approximately $12,000 to $20,000 for a two to three cycle
procedure, with considerable variability between institutions depending on the
mobilization regimen and the total volume, time and number of aphereses
required.
25
<PAGE>
Overall costs of stem cell therapy include the costs of the cell collection
and infusion procedures, and the costs associated with supporting the patient
during post-transplant recovery. Post-transplant costs include hospitalization
time, antibiotic support, management of adverse reactions to the large volume
cell infusions, and infusions of platelets and red blood cells. Any new stem
cell therapy process will generally need to provide similar recovery endpoints
to be competitive with the current procedures. In this regard, PBPC procedures
have gained popularity compared with bone marrow harvests because the number
of platelet transfusions is reduced for some patients.
Recently, products to implement a cell isolation method known as CD34
selection have been developed by other companies in conjunction with bone
marrow harvest and PBPC collections. CD34 selection is a process designed to
isolate specific types of cells in order to decrease storage and infusion
problems associated with the large volume of fluids collected in bone marrow
or multiple apheresis procedures. CD34 selection is used after the initial
collection of stem and progenitor cells and, therefore, does not address the
difficulties or costs associated with the basic cell collection procedures. A
future objective of CD34 selection is to assist in depleting tumor cells from
the transplant cells collected, thereby expanding the availability of stem
cell therapy to new patient populations.
UMBILICAL CORD BLOOD
UCB, which is collected directly from the umbilical cord of newborn infants,
without pain or risk to the infant or the mother, is emerging as a new source
of cells for stem cell therapy. UCB has been reported to have stem cell
concentrations that are much higher than that typically obtained from
traditional bone marrow and PBPC collection methods. After collection, UCB is
typically frozen for later use in a stem cell therapy procedure. Storage of
UCB samples involves small volumes of cells, compared to typical bone marrow
or PBPC storage. Accordingly, the costs of collection and storage of UCB cells
are comparatively low. This source of cells is also "tumor-free," such that
UCB would be preferred for many current stem cell therapy procedures in
metastatic cancer patients. Before UCB can become a major supply source for
stem cell therapy, a coordinated UCB banking system must emerge. In this
regard, several UCB banking institutions have been established to date, and
the group is growing in both number and size. The establishment of these UCB
banking institutions is an initial step which may lead to a coordinated UCB
banking system.
Current disadvantages of UCB include the relatively low number of available
cells which may contribute to prolonged engraftment times for the cells once
transplanted into the patient. Unlike bone marrow or PBPC harvest, where the
collection of more cells to meet a particular treatment is typically
achievable, the number of cells available from a UCB donor is limited. This
problem is exacerbated by the required cryopreservation of the cells, which
causes significant cell loss. The resultant low cell number is believed to be
responsible for the longer hematopoietic recovery times observed with UCB
transplants, as compared with bone marrow or PBPC transplants. Further,
because of the low cell number, UCB transplants are typically restricted to
small patients. Therefore, increasing the number of therapeutic cells from a
UCB sample may facilitate the more widespread use of UCB transplants. Aastrom
believes that providing the transplant site with the capability to carry out
the UCB cell expansion will be a major factor in the increased use of UCB for
stem cell therapy and a significant business opportunity.
AASTROM TECHNOLOGY
Aastrom is developing proprietary process technologies that are pioneering
the ex vivo production of human stem and progenitor cells. The Company has
also developed a proprietary cell culture device that mimics the biological
and physical environment necessary for the growth of certain human cells and
tissues, including bone marrow. The Company's initial product candidate, the
Aastrom CPS, utilizes the Company's process technology and is designed to
enable the ex vivo production of human stem and progenitor cells as an
alternative to bone marrow harvest and PBPC mobilization methods and to
enhance the clinical utility of UCB cells. The Company believes that the
Aastrom CPS may be used for other cell production processes, such as
immunotherapy and solid tissue repair, which are being developed by third
parties and, in combination with the Company's proprietary gene transfer
process, may have application in the developing field of ex vivo gene therapy.
26
<PAGE>
CORE TECHNOLOGY
Stem Cell Growth Process
Aastrom has developed proprietary process technologies for ex vivo
production of therapeutic stem and progenitor cells as well as other key cells
found in human bone marrow. The Company's proprietary process entails the
placement of a stem cell mixture in a culture environment that mimics the
biology and physiology of natural bone marrow. This process enables the stem
and early and late-stage progenitor cells needed for an effective stem cell
therapy procedure to be concurrently expanded. Growth factors can be added to
stimulate specific cell lineages to grow or to increase cell growth to meet a
particular therapeutic objective. The stem cell growth process can best be
completed with little or no additional stem cell selection or purification
procedures. This stem cell replication process can also enable or augment the
genetic modification of cells by providing the cell division step needed for
new genes to integrate into the stem cell DNA. Currently available cell
culture methods tend to result in a loss of stem cells, either through death
or through differentiation into mature cells. The Company has exclusive rights
to several issued U.S. patents that cover these processes and cell
compositions. See "--Additional Stem Cell and Other Cell Therapies."
Aastrom Cell Culture Chamber
Aastrom has developed a proprietary cell culture chamber to implement the
Company's process technology. The culture chamber produces cells on a clinical
scale and allows for simple, sterile recovery of the cells for therapeutic
use. The Company believes that the Aastrom cell culture chamber may also be
used for growing other human therapeutic cells, such as T-Cells and dendritic
cells used for immunotherapies, chondrocytes for cartilage replacement, and
mesenchymal tissues for bone and cartilage replacement. The Company holds
exclusive rights to issued U.S. patents and additional applications for its
cell culture chamber device technology. See "--Additional Stem Cell and Other
Cell Therapies."
Efficient Gene Transfer
Aastrom has developed proprietary processes and device technology that may
enable increased efficiency of vector-mediated gene transfer into cells as
compared to conventional procedures. This directed-motion gene transfer or
gene loading technology is being pursued by the Company for application in
most cell and tissue types and most vector technologies. The Company intends
to develop products based upon its gene loading technology. Development of
additional products, however, will require the Company to raise additional
funds or to seek collaborative partners, or both, to finance related research
and development activities, as to which there can be no assurance of success.
Furthermore, due to the uncertainties involved, the Company is unable to
estimate the length of time such development may take. If successfully
developed into products, the Company believes that such products would
facilitate the advancement of numerous gene therapy protocols into the clinic
and ultimately the market. The Company has exclusive rights to three issued
U.S. patents, and has additional applications pending, for this technology.
See "Aastrom Product Candidates For Ex Vivo Gene Therapy."
THE AASTROM CPS
The Aastrom CPS is the Company's lead product under development. While
potentially applicable to multiple cell therapy applications such as
immunotherapy, solid tissue repair and ex vivo gene therapy, the Aastrom CPS
is being developed initially by the Company for stem cell therapy. The Aastrom
CPS is a proprietary system that the Company believes will enable the large
scale ex vivo production of a variety of therapeutic cells at healthcare
facilities, independent laboratories, transplant centers and blood banks, and
has been designed to implement Aastrom's stem cell growth process as well as
processes for the production of other cell types.
The Aastrom CPS is comprised of several components, including single-use
Cell Cassettes and reagents and microprocessor-controlled instruments, which
are at various stages of development. The Cell Cassette is a single-use
cartridge which contains the Aastrom cell culture chamber and the related
media supply waste reservoirs and harvest bag. The microprocessor-controlled
instruments include the Incubator which controls the culture
27
<PAGE>
conditions for the operation of the Cell Cassette, and the Processor which
automates the priming and harvesting of the cells from the Cell Cassette. The
System Manager is a user interface computer that is being developed to
simultaneously track and monitor the cell production process in over thirty
CPS Incubators and record relevant process variables and operator actions.
Prototype components of the Aastrom CPS are currently being used in clinical
trials and ongoing development activities are directed at completing other
production level components of the Aastrom CPS.
The Aastrom CPS is designed to be operated with minimal operator activity by
a medical or laboratory technician and can implement clinical scale cell
production at the patient care site. The end product of the Aastrom CPS
process is a blood-bag container with the cell product. The control and
documentation features of the Aastrom CPS have been designed to meet cGMP
requirements for the therapeutic production of cells.
AASTROM CPS FOR STEM CELL THERAPY
The Company's initial application for the Aastrom CPS is expected to be in
the growing field of stem cell therapy, where the Company believes that the
Aastrom CPS may address many of the limitations of existing procedures. The
Aastrom CPS is based on a comparatively simple process in which a small volume
of bone marrow cells are collected from the patient or donor using a needle
aspiration procedure typically under a local anesthetic or sedative. This cell
mixture is quantified, and an appropriate volume of cells is then inoculated
into one or more Cell Cassettes with the necessary growth media. Growth-
factor-stimulated cells are produced using the Aastrom CPS in approximately 12
to 13 days, with no further patient involvement. Depending upon the cell
quantity necessary for a therapeutic application, single or multiple Cell
Cassettes may be required, with a different volume requirement of starting
cells taken from the patient at the initial visit. The Aastrom CPS has been
designed to minimize operator involvement during the cell production process,
and the steps required before and after the Aastrom CPS are standard
laboratory procedures. Cells derived from UCB may also serve as a tumor-free
source of stem and progenitor cells for expansion in the Aastrom CPS.
Potential Advantages of Aastrom CPS
The Company believes that the Aastrom CPS, if approved for commercial sale
by the FDA and foreign regulatory agencies, may provide certain improvements
and efficiencies over traditional cell collection and infusion processes. The
following table, which sets forth estimates based on a 1996 survey conducted
by the Company of 11 stem cell transplant physicians at different transplant
institutions throughout the United States, compares estimated patient care
episodes and procedure time for currently established cell collection and
infusion techniques with the Aastrom CPS method of cell procurement:
<TABLE>
<CAPTION>
PROCEDURE TIME
CELL SOURCE CARE EPISODES(1) (HOURS)(1)
----------- ---------------- --------------
<S> <C> <C>
Bone Marrow Harvest (2)................... 8 16
PBPC Mobilization and Collection (3)...... 21 39
Aastrom CPS (4)........................... 2 1-3
</TABLE>
--------
(1) Includes all outpatient, inpatient, and home care episodes.
(2) Includes operating room procedure and all preparatory and recovery
procedures.
(3) Based on an average of three rounds of apheresis following cell
mobilization injections.
(4) Projections, based on data accumulated during the Company's
research and clinical trials.
The Company believes that the Aastrom CPS may provide the following benefits
when compared to current cell collection and infusion methods:
Cost-Effectiveness. The Company believes the Aastrom CPS has the potential
to cost-effectively replace the labor intensive and invasive cell collection
and infusion procedures currently employed for stem cell therapy and to reduce
physician, staff and patient time requirements.
Reduced Patient and Physician Burden. Cell production with the Aastrom CPS
is expected to require the collection of a small volume of starting material
compared to current collection procedures, eliminating the
28
<PAGE>
requirement for general surgical anesthesia, multiple drug injections or blood
apheresis. Patient benefits are expected to include fewer needle sticks than
with current cell collection and infusion methods and a reduction in overall
patient procedure time. Additionally, Aastrom's process for cell expansion is
expected to minimize the time requirement for physicians compared with bone
marrow harvest.
Enhanced Multicycle High-Dose Chemotherapy. The long restoration period for
the hematopoietic system following myeloablative therapy effectively limits
patients to one opportunity for cell collection prior to cancer therapy. The
Aastrom CPS may enhance the practice of multicycle, high-dose chemotherapy by
providing the ability to produce a therapeutic dose of cells from a small
starting volume. The initial cell collection can be divided into multiple
samples and stored frozen until expansion at a later time is required.
Reduced Quantity of Lymphocytes. The Company believes its approach to stem
cell therapy may provide an additional benefit over current methods by
depleting potentially harmful cells such as T-cells and B-cells. These cells
are believed to be primarily responsible for graft-versus-host disease, a
common manifestation of allogeneic transplants in which the grafted donor's
cells attack the host's tissues and organs.
Tumor Cell Purging. Cancer patients with tumor metastases, in which the
cancer has spread to the blood and bone marrow, have not traditionally been
candidates for autologous stem cell transplants because such transplant might
reintroduce cancer cells into the patient. Additionally, patients may have
undetected tumor cells present in their marrow or PBPC transplant, which could
re-establish cancer in the patient following transplant. The Company's initial
clinical results, as well as studies conducted by third-party investigators,
have shown that some primary human tumor cells die or do not grow during
hematopoietic cell culture. The smaller volume of starting cells used for the
Aastrom CPS compared with bone marrow harvest or PBPC transplants may provide
approximately 10 to 70 fold less tumor cells in a transplant. Further, in an
evaluation of seven tumor-contaminated bone marrow samples that were expanded
with the Aastrom CPS process, the presence of breast cancer cells in each
sample was either substantially reduced or was no longer detectable. The
Company believes that this combination of passive depletion during culture
with the lower starting volume of tumor cells may result in a tumor-free or
tumor-reduced cell product for transplant. The clinical benefit of such tumor
depletion, if any, will vary depending upon the type of cancer and state of
disease.
CLINICAL DEVELOPMENT
The Company's clinical development plan is initially to obtain regulatory
approval in the United States to market the Aastrom CPS for autologous stem
cell therapy and UCB transplantation, and in Europe for more general cell
therapy applications. The Company also intends to pursue approval of the
Aastrom CPS for additional clinical indications.
The Company believes that the Aastrom CPS for stem cell therapy will be
regulated as a medical device and that the Company will be required to submit
a PMA application to, and obtain approval from, the FDA to allow it to market
this product in the United States. In order to obtain PMA registration, the
Company will be required to complete clinical trials under an IDE. See "--
Government Regulation--Devices."
Aastrom is currently conducting a pre-pivotal stem cell therapy clinical
trial at four U.S. sites. This clinical trial is designed to demonstrate that
cells produced using the Aastrom CPS can alone provide hematopoietic recovery
in accordance with trial endpoints in breast cancer patients who have received
myeloablative chemotherapy. Bone marrow or mobilized PBPC obtained from the
patients by traditional methods will be available for precautionary reasons at
defined clinical stages.
Initial patient data from one trial site have been presented and demonstrate
that cells produced in the Aastrom CPS can lead to engraftment of stem cells
in patients within a recovery time frame that is comparable with that of
conventional bone marrow transplantation following ablative chemotherapy.
These patients started to recover their white blood cell counts within a
median time of approximately seven days post-transplant and reached safe
levels of neutrophils at approximately 16 days and platelets at approximately
23 days. Prior to implementing the trial protocol used for these patients, the
Company had evaluated the cells produced in the Aastrom CPS in Stage IV breast
cancer patients who had received significant prior cytotoxic therapy for their
advanced cancer.
29
<PAGE>
The Company has also initiated clinical trials at one site for adult
patients and at another site for pediatric patients to evaluate the use of the
Aastrom CPS to expand cells obtained from UCB for use in patients who have
received myeloablative radiation or chemotherapy.
The objective of the current and anticipated future trials is to establish
the protocols for pivotal trials of the Aastrom CPS in stem cell therapy.
Provided that these pre-pivotal trials provide further evidence of the
feasibility and safety of cells produced in the Aastrom CPS, the Company
anticipates initiating pivotal clinical trials at multiple sites no earlier
than late 1997, with patient enrollment to support a PMA filing, although this
schedule is subject to numerous risks and uncertainties.
Aastrom, in partnership with Cobe, has initiated two clinical sites in
Europe to evaluate the use of Aastrom CPS cells to promote hematopoietic
recovery in breast cancer patients undergoing aggressive myelosuppressive or
myelotoxic chemotherapy. Assuming the successful completion of these and other
clinical trials, the Company intends to seek approval to market the Aastrom
CPS in Europe through CE Mark Registration. See "--Government Regulation--
Regulatory Process in Europe."
The ongoing trials were preceded by earlier studies designed to evaluate
safety and process feasibility. Aastrom completed the first feasibility trial
of its cell production system technology at the M.D. Anderson Cancer Center in
October 1995. In this trial, ten breast cancer patients, who were subjected to
myeloablative chemotherapy, were treated with cells obtained from a standard
bone marrow harvest and with cells produced from a sample of such cells with a
predecessor of the Aastrom CPS. The patients exhibited standard clinical
recoveries, providing evidence of the clinical safety of cells obtained from
the Company's cell production process and of the feasibility of cell
production with a predecessor of the Aastrom CPS by clinical personnel at an
investigational site. With this study completed, a five-patient study was then
conducted to begin to evaluate the use of cells obtained from the Company's
cell production process alone in the transplant setting.
The results from these patients provided evidence of the clinical safety of
the Aastrom CPS-produced cells in patients and that the hematopoietic recovery
endpoints specified for the trial are achievable. Four of these five patients
received the delayed administration of the precautionary bone marrow pursuant
to the trial protocol. Following further review by the FDA, the IDE was
amended to expand the trail to the four additional sites where the clinical
trail is now ongoing. The amended IDE provided for the enrollment of Stage II,
III and IV patients, and a delayed use of the precautionary bone marrow.
In a dose-ranging study conducted by the University of Michigan (the
"University") in 1993, ex vivo produced cells utilizing the Company's
proprietary cell production technology were infused into seven patients with
non-Hodgkin's lymphoma after they received myeloablative chemotherapy. These
patients also received cells obtained from either an autologous bone marrow
harvest or PBPC procedure. No safety issues attributable to the infused cells
were observed in this trial and the patients exhibited recovery profiles
consistent with traditional transplantation techniques.
The preliminary results of the Company's pre-pivotal trials may not be
predictive of results that will be obtained from subsequent patients in the
trials or from more extensive trials. Further, there can be no assurance that
the Company's pre-pivotal or pivotal trials will be successful, or that PMA
registration or required foreign regulatory approvals for the Aastrom CPS will
be obtained in a timely fashion, or at all. See "Risk Factors--Uncertainties
Related to Clinical Trials."
BUSINESS STRATEGY
Aastrom's objective is to build a leadership position in cell therapy
process technology. The primary elements of the Company's business strategy
are as follows:
Establish Consumable Based Business Model. Aastrom's strategy is to sell the
Aastrom CPS to institutions, hospitals, and other clinical care or commercial
cell production facilities that are producing cells for patient treatments.
The Company plans to obtain ongoing revenue from the sale of single-use Cell
Cassettes and related cell culture media and reagents, which are utilized in
individual cell therapy applications. After cells are cultured, the Cell
Cassette is discarded and a new Cell Cassette is utilized for a subsequent
cell production
30
<PAGE>
procedure. Cell Cassettes are specifically designed for particular cell types,
allowing for different marketing strategies for different cell therapy
indications. Along with ongoing revenue from the sale of instruments and
single-use Cell Cassettes and reagents for cell therapy applications, the
Company believes it will be able to obtain license revenue from its stem cell
therapy applications for its proprietary stem cell processes.
Focus Initially on Established and Reimbursed Therapies. Aastrom will seek
to establish the use of the Aastrom CPS in the field of stem cell therapy for
the treatment of hematopoietic system toxicity resulting from many cancer
therapies, including those for breast cancer, lymphoma, ovarian cancer, germ
cell cancers, leukemias and aplastic anemias. Stem cell therapy is a well-
established and growing treatment modality in cancer therapy, and current cell
collection procedures are widely reimbursed by third party payors.
Leverage Platform Technology Across Multiple Market Opportunities. In
addition to stem cell therapy applications, the Company believes that the
Aastrom CPS may serve as a platform product that can be used to produce a
variety of other cells for multiple therapeutic applications, such as T-cells
and dendritic cells for use in cellular immunotherapies, chondrocytes for
cartilage replacement, and mesenchymal cells for use in certain solid tissue
repair applications. The Company believes that by providing systems with broad
cell processing capabilities, hospitals or other cell production facilities
may use the Aastrom CPS for multiple cell therapy applications.
Enter Into Collaborative Relationships. The Company plans to market its
products and establish reimbursement for such products through corporate
collaborations. The Company currently plans to establish corporate
relationships in its targeted market segments, which include immunotherapy,
solid tissue repair and ex vivo gene therapy. For the stem cell therapy market
segment, the Company has formed a strategic collaboration with Cobe, a leading
provider of blood processing equipment systems. Under the terms of this
agreement, Cobe will be the Company's exclusive worldwide marketing,
distribution and service provider for the Aastrom CPS for stem cell therapy
applications, other than stem cell gene therapy. For selected emerging cell
therapies, additional alliances will be sought by the Company to (i) secure
additional technology, such as gene vectors or growth factors, or regulatory
or marketing capability which may augment the Aastrom CPS or Aastrom Gene
Loader; (ii) assist with regulatory and reimbursement matters for new therapy
applications; and (iii) assist with marketing new therapy applications to
physicians. To assist the Company in securing new strategic alliances, the
Company has entered into an agreement with Burrill & Company, LLC ("Burrill").
Under this agreement, Burrill will work with the Company to identify and
transact cell therapy collaborations, and a majority of Burrill's compensation
under the agreement is contingent upon the Company successfully entering into
new corporate alliances. See "--Strategic Relationships."
ADDITIONAL STEM CELL AND OTHER CELL THERAPIES
The Company believes that the Aastrom CPS hardware and single-use Cell
Cassettes may be developed to serve as platform products for application in a
variety of other emerging cell therapies in addition to stem cell therapy. The
Company believes that the Aastrom CPS has the potential to supplant current
manual cell culture methods to produce therapeutic quantities of cell types
such as T-cells, chondrocytes, mesenchymal cells, keratinocytes, neuronal
cells and dendritic cells. Other than a limited application of chondrocyte
therapy, novel cell therapies are still in early stages of development by
third parties, and no assurance can be given that such other cell therapies
will be successfully developed. Potential advantages of the Aastrom CPS in
these therapies may include: (i) reducing labor and capital costs; (ii)
enhancing process reliability; (iii) automating quality assurance; (iv)
reducing the need for specialized, environmentally controlled facilities; and
(v) providing greater accessibility of these procedures to care providers and
patients and, in certain cases, providing a more biologically active cell
product.
Modification of such processes and application of the Company's products to
the expansion of other cell types may require substantial additional
development of specialized cell culture environments which may need to be
incorporated within the Company's existing Cell Cassettes. Such modifications
may require the Company to raise substantial additional funds, or to seek
additional collaborative partners, or both. There can be no assurance that the
Company will be able to successfully modify or develop existing or future
products to enable such additional cell production processes. The Company's
business opportunity is dependent upon successful development and regulatory
approval of these novel cell therapies. No assurance can be given that such
novel
31
<PAGE>
therapies will be successfully developed by other companies or approved by
applicable regulatory authorities, or that the Company's processes or product
candidates will find successful application in such therapies. In addition,
the Company may be required to obtain license rights to such technologies in
order to develop or modify existing or future products for use in such
therapies. No assurance can be given that the Company will be able to obtain
such licenses or that such licenses, if available, could be obtained on
commercially reasonable terms. See "--Business Strategy" and "--Clinical
Development," "Use of Proceeds," and "Risk Factors--Future Capital Needs;
Uncertainty of Additional Funding."
Immunotherapies
Immunotherapy involves using cells of the immune system to eradicate a
disease target. T-cell lymphocytes and dendritic cells are being actively
investigated by other companies for this purpose, and the Company anticipates
that many of these procedures will require ex vivo cell production.
T-cells, a class of lymphocyte white blood cells, play a critical role in
the human immune system and are responsible for the human immune response in a
broad spectrum of diseases, including cancers and infectious diseases.
Cytotoxic T-lymphocytes ("CTLs") is a new process that involves collecting T-
cells from a patient and culturing them in an environment resulting in T-cells
with specificity for a particular disease target. Clinical trials by third
parties have been initiated to demonstrate CTL effectiveness. The ex vivo
production of these cells under conditions for use in medical treatment
represents a critical step in the advancement of this therapy.
Dendritic cells (the potent antigen presenting cells) are believed to play
an important role in the function of the immune system. Researchers believe
that cultured dendritic cells could augment the natural ability of a patient
to present antigens from the infectious agents to the immune system and aid in
the generation of a cytotoxic T-cell response to the infectious agent.
Solid Tissue Cell Therapies
One of the newest areas of cell therapy involves the production of
chondrocytes for the restoration of cartilage. Chondrocyte therapy involves
the surgical removal of a small amount of tissue from the patient's knee and a
therapeutic quantity of chondrocytes is produced from this surgical biopsy.
The cells are then implanted into the patient's knee. Published reports
indicate that such cells then reestablish mature articular cartilage.
Currently, this cell production process is completed in highly specialized
laboratory facilities using trained scientists and manual laboratory
procedures. The Company believes that the Aastrom CPS may have the potential
to reduce costs associated with the cell production procedure and, if
successfully developed by the Company for this application, may eventually
facilitate the transfer of the cell production capability away from
specialized facilities directly to the clinical care sites.
Other Stem Cell Therapies
Autoimmune Diseases. Stem cell therapy is under clinical investigation by
third parties for the treatment of other diseases. Clinical studies have
suggested a potential role for stem cell therapy in treatment of autoimmune
diseases such as rheumatoid arthritis, multiple sclerosis and lupus
erythematosus. The generic cause of these diseases is a malfunctioning immune
system, including T-lymphocytes. Clinical trials in which the patient receives
treatment resulting in immune ablation (usually involving myelotoxic cancer
drugs or radiation), followed by stem cell therapy to restore the bone marrow
and cells of the blood and immune system, have demonstrated remission of the
autoimmune disease in some patients.
Organ Transplantation. Recently, a number of academic and corporate
researchers and companies have identified the potential use of stem cell
therapy to facilitate successful solid organ and tissue transplants between
human donors and recipients, as well as using organs from non-human species
for transplantation into humans. These proposed applications are based on the
observation that donor-specific bone marrow, infused concurrent
32
<PAGE>
with or prior to the organ transplant, can provide for reduction of the normal
immune rejection response by the transplant recipient (e.g. heart, lung, liver
or kidney transplants).
A major limitation to the use of stem cell therapy in solid organ transplant
is the limited availability of sufficient amounts of bone marrow to obtain a
desired therapeutic response of immune tolerization. This limitation is
particularly problematic when cadaveric donor organs are used, which has
traditionally been the source of cells for these procedures. Bone marrow is
also often available from the cadaveric donor, but only in a limited amount.
Normally this amount may be sufficient for one transplant, but a donor might
provide multiple organs for transplant into multiple recipients. Aastrom
believes that the ability to expand the available bone marrow ex vivo will
enhance the use of stem cell therapy for such transplant procedures and may
pursue development of its products for application in such therapy in the
future.
AASTROM PRODUCT CANDIDATES FOR EX VIVO GENE THERAPY
A novel form of cell therapy is ex vivo gene therapy. For this type of cell
therapy, cells procured from the patient or a donor are genetically modified
prior to their infusion into the patient. Analogous to other cell therapies,
the ability to produce a therapeutic dose of these gene-modified cells is a
major limitation to the commercialization of these cell therapies. This
limitation is further exacerbated by the additional requirement that the cells
be genetically modified under conditions that are sterile and comply with GMP.
Gene therapy is a therapeutic modality that holds the potential to
significantly impact the delivery of healthcare and the delivery of
therapeutically useful protein-based drugs within the body. Gene therapies are
generally targeted at the introduction of a missing normal gene into otherwise
defective human tissue, or the introduction of novel biologic capability into
the body via the introduction of a gene not ordinarily present (for example,
genes providing for the enhanced recognition and destruction or inhibition of
the HIV-1 virus). The major developmental focus of the ex vivo gene therapy
industry has been to identify the therapeutic gene of interest, insert it into
a suitable vector that can be used to transport and integrate the gene into
the DNA of the target cell, and then cause the gene to become expressed. The
Company believes that for ex vivo gene therapy to progress to clinical
applications, a process to produce a sufficient quantity of therapeutic cells
is required as is an efficient means to insert the gene vector into target
cells. Gene therapy is still in an early stage of development by third
parties. The Company's business opportunity is dependent upon the successful
development and regulatory approval of individual gene therapy applications.
No assurance can be given that such applications will be developed or approved
or that the Company's processes or product candidates will find successful
applications in such therapies. Successful development of the Company's
processes and product candidates for application in ex vivo gene therapy will
require substantial additional research and development, including clinical
testing, and will be subject to the Company's ability to finance such
activities on acceptable terms, if at all. See "Risk Factors--Future Capital
Needs; Uncertainty of Additional Funding."
THE AASTROM CPS FOR GENE THERAPY (GT-CPS)
The Aastrom CPS has been designed to produce cells for therapy and the
Company believes that the Aastrom CPS may be useful in many potential ex vivo
gene therapy applications. Further, the Company anticipates that its
proprietary stem cell production process technology implemented by the Aastrom
CPS may provide the conditions for clinical scale stem cell division, and
enable or enhance the introduction of therapeutic genes into stem cell DNA.
The Company believes that its technology may also enable expansion of more
mature progeny of these stem cells to create a gene therapy cell product with
potential short and long term therapeutic effect.
The Company has two principal objectives for the development of Aastrom GT-
CPS: (i) the enablement of stem cell gene therapies for a variety of
hematologic and other disorders, based on the GT-CPS's ability to enable large
scale stem cell division ex vivo; and (ii) the enablement of gene transfer and
therapeutic cell production by local and regional primary patient care
facilities and ancillary service laboratories.
33
<PAGE>
THE AASTROM GENE LOADER
The Aastrom Gene Loader product technology, which is under development, is
being designed to enhance the efficiency and reliability of the transfer of
new therapeutic genes, which are carried by vectors, into the target cell.
This process, which is typically inefficient in many human cells inhibits many
ex vivo gene therapies from moving forward in the clinic. The Aastrom Gene
Loader is being designed to incorporate the Company's proprietary directed
motion gene transfer technology. Complete product development is expected to
require additional funding sources or collaborations with others, or both.
The Company believes that these issues represent a general bottleneck for
other companies pursuing ex vivo gene therapy clinical applications. The
Company's technology under development may favorably influence these gene
therapy applications, the development of which are impeded due to low
transduction efficiencies and the resultant need for use of extreme quantities
of gene vectors and/or target "delivery" tissues.
STRATEGIC RELATIONSHIPS
On October 22, 1993, the Company entered into a Distribution Agreement (the
"Distribution Agreement") with Cobe for Cobe to be the Company's exclusive,
worldwide marketing, distribution and service provider for the Aastrom CPS for
stem cell therapy applications (the "Stem Cell Therapy Applications"). Under
the terms of the Company's Distribution Agreement with Cobe, other than with
respect to sales to affiliates, the Company is precluded from selling the
Aastrom CPS to customers for stem cell therapy applications. The Company has,
however, reserved the right to sell the Aastrom CPS for: (i) all diagnostic or
other non-therapeutic clinical applications; (ii) all gene therapy or gene
transfer applications, including those for stem cells; (iii) all non-human
applications; (iv) certain permitted clinical research applications; and (v)
all applications that are labeled not for human use. The Company has also
reserved the unconditional right to sell other products under development,
including but not limited to products based upon its gene loading technology.
The initial term of the Distribution Agreement expires on October 22, 2003,
and Cobe has the option to extend the term for an additional ten-year period.
The Company is responsible for the expenses to obtain FDA and other regulatory
approval in the United States, while Cobe is responsible for the expenses to
obtain regulatory approval in foreign countries to allow for worldwide
marketing of the Aastrom CPS for Stem Cell Therapy Applications. See "Risk
Factors--Consequences of Cobe Relationship."
Under the terms of the Distribution Agreement, the Company will realize
approximately 58% to 62% of the net sales price at which Cobe ultimately sells
the Aastrom CPS for Stem Cell Therapy Applications, subject to certain
negotiated discounts and volume-based adjustments and subject to the
obligation of the Company to make aggregate royalty payments of up to 5% to
certain licensors of its technology. The Company is also entitled to a premium
on United States sales in any year in which worldwide sales exceed specified
levels.
The Distribution Agreement may be terminated by Cobe upon twelve months
prior notice to the Company in the event that any person or entity other than
Cobe beneficially owns more than 50% of the Company's outstanding Common Stock
or voting securities. The Distribution Agreement may also be terminated by
Cobe at any time after December 31, 1997 if Cobe determines that
commercialization of the Aastrom CPS for stem cell therapy on or prior to
December 31, 1998 is unlikely.
In conjunction with the Distribution Agreement, the Company also entered
into a Stock Purchase Agreement with Cobe (the "Cobe Stock Agreement"),
whereby Cobe acquired certain option, registration, preemptive and other
rights pertaining to shares of the Company's stock. Pursuant to such
preemptive rights, Cobe elected to purchase 714,200 shares of Common Stock in
the Company's initial public offering in February 1997. See "Description of
Capital Stock--Rights of Cobe" and "Certain Transactions."
The Company has entered into a Strategic Planning Consulting Services and
Collaboration Agreement (the "Consulting Agreement") with Burrill, pursuant to
which Burrill will advise the Company on potential strategic alliances and
seek to identify potential collaborations. Pursuant to the Consulting
Agreement, Burrill will be paid a monthly retainer of $10,000 and will be
reimbursed for expenses incurred pursuant to an approved budget.
34
<PAGE>
Aastrom has issued Burrill an immediately exercisable warrant to purchase
100,000 shares of Common Stock at an exercise price of $7.24 and a second
warrant, which vests over a one-year period, to purchase 100,000 shares at an
exercise price of $7.24. The Consulting Agreement is terminable by either
party following periods of up to 30 days following notice.
The Consulting Agreement also provides for payments to Burrill that are
based on the timing and amount of proceeds Aastrom may receive from any future
strategic alliances. In the event that the Company enters into strategic
alliances (which exclude minor technology license agreements and customary
manufacturing or supply agreements that do not involve equity investments in
Aastrom, as well as performance pursuant to any of Cobe's existing agreements
with Aastrom), the Company will pay Burrill a success fee ranging from 4% to
7.5% of the proceeds in connection with the strategic alliance. In addition to
the success fee, Aastrom will issue to Burrill additional warrants to purchase
up to 500,000 shares of Common Stock, depending upon the achievement of
certain milestones.
MANUFACTURING
The Company has no current intention of internally manufacturing its product
candidates and, accordingly, is developing relationships with third party
manufacturers which are FDA registered as suppliers for the manufacture of
medical products.
In May 1994, the Company entered into a Collaborative Product Development
Agreement with SeaMED Corporation, ("SeaMED"). Pursuant to this agreement, the
Company and SeaMED will collaborate on the further design of certain
instrument components in the Aastrom CPS, and enable SeaMED to manufacture
pre-production units of the instrument components for laboratory and clinical
evaluation. The Company is paying SeaMED for its design and pre-production
work on a "time and materials" basis, utilizing SeaMED's customary hourly
billing rates and actual costs for materials. Subject to certain conditions,
the Company has committed to enter into a manufacturing agreement with SeaMED
for commercial manufacture of the instrument components for three years after
shipment by SeaMED of the first commercial unit pursuant to a pricing formula
set forth in the agreement. The Company retains all proprietary rights to its
intellectual property which is utilized by SeaMED pursuant to this agreement.
In November 1994, the Company entered into a Collaborative Product
Development Agreement with Ethox Corporation ("Ethox"). Pursuant to this
agreement, the Company and Ethox collaborated on the design of certain
bioreactor assembly and custom tubing kit components of the Aastrom CPS. The
Company is paying Ethox for its design and production work on a "time and
materials" basis, utilizing Ethox's customary hourly billing rates and actual
costs for materials. The Company retains all proprietary rights to its
intellectual property which are utilized by Ethox pursuant to this agreement.
35
<PAGE>
In March 1996, the Company entered into a five-year License and Supply
Agreement with Immunex to purchase and resell certain cytokines and ancillary
materials for use in conjunction with the Aastrom CPS. The agreement required
the Company to pay Immunex an initial up-front fee of $1,500,000 to be
followed by subsequent annual renewal payments equal to $1,000,000 per year
during the term of the agreement in addition to payment for supplies purchased
by the Company. In August 1997, the Company and Immunex amended the agreement
to expand the Company's territorial rights to use and sell such materials to a
worldwide basis. Unless earlier terminated or renewed by the Company for an
additional five-year term, the agreement will expire in April 2001. The
agreement may be terminated by either party effective immediately upon written
notice of termination to the other party in the event that such party
materially breaches the agreement and such breach continues unremedied after
notice and expiration of a specified cure period or in the event that a
bankruptcy proceeding is commenced against a party and is not dismissed or
stayed within a 45-day period. In addition, Immunex has the right to cease the
supply to the Company of cytokines and ancillary materials if the Company
fails to purchase a minimum amount of its forecasted annual needs from Immunex
after notice to the Company and expiration of a specified cure period. The
Company also has the right to terminate the agreement at any time subject to
the payment to Immunex of a specified amount for liquidated damages. In the
event that Immunex elects to cease to supply to the Company cytokines and
ancillary materials or is prevented from supplying such materials to the
Company by reason of force majeure, limited manufacturing rights will be
transferred to the Company under certain circumstances. There is, however, no
assurance that the Company could successfully manufacture the compounds itself
or identify others that could manufacture these compounds to acceptable
quality standards and costs, if at all.
In December 1996, the Company entered into a Collaborative Supply Agreement
with Anchor Advanced Products, Inc., Mid-State Plastics Division ("MSP").
Under this agreement, MSP will conduct both pre-production manufacturing
development and commercial manufacturing and assembly of the Cell Cassette
component of the Aastrom CPS for the Company. During the initial phase of the
seven-year agreement, the Company will pay MSP for its development activities
on a time and materials basis. Upon reaching certain commercial manufacturing
volumes, MSP will be paid by the Company on a per unit basis for Cell
Cassettes delivered to the Company under a pricing formula specified in the
agreement. Throughout the term of this agreement, the Company has agreed to
treat MSP as its preferred supplier of Cell Cassettes, using MSP as its
supplier of at least 60% of its requirements for Cell Cassettes.
There can be no assurance that the Company will be able to continue its
present arrangements with its suppliers, supplement existing relationships or
establish new relationships or that the Company will be able to identify and
obtain the ancillary materials that are necessary to develop its product
candidates in the future. The Company's dependence upon third parties for the
supply and manufacture of such items could adversely affect the Company's
ability to develop and deliver commercially feasible products on a timely and
competitive basis. See "Risk Factors--Manufacturing and Supply Uncertainties;
Dependence on Third Parties."
PATENTS AND PROPRIETARY RIGHTS
The Company's success depends in part on its ability, and the ability of its
licensors, to obtain patent protection for its products and processes. The
Company has exclusive rights to twelve issued U.S. patents and one patent with
respect to which the Company has received notice of allowance that present
claims to (i) certain methods for ex vivo stem cell division as well as ex
vivo human hematopoietic stem cell stable genetic transformation and expanding
and harvesting a human hematopoietic stem cell pool; (ii) certain apparatus
for cell culturing, including a bioreactor suitable for culturing human stem
cells or human hematopoietic cells; (iii) certain methods of infecting or
transfecting target cells with vectors; and (iv) a cell composition containing
human stem cells or progenitor cells, or genetically modified stem cells, when
such cells are produced in an ex vivo medium exchange culture. Patents
equivalent to two of these U.S. patents have also been issued in other
jurisdictions: one in Australia and another in Canada and under the European
Patent Convention. These twelve
36
<PAGE>
issued patents, in addition to the one patent with respect to which the Company
has received notice of allowance, are due to expire beginning in 2006, through
2014. In addition, the Company and its exclusive licensors have filed
applications for patents in the United States and equivalent applications in
certain other countries claiming other aspects of the Company's products and
processes, including a number of U.S. patent applications and corresponding
applications in other countries related to various components of the Aastrom
CPS.
The validity and breadth of claims in medical technology patents involve
complex legal and factual questions and, therefore, may be highly uncertain. No
assurance can be given that any patents based on pending patent applications or
any future patent applications of the Company or its licensors will be issued,
that the scope of any patent protection will exclude competitors or provide
competitive advantages to the Company, that any of the patents that have been
or may be issued to the Company or its licensors will be held valid if
subsequently challenged or that others will not claim rights in or ownership of
the patents and other proprietary rights held or licensed by the Company.
Furthermore, there can be no assurance that others have not developed or will
not develop similar products, duplicate any of the Company's products or design
around any patents that have been or may be issued to the Company or its
licensors. Since patent applications in the United States are maintained in
secrecy until patents issue, the Company also cannot be certain that others did
not first file applications for inventions covered by the Company's and its
licensors' pending patent applications, nor can the Company be certain that it
will not infringe any patents that may issue to others on such applications.
The Company relies on certain licenses granted by the University of Michigan
and Dr. Cremonese for the majority of its patent rights. If the Company
breaches such agreements or otherwise fails to comply with such agreements, or
if such agreements expire or are otherwise terminated, the Company may lose its
rights under the patents held by the University of Michigan and Dr. Cremonese,
which would have a material adverse effect on the Company's business, financial
condition and results of operations. See "--Research and License Agreements."
The Company also relies on trade secrets and unpatentable know-how which it
seeks to protect, in part, by confidentiality agreements. It is the Company's
policy to require its employees, consultants, contractors, manufacturers,
outside scientific collaborators and sponsored researchers, and other advisors
to execute confidentiality agreements upon the commencement of employment or
consulting relationships with the Company. These agreements provide that all
confidential information developed or made known to the individual during the
course of the individual's relationship with the Company is to be kept
confidential and not disclosed to third parties except in specific limited
circumstances. The Company also requires signed confidentiality or material
transfer agreements from any company that is to receive its confidential data.
In the case of employees, consultants and contractors, the agreements generally
provide that all inventions conceived by the individual while rendering
services to the Company shall be assigned to the Company as the exclusive
property of the Company. There can be no assurance, however, that these
agreements will not be breached, that the Company would have adequate remedies
for any breach, or that the Company's trade secrets or unpatentable know-how
will not otherwise become known or be independently developed by competitors.
The Company's success will also depend in part on its ability to develop
commercially viable products without infringing the proprietary rights of
others. The Company has not conducted freedom of use patent searches and no
assurance can be given that patents do not exist or could not be filed which
would have an adverse effect on the Company's ability to market its products or
maintain its competitive position with respect to its products. If the
Company's technology components, devices, designs, products, processes or other
subject matter are claimed under other existing United States or foreign
patents or are otherwise protected by third party proprietary rights, the
Company may be subject to infringement actions. In such event, the Company may
challenge the validity of such patents or other proprietary rights or be
required to obtain licenses from such companies in order to develop,
manufacture or market its products. There can be no assurances that the Company
would be able to obtain such licenses or that such licenses, if available,
could be obtained on commercially reasonable terms. Furthermore, the failure to
either develop a commercially viable alternative or obtain such licenses could
result in delays in marketing the Company's proposed products or the inability
to proceed with
37
<PAGE>
the development, manufacture or sale of products requiring such licenses,
which could have a material adverse effect on the Company's business,
financial condition and results of operations. If the Company is required to
defend itself against charges of patent infringement or to protect its own
proprietary rights against third parties, substantial costs will be incurred
regardless of whether the Company is successful. Such proceedings are
typically protracted with no certainty of success. An adverse outcome could
subject the Company to significant liabilities to third parties and force the
Company to curtail or cease its development and sale of its products and
processes.
Certain of the Company's and its licensors' research has been or is being
funded in part by the Department of Commerce and by a Small Business
Innovation Research Grant obtained from the Department of Health and Human
Services. As a result of such funding, the U.S. Government has certain rights
in the technology developed with the funding. These rights include a non-
exclusive, paid-up, worldwide license under such inventions for any
governmental purpose. In addition, the government has the right to require the
Company to grant an exclusive license under any of such inventions to a third
party if the government determines that (i) adequate steps have not been taken
to commercialize such inventions, (ii) such action is necessary to meet public
health or safety needs or (iii) such action is necessary to meet requirements
for public use under federal regulations. Additionally, under the federal Bayh
Dole Act, a party which acquires an exclusive license for an invention that
was partially funded by a federal research grant is subject to the following
government rights: (i) products using the invention which are sold in the
United States are to be manufactured substantially in the United States,
unless a waiver is obtained; (ii) if the licensee does not pursue reasonable
commercialization of a needed product using the invention, the government may
force the granting of a license to a third party who will make and sell the
needed product; and (iii) the U.S. Government may use the invention for its
own needs.
RESEARCH AND LICENSE AGREEMENTS
In August 1989, the Company entered into a Research Agreement (the "Research
Agreement") with the University, pursuant to which the Company funded a
research project at the University under the direction of Stephen G. Emerson,
M.D., Ph.D., as the principal inventor, together with Michael F. Clarke, M.D.,
and Bernhard O. Palsson, Ph.D., as co-inventors. Pursuant to the Research
Agreement, the Company was granted the right to acquire an exclusive,
worldwide license to utilize all inventions, know-how and technology derived
from the research project. By Extension Agreements, the Company and the
University extended the scope and term of the Research Agreement through
December 1994.
In March 1992, the Company and the University entered into the License
Agreement, as contemplated by the Research Agreement. There have been
clarifying amendments to the License Agreement, in March 1992, October 1993
and June 1995. Pursuant to this License Agreement, (i) the Company acquired
exclusive worldwide license rights to the patents and know-how for the
production of blood cells and bone marrow cells as described in the
University's research project or which resulted from certain further research
conducted through December 1994, and (ii) the Company is obligated to pay to
the University a royalty equal to 2% of the net sales of products which are
covered by the University's patents. Unless it is terminated earlier at the
Company's option or due to a material breach by the Company, the License
Agreement will continue in effect until the latest expiration date of the
patents to which the License Agreement applies.
In July 1992, the Company entered into a License Agreement with Joseph G.
Cremonese pursuant to which the Company obtained exclusive worldwide license
rights for all fields of use, to utilize U.S. Patent No. 4,839,292, entitled
"Cell Culture Flask Utilizing a Membrane Barrier," which patent was issued to
Dr. Cremonese on June 13, 1989, and to utilize any other related patents that
might be issued to Dr. Cremonese. Pursuant to the License Agreement, the
Company has reimbursed Dr. Cremonese for $25,000 of his patent costs. Under
the terms of the License Agreement, the Company is to pay to Dr. Cremonese a
royalty of 3% of net sales of the products which are covered by said patent,
subject to specified minimum royalty payments ranging from $20,000 to $50,000
per year, commencing in calendar year 1997. Unless earlier terminated, the
License
38
<PAGE>
Agreement will continue in effect until the latest expiration date of the
patents to which the License Agreement applies, which latest expiration date
is currently August 2009. The License Agreement may be terminated by either
party upon default by the other party of any of its obligations under the
agreement without cure after expiration of a 30-day notice period. The Company
also has the right to terminate the License Agreement at any time without
cause upon 30 days prior written notice to Dr. Cremonese.
GOVERNMENT REGULATION
The Company's research and development activities and the manufacturing and
marketing of the Company's products are subject to the laws and regulations of
governmental authorities in the United States and other countries in which its
products will be marketed. Specifically, in the United States, the FDA, among
other activities, regulates new product approvals to establish safety and
efficacy of these products. Governments in other countries have similar
requirements for testing and marketing. In the United States, in addition to
meeting FDA regulations, the Company is also subject to other federal laws,
such as the Occupational Safety and Health Act and the Environmental
Protection Act, as well as certain state laws.
REGULATORY PROCESS IN THE UNITED STATES
To the Company's knowledge, it is the first to develop a cell culture system
for ex vivo human cell production to be sold for therapeutic applications.
Therefore, to a certain degree, the manner in which the FDA will regulate the
Company's products is uncertain.
The Company's products are potentially subject to regulation as medical
devices under the Federal Food, Drug, and Cosmetic Act, and as biological
products under the Public Health Service Act, or both. Different regulatory
requirements may apply to the Company's products depending on how they are
categorized by the FDA under these laws. To date, the FDA has indicated that
it intends to regulate the Aastrom CPS product for stem cell therapy as a
Class III medical device through the Center for Biologics Evaluation and
Research. However, there can be no assurance that FDA will ultimately regulate
the Aastrom CPS as a medical device.
Further, it is unclear whether the FDA will separately regulate the cell
therapies derived from the Aastrom CPS. The FDA is still in the process of
developing its requirements with respect to somatic cell therapy and gene cell
therapy products and has recently issued draft documents concerning the
regulation of umbilical cord blood stem cell products, as well as cellular and
tissue-based products. If the FDA adopts the regulatory approach set forth in
the draft document, the FDA may require separate regulatory approval for such
cells in some cases. The FDA also recently proposed a new type of license,
called a biologic license application ("BLA"), for autologous cells
manipulated ex vivo and intended for structural repair or reconstruction. This
proposal may indicate that the FDA will extend a similar approval requirement
to other types of autologous cellular therapies, such as autologous cells for
stem cell therapy. Any such additional regulatory or approval requirements
could significantly delay the introduction of the Company's product candidates
to the market, and have a material adverse impact on the Company.
Approval of new medical devices and biological products is a lengthy
procedure leading from development of a new product through preclinical and
clinical testing. This process takes a number of years and the expenditure of
significant resources. There can be no assurance that the Company's product
candidates will ultimately receive regulatory approval.
Regardless of how the Company's product candidates are regulated, the
Federal Food, Drug, and Cosmetic Act and other Federal statutes and
regulations govern or influence the research, testing, manufacture, safety,
labeling, storage, recordkeeping, approval, distribution, use, reporting,
advertising and promotion of such products. Noncompliance with applicable
requirements can result in civil penalties, recall, injunction or seizure of
products, refusal of the government to approve or clear product approval
applications or to allow the Company to enter into government supply
contracts, withdrawal of previously approved applications and criminal
prosecution.
39
<PAGE>
DEVICES
In order to obtain FDA approval of a new medical device sponsors must
generally submit proof of safety and efficacy. In some cases, such proof
entails extensive clinical and preclinical laboratory tests. The testing,
preparation of necessary applications and processing of those applications by
the FDA is expensive and may take several years to complete. There can be no
assurance that the FDA will act favorably or in a timely manner in reviewing
submitted applications, and the Company may encounter significant difficulties
or costs in its efforts to obtain FDA approvals which could delay or preclude
the Company from marketing any products it may develop. The FDA may also
require postmarketing testing and surveillance of approved products, or place
other conditions on the approvals. These requirements could cause it to be
more difficult or expensive to sell the products, and could therefore restrict
the commercial applications of such products. Product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing. For patented technologies, delays
imposed by the governmental approval process may materially reduce the period
during which the Company will have the exclusive right to exploit such
technologies.
If human clinical trials of a proposed device are required and the device
presents significant risk, the manufacturer or distributor of the device will
have to file an IDE submission with the FDA prior to commencing human clinical
trials. The IDE submission must be supported by data, typically including the
results of pre-clinical and laboratory testing. If the IDE submission is
granted, human clinical trials may commence at a specified number of
investigational sites with the number of patients approved by the FDA.
The FDA categorizes devices into three regulatory classifications subject to
varying degrees of regulatory control. In general, Class I devices require
compliance with labeling and recordkeeping regulations, GMPs, 510(k) pre-
market notification, and are subject to other general controls. Class II
devices may be subject to additional regulatory controls, including
performance standards and other special controls, such as postmarket
surveillance. Class III devices, which are either invasive or life-sustaining
products, or new products never before marketed (for example, non-
"substantially equivalent" devices), require clinical testing to demonstrate
safety and effectiveness and FDA approval prior to marketing and distribution.
The FDA also has the authority to require clinical testing of Class I and
Class II devices.
If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent, the manufacturer or distributor
must submit a PMA application to the FDA. A PMA application must be supported
by extensive data, including preclinical and human clinical trial data, to
prove the safety and efficacy of the device. Upon receipt, the FDA conducts a
preliminary review of the PMA application. If sufficiently complete, the
submission is declared filed by the FDA. By regulation, the FDA has 180 days
to review a PMA application once it is filed, although PMA application reviews
more often occur over a significantly protracted time period, and may take
approximately one year or more from the date of filing to complete.
Some of the Company's products may be classified as Class II or Class III
medical devices. The Company has submitted several IDEs for the Aastrom CPS,
and is currently conducting pre-pivotal clinical studies under these IDEs. The
Company believes that the Aastrom CPS product will be regulated by the FDA as
a Class III device, although there can be no assurance that the FDA will not
choose to regulate this product in a different manner.
The Company and any contract manufacturer are required to be registered as a
medical device manufacturer with the FDA. As such, they will be inspected on a
routine basis by the FDA for compliance with the FDA's GMP regulations. These
regulations will require that the Company and any contract manufacturer
manufacture products and maintain documents in a prescribed manner with
respect to manufacturing, testing, distribution, storage, design control and
service activities, and that adequate design and service controls are
implemented. The Medical Device Reporting regulation requires that the Company
provide information to the FDA on deaths or serious injuries alleged to be
associated with the use of its devices, as well as product malfunctions that
are likely to cause or contribute to death or serious injury if the
malfunction were to recur. In addition, the FDA prohibits a company from
promoting an approved device for unapproved applications and reviews company
labeling for accuracy.
40
<PAGE>
BIOLOGICAL PRODUCTS
For certain of the Company's new products which may be regulated as
biologics, the FDA requires (i) preclinical laboratory and animal testing,
(ii) submission to the FDA of an investigational new drug ("IND") application
which must be effective prior to the initiation of human clinical studies,
(iii) adequate and well-controlled clinical trials to establish the safety and
efficacy of the product for its intended use, (iv) submission to the FDA of a
product license application ("PLA") and establishment license application
("ELA") and (v) review and approval of the PLA and ELA as well as inspections
of the manufacturing facility by the FDA prior to commercial marketing of the
product.
Preclinical testing covers laboratory evaluation of product chemistry and
formulation as well as animal studies to assess the safety and efficacy of the
product. The results of these tests are submitted to the FDA as part of the
IND. Following the submission of an IND, the FDA has 30 days to review the
application and raise safety and other clinical trial issues. If the Company
is not notified of objections within that period, clinical trials may be
initiated. Clinical trials are typically conducted in three sequential phases.
Phase I represents the initial administration of the drug or biologic to a
small group of humans, either healthy volunteers or patients, to test for
safety and other relevant factors. Phase II involves studies in a small number
of patients to assess the efficacy of the product, to ascertain dose tolerance
and the optimal dose range and to gather additional data relating to safety
and potential adverse effects. Once an investigational drug is found to have
some efficacy and an acceptable safety profile in the targeted patient
population, multi-center Phase III studies are initiated to establish safety
and efficacy in an expanded patient population and multiple clinical study
sites. The FDA reviews both the clinical plans and the results of the trials
and may request the Company to discontinue the trials at any time if there are
significant safety issues.
The results of the preclinical tests and clinical trials are submitted to
the FDA in the form of a PLA for marketing approval. The testing and approval
process is likely to require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all.
Additional animal studies or clinical trials may be requested during the FDA
review period that may delay marketing approval. After FDA approval for the
initial indications, further clinical trials may be necessary to gain approval
for the use of the product for additional indications. The FDA requires that
adverse effects be reported to the FDA and may also require post-marketing
testing to monitor for adverse effects, which can involve significant expense.
Under current requirements, facilities manufacturing biological products
must be licensed. To accomplish this, an ELA must be filed with the FDA. The
ELA describes the facilities, equipment and personnel involved in the
manufacturing process. An establishment license is granted on the basis of
inspections of the applicant's facilities in which the primary focus is on
compliance with cGMP and the ability to consistently manufacture the product
in the facility in accordance with the PLA. If the FDA finds the inspection
unsatisfactory, it may decline to approve the ELA, resulting in a delay in
production of products. Although reviewed separately, approval of both the PLA
and ELA must be received prior to commercial marketing of a cellular biologic.
As part of the approval process for human biological products, each
manufacturing facility must be registered and inspected by FDA prior to
marketing approval. In addition, state agency inspections and approvals may
also be required for a biological product to be shipped out of state.
REGULATORY PROCESS IN EUROPE
The Company believes that the Aastrom CPS will be regulated in Europe as a
Class IIb medical device, under the authority of the new Medical Device
Directives ("MDD") being implemented by European Union ("EU") member
countries. This classification applies to medical laboratory equipment and
supplies including, among other products, many devices that are used for the
collection and processing of blood for patient therapy. Certain ancillary
products (e.g., biological reagents) used with the Aastrom CPS may be
considered Class III medical devices.
The MDD regulations vest the authority to permit affixing of the "CE Mark"
with various "Notified Bodies." These are private and state organizations
which operate under license from the EU to certify that
41
<PAGE>
appropriate quality assurance standards and compliance procedures are followed
by developers and manufacturers of medical device products or, alternatively,
that a manufactured medical product meets a more limited set of requirements.
Notified Bodies are also charged with responsibility for determination of the
appropriate standards to apply to a medical product. Receipt of permission to
affix the CE Mark enables a company to sell a medical device in all EU member
countries. Other registration requirements may also need to be satisfied in
certain countries, although there is a general trend among EU member countries
not to impose additional requirements beyond those specified for CE Mark
certification.
COMPETITION
The biotechnology and medical device industries are characterized by rapidly
evolving technology and intense competition. The Company's competitors include
major pharmaceutical, medical device, medical products, chemical and
specialized biotechnology companies, many of which have financial, technical
and marketing resources significantly greater than those of the Company. In
addition, many biotechnology companies have formed collaborations with large,
established companies to support research, development and commercialization
of products that may be competitive with those of the Company. Academic
institutions, governmental agencies and other public and private research
organizations are also conducting research activities and seeking patent
protection and may commercialize products on their own or through joint
ventures. The Company's product development efforts are primarily directed
toward obtaining regulatory approval to market the Aastrom CPS for stem cell
therapy. That market is currently dominated by the bone marrow harvest and
PBPC collection methods. The Company's clinical data, although early, suggests
that cells expanded in the Aastrom CPS using its current process will enable
hematopoietic recovery within the time frames currently achieved by bone
marrow harvest, however, neutrophil and platelet recovery times may be slower
than with PBPC collection methods. The Company is evaluating techniques and
methods to optimize the cells produced in the Aastrom CPS to reduce the
recovery time of neutrophils and platelets in patients. There can be no
assurance that if such procedure optimization does not lead to recovery times
equal to or faster than those of PBPC collection methods, such outcome would
not have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the bone marrow harvest and
PBPC collection methods have been widely practiced for a number of years and,
recently, the patient costs associated with these procedures have begun to
decline. There can be no assurance that the Aastrom CPS method, if approved
for marketing, will prove to be competitive with these established collection
methods on the basis of hematopoietic recovery time, cost or otherwise. The
Company is aware of certain other products manufactured or under development
by competitors that are used for the prevention or treatment of certain
diseases and health conditions which the Company has targeted for product
development. In particular, the Company is aware that competitors such as
Amgen, Inc., CellPro, Incorporated, Novartis, A.G., Baxter Healthcare Corp.
and RPR are in advanced stages of development of technologies and products for
use in stem cell therapy and other market applications currently being pursued
by the Company. In addition, Cobe, a significant shareholder of the Company,
is a market leader in the blood cell processing products industry and,
accordingly, a potential competitor of the Company. There can be no assurance
that developments by others will not render the Company's product candidates
or technologies obsolete or noncompetitive, that the Company will be able to
keep pace with new technological developments or that the Company's product
candidates will be able to supplant established products and methodologies in
the therapeutic areas that are targeted by the Company. The foregoing factors
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's products under development are expected to address a broad
range of existing and new markets. The Company believes that its stem cell
therapy products will, in large part, face competition by existing procedures
rather than novel new products. The Company's competition will be determined
in part by the potential indications for which the Company's products are
developed and ultimately approved by regulatory authorities. In addition, the
first product to reach the market in a therapeutic or preventive area is often
at a significant competitive advantage relative to later entrants to the
market. Accordingly, the relative speed with which the Company or its
corporate partners can develop products, complete the clinical trials and
approval processes and supply commercial quantities of the products to the
market are expected to be important competitive factors. The Company's
competitive position will also depend on its ability to attract and retain
42
<PAGE>
qualified scientific and other personnel, develop effective proprietary
products, develop and implement production and marketing plans, obtain and
maintain patent protection and secure adequate capital resources. The Company
expects its products, if approved for sale, to compete primarily on the basis
of product efficacy, safety, patient convenience, reliability, value and
patent position.
FACILITIES
The Company leases approximately 20,000 square feet of office and research
and development space in Ann Arbor, Michigan under a lease agreement expiring
in May 1998. The lease is renewable at the option of the Company for up to an
additional five-year term. The Company believes that its facilities will be
adequate for its currently anticipated needs. Contract manufacturing or
additional facilities will be required in the future to support expansion of
research and development and to manufacture products.
EMPLOYEES
As of August 31, 1997, the Company employed approximately 72 individuals
full-time. A significant number of the Company's management and professional
employees have had prior experience with pharmaceutical, biotechnology or
medical product companies. None of the Company's employees are covered by
collective bargaining agreements, and management considers relations with its
employees to be good.
LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings, although from
time to time it may become involved in disputes in connection with the
operation of its business.
43
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their respective
ages as of August 31, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert J. Kunze(2).................... 62 Chairman of the Board and Director
R. Douglas Armstrong, Ph.D.(2)........ 44 President, Chief Executive Officer and Director
James Maluta.......................... 50 Vice President, Product Development
Todd E. Simpson....................... 36 Vice President, Finance & Administration,
Chief Financial Officer, Secretary and Treasurer
Walter C. Ogier....................... 40 Vice President, Marketing
Thomas E. Muller, Ph.D. .............. 61 Vice President, Regulatory Affairs
Alan K. Smith, Ph.D. ................. 42 Vice President, Research
Stephen G. Emerson, M.D., Ph.D. ...... 43 Director and Scientific Advisor
G. Bradford Jones(1)(2)............... 42 Director
Horst R. Witzel, Dr.-Ing.............. 70 Director
Edward C. Wood, Jr.(1)(2)............. 52 Director
</TABLE>
- --------
(1) Member of Audit Committee.
(2) Member of Executive Committee.
All directors hold office until the next election of the class for which
such directors have been chosen and until their successors have been duly
elected and qualified. The Company's Bylaws provide that the Board of
Directors will consist of between five and nine members, and the number of
directors is currently set at six members. The Bylaws also provide that the
Board of Directors will serve staggered three-year terms, or until their
successors are elected and qualified. The terms of office of the Company's
current directors expire as follows: Mr. Jones and Mr. Wood, 1999; Mr. Kunze
and Dr. Emerson, 1998; and Dr. Armstrong and Dr. Witzel, 1997. Pursuant to the
Stock Purchase Equity Commitment with Cobe, dated October 29, 1996, the
Company agreed to use reasonable and good faith efforts to cause a nominee of
Cobe, who most be deemed by the Board of Directors to be qualified, to be
elected to the Board of Directors for so long as Cobe owns at least 15% of the
outstanding shares of Common Stock. There are no family relationships among
the directors or officers of the Company. Officers of the Company are elected
by and serve at the discretion of the Board of Directors.
Robert J. Kunze, a director of the Company since its inception in 1989, is a
founder of the Company and served as its President and Chief Executive Officer
through May 1991. Mr. Kunze is a general partner of McFarland and Dewey, an
investment bank. From 1987 through early 1997, he was a General Partner of H&Q
Life Science Venture Partners, a venture capital fund specializing in medical
products and biotechnology investments. Previous to that, Mr. Kunze was
Managing Partner of Hambrecht & Quist Venture Partners. Prior to that he
served as a senior executive with W.R. Grace & Co. and General Electric. Mr.
Kunze also serves on the Board of Directors of Escalon Medical Corporation.
R. Douglas Armstrong, Ph.D. joined the Company in June 1991 as a director
and as its President and Chief Executive Officer. From 1987 to 1991, Dr.
Armstrong served in different capacities, including as Executive Vice
President and a Trustee of the La Jolla Cancer Research Foundation ("LJCRF"),
a 250-employee scientific research institute located in San Diego, California.
Dr. Armstrong received his doctorate in Pharmacology and Toxicology from the
Medical College of Virginia, and has held faculty and staff positions at Yale
University, University of California, San Francisco, LJCRF and University of
Michigan. Dr. Armstrong also serves on the Board of Directors of Nephros
Therapeutics, Inc.
44
<PAGE>
James Maluta joined the Company in August 1992 as Vice President, Product
Development. Mr. Maluta has a broad background in the development and
manufacturing of medical devices, with over 25 years of experience in the
industry, principally with OHMEDA and with Cobe BCT, Inc. While with Cobe BCT,
Inc., Mr. Maluta was Program Manager for the Cobe Spectra Apheresis System, a
device for blood cell processing and apheresis. Mr. Maluta held other
engineering management positions and also was director of Quality Assurance
for Cobe BCT. Mr. Maluta received his degree in electrical engineering from
the University of Wisconsin, Madison.
Todd E. Simpson joined the Company in January 1996 as Vice President,
Finance and Administration and Chief Financial Officer and is also the
Company's Secretary and Treasurer. Prior to that, Mr. Simpson was Treasurer of
Integra LifeSciences Corporation ("Integra"), a biotechnology company, which
acquired Telios Pharmaceuticals, Inc. ("Telios") in August 1995 in connection
with the reorganization of Telios under Chapter 11 of the U.S. Bankruptcy
Code. Mr. Simpson served as Vice President of Finance and Chief Financial
Officer of Telios up until its acquisition by Integra and held various other
financial positions at Telios after joining that company in February 1992.
Telios was a publicly-held company engaged in the development of
pharmaceutical products for the treatment of dermal and ophthalmic wounds,
fibrotic disease, vascular disease, and osteoporosis. From August 1983 through
February 1992, Mr. Simpson practiced public accounting with the firm of Ernst
& Young, LLP. Mr. Simpson is a Certified Public Accountant and received his
B.S. degree in Accounting and Computer Science from Oregon State University.
Walter C. Ogier joined the Company in March 1994 as Director of Marketing
and was promoted to Vice President, Marketing during 1995. Prior to that, Mr.
Ogier was at Baxter Healthcare Corporation's Immunotherapy Division, where he
served as Director, Business Development from 1992 to 1994 and as Manager,
Marketing and Business Development in charge of the company's cell therapy
product lines from 1990 to 1992. Mr. Ogier previously held positions with
Ibbottson Associates and with the Business Intelligence Center at SRI
International (formerly Stanford Research Institute). Mr. Ogier received his
B.A. degree in Chemistry from Williams College in 1979 and his Masters of
Management degree from the Yale School of Management in 1987.
Thomas E. Muller, Ph.D. joined the Company in May 1994 as Vice President,
Regulatory Affairs. Prior to that, Dr. Muller was Director, Biomedical Systems
with W.R. Grace & Company in Lexington, Massachusetts. Prior to this, Dr.
Muller was Vice President, Engineering and Director of Research and
Development with the Renal Division of Baxter Healthcare in Deerfield,
Illinois. Dr. Muller has also served as Adjunct Professor at Columbia
University and as Visiting Professor at the University of Gent, Belgium. Dr.
Muller graduated from the Technical University in Budapest, Hungary, in 1956
with a B.S. in Chemical Engineering. Dr. Muller received his M.S. degree in
1959 and was awarded a Ph.D. in 1964, both in Polymer Chemistry, from McGill
University.
Alan K. Smith, Ph.D. joined the Company in November 1995 as Vice President,
Research. Previously, Dr. Smith was Vice President of Research and Development
at Geneic Sciences, Inc., a developmental stage bone marrow transplantation
company. Prior to that, Dr. Smith held the position of Director, Cell
Separations Research and Development of the Immunotherapy Division of Baxter
Healthcare Corporation. In this capacity, he was responsible for the research
and development activities for a stem cell concentration system approved for
clinical use in Europe and currently in pivotal clinical trials in the United
States. Dr. Smith has also held positions as Research and Development Manager
at BioSpecific Technologies, as Director of Biochemistry at HyClone
Laboratories and as a member of the Board of Directors of Dallas Biomedical.
Dr. Smith received his B.S. degree in Chemistry from Southern Utah State
College in 1976 and a Ph.D. in Biochemistry from Utah State University in
1983.
Stephen G. Emerson, M.D., Ph.D., a director since the inception of the
Company in 1989, is a scientific founder of the Company and has been an active
advisor of the Company since that time. Dr. Emerson has been a Professor of
Medicine at the University of Pennsylvania since 1994 where he serves as head
of Hematology and Oncology. From 1991 to 1994, Dr. Emerson was an Associate
Professor of Medicine at the University of Michigan. Dr. Emerson received his
doctorate degrees in Medicine and Cell Biology/Immunology from Yale
45
<PAGE>
University. He completed his internship and residency at Massachusetts General
Hospital and his clinical and research fellowship in hematology at the Brigham
and Women's Hospital, the Dana-Farber Cancer Institute and Children's Hospital
Medical Center.
G. Bradford Jones, a director since April 1992, is a general partner of
Brentwood V Ventures, L.P., the general partner of Brentwood Associates V,
L.P. Brentwood Associates V, L.P. is a partnership organized by the firm
Brentwood Venture Capital, which Mr. Jones joined in 1981. Mr. Jones was
elected to the Board of Directors of the Company pursuant to the terms of the
Series B Preferred Stock Purchase Agreement dated April 7, 1992 with the
Company, of which Brentwood Associates V, L.P. is a party. Mr. Jones received
a B.A. degree in Chemistry and an M.A. degree in Physics from Harvard
University and M.B.A. and J.D. degrees from Stanford University. Mr. Jones
also serves on the Board of Directors of Interpore International, ISOCOR, Onyx
Acceptance Corporation, Plasma & Materials Technologies, and several
privately-held companies.
Horst R. Witzel, Dr.-Ing., a director since June 1994, served as Chairman of
the Board of Executive Directors of Schering AG in Berlin, Germany from 1986
until his retirement in 1989, whereupon he became a member of the Supervisory
Board of Schering AG until 1994. Prior to that, Dr. Witzel held various
leadership positions in research and development with Schering AG where he was
responsible for worldwide production and technical services. Dr. Witzel
received his doctorate in chemistry from the Technical University of West
Berlin. Dr. Witzel also serves on the Board of Directors of The Liposome
Company, Inc. and Cephalon, Inc. and is a member of the Supervisory Board of
Brau and Brunnen AG.
Edward C. Wood, Jr., a director since August 1994, has served as president
of Cobe BCT, Inc., a division of Cobe Laboratories, Inc., since 1991. Cobe is
a subsidiary of Gambro AB, a Swedish company, and is a leading provider of
blood cell processing products. Prior to that, Mr. Wood held various positions
in manufacturing, research and development, and marketing with Cobe. Mr. Wood
received degrees in chemistry from Harvey Mudd College and in management from
the University of Colorado.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Restated Articles of Incorporation
that limit the liability of its directors for monetary damages arising from a
breach of their fiduciary duty as directors, except under certain
circumstances which include breach of the director's duty of loyalty to the
Company or its shareholders, acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of the law.
The Company's Bylaws provide that the Company shall indemnify its directors
to the fullest extent authorized or permitted by the Michigan Business
Corporation Act. Additionally, the Company has entered into an Indemnification
Agreement, originally dated as of December 14, 1993 (the "Indemnification
Agreement"), with certain of its directors, officers and other key personnel,
which may, in certain cases, be broader than the specific indemnification
provisions contained under applicable law. The Indemnification Agreement may
require the Company, among other things, to indemnify such officers, directors
and key personnel against certain liabilities that may arise by reason of
their status or service as directors, officers or employees of the Company, to
advance the expenses incurred by such parties as a result of any threatened
claims or proceedings brought against them as to which they could be
indemnified, and to cover such officers, directors and key employees under the
Company's directors' and officers' liability insurance policies to the maximum
extent that insurance coverage is maintained.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification by
the Company will be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.
46
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation of
the Chief Executive Officer of the Company and each of the Company's five
other most highly compensated executive officers (the "Named Executive
Officers") for services rendered in all capacities to the Company, during the
fiscal years ended June 30, 1996 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION
---------------------- SHARES
NAME AND PRINCIPAL UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
------------------ ---- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
R. Douglas Armstrong,
Ph.D. ................. 1997 $ 183,583 -- 333,333 $ 7,108(1)
President and Chief
Executive Officer 1996 156,962 $ 55,000 -- 8,885(1)
James Maluta............ 1997 130,354 -- 120,000 --
Vice President, Product
Development 1996 118,942 10,000 -- --
Walter C. Ogier......... 1997 120,265 -- 80,000 --
Vice President,
Marketing 1996 106,250 7,500 6,667 --
Todd E. Simpson......... 1997 125,593 12,500 75,000 --
Vice President, Finance 1996 60,779(2) -- 40,000 48,061(3)
and Administration
and Chief Financial
Officer
Alan K. Smith, Ph.D. ... 1997 128,685 -- 75,000 60(3)
Vice President,
Research 1996 77,740(4) -- 40,000 76,000(3)
Thomas E. Muller, Ph.D.. 1997 119,517 -- 20,000 --
Vice President,
Regulatory Affairs 1996 118,560 -- 6,667 --
</TABLE>
- --------
(1) Consists of vacation pay.
(2) Mr. Simpson began his employment with the Company in January 1996.
(3) Consists of relocation expenses.
(4) Dr. Smith began his employment with the Company in October 1995.
47
<PAGE>
The following table provides information with respect to stock option grants
to the Named Executive Officers during the year ended June 30, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(1)
------------------------------------------------ ---------------------
NUMBER OF % OF TOTAL
SHARES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES PRICE PER EXPIRATION
NAME GRANTED(2) IN FISCAL YEAR SHARE(2) DATE 5% 10%
- ---- ---------- -------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
R. Douglas Armstrong,
Ph.D................... 333,333 42.5% $7.00 2/3/07 $3,800,750 $6,052,060
James Maluta............ 120,000 15.3 7.00 2/3/07 1,368,271 2,178,744
Walter C. Ogier......... 80,000 10.2 7.00 2/3/07 912,181 1,452,496
Todd E. Simpson......... 75,000 9.6 7.00 2/3/07 855,170 1,361,715
Alan K. Smith, Ph.D..... 75,000 9.6 7.00 2/3/07 855,170 1,361,715
Thomas E. Muller, Ph.D.. 20,000 2.6 7.00 2/3/07 228,045 363,124
</TABLE>
- --------
(1) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the rules of the Securities and Exchange Commission and do
not represent the Company's estimate or projection of the future price of
the Common Stock.
(2) Each of these options was granted under the Company's Amended and Restated
1992 Incentive and Non-Qualified Stock Option Plan (the "1992 Plan") at an
exercise price equal to the fair market value of the Common Stock on the
date of grant. With the exception of the option grant to Dr. Armstrong,
which is immediately exercisable, all such options vest over a four-year
period, subject to continued employment with the Company.
The following table provides information with respect to exercises of stock
options during the year ended June 30, 1997, and unexercised options held as
of June 30, 1997, by the Named Executive Officers.
AGGREGATED OPTION EXERCISES
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT JUNE
OPTIONS AT JUNE 30, 1997 30, 1997(2)
------------------------- -------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
R. Douglas Armstrong,
Ph.D................... -- -- 333,333 -- $ 41,667 --
James Maluta............ 16,667 $99,169 -- 120,000 -- $ 15,000
Walter C. Ogier......... -- -- 22,083 92,917 130,842 86,533
Todd E. Simpson......... -- -- 12,500 102,500 74,063 172,313
Alan K. Smith, Ph.D..... -- -- 15,000 100,000 88,875 157,500
Thomas E. Muller, Ph.D.. -- -- 22,083 31,251 130,842 69,162
</TABLE>
- --------
(1) "Value Realized" represents the fair market value of the underlying shares
of Common Stock on the exercise date, minus the aggregate exercise price
of such options.
(2) The value of "in-the-money" stock options represents the difference
between the exercise price of such options and the fair market value of
$7.125 per share of Common Stock as of June 30, 1997, the closing price of
the Common Stock reported on the Nasdaq National Market on such date.
48
<PAGE>
No compensation intended to serve as incentive for performance to occur over
a period longer than one fiscal year was paid pursuant to a long-term
incentive plan during the last fiscal year to any of the Named Executive
Officers. The Company does not have any defined benefit or actuarial plan with
any of the Named Executive Officers under which benefits are determined
primarily by final compensation or average final compensation and years of
service.
EMPLOYMENT AGREEMENTS
The Company has a policy of entering into employment agreements with all of
its employees, and has entered into such agreements with all of its executive
officers other than Dr. Armstrong. Such employment agreements generally
establish salary levels (which are subject to periodic review) and provide for
customary fringe benefits such as vacation leave, sick leave and health
insurance. The agreements also generally provide for the protection of
confidential information and the assignment to the Company of inventions
conceived by the employee during his or her employment and permit the
termination of the employment relationship by either party upon fourteen days
prior written notice.
The Company entered into employment agreements with James Maluta, Walter C.
Ogier, Thomas E. Muller, Ph.D., Alan K. Smith, Ph.D. and Todd E. Simpson in
June 1992, February 1994, April 1994, October 1995 and December 1995,
respectively. Pursuant to these agreements, the Company agreed to pay Messrs.
Maluta, Ogier, Muller, Smith and Simpson annual base salaries of $90,000,
$87,500, $110,000, $122,500 and $122,500, respectively, certain of which base
salaries have been increased by the Board of Directors and are subject to
annual review and adjustment. Pursuant to the terms of the foregoing
employment agreements, either party may generally terminate the employment
relationship without cause at any time upon 14 days prior written notice to
the other party or immediately with cause upon notice.
STOCK OPTION AND EMPLOYEE BENEFIT PLANS
1989 STOCK OPTION PLAN
In 1989, the Company established the 1989 Stock Option Plan. As of September
30, 1997, options to purchase an aggregate of 932,266 shares of Common Stock
have been exercised at $0.15 per share. Options to purchase 13,127 shares of
Common Stock were cancelled unexercised. No additional shares remain available
for grant under the 1989 Stock Option Plan.
ANCILLARY PLAN
In 1991, the Company established an Ancillary Plan to grant options to
individuals who were not eligible to receive options under the 1989 Stock
Option Plan. Options to purchase an aggregate of 7,498 shares of the Company's
Common Stock were granted under the Ancillary Plan, of which options to
purchase 4,328 shares have been exercised at $0.15 per share and the remaining
options to purchase 3,170 shares have been cancelled. No additional shares
remain available for grant under the Ancillary Plan.
AMENDED AND RESTATED 1992 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
In 1992, the Company adopted the 1992 Plan, providing for the grant of
options to purchase 666,667 shares of Common Stock. The Company allocated an
additional 100,000 shares of Common Stock during 1992, an additional 333,333
shares of Common Stock in 1994 and an additional 800,000 shares of Common
Stock in 1996 to the 1992 Plan, resulting in a total share reserve of
1,900,000 shares. The 1992 Plan was amended and restated to its current form
in 1996. Options under the 1992 Plan for a total of 508,530 shares have been
exercised as of September 30, 1997. As of September 30, 1997, options to
purchase 1,076,908 shares of Common Stock were outstanding.
The 1992 Plan provides for grants to employees and officers of "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended, provided that such employee or
49
<PAGE>
officer is an employee on the date of grant. The 1992 Plan also provides for
grants to employees, officers, consultants or service providers of
nonqualified stock options. The 1992 Plan previously has been administered by
the Board of Directors, but is currently administered by the Compensation
Committee of the Board of Directors (the "Committee"). Each option granted
pursuant to the 1992 Plan is authorized by the Committee and evidenced by a
notice in such form as the Committee may from time to time determine.
The exercise price of each incentive stock option granted under the 1992
Plan must be at least equal to the fair market value of a share of Common
Stock on the date of grant, except for incentive stock options granted to
individuals who, at the time of grant, own stock possessing more than 10% of
the total combined voting power of the Company, which options must have an
exercise price of at least 110% of the fair market value of a share of Common
Stock on the date of grant and must expire five years from the date of grant.
The exercise price of each nonqualified stock option granted under the 1992
Plan must be at least 85% of the fair market value of the shares on the date
of grant. No option shall be treated as an incentive stock option to the
extent that such option would cause the aggregate fair market value
(determined as of the date of grant of such option) of the shares with respect
to which incentive stock options are exercisable by such optionee for the
first time during any calendar year to exceed $100,000. The terms of all
incentive stock options and nonqualified stock options granted under the 1992
Plan may not exceed ten years. The exercise price may be paid in cash or, at
the Committee's discretion, by delivery of previously owned shares of the
Company's Common Stock, by a combination of cash and shares, or any other form
of legal consideration acceptable to the Committee. Options under the 1992
Plan generally may not be granted after April 2006.
In the event of a transfer of control of the Company, as defined under the
1992 Option Plan, the Company must cause any successor corporation to assume
the options or substitute similar options for outstanding options or continue
such options in effect. In the event that any successor to the Company in a
merger, consolidation or dissolution will not assume the options or substitute
similar options, then the options become exercisable in full and such options
will be terminated if not exercised prior to such merger, consolidation or
dissolution. The vesting of certain options granted to executive officers of
the Company accelerates if such officer is terminated following a change of
control.
1996 OUTSIDE DIRECTORS STOCK OPTION PLAN
A total of 150,000 shares of Common Stock have been reserved for issuance
under the Company's 1996 Outside Directors Stock Option Plan (the "Directors
Plan"). As of September 30, 1997, options to purchase 30,000 shares of Common
Stock have been granted under the Directors Plan. The Directors Plan provides
for the automatic granting of non-qualified stock options to directors of the
Company who are not employees of the Company ("Outside Directors"). Under the
Directors Plan, each Outside Director will automatically be granted an option
to purchase 5,000 shares of Common Stock on the date of his or her election or
appointment. In addition, each serving Outside Director will thereafter
automatically be granted an option to purchase 5,000 shares of Common Stock
following each annual meeting of shareholders after their election, provided
that the Outside Director continues to serve in such capacity and that the
Outside Director has served continuously as a director for at least six
months. The exercise price of the options in all cases will be equal to the
fair market value of the Common Stock on the date of grant. Options granted
under the Directors Plan generally vest over a one-year period in equal
monthly installments and must be exercised within ten years from the date of
grant.
1996 EMPLOYEE STOCK PURCHASE PLAN
A total of 250,000 shares of the Company's Common Stock have been reserved
for issuance under the Company's 1996 Employee Stock Purchase Plan (the
"Purchase Plan"). As of September 30, 1997, 6,961 shares of Common Stock have
been issued under the Purchase Plan. The Purchase Plan permits eligible
employees to purchase Common Stock at a discount through payroll deductions,
during sequential 24-month offering periods. Each offering period is divided
into four consecutive six-month purchase periods. Unless otherwise provided by
the Board of Directors prior to the commencement of an offering period, the
price at which stock is purchased under the Purchase Plan for such offering
period is equal to 85% of the lesser of the fair market value of the
50
<PAGE>
Common Stock on the first day of such offering period or the last day of the
purchase period of such offering period.
SECTION 401(K) PLAN
Effective January 1, 1994, the Company adopted the Aastrom Biosciences, Inc.
401(k) Plan (the "Plan"). The Plan is intended to be a qualified retirement
plan under the Internal Revenue Code. Employees of the Company are eligible to
participate in the Plan upon the completion of three consecutive months of
employment. Participants may make salary deferral contributions to the Plan of
up to 15% of compensation, subject to the limitations imposed under the
Internal Revenue Code. The Company may, but is not required to, make matching
contributions to the Plan based on the participants' salary-defined
contributions. Employer contributions are subject to a graduated vesting
schedule based upon an employee's years of service with the Company. It is not
anticipated that the Company will make any contributions to the Plan for the
1998 Plan Year. All contributions to the Plan are held in a trust which is
intended to be exempt from income tax under Section 501(a) of the Internal
Revenue Code. The Plan's trustees are R. Douglas Armstrong and Todd E.
Simpson. Participants may direct the investment of their contributions among
specified Merrill Lynch investment funds. The Plan may be amended or
terminated by the Company at any time, subject to certain restrictions imposed
by the Internal Revenue Code and the Employee Retirement Income Security Act
of 1974.
COMPENSATION OF DIRECTORS
Each Outside Director receives a cash payment of $1,000 for each meeting of
the Board of Directors attended in person and a cash payment of $500 for each
telephonic meeting of the Board of Directors attended telephonically. In lieu
of such cash payments for attending meetings, Mr. Kunze receives $5,000 per
month for his services as Chairman of the Board of Directors, which payments
have been approved through the date of the Company's 1997 annual meeting of
shareholders. Directors also receive reimbursement for expenses incurred in
attending each meeting of the Board of Directors and its committees. In
addition, Outside Directors receive annual grants of options to purchase
shares of Common Stock in accordance with the Directors Plan. See "--Stock
Option and Employee Benefit Plans--1996 Outside Directors Stock Option Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
During the fiscal year ended June 30, 1997, Robert J. Kunze, who served as
President and Chief Executive Officer of the Company until 1991 and currently
serves as its Chairman of the Board, and Albert B. Deisseroth, M.D., Ph.D., a
former director of the Company, were initially the members of the Compensation
Committee of the Board of Directors. Currently, all of the Company's directors
comprise the Compensation Committee, including Mr. Kunze and R. Douglas
Armstrong, Ph.D., the Company's President and Chief Executive Officer. During
the last fiscal year, none of the executive officers who serve on the Board of
Directors participated in deliberations regarding their own compensation. No
member of the Board of Directors of the Company serves as a member of the
board of directors or compensation committee of an entity that has one or more
executive officers serving as members of the Company's Board of Directors.
51
<PAGE>
CERTAIN TRANSACTIONS
In April 1995, the Company sold 775,001 shares of Series D Preferred Stock
at a price per share of $4.00 to the following investors: (i) H&Q Life Science
Technology Fund I purchased 167,001 shares for a purchase price of $668,004,
(ii) H&Q London Ventures purchased 100,000 shares for a purchase price of
$400,000, (iii) Brentwood Associates V, L.P. ("Brentwood") purchased 231,250
shares for a purchase price of $925,000, (iv) Windpoint Partners II, L.P.
purchased 89,250 shares for a purchase price of $357,000, and (v) the State
Treasurer of the State of Michigan ("Michigan") purchased 187,500 shares for a
purchase price of $750,000. In May 1995, Cobe purchased 1,250,000 shares of
Series D Preferred Stock for a purchase price of $5,000,000. Upon the closing
of the Company's initial public offering in February 1997, each outstanding
share of Series D Preferred Stock was converted into two-thirds of a share of
Common Stock.
In April 1995, Dr. Armstrong and Dr. Emerson agreed to grant to Brentwood an
option to purchase up to 28,000 shares and 14,667 shares of Common Stock,
respectively, and, together with two other shareholders of the Company, an
aggregate of up to 66,667 shares of Common Stock at a purchase price of
$100,000. Brentwood exercised this option in April 1996, purchasing an
aggregate of 66,667 shares of Common Stock at a purchase price of $100,000
from such shareholders.
In September 1995, the Company and RPR entered into a collaborative
relationship for use of the Aastrom CPS as a component of its lymphoid cell
therapy program. During September 1996, RPR notified the Company that it would
not exercise its option to continue the collaboration. As a result, $3,500,000
of option payments previously paid to the Company by RPR were converted into
205,882 shares of the Company's Series E Preferred Stock. Upon the closing of
the Company's initial public offering in February 1997, each outstanding share
of Series E Preferred Stock was converted into two-thirds of a share of Common
Stock.
In October 1995, the Company repurchased 62,500 shares of Series D Preferred
Stock from Brentwood at the original purchase price of $250,000 and in
December 1995 resold these shares to Northwest Ohio Venture Fund, a
shareholder of the Company, for a total purchase price of $250,000.
In January 1996, the Company sold 1,411,765 shares of Series E Preferred
Stock at a price per share of $4.25 to the following investors: (i) Michigan
purchased 470,588 shares for a total purchase price of $1,999,999, and (ii)
SBIC Partners, L.P. purchased 941,177 shares for a total purchase price of
$4,000,002.
In November 1993, in connection with the purchase of Common Stock upon
exercise of stock options granted under the 1989 Stock Option Plan to R.
Douglas Armstrong, the Company's President and Chief Executive Officer, the
Company loaned to Dr. Armstrong $120,000 at an interest rate of 4% per annum
pursuant to a full recourse promissory note. During September 1997, Dr.
Armstrong repaid the outstanding principal under the note plus $18,467 in
accrued interest by surrendering 15,711 shares of Common Stock to the Company,
which shares were cancelled.
In October 1993, in connection with the purchase of Common Stock upon
exercise of stock options granted under the 1989 Stock Option Plan and the
1992 Plan to Stephen G. Emerson, a director of the Company, the Company loaned
to Dr. Emerson $47,303 at an interest rate of 6% per annum pursuant to a full
recourse promissory note. Interest on the note is payable on an annual basis,
and all principal and accrued but unpaid interest is due on June 30, 1998. The
loan is secured by the shares of Common Stock held by Dr. Emerson. During May
1997, the Company and Dr. Emerson entered into an agreement, pursuant to which
Dr. Emerson may repay the outstanding balance under the note by surrendering
shares of Common Stock to the Company.
In October 1996, the Company executed a financing commitment with Cobe to
provide the Company with up to $5,000,000 (the "Equity Commitment") and up to
$5,000,000 in funding from Michigan under a convertible loan commitment
agreement ("Convertible Loan Commitment"). Both the Equity Commitment and the
Convertible Loan Commitment terminated in February 1997 upon the closing of
the Company's initial public offering. The Company issued warrants to Michigan
to purchase 69,444 shares of Common Stock as
52
<PAGE>
consideration for securing the Convertible Loan Commitment. The warrants
expire on October 15, 2000 if not exercised, and may be exercised, in whole or
in part, at a price equal to the lesser of (a) $9.00 per share, which price
increases by $3.00 per share on each of February 7, 1998, 1999 and 2000; and
(b) 85% of the fair market value of the Company's Common Stock at the time of
exercise.
Cobe Laboratories, Inc. purchased 714,200 shares of Common Stock in the
Company's initial public offering at the initial public offering price of
$7.00 per share. See "Description of Capital Stock--Rights of Cobe."
The Company has entered into employment agreements with certain of its
executive officers. See "Management--Employment Agreements." The Company has
also entered into an Indemnification Agreement with certain of its directors,
officers and other key personnel. See "Management--Limitation of Liability and
Indemnification Matters."
The Company believes that all of the foregoing transactions were on terms no
less favorable to the Company than would be obtained from unrelated third
parties. Any future transactions between the Company and its executive
officers, directors and affiliates will be on terms no less favorable to the
Company than can be obtained from unaffiliated third parties, and any material
transactions with any such person will be approved by a majority of the
members of the Company's Board of Directors and by a majority of the
disinterested members of the Company's Board of Directors.
53
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the outstanding shares of the Company's Common Stock as of August
31, 1997, and as adjusted to give effect to the sale of 1,500,000 shares of
Common Stock in this offering by (i) each person known by the Company to be
the beneficial owner of 5% or more of the outstanding shares of Common Stock,
(ii) each Named Executive Officer, (iii) each director of the Company, and
(iv) all executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED(1)
-------------------------
NUMBER OF SHARES OF
COMMON STOCK BEFORE THE AFTER THE
BENEFICIAL OWNER BENEFICIALLY OWNED(1) OFFERING OFFERING
---------------- -------------------- ---------- ---------
<S> <C> <C> <C>
Cobe Laboratories, Inc.(2)...................... 3,214,199 24.2% 21.7%
1185 Oak Street
Lakewood, CO 80215
State Treasurer of the State of Michigan(3)..... 1,408,168 10.5 9.5
Custodian of Certain Retirement Systems
c/o Venture Capital Division
430 West Allegan
Lansing, MI 48992
H&Q London Ventures............................. 816,666 6.1 5.5
One Bush Street, 18th Floor
San Francisco, CA 94104
R. Douglas Armstrong, Ph.D.(4).................. 822,888 6.0 5.4
Albert B. Deisseroth, M.D., Ph.D.(5)............ 28,333 * *
Stephen G. Emerson, M.D., Ph.D.(6).............. 260,122 2.0 1.8
G. Bradford Jones(7)............................ 381,220 2.9 2.6
Robert J. Kunze(8).............................. 46,810 * *
James Maluta(9)................................. 83,332 * *
Thomas E. Muller, Ph.D.(10)..................... 24,167 * *
Walter C. Ogier(11)............................. 31,667 * *
Todd E. Simpson(12)............................. 17,500 * *
Alan K. Smith, Ph.D.(13)........................ 18,988 * *
Horst R. Witzel, Dr.-Ing.(14)................... 14,620 * *
Edward C. Wood, Jr.(15)......................... 3,220,532 24.2 21.8
All officers and directors as a group (12 per-
sons)(16)...................................... 4,950,179 36.1 32.5
</TABLE>
- --------
* Represents less than 1% of outstanding Common Stock or voting power.
(1) Shares beneficially owned and percentage of ownership are based on
13,285,511 shares of Common Stock outstanding before this offering and
14,785,511 shares of Common Stock to be outstanding after the closing of
this offering. Beneficial ownership determined in accordance with the
rules of the Securities and Exchange Commission and generally includes
voting or disposition power with respect to such shares.
(2) Pursuant to an agreement between Cobe and the Company, Cobe has an option
to purchase the number of shares in this offering necessary to maintain
its current percentage ownership of the Company. As of the date of this
Prospectus, the Company is not aware of Cobe's determination with respect
to this option. In addition, Cobe has an option to purchase from the
Company an amount of Common Stock equal to 30% of the Company's fully
diluted shares after the exercise of such option, at a purchase price
equal to 120% of the public market trading price of the Company's Common
Stock. The option expires on February 6, 2000. Cobe also has a "right of
first negotiation" in the event the Company receives any proposal
concerning, or otherwise decides to pursue, a merger, consolidation or
other transaction in which all or a majority of the Company's equity
securities or all or substantially all of the Company's assets, or any
material portion of
54
<PAGE>
the assets of the Company used by the Company in performing its obligations
under Cobe's distribution agreement with the Company would be acquired by a
third party outside of the ordinary course of business. Edward C. Wood,
Jr., a director of the Company, is the President of Cobe BCT, Inc., an
affiliate of Cobe. See footnote 15, below and "Description of Capital
Stock--Rights of Cobe."
(3) Includes 69,444 shares issuable upon exercise of warrants held by the
State Treasurer of the State of Michigan ("Michigan") that are exercisable
until October 15, 2000.
(4) Includes 333,333 shares issuable upon exercise of options held by Dr.
Armstrong that are exercisable within the 60-day period following August
31, 1997. Also includes 15,711 shares that were surrendered to the Company
and cancelled in payment of the outstanding balance under a promissory
note subsequent to August 31, 1997. See "Certain Transactions." Dr.
Armstrong's address is 24 Frank Lloyd Wright Drive, Ann Arbor, MI 48106.
(5) Includes 3,333 shares issuable upon exercise of options held by Dr.
Deisseroth that are exercisable within the 60-day period following August
31, 1997. Dr. Deisseroth resigned from his position as a director of the
Company in October 1997. 6,250 of the shares held by Dr. Deisseroth are
subject to vesting and a right of repurchase by the Company until December
15, 1997.
(6) Includes 3,333 shares issuable upon exercise of options held by Dr.
Emerson that are exercisable within the 60-day period following August 31,
1997. Also includes 90,000 shares which, to the Company's knowledge, Dr.
Emerson intends to transfer as a gift.
(7) Includes 370,831 shares held by Brentwood Associates V, L.P. Mr. Jones, as
a general partner of Brentwood Associates V Ventures, L.P., which is the
general partner of Brentwood Associates V, L.P., may be deemed to
beneficially own such shares, but Mr. Jones disclaims beneficial ownership
of all such shares except to the extent of his pecuniary interest therein.
Also includes 3,333 shares issuable upon exercise of options held by Mr.
Jones that are exercisable within the 60-day period following August 31,
1997.
(8) Includes 3,333 shares issuable upon exercise of options held by Mr. Kunze
that are exercisable within the 60-day period following August 31, 1997.
(9) Consists of shares held of record by James Maluta and Deborah Vincent, as
Trustees, with shared voting and investment power, of the James Maluta and
Deborah Vincent Living Trust dated October 26, 1993.
(10) Consists of shares issuable upon exercise of options held by Dr. Muller
that are exercisable within the 60-day period following August 31, 1997.
(11) Includes 26,667 shares issuable upon exercise of options held by Mr.
Ogier that are exercisable within the 60-day period following August 31,
1997.
(12) Consists of shares issuable upon exercise of options held by Mr. Simpson
that are exercisable within the 60-day period following August 31, 1997.
(13) Includes 17,500 shares issuable upon exercise of options held by Dr.
Smith that are exercisable within the 60-day period following August 31,
1997.
(14) Includes 8,620 shares issuable upon exercise of options held by Dr.
Witzel that are exercisable within the 60-day period following August 31,
1997.
(15) Mr. Wood, as the President of Cobe BCT, Inc., an affiliate of Cobe, may
be deemed to beneficially own shares held by Cobe, but Mr. Wood disclaims
beneficial ownership of all such shares. Includes 3,333 shares issuable
upon exercise of options that are exercisable within the 60-day period
following August 31, 1997. Mr. Wood's address is 1201 Oak Street,
Lakewood, CO 80215.
(16) Includes 444,452 shares issuable upon exercise of options that are
exercisable within the 60-day period following August 31, 1997. Does not
include any shares which Cobe may elect to purchase in this offering
pursuant to its contractual preemptive rights. See footnote 2, above.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000 shares of
Common Stock, no par value, and 5,000,000 shares of Preferred Stock, no par
value.
COMMON STOCK
As of August 31, 1997, there were 13,285,511 shares of Common Stock
outstanding held by approximately 140 shareholders of record. The holders of
Common Stock are entitled to one vote per share on all matters to be voted
upon by the Company's shareholders. Subject to preferences that may be
applicable to outstanding shares of Preferred Stock, the holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. See "Dividend Policy." In the event of any liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior liquidation rights of holders of Preferred Stock
then outstanding. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are
fully paid and nonassessable. The rights, preferences and privileges of
holders of Common Stock are set forth in the Company's Restated Articles of
Incorporation, which Articles may only be amended by the holders of at least
two-thirds of the outstanding shares of Common Stock. The rights of the
holders of Common Stock are also subject to, and may be adversely affected by,
the rights of the holders of any shares of any Preferred Stock which the
Company may designate and issue in the future.
PREFERRED STOCK
No shares of Preferred Stock are outstanding. The Board of Directors of the
Company is authorized, without further shareholder approval, to issue up to
5,000,000 shares of Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions granted or imposed upon any
unissued shares of Preferred Stock and to fix the number of shares
constituting any series and the designations of such series. The issuance of
Preferred Stock may have the effect of delaying or preventing a change in
control of the Company. The issuance of Preferred Stock could decrease the
amount of earnings and assets available for distribution to the holders of
Common Stock or could adversely affect the rights and powers, including voting
rights, of the holders of the Common Stock. In certain circumstances, such
issuance could have the effect of decreasing the market price of the Common
Stock. The Company currently has no plans to issue any shares of Preferred
Stock.
MICHIGAN LAW AND CERTAIN CHARTER PROVISIONS
The Company is a Michigan corporation and is subject to certain anti-
takeover provisions of the Michigan Business Corporation Act (the "MBCA")
which could delay or make more difficult a merger or tender offer involving
the Company. Chapter 7A of the MBCA prevents, in general, an "interested
shareholder" (defined generally as a person owning 10% or more of a
corporation's outstanding voting shares) from engaging in a "business
combination" (as defined therein) with a Michigan corporation unless: (a) the
Board of Directors issues an advisory statement, holders of 90% of the shares
of each class of stock entitled to vote approve the transaction, and holders
of two-thirds of the "disinterested" shares of each class of stock approve the
transaction; or (b) the interested shareholder has been an interested
shareholder for at least five years and has not acquired beneficial ownership
of any additional shares of the corporation subsequent to the transaction
which resulted in such shareholder being classified as an interested
shareholder, and meets certain requirements, including, but not limited to,
provisions relating to the fairness of the price and the form of consideration
paid; or (c) the Board of Directors, by resolution, exempts a particular
interested shareholder from these provisions prior to the interested
shareholder becoming an interested shareholder. The MBCA also contains certain
other provisions which could have anti-takeover effects, including, but not
limited to, Section 368, which pertains to "greenmail."
The Company's Bylaws provide that the Board of Directors is divided into
three classes of directors, with each class serving a staggered three-year
term. The classification system of electing directors may tend to
56
<PAGE>
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company and may maintain the incumbency of the Board of
Directors, as it generally makes it more difficult for shareholders to replace
a majority of the directors. The Company's Restated Articles of Incorporation
eliminate the right of shareholders to act without a meeting, do not provide
for cumulative voting in the election of directors and provide that the
holders of at least two-thirds of the outstanding shares of Common Stock must
approve certain transactions resulting in a change of control of the Company.
The amendment of any of these provisions would require approval by holders of
at least two-thirds of the outstanding shares of Common Stock.
The foregoing and other statutory provisions and provisions of the Company's
Restated Articles of Incorporation could have the effect of deterring certain
takeovers or delaying or preventing certain changes in control or management
of the Company, including transactions in which shareholders might otherwise
receive a premium for their shares over then-current market prices.
REGISTRATION RIGHTS
Pursuant to the Amended and Restated Investors Rights Agreement, dated as of
April 7, 1992, as amended (the "Investors Agreement"), the provisions of which
are incorporated into the agreements relating to the purchase of the Company's
Series D and Series E Preferred Stock, certain holders of outstanding shares
of Common Stock are entitled to certain demand and incidental registration
rights with respect to such shares, subject to certain customary limitations.
Under the Investors Agreement, subject to certain exceptions, the holders of
at least 50% of the Registrable Securities (as defined therein) may require
the Company to use its diligent best efforts to register Registrable
Securities for public resale on one occasion (so long as such registration
includes at least 20% of the Registrable Securities or a lesser percentage if
the anticipated aggregate offering price net of underwriting discounts and
commissions would exceed $2 million). In addition, whenever the Company
proposes to register any of its securities under the Act, holders of
Registrable Securities are entitled, subject to certain restrictions
(including customary underwriters "cut back" limitations), to include their
Registrable Securities in such registration. Subject to certain limitations,
the holders of Registrable Securities may also require the Company to register
such shares on Form S-3 no more than once every twelve months, provided that
the anticipated aggregate proceeds would exceed $500,000. The Company is
required to bear all registration and selling expenses (other than
underwriter's discounts and commissions and more than a single special counsel
to the selling shareholders) in connection with the registration of
Registrable Securities in one demand registration and two piggy-back
registrations. The participating investors are required to bear all expenses
in connection with the registration of Registrable Securities on Form S-3.
Registration rights may be transferred to an assignee or transferee provided
that such assignee or transferee acquires at least 66,667 shares of the
Registrable Securities held by the transferring holder (13,333 shares in the
case of a transfer from the holder of certain stock options). These
registration rights may be amended or waived (either generally or in a
particular instance) only with the written consent of the Company and the
holders of a majority of the Registrable Securities then outstanding.
The registration rights granted under the Investors Agreement shall not be
exercisable by a holder during the period in which the holder may sell all of
the holder's shares under Rule 144 or Rule 144A during a single 90-day period.
Pursuant to the Stock Purchase Agreement dated October 22, 1993 by and
between Cobe and the Company (the "Cobe Stock Agreement"), the Company granted
to Cobe certain stock registration rights for any and all of the Company's
Common Stock which Cobe acquires by conversion or otherwise. Cobe's stock
registration rights commence during August 2000, or earlier in the event of
any termination of the Distribution Agreement. Pursuant to Cobe's registration
rights, Cobe is entitled to two demand registration rights, and an unlimited
number of piggyback registration rights. Cobe's stock registration rights are
subject to customary underwriter's "cut back" requirements. The registration
rights granted to Cobe shall not be exercisable during the period in which
Cobe has the ability to sell all of its shares pursuant to Rule 144 during a
single 90-day period. Subject to certain conditions, these registration rights
may be transferred with the transfer of stock to certain affiliates of the
transferor or to a transferee who acquires the greater of 66,667 shares or 20%
of the transferor's registrable stock.
57
<PAGE>
RIGHTS OF COBE
Pursuant to the Cobe Stock Agreement, Cobe purchased an aggregate of
$10,000,000 of shares of the Company's Series C Preferred Stock. Such shares
of Series C Preferred Stock automatically converted into 1,666,666 shares of
Common Stock upon the closing of the Company's initial public offering in
February 1997.
Pursuant to the Cobe Stock Agreement, Cobe also has certain preemptive
rights to purchase a portion of any new stock issued by the Company, subject
to certain exceptions, so as to enable Cobe to maintain its relative
percentage ownership and voting power interests in the Company. Pursuant to
such preemptive rights, Cobe elected to purchase 714,200 shares of Common
Stock for approximately $5,000,000 in the Company's initial public offering in
February 1997. Under the terms of the Cobe Stock Agreement, the Company also
has the right to require Cobe to purchase stock issued by the Company in
certain qualifying offerings, under certain circumstances (the "Put Option").
The Put Option may generally require Cobe to purchase up to 25% of the stock
issued by the Company in a qualifying offering upon the same terms and
conditions as the underwriters or other purchasers participating in the
offering provided that Cobe shall not be required to purchase stock having an
aggregate purchase price of more than $5,000,000. If the Company exercises the
Put Option with respect to any such qualifying offering, Cobe has the option
to purchase the greater of up to 40% of the number of shares to be offered in
the qualifying offering or the number of shares necessary to maintain its
percentage ownership interest in the Company. The Put Option was not exercised
by the Company in connection with its initial public offering in February
1997. The Put Option does not apply to any public offerings, including this
offering. The Company and Cobe are evaluating whether or not the Put Option
remains in effect as to any future private offerings of the Company's equity
securities.
Additionally, until February 2000, Cobe has an option to purchase from the
Company a quantity of new shares of the Company's Common Stock at a price
equal to 120% of the public market trading price for the Company's Common
Stock. The quantity of Common Stock to be purchased if Cobe exercises this
option shall be equal to 30% of the Company's fully diluted shares after the
exercise of this option.
In the Cobe Stock Agreement, the Company also granted to Cobe a "right of
first negotiation" in the event the Company receives any proposal concerning,
or otherwise decides to pursue, a merger, consolidation or other transaction
in which all or a majority of the Company's equity securities or all or
substantially all of the Company's assets, or any material portion of the
assets of the Company used by the Company in performing its obligations under
the Distribution Agreement would be acquired by a third party outside of the
ordinary course of business.
Pursuant to the Stock Purchase Commitment Agreement with Cobe, dated October
29, 1996, the Company agreed to use reasonable and good faith efforts to cause
a nominee of Cobe, who must be deemed by the Board of Directors to be
qualified, to be elected to the Board of Directors for as long as Cobe owns at
least 15% of the outstanding shares of Common Stock.
RIGHT OF FIRST REFUSAL
Pursuant to the Investors Agreement and the agreement relating to the
purchase of the Company's Series E Preferred Stock, certain shareholders of
the Company have a right of first refusal to purchase their pro rata share
(determined on a fully diluted basis) of any new issuances of shares of Common
Stock or Preferred Stock, or of options, warrants or other rights to purchase
such shares, other than issuances (i) in public offerings, (ii) in connection
with acquisitions, or (iii) under the Company's stock option plans.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Continental Stock
Transfer & Trust Company. Its telephone number in New York, New York is (212)
509-4000.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market following
this offering could adversely affect the prevailing market price of the Common
Stock and the Company's ability to raise capital in the future. Upon
completion of this offering, the Company will have 14,772,674 shares of Common
Stock outstanding, based upon the number of shares outstanding as of September
30, 1997, all of which are eligible for resale in the public market, subject
in some cases to certain volume restrictions and other conditions imposed by
Rule 144 under the Securities Act. However, 5,707,252 outstanding shares of
Common Stock are subject to lock-up agreements expiring 90 days following the
date of this Prospectus. Such agreements provide that Cowen & Company may, in
its sole discretion and at any time without notice, release all or a portion
of the shares subject to these lock-up agreements. Certain existing
shareholders have rights to include shares of Common Stock owned by them in
future registrations by the Company for the sale of Common Stock or to request
that the Company register their shares under the Securities Act. See "Plan of
Distribution" and "Description of Capital Stock--Registration Rights."
59
<PAGE>
PLAN OF DISTRIBUTION
The shares of Common Stock offered hereby are being offered, on an all or
none basis, for sale by the Company principally to selected investors. The
Placement Agent has been retained to act as agent for the Company in
connection with the arrangement of such offers and sales on a best efforts
basis. The Placement Agent is not obligated and does not intend to itself take
(or purchase) any of the shares offered hereby. It is anticipated that the
Placement Agent will obtain indications of interest from potential investors
for the number of shares offered hereby and that effectiveness of the
Registration Statement of which this Prospectus forms a part will not be
requested, and no investor funds will be accepted, until indications of
interest have been received for all of the shares offered hereby. Confirmation
and definitive prospectuses will be distributed to all investors at the time
of pricing, informing investors of the closing date, which will be scheduled
for three business days after pricing. No investor funds will be accepted
prior to the effectiveness of the Registration Statement. Prior to the closing
date, an escrow account with the Escrow Agent will be established for the
benefit of the investors. Prior to the closing date, the Placement Agent from
time to time will cause to be wired to or deposited with the Escrow Agent
funds or checks of the investors delivered in payment for the shares offered
hereby. The Placement Agent will promptly place all investor funds in the
escrow account. Such investor funds will be wired to or deposited with the
Escrow Agent not later than 12:00 noon on the date following the date on which
it is received by the Placement Agent. Any checks delivered to the Escrow
Agent shall be made payable to or endorsed to the order of the Escrow Agent.
The Escrow Agent, upon receipt of such checks, will present such checks for
payment to the drawee-bank under such checks. Any checks not honored by the
drawee-bank after the first presentment for payment will be returned to the
Company. Upon receipt of funds or checks from the Placement Agent, the Escrow
Agent will credit such funds and the amount of such checks to the escrow
account. The Escrow Agent will invest such funds in accordance with Rule 15c2-
4 promulgated under the Securities Exchange Act of 1934, as amended. Prior to
the closing date, the Escrow Agent will advise the Company that payment for
the purchase of the shares offered hereby has been affirmed by the investors
and that the investors have deposited the requisite funds in the escrow
account with the Escrow Agent. Upon receipt of such notice, the Company will
deposit with The Depository Trust Company the shares to be credited to the
respective accounts of the investors. Investor funds, together with interest
thereon, if any, will be collected by the Company through the facilities of
the Escrow Agent on the scheduled closing date. This offering will not
continue after the closing date, as extended by the parties. In the event that
investor funds are not received in the full amount necessary to satisfy the
requirements of this offering, all funds deposited in the escrow account will
promptly be returned.
The Company has agreed to pay the Placement Agent, as the Placement Fee, an
aggregate of 6% of the gross proceeds of the sale of the shares of Common
Stock offered hereby and to indemnify the Placement Agent against certain
liabilities, including liabilities under the Securities Act.
The Company and its directors and certain of its officers and other
shareholders, have entered into agreements providing that, for a period of 90
days after the date of this Prospectus, they will not, without the prior
written consent of Cowen & Company, offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into, or
exchangeable for, or warrants to purchase, any shares of Common Stock, or
grant any option to purchase or right to acquire, or acquire any option to
dispose of any shares of Common Stock, except in certain limited
circumstances. See "Shares Eligible for Future Sale."
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Pepper, Hamilton & Scheetz, Detroit, Michigan. Gray Cary Ware &
Freidenrich, A Professional Corporation, San Diego, California, has acted as
special counsel to the Company in connection with this offering. Certain legal
matters in connection with this offering will be passed upon for the Placement
Agent by Brobeck Phleger & Harrison LLP, New York, New York.
60
<PAGE>
EXPERTS
The balance sheets of the Company as of June 30, 1996 and 1997, and the
statements of operations, shareholders' equity, and cash flows for the years
ended June 30, 1995, 1996 and 1997 and the cumulative period from March 24,
1989 (Inception) to June 30, 1997 included in this Prospectus have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The statements in this Prospectus concerning the patents and patent
applications either owned or licensed by the Company under the captions "Risk
Factors--Uncertainty Regarding Patents and Proprietary Rights" and "Business--
Patents and Proprietary Rights" and the other references herein concerning the
patents and patent applications either owned or licensed by the Company have
been reviewed and approved by Oblon, Spivak, McClelland, Maier & Neustadt,
P.C., Arlington, Virginia, patent counsel to the Company, as experts on such
matters, and are included herein in reliance upon that review and approval.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. The Company is subject to the informational requirements
of the Securities Exchange Act of 1934, as amended, and in accordance
therewith files reports and other information with the Securities and Exchange
Commission. This Prospectus does not contain all of the information set forth
in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Common Stock,
reference is made to the Registration Statement and the exhibits and schedules
filed as a part thereof. Statements contained in this Prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete, and, in each instance, if such contract or document is filed as an
exhibit to the Registration Statement, reference is made to the copy of such
contract or document filed as an exhibit, each such statement being qualified
in all respects by such reference. The Registration Statement, including
exhibits and schedules thereto, may be inspected without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located
at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 10661. Copies of all or any part
of such materials may be obtained from the Commission upon the payment of
certain fees prescribed by the Commission. Such reports and other information
may also be inspected without charge at the Commission's Web site, located at
http://www.sec.gov.
61
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................... F-2
Balance Sheets as of June 30, 1996 and 1997............................... F-3
Statements of Operations for the years ended June 30, 1995, 1996 and 1997
and for the period from March 24, 1989 (Inception) to June 30, 1997...... F-4
Statements of Shareholders' Equity from March 24, 1989 (Inception) to June
30, 1997................................................................. F-5
Statements of Cash Flows for the years ended June 30, 1995, 1996 and 1997
and for the period from March 24, 1989 (Inception) to June 30, 1997...... F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Aastrom Biosciences, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' equity and of cash flows present fairly, in
all material respects, the financial position of Aastrom Biosciences, Inc. (a
development stage company) at June 30, 1996 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1997, and for the period from March 24, 1989 (Inception) to June 30,
1997, in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
Detroit, Michigan
August 15, 1997
F-2
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $ 10,967,000 $ 1,943,000
Short-term investments........................... -- 15,064,000
Receivables...................................... 81,000 229,000
Prepaid expenses................................. 437,000 126,000
------------ ------------
Total current assets........................... 11,485,000 17,362,000
PROPERTY, NET...................................... 1,188,000 1,048,000
------------ ------------
Total assets................................... $ 12,673,000 $ 18,410,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses............ $ 1,192,000 $ 1,508,000
Accrued employee expenses........................ 97,000 130,000
Current portion of capital lease obligations..... 223,000 124,000
Deferred revenue................................. 122,000 --
------------ ------------
Total current liabilities...................... 1,634,000 1,762,000
CAPITAL LEASE OBLIGATIONS.......................... 189,000 65,000
COMMITMENTS (Note 7)
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value; shares authorized--
9,951,765 and
5,000,000, respectively; shares issued and
outstanding--
9,451,766 and 0, respectively..................... 34,218,000 --
Common Stock, no par value; shares authorized--
18,500,000 and
40,000,000, respectively; shares issued and
outstanding--
1,886,479 and 13,275,208, respectively............ 324,000 58,073,000
Deficit accumulated during the development stage... (27,025,000) (41,313,000)
Shareholder notes receivable....................... (167,000) (167,000)
Stock purchase rights.............................. 3,500,000 --
Unrealized losses on investments................... -- (10,000)
------------ ------------
Total shareholders' equity....................... 10,850,000 16,583,000
------------ ------------
Total liabilities and shareholders' equity..... $ 12,673,000 $ 18,410,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
MARCH 24, 1989
(INCEPTION) TO
JUNE 30,
1995 1996 1997 1997
----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
REVENUES:
Research and develop-
ment agreements...... $ 396,000 $ 1,342,000 $ 230,000 $ 2,017,000
Grants................ 121,000 267,000 148,000 2,143,000
----------- ------------ ------------ ------------
Total revenues...... 517,000 1,609,000 378,000 4,160,000
COSTS AND EXPENSES:
Research and develop-
ment................. 4,889,000 10,075,000 13,357,000 38,432,000
General and adminis-
trative.............. 1,558,000 2,067,000 1,953,000 9,042,000
----------- ------------ ------------ ------------
Total costs and ex-
penses............. 6,447,000 12,142,000 15,310,000 47,474,000
----------- ------------ ------------ ------------
LOSS FROM OPERATIONS.... (5,930,000) (10,533,000) (14,932,000) (43,314,000)
OTHER INCOME (EXPENSE):
Interest income....... 279,000 678,000 676,000 2,252,000
Interest expense...... (66,000) (62,000) (32,000) (251,000)
----------- ------------ ------------ ------------
Other income........ 213,000 616,000 644,000 2,001,000
----------- ------------ ------------ ------------
NET LOSS................ $(5,717,000) $ (9,917,000) $(14,288,000) $(41,313,000)
=========== ============ ============ ============
NET LOSS PER SHARE...... $ (.66) $ (.98) $ (1.26)
=========== ============ ============
Weighted average num-
ber of common and
common equivalent
shares outstanding... 8,644,000 10,103,000 11,315,000
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED UNREALIZED
PREFERRED STOCK COMMON STOCK DURING THE SHAREHOLDER STOCK GAIN
----------------------- ----------------------- DEVELOPMENT NOTES PURCHASE (LOSSESS) ON
SHARES AMOUNT SHARES AMOUNT STAGE RECEIVABLE RIGHTS INVESTMENTS
---------- ----------- ---------- ----------- ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH
24, 1989
(Inception)..... -- $ -- -- $ -- $ -- $ -- $ -- $ --
Non-cash
issuance of
Common Stock... 454,545 --
Issuance of
Series A
Preferred Stock
at $1.00 per
share in August
1989........... 1,500,000 1,500,000
Issuance of
Series A
Preferred Stock
in March 1991
at $1.00 per
share, net of
issuance costs
of $5,000...... 1,000,000 995,000
Issuance of
Series B
Preferred Stock
in April 1992
at $2.00 per
share, net of
issuance costs
of $46,000..... 3,030,000 6,014,000
Issuance of
Common Stock
for services... 33,333 10,000
Issuance of
Series C
Preferred Stock
in October 1993
at $1,000 per
share, net of
issuance costs
of $175,000.... 10,000 9,825,000
Exercise of
stock options.. 1,229,482 230,000 (198,000)
Net loss........ (11,391,000)
---------- ----------- ---------- ----------- ------------ --------- ---------- --------
BALANCE, JUNE 30,
1994............ 5,540,000 18,334,000 1,717,360 240,000 (11,391,000) (198,000) -- --
Issuance of
Series D
Preferred Stock
in April and
May 1995 at
$4.00 per
share, net of
issuance costs
of $81,000..... 2,500,001 9,919,000
Exercise of
stock options.. 39,103 8,000
Retirement of
Common Shares
outstanding.... (25,000) (7,000)
Unrealized loss
on investments. (2,000)
Net loss........ (5,717,000)
---------- ----------- ---------- ----------- ------------ --------- ---------- --------
BALANCE, JUNE 30,
1995............ 8,040,001 28,253,000 1,731,463 241,000 (17,108,000) (198,000) -- (2,000)
Issuance of
Series E
Preferred Stock
in January 1996
at $4.25 per
share, net of
issuance costs
of $35,000..... 1,411,765 5,965,000
Exercise of
stock options.. 130,016 53,000
Issuance of
Common Stock at
$1.20 per
share.......... 25,000 30,000
Issuance of
Stock Purchase
Rights for cash
in September
1995 and March
1996........... 3,500,000
Repurchase of
Series D
Preferred Stock
at $4.00 per
share.......... (62,500) (250,000)
Sale of Series D
Preferred Stock
at $4.00 per
share.......... 62,500 250,000
Principal
payment
received under
shareholder
note
receivable..... 31,000
Unrealized gain
on investments. 2,000
Net loss........ (9,917,000)
---------- ----------- ---------- ----------- ------------ --------- ---------- --------
BALANCE, JUNE 30,
1996............ 9,451,766 34,218,000 1,886,479 324,000 (27,025,000) (167,000) 3,500,000 --
Exercise of
stock options.. 40,307 26,000
Issuance of
Series E
Preferred Stock
at $17.00 per
share.......... 205,882 3,500,000 (3,500,000)
Issuance of
Common Stock at
$7.00 per
share, net of
issuance costs
of $2,865,000.. 3,250,000 19,885,000
Conversion of
Preferred
Stock.......... (9,657,648) (37,718,000) 8,098,422 37,718,000
Compensation
expense related
to stock
options
granted........ 120,000
Unrealized
losses on
investments.... (10,000)
Net loss........ (14,288,000)
---------- ----------- ---------- ----------- ------------ --------- ---------- --------
BALANCE, JUNE 30,
1997............ -- $ -- 13,275,208 $58,073,000 $(41,313,000) $(167,000) $ -- $(10,000)
========== =========== ========== =========== ============ ========= ========== ========
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
BALANCE, MARCH
24, 1989
(Inception)..... $ --
Non-cash
issuance of
Common Stock... --
Issuance of
Series A
Preferred Stock
at $1.00 per
share in August
1989........... 1,500,000
Issuance of
Series A
Preferred Stock
in March 1991
at $1.00 per
share, net of
issuance costs
of $5,000...... 995,000
Issuance of
Series B
Preferred Stock
in April 1992
at $2.00 per
share, net of
issuance costs
of $46,000..... 6,014,000
Issuance of
Common Stock
for services... 10,000
Issuance of
Series C
Preferred Stock
in October 1993
at $1,000 per
share, net of
issuance costs
of $175,000.... 9,825,000
Exercise of
stock options.. 32,000
Net loss........ (11,391,000)
-------------
BALANCE, JUNE 30,
1994............ 6,985,000
Issuance of
Series D
Preferred Stock
in April and
May 1995 at
$4.00 per
share, net of
issuance costs
of $81,000..... 9,919,000
Exercise of
stock options.. 8,000
Retirement of
Common Shares
outstanding.... (7,000)
Unrealized loss
on investments. (2,000)
Net loss........ (5,717,000)
-------------
BALANCE, JUNE 30,
1995............ 11,186,000
Issuance of
Series E
Preferred Stock
in January 1996
at $4.25 per
share, net of
issuance costs
of $35,000..... 5,965,000
Exercise of
stock options.. 53,000
Issuance of
Common Stock at
$1.20 per
share.......... 30,000
Issuance of
Stock Purchase
Rights for cash
in September
1995 and March
1996........... 3,500,000
Repurchase of
Series D
Preferred Stock
at $4.00 per
share.......... (250,000)
Sale of Series D
Preferred Stock
at $4.00 per
share.......... 250,000
Principal
payment
received under
shareholder
note
receivable..... 31,000
Unrealized gain
on investments. 2,000
Net loss........ (9,917,000)
-------------
BALANCE, JUNE 30,
1996............ 10,850,000
Exercise of
stock options.. 26,000
Issuance of
Series E
Preferred Stock
at $17.00 per
share.......... --
Issuance of
Common Stock at
$7.00 per
share, net of
issuance costs
of $2,865,000.. 19,885,000
Conversion of
Preferred
Stock.......... --
Compensation
expense related
to stock
options
granted........ 120,000
Unrealized
losses on
investments.... (10,000)
Net loss........ (14,288,000)
-------------
BALANCE, JUNE 30,
1997............ $16,583,000
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
MARCH 24, 1989
YEAR ENDED JUNE 30, (INCEPTION) TO
--------------------------------------- JUNE 30,
1995 1996 1997 1997
------------ ----------- ------------ --------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............... $ (5,717,000) $(9,917,000) $(14,288,000) $(41,313,000)
Adjustments to
reconcile net loss to
net cash
used for operating
activities:
Depreciation and
amortization........ 329,000 536,000 564,000 1,831,000
Loss on property held
for resale.......... -- -- -- 110,000
Amortization of
discounts and
premiums on
investments......... (9,000) (110,000) (84,000) (203,000)
Stock compensation
expense............. -- -- 120,000 130,000
Changes in assets and
liabilities:
Receivables........ 132,000 18,000 (148,000) (229,000)
Prepaid expenses... (59,000) (332,000) 311,000 (126,000)
Accounts payable
and accrued
expenses.......... (40,000) 864,000 316,000 1,508,000
Accrued employee
expenses.......... 28,000 (33,000) 33,000 130,000
Deferred revenue... 79,000 (103,000) (122,000) --
------------ ----------- ------------ ------------
Net cash used for
operating activities.. (5,257,000) (9,077,000) (13,298,000) (38,162,000)
------------ ----------- ------------ ------------
INVESTING ACTIVITIES:
Organizational costs... -- -- -- (73,000)
Purchase of short-term
investments........... (10,981,000) -- (19,190,000) (31,138,000)
Maturities of short-
term investments...... 3,567,000 8,500,000 4,200,000 16,267,000
Capital purchases...... (118,000) (445,000) (424,000) (2,142,000)
Proceeds from sale of
property held for
resale................ -- -- -- 400,000
------------ ----------- ------------ ------------
Net cash provided by
(used for) investing
activities............ (7,532,000) 8,055,000 (15,414,000) (16,686,000)
------------ ----------- ------------ ------------
FINANCING ACTIVITIES:
Issuance of Preferred
Stock................. 9,919,000 5,965,000 -- 34,218,000
Issuance of Common
Stock................. 1,000 83,000 19,911,000 20,027,000
Payments received for
stock purchase
rights................ -- 3,500,000 -- 3,500,000
Payments received
under shareholder
notes................. -- 31,000 -- 31,000
Principal payments
under capital lease
obligations........... (214,000) (270,000) (223,000) (985,000)
------------ ----------- ------------ ------------
Net cash provided by
financing activities.. 9,706,000 9,309,000 19,688,000 56,791,000
------------ ----------- ------------ ------------
NET INCREASE (DECREASE)
IN CASH AND
CASH EQUIVALENTS....... (3,083,000) 8,287,000 (9,024,000) 1,943,000
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD.... 5,763,000 2,680,000 10,967,000 --
------------ ----------- ------------ ------------
CASH AND CASH
EQUIVALENTS AT END OF
PERIOD................. $ 2,680,000 $10,967,000 $ 1,943,000 $ 1,943,000
============ =========== ============ ============
SUPPLEMENTAL CASH FLOW
INFORMATION:
Interest paid......... $ 66,000 $ 62,000 $ 32,000 $ 251,000
Additions to capital
lease obligations.... 270,000 -- -- 1,174,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Aastrom Biosciences, Inc. (the Company) was incorporated in March 1989
(Inception) under the name Ann Arbor Stromal, Inc. The Company changed its
name in 1991 concurrent with the commencement of employee-based operations.
The Company is in the development stage with its principal business activities
being research and product development, conducted both on its own behalf and
in connection with various collaborative research and development agreements
with other companies, involving the development of processes and
instrumentation for the ex vivo production of human stem cells and their
progeny, and hematopoetic and other tissues.
Successful future operations are subject to several technical and business
risks, including satisfactory product development, obtaining regulatory
approval and market acceptance for its products and the Company's continued
ability to maintain adequate levels of funding.
SIGNIFICANT REVENUE RELATIONSHIPS--Two companies accounted for 49% and 28%
of total revenues for the year ended June 30, 1995 and one company accounted
for 83% and 52% of total revenues for the year ended June 30, 1996 and 1997,
respectively. One company accounted for 43% of total revenues for the period
from Inception to June 30, 1997. Grant revenues consist of grants sponsored by
the U.S. government.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash and short-
term investments with original maturities of three months or less.
SHORT-TERM INVESTMENTS--Short-term investments consist of U.S. government
securities and commercial paper with original maturities of over three months
but less than one year. Short-term investments are classified as available-
for-sale, and are presented at market value, with unrealized gains and losses
on investments reflected as a component of shareholders' equity.
DIVERSITY OF CREDIT RISK--The Company invests its excess cash in U.S.
government securities and commercial paper, maintained in U.S. financial
institutions, and has established guidelines relative to diversification and
maturities in an effort to maintain safety and liquidity. These guidelines are
periodically reviewed and modified to take advantage of trends in yields and
interest rates. The Company has not experienced any significant realized
losses on its cash equivalents or short-term investments.
PROPERTY--Property is recorded at cost and depreciated or amortized using
the straight-line method over the estimated useful life of the asset
(primarily five years), or the remaining lease term, if shorter, with respect
to leasehold improvements and certain capital lease assets.
REVENUE RECOGNITION--Revenue from grants and research agreements is
recognized on a cost reimbursement basis consistent with the performance
requirements of the related agreement. Funding received in advance of costs
incurred is presented as deferred revenue in the accompanying financial
statements.
RESEARCH AND DEVELOPMENT COSTS--Research and development costs are expensed
as incurred. Such costs and expenses related to programs under collaborative
agreements with other companies totaled $146,000, $1,294,000 and $154,000 for
the years ended June 30, 1995, 1996 and 1997, respectively, and $1,642,000 for
the period from Inception to June 30, 1997.
STOCK COMPENSATION--The Company adopted the disclosure provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS 123) as of July 1, 1996. As permitted by SFAS 123,
the Company continues to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB 25) and related
interpretations in accounting for its plans and does not recognize
compensation expense for its employee stock-based compensation plans as
prescribed in SFAS 123.
F-7
<PAGE>
AASTROM BIOSCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES--The Company recognizes deferred tax assets and liabilities for
the differences between the carrying amounts and the tax basis of assets and
liabilities, as well as net operating loss and tax credit carryforwards.
Additionally, the Company establishes a valuation allowance to reflect the
likelihood of realization of deferred tax assets.
NET LOSS PER SHARE--Net loss per share is computed using the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares are not included in the per share calculation
where the effect of their inclusion would be anti-dilutive. However, common
and common equivalent shares issued during the twelve month period preceding
the filing of the registration statement for the Company's initial public
offering which was completed in February 1997, (the IPO) at a price below the
expected offering price are considered to be cheap stock and are included in
the calculation for periods prior to the IPO, as if they were outstanding for
all periods using the treasury stock method, as applicable, even though their
inclusion is anti-dilutive. Due to the automatic conversion of all outstanding
shares of Preferred Stock into Common Stock upon the completion of the IPO,
Preferred Stock is assumed to have been converted into Common Stock at the
time of issuance, except for those shares considered to be cheap stock which
are treated as outstanding for all periods presented.
During March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128)
which amends the standards for computing earnings per share previously set
forth in Accounting Principles Board Opinion No. 15 "Earnings per Share" (APB
15). SFAS 128, which will be adopted by the Company for the periods ending
December 31, 1997, will not have a material effect on the computation of net
loss per share for the periods presented in the accompanying financial
statements.
USE OF ESTIMATES--The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
that affect the amounts reported in the financial statements and disclosures
made in the accompanying notes to financial statements. Actual results could
differ from those estimates.
FINANCIAL INSTRUMENTS--The Company evaluates the fair value of those assets
and liabilities identified as financial instruments and estimates that the
fair value of such financial instruments generally approximates the carrying
value in the accompanying financial statements. Fair values have been
determined through information obtained from market sources and management
estimates.
LONG-LIVED ASSETS--The Company adopted Statement of Financial Accounting
Standards No. 121 (SFAS 121) as of July 1, 1996 and evaluates the impairment
of long-lived assets and long-lived assets to be disposed of whenever events
or changes in circumstances indicate that the carrying amount of those assets
may not be recoverable. Adoption of this pronouncement has not significantly
impacted the accompanying financial statements as no impairment losses have
been identified by the Company.
2. SHORT-TERM INVESTMENTS
All short-term investments are available-for-sale and have maturities of one
year or less and are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
June 30, 1997:
U.S. Government Securities...... $13,574,000 $1,000 $(11,000) $13,564,000
Commercial Paper................ 1,500,000 -- -- 1,500,000
----------- ------ -------- -----------
$15,074,000 $1,000 $(11,000) $15,064,000
=========== ====== ======== ===========
</TABLE>
F-8
<PAGE>
AASTROM BIOSCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY
Property consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Machinery and equipment........................ $ 1,337,000 $ 1,425,000
Office equipment............................... 482,000 733,000
Leasehold improvements......................... 520,000 605,000
----------- -----------
2,339,000 2,763,000
Less accumulated depreciation and amortiza-
tion.......................................... (1,151,000) (1,715,000)
----------- -----------
$ 1,188,000 $ 1,048,000
=========== ===========
</TABLE>
Equipment under capital leases totaled $1,131,000 at June 30, 1996 and 1997,
with related accumulated amortization of $622,000 and $844,000, respectively
(Note 7).
4. SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING--In February 1997, the Company completed an
underwritten initial public offering of 3,000,000 shares of its Common Stock
at an offering price of $7.00 per share. In March 1997, the underwriters
elected to purchase an additional 250,000 shares of Common Stock pursuant to
the underwriters' over-allotment option at a price of $7.00 per share.
Proceeds from the offering, net of underwriter's commissions and expenses,
were $19,885,000.
PREFERRED STOCK--The Company had the following classes of preferred stock
outstanding as of June 30, 1996. As a result of the IPO, all 9,657,648 shares
of previously outstanding preferred stock were automatically converted into
8,098,422 shares of Common Stock.
<TABLE>
<CAPTION>
SHARES ISSUED
SHARES AND LIQUIDATION
AUTHORIZED OUTSTANDING PREFERENCE
---------- ------------- -----------
<S> <C> <C> <C>
Series A........................... 2,500,000 2,500,000 $ 2,500,000
Series B........................... 3,030,000 3,030,000 6,060,000
Series C........................... 10,000 10,000 10,000,000
Series D........................... 3,000,000 2,500,001 10,000,000
Series E........................... 1,411,765 1,411,765 6,000,000
--------- --------- -----------
Balance, June 30, 1996............. 9,951,765 9,451,766 $34,560,000
========= ========= ===========
</TABLE>
No dividends have ever been declared or paid.
COBE LABORATORIES, INC. STOCK PURCHASE RIGHTS--In connection with the
purchase of the Series C Convertible Preferred Stock by Cobe Laboratories,
Inc. (Cobe) in October 1993, Cobe received a preemptive right to purchase a
pro-rata portion of any newly issued shares of stock by the Company in order
to maintain its then current percentage ownership interest. Any such purchase
of newly issued shares shall be at the net price to the Company after
deducting underwriter's discounts and commissions, if any. The agreements
establishing the Company's relationship with Cobe provide the Company with an
option (the Put Option) to require Cobe to
F-9
<PAGE>
AASTROM BIOSCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
purchase the lesser of 20%, or $5,000,000, in an initial public offering or a
private offering meeting certain minimum requirements. In the event that the
Company exercises the Put Option, Cobe then has the option to purchase up to
40% of that offering. While the Put Option was not exercised by the Company in
connection with the IPO, Cobe elected to purchase an additional $5,000,000 in
Common Stock as part of the IPO. The Company and Cobe are evaluating whether
or not the Put Option remains in effect as it relates to the Company's ability
to exercise the option in a subsequent private offering of its equity
securities.
Cobe has an option to purchase additional shares from the Company equal to
30% of the total number of shares outstanding assuming exercise of the option.
Such option, which is exercisable until February 2000, must be exercised in
full with the purchase price of the shares equal to 120% of the public market
trading price as determined by the 30-day average market price preceding the
date of exercise of the option.
The Company has granted Cobe a right of first negotiation in the event the
Company receives any proposal concerning, or otherwise decides to pursue, a
merger, consolidation or other transaction in which all or a majority of the
Company's equity securities or substantially all of the Company's assets, or
any material portion of the assets of the Company used by the Company in
performing its obligation under the Distribution Agreement (Note 6), would be
acquired by a third party outside of the ordinary course of business.
STOCK OPTION PLANS--The Company has various stock option plans which provide
for the issuance of nonqualified and incentive stock options to acquire up to
2,986,594 shares of Common Stock. Such options may be granted by the Company's
Board of Directors to certain of the Company's founders, employees, directors
and consultants. The exercise price of incentive stock options shall not be
less than the fair market value of the shares on the date of grant. In the
case of individuals who are also holders of 10% or more of the outstanding
shares of Common Stock, the exercise price of incentive stock options shall
not be less than 110% of the fair market value of the shares on the date of
grant. The exercise price of non-qualified stock options shall not be less
than 85% of the fair market value on the date of grant. Options granted under
these plans expire no later than ten years from the date of grant and
generally become exercisable ratably over a four-year period following the
date of grant.
For certain options granted, the Company recognizes compensation expense for
the difference between the deemed value for accounting purposes and the option
exercise price on the date of grant. During the year ended June 30, 1997,
compensation expense totaling approximately $120,000 has been charged with
respect to these options. Additional future compensation expense with respect
to the issuance of such options totals approximately $135,000 and will be
recognized through December 2001.
As permitted by SFAS 123, the Company continues to apply APB 25 and related
interpretations in accounting for its stock option plans and does not
recognize compensation expense for its employee stock-based compensation plans
as prescribed in SFAS 123. If the Company had elected to recognize
compensation expense based upon the fair value at the grant dates for stock
option awards granted in 1996 and 1997, in accordance with SFAS No. 123, the
pro forma net loss and net loss per share would be as follows.
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1996 1997
---------- -----------
<S> <C> <C>
Net Loss:
As reported................................... $9,917,000 $14,288,000
Pro forma..................................... 9,942,000 14,793,000
Net Loss per common share:
As reported................................... $ (.98) $ (1.26)
Pro forma..................................... (.98) (1.31)
</TABLE>
F-10
<PAGE>
AASTROM BIOSCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The fair value of options was estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions; no dividend
yields, 40% volatility, risk free interest rates ranging from 5.2% to 6.8% and
expected option lives of three to five years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the use of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
subjective assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock based
compensation plans.
The following table summarizes option activity under the Company's stock
option plans:
<TABLE>
<CAPTION>
OPTIONS OPTIONS WEIGHTED AVERAGE OPTIONS
OPTIONS AVAILABLE EXERCISE PRICE EXERCISABLE
OUTSTANDING FOR GRANT PER SHARE AT PERIOD END
----------- --------------- ---------------- -------------
<S> <C> <C> <C> <C>
March 24, 1989 (Incep-
tion)
Options authorized.... -- 1,703,261
Options granted....... 1,727,111 (1,727,111) $ .31
Options exercised..... (1,229,482) -- $ .19
Options canceled...... (103,964) 103,964 $ .66
---------- ----------
Balance, June 30, 1994.. 393,665 80,114 $ .61 77,682
Options authorized.... -- 333,333
Options granted....... 55,333 (55,333) $1.20
Options exercised..... (39,103) -- $ .21
Options canceled...... (60,230) 60,230 $ .34
---------- ----------
Balance, June 30, 1995.. 349,665 418,344 $ .78 108,492
Options authorized.... -- 800,000
Options granted....... 155,337 (155,337) $1.44
Options exercised..... (130,016) -- $ .41
Options canceled...... (44,690) 44,690 $ .85
---------- ----------
Balance, June 30, 1996.. 330,296 1,107,697 $1.20 101,021
Options authorized.... -- 150,000
Options granted....... 785,200 (785,200) $6.78
Options exercised..... (40,307) -- $ .65
Options canceled...... (16,818) 16,818 $1.83
---------- ----------
Balance, June 30, 1997.. 1,058,371 489,315 $5.36 483,376
---------- ----------
---------- ----------
</TABLE>
OUTSIDE DIRECTORS' STOCK OPTION PLAN--The Company has an outside directors'
stock option plan which provides for the issuance of options to purchase up to
150,000 shares of Common Stock to outside directors. Under this plan, non-
qualified options to purchase 5,000 shares of Common Stock are granted to each
outside director on the day of the Annual Shareholders' meeting. These options
generally vest over a one-year period and expire ten years after the date of
grant. As of June 30, 1997, options to purchase 30,000 shares of Common Stock
at $7.00 per share are outstanding under this plan, of which options to
purchase 10,002 shares of Common Stock are exercisable.
F-11
<PAGE>
AASTROM BIOSCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock-based compensation
plans outstanding as of June 30, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED EXERCISE
RANGE OF NUMBER OF REMAINING AVERAGE PRICE OF
EXERCISE OPTIONS CONTRACTUAL EXERCISE NUMBER EXERCISABLE
PRICES OUTSTANDING LIFE-YEARS PRICE EXERCISABLE OPTIONS
-------------- ----------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ .30 - $ 1.20 260,170 7.7 $1.15 135,542 $1.11
$ 3.20 - $3.88 58,418 9.2 $3.24 4,501 $3.20
$7.00 - $ 7.13 739,783 9.6 $7.00 343,333 $7.00
--------- -------
1,058,371 483,376
========= =======
</TABLE>
The weighted average fair value of options granted during the year ended
June 30, 1997 was $6.78 per share.
EMPLOYEE STOCK PURCHASE PLAN--The Company has an employee stock purchase
plan under which eligible employees can purchase Common Stock, at a discount
to the market price, through payroll deductions up to 10% of the employees
base compensation, subject to certain limitations, during sequential 24-month
offering periods. Each offering period is divided into four consecutive six-
month purchase periods ending on March 1 and September 1 of each year. Unless
otherwise provided by the Board of Directors prior to the commencement of an
offering period, the price at which stock is purchased under the plan for such
offering period is equal to 85% of the lesser of the fair market value of the
Common Stock on the first day of such offering period or the last day of the
purchase period of such offering period. The initial purchase date under this
plan is August 31, 1997, accordingly, no shares have been sold under this plan
as of June 30, 1997.
STOCK PURCHASE WARRANTS--The Company has issued warrants to purchase 69,444
shares of Common Stock which expire on October 15, 2000. These warrants may be
exercised, in whole or in part, at a price equal to the lesser of (a) $9.00
per share, which price increases by $3.00 per share on February 7, 1998, 1999
and 2000; or (b) 85% of the fair market value of the Company's Common Stock at
the time of exercise.
COMMON SHARES RESERVED--As of June 30, 1997, the Company has reserved shares
of Common Stock for future issuance as follows:
<TABLE>
<S> <C> <C>
Issuance under stock option plans:
1992 Incentive and Non-Qualified Stock Option Plan........ 1,397,686
1995 Outside Director Stock Option Plan................... 150,000
---------
1,547,686
Issuance under 1996 Employee Stock Purchase Plan............ 250,000
Exercise of Stock Purchase Warrants......................... 69,444
---------
1,867,130
=========
</TABLE>
F-12
<PAGE>
AASTROM BIOSCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1996 1997
----------- ------------
<S> <C> <C>
Net operating loss carryforwards............... $ 9,210,000 $ 14,150,000
Tax credits and other.......................... 440,000 1,162,000
----------- ------------
Gross deferred tax assets...................... 9,650,000 15,312,000
Deferred tax assets valuation allowance........ (9,650,000) (15,312,000)
----------- ------------
$ -- $ --
=========== ============
</TABLE>
Due to the historical losses incurred by the Company, a full valuation
allowance for deferred tax assets has been provided. If the Company achieves
profitability, these deferred tax assets may be available to offset future
income taxes.
At June 30, 1997, the Company's Federal tax net operating loss and tax
credit carryfowards were $40,420,000 and $971,000, respectively, which will
expire from 2004 through 2012, if not utilized. The Company underwent an
ownership change in October 1993 which has resulted in a limitation under
which the Company can utilize a portion of its federal net operating loss
carryforward amounting to $1,153,000 per year. As of June 1997, the portion of
the Company's net operating loss that remains subject to this limitation is
$2,490,000 and therefore is not expected to ultimately effect the Company's
ability to utilize the benefit. If certain changes in ownership should occur
again in the future, the Company's ability to utilize its net operating loss
and tax credit carryforwards may become subject to further annual limitation.
6. LICENSES, ROYALTIES AND COLLABORATIVE AGREEMENTS:
UNIVERSITY OF MICHIGAN--In August 1989, the Company entered into a research
agreement with the University of Michigan (the University). Under the terms of
this research agreement, as amended, the Company agreed to reimburse the
University for certain research costs through the date of its expiration in
December 1994. Payments made to the University under the aforementioned
agreements totaled $121,000 and $2,521,000 for the years ended June 30, 1995
and for the period from Inception to June 30, 1997, respectively, which
amounts are included in research and development expense in the accompanying
Statements of Operations. As part of this relationship, the Company issued to
the University 454,545 shares of Common Stock in August 1989. No value has
been assigned to these shares in the accompanying financial statements. In
March 1992, and as provided for under the research agreement, the Company
entered into a license agreement for the technology developed under the
research agreement. The license agreement, as amended, provides for a royalty
to be paid to the University equal to 2% of net sales of products containing
the licensed technology sold by the Company.
COBE BCT, INC.--In connection with the issuance of the Series C Preferred
Stock to Cobe in October 1993, the Company and Cobe BCT, Inc. (Cobe BCT), an
affiliate of Cobe, entered into an agreement which grants to Cobe BCT
exclusive worldwide distribution and marketing rights to the Company's Cell
Production System (CPS) for stem cell therapy applications (Distribution
Agreement). The term of the Distribution Agreement is ten years, with an
option, exercisable by Cobe BCT, to extend the term for an additional ten
years. Cobe has the right to terminate its Distribution Agreement with the
Company with twelve months' notice upon a change of control of the Company,
other than to Cobe, or at any time after December 31, 1997, if Cobe determines
that commercialization of the Aastrom CPS for stem cell therapy on or prior to
December 31, 1998 is unlikely. Pursuant to the Distribution Agreement, Cobe
BCT will perform worldwide marketing and distribution activities of the CPS
for use in stem cell therapy and will receive a share of the resulting net
sales, as defined, ranging from 38% to 42%, subject to certain negotiated
discounts and volume-based adjustments.
F-13
<PAGE>
AASTROM BIOSCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The agreements establishing this collaboration provided for payments
totaling $5,000,000 to be made by Cobe BCT upon the Company meeting certain
development milestones. In May 1995, the Company accepted, as part of the sale
of the Series D Preferred Stock, an equity investment of $5,000,000 from Cobe
in lieu of those future milestone payments.
LICENSE AND ROYALTY AGREEMENTS--In July 1992, the Company licensed certain
cell culture technology under which it obtained an exclusive worldwide license
to the technology in exchange for a royalty payable of up to 3% of net sales
on products containing the licensed technology.
In March 1996, the Company executed a license agreement which provides for
the use of licensed products in the CPS. Pursuant to this license agreement,
the Company recorded a charge to research and development expense of
$1,500,000 representing the license fee payable upon execution of the
agreement. The license agreement provides for annual renewal fees of
$1,000,000 over the five year license term, if renewed by the Company, and can
be extended at the Company's option for an additional five years.
RHONE-POULENC RORER, INC.--In September 1995, the Company entered into a
research and development collaboration with Rhone-Poulenc Rorer, Inc. (RPR),
granting RPR a right to license the Company's CPS for Lymphoid cell
applications. Pursuant to the agreements establishing this collaboration, RPR
was obligated to fund certain research costs associated with the development
of the CPS for Lymphoid cell applications and was entitled to make equity
purchases of up to $12,500,000 subject to the Company's satisfaction of
certain milestones and RPR's decision to exercise certain options. In
September 1996, RPR notified the Company of its intent to not exercise its
additional options under the collaboration. This notification was made after
RPR had determined that for strategic reasons it would not pursue Lymphoid
cell therapy applications, including those being pursued under the
collaboration the Company. The Company received $3,500,000 in equity payments
and recognized $1,538,000 in research revenue under this collaboration. As a
result of this termination, no further equity payments or research funding is
due from RPR and RPR's license rights to the Company's CPS for Lymphoid cell
applications have been terminated.
7. COMMITMENTS
The Company leases certain machinery and equipment and office equipment
under capital leases. Obligations under these leasing arrangements bear
interest at rates ranging from 9.7% to 12.1% and mature through May 1999.
Additionally, the Company leases its facility under an operating lease which
expires in May 1998, at which time the Company has the option to renew the
lease for an additional period of up to five years.
Future minimum payments under capital leases and non-cancelable operating
leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
Year Ending June 30,
1998.................................................... $138,000 $435,000
1999.................................................... 69,000 --
-------- --------
Total minimum lease payments.............................. 207,000 $435,000
========
Less amount representing interest......................... (18,000)
--------
Obligations under capital lease........................... $189,000
========
</TABLE>
Certain of the Company's capital lease agreements contain restrictive
provisions which require that the Company's total assets exceed its total
liabilities by at least $1,000,000. Should the Company fall out of compliance
with this provision, and a waiver cannot be obtained from the lessor,
remaining amounts due under the lease agreements become immediately due and
payable.
F-14
<PAGE>
AASTROM BIOSCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Rent expense for the years ended June 30, 1995, 1996 and 1997, was $241,000,
$338,000 and $456,000, respectively, and for the period from Inception to June
30, 1997 was $1,278,000.
8. EMPLOYEE SAVINGS PLAN
The Company has a 401(k) plan that became effective in January 1994. The
plan allows participating employees to contribute up to 15% of their salary,
subject to annual limits and minimum qualifications. The Board may, at its
sole discretion, approve Company contributions. Through June 30, 1997, the
Company has made no contributions to the plan.
F-15
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company, the Placement Agent or
any other person. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any security other than the shares of Common
Stock offered hereby, nor does it constitute an offer to sell or a solicitation
of an offer to buy any of the securities offered hereby to any person in any
jurisdiction in which it is unlawful to make such offer or solicitation to such
person. Neither the delivery of this Prospectus nor any sale made hereunder
shall under any circumstances create an implication that the information
contained herein is correct as of any date subsequent to the date hereof.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
The Company............................................................... 16
Use of Proceeds........................................................... 16
Price Range of Common Stock............................................... 16
Dividend Policy........................................................... 16
Dilution.................................................................. 17
Capitalization............................................................ 18
Selected Financial Data................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 23
Management................................................................ 44
Certain Transactions...................................................... 52
Principal Shareholders.................................................... 54
Description of Capital Stock.............................................. 56
Shares Eligible for Future Sale........................................... 59
Plan of Distribution...................................................... 60
Legal Matters............................................................. 60
Experts................................................................... 61
Additional Information.................................................... 61
Index to Financial Statements............................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,500,000 SHARES
[LOGO]AASTROM
BIOSCIENCES INC
---------------------
COMMON STOCK
---------------
PROSPECTUS
---------------
COWEN & COMPANY
,1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Other expenses in connection with the registration of the securities
hereunder, which will be paid by the Registrant, will be substantially as
follows:
<TABLE>
<S> <C>
ITEM AMOUNT
---- --------
Securities and Exchange Commission registration fee............. $ 3,239
NASD filing fee................................................. 1,569
Nasdaq National Market fee...................................... 17,500
Blue sky qualification fees and expenses*....................... 5,000
Accounting fees and expenses*................................... 25,000
Legal fees and expenses*........................................ 100,000
Printing and engraving expenses*................................ 100,000
Transfer agent and registrar fees*.............................. 5,000
Escrow agent fees*.............................................. 10,000
Miscellaneous expenses*......................................... 82,692
--------
Total*........................................................ $350,000
========
</TABLE>
- --------
* Estimated expenses.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 1561 through 1565 of the Michigan Business Corporation Act (the
"MBCA") authorize a corporation to grant or a court to award indemnity to
directors, officers, employees and agents in terms sufficiently broad to
permit such indemnification under certain circumstances for liabilities
(including reimbursement for expenses incurred) arising under the Securities
Act of 1933.
The Bylaws of the Registrant (see Exhibit 3.2), provide that the Registrant
shall, to the fullest extent authorized or permitted by the MBCA, or other
applicable law, indemnify a director or officer who was or is a party or is
threatened to be made a party to any proceeding by or in the right of the
Registrant to procure a judgment in its favor by reason of the fact that such
person is or was a director, officer, employee or agent of the Registrant,
against expenses, including actual and reasonable attorneys' fees, and amounts
paid in settlement incurred in connection with the action or suit, if the
indemnitee acted in good faith and in a manner the person reasonably believed
to be in, or not opposed to, the best interests of the Registrant or its
shareholders. This section also authorizes the Registrant to advance expenses
incurred by any agent of the Registrant in defending any proceeding prior to
the final disposition of such proceeding upon receipt of an undertaking by or
on behalf of the agent to repay such amount unless it shall be determined
ultimately that the agent is entitled to be indemnified.
The Bylaws also authorize the Registrant to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent
of the Registrant against any liability asserted against or incurred by such
person in such capacity or arising out of such person's status as such,
regardless of whether the Registrant would have the power to indemnify such
person against such liability under the provisions of the MBCA.
The Registrant has entered into an indemnification agreement with certain of
its directors, officers and other key personnel, which contains provisions
that may in some respects be broader than the specific indemnification
provisions contained under applicable law. The indemnification agreement may
require the Registrant, among other things, to indemnify such directors,
officers and key personnel against certain liabilities that may arise by
reason of their status or service as directors, officers or employees of the
Registrant, to advance the expenses incurred by such parties as a result of
any threatened claims or proceedings brought against them as to which they
could be indemnified and, to the maximum extent that insurance coverage of
such directors, officers and key employees under the Registrant's directors'
and officers' liability insurance policies is maintained.
II-1
<PAGE>
Section 1209 of the MBCA permits a Michigan corporation to include in its
Articles of Incorporation a provision eliminating or limiting a director's
liability to a corporation or its shareholders for monetary damages for
breaches of fiduciary duty. The enabling statute provides, however, that
liability for breaches of the duty of loyalty, acts or omissions not in good
faith or involving intentional misconduct or knowing violation of the law, or
the receipt of improper personal benefits cannot be eliminated or limited in
this manner. The Registrant's Restated Articles of Incorporation include a
provision which eliminates, to the fullest extent permitted by the MBCA,
director liability for monetary damages for breaches of fiduciary duty.
Section 7 of the Placement Agent Agreement filed as Exhibit 1.1 hereto sets
forth certain provisions with respect to the indemnification of certain
controlling persons, directors and officers against certain losses and
liabilities, including certain liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(A) ISSUANCES OF COMMON STOCK
Since October 1, 1994, the Registrant has sold the following shares of
Common Stock:
In October 1995, the Registrant issued and sold 37,500 shares of Common
Stock to Albert B. Deisseroth at a price of $0.80 per share.
(B) ISSUANCES OF PREFERRED STOCK
Since October 1, 1994, the Registrant has sold the following shares of
Preferred Stock:
In April and May 1995, the Registrant issued an aggregate of 2,500,001
shares of Series D Preferred Stock to 11 accredited investors at a price of
$4.00 per share.
In December 1995, the Registrant issued 62,500 shares of Series D Preferred
Stock to Northwest Ohio Venture Fund, L.P., at a purchase price of $4.00 per
share.
In January 1996, the Registrant issued an aggregate of 1,411,765 shares of
Series E Preferred Stock to SBIC Partners, L.P., and the State Treasurer of
the State of Michigan ("Michigan") at a purchase price of $4.25 per share.
Pursuant to a Governance Agreement between the Company and Rhone-Poulenc
Rorer, Inc. ("RPR"), dated September 15, 1995, RPR terminated its contractual
relationship with the Registrant on September 6, 1996. As a result of such
termination, the Registrant issued 205,882 shares of Series E Preferred Stock
to RPR at a purchase price of $17.00 per share.
(C) ISSUANCES OF WARRANTS
Since October 1, 1994, the Registrant has issued the following warrants:
In October 1996, the Registrant issued warrants to Michigan to purchase
69,444 shares of Common Stock as consideration for entering into the
Convertible Loan Commitment.
In October 1997, the Registrant entered into an agreement with Burrill &
Company, pursuant to which the Registrant issued warrants to purchase 200,000
shares of Common Stock as consideration for certain services to be rendered by
Burrill & Company under such agreement.
(D) OPTION ISSUANCES TO, AND EXERCISES BY, EMPLOYEES, DIRECTORS AND
CONSULTANTS
From January 18, 1990 to April 11, 1997, the Registrant issued options to
purchase a total of 2,719,231 shares of Common Stock at exercise prices
ranging from $0.15 to $7.125 per share to 99 employees and consultants and six
non-employee directors. From October 30, 1992 to April 11, 1997, the
Registrant issued a total of 1,434,534 shares of Common Stock to 31 employees
and consultants and one non-employee director upon exercise of stock options
at exercise prices ranging from $0.15 to $1.20 per share.
II-2
<PAGE>
There were no underwriters employed in connection with any of the
transactions set forth in Item 15.
The issuances described in Items 15(a), 15(b) and 15(c) were exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering.
The issuances described in item 15(d) were exempt from registration under the
Securities Act in reliance on Rule 701 promulgated thereunder as transactions
pursuant to compensatory benefit plans and contracts relating to compensation.
The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates or other instruments issued in
such transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
See Exhibit Index.
(b) Financial Statement Schedules
All such schedules have been omitted because they are not applicable or not
required under the instructions contained in Regulation S-X or because the
information is included elsewhere in the Financial Statements or the notes
thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions, 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.
The undersigned Registrant undertakes that:
(1) For purposes of determining any liability under the Securities act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 4340A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) of
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective; and
(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.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Ann Arbor, State of
Michigan, on the 8th day of October, 1997.
AASTROM BIOSCIENCES, INC.
By: /s/R. Douglas Armstrong
----------------------------------
R. DOUGLAS ARMSTRONG, PH.D.
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints R. Douglas Armstrong and Todd E.
Simpson, or either of them, as his attorney-in-fact, each with full power of
substitution for him in any and all capacities, to sign any and all amendments
to this registration statement, including, but not limited to, post-effective
amendments and any and all new registration statements filed pursuant to Rule
462 under the Securities Act of 1933 in connection with or related to the
offering contemplated by this registration statement, as amended, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all that each said attorney-in-fact or his substitute or substitutes may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ R. Douglas Armstrong President, Chief Executive October 8,
- --------------------------------- Officer, and Director 1997
R. DOUGLAS ARMSTRONG, PH.D (Principal Executive
Officer)
/s/ Todd E. Simpson Vice President, Finance & October 8,
- --------------------------------- Administration, Secretary 1997
TODD E. SIMPSON and Treasurer, Chief
Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Robert J. Kunze Chairman of the Board and October 8,
- --------------------------------- Director 1997
ROBERT J. KUNZE
/s/ Stephen G. Emerson Director October 8,
- --------------------------------- 1997
STEPHEN G. EMERSON, M.D., PH.D
/s/ G. Bradford Jones Director October 8,
- --------------------------------- 1997
G. BRADFORD JONES
/s/ Horst R. Witzel Director October 8,
- --------------------------------- 1997
HORST R. WITZEL, DR. -ING
/s/ Edward C. Wood, Jr. Director October 8,
- --------------------------------- 1997
EDWARD C. WOOD, JR.
II-4
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated August 15, 1997,
relating to the financial statements of Aastrom Biosciences, Inc., which
appears in such Prospectus. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
Price Waterhouse LLP
Detroit, Michigan
October 7, 1997
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Placement Agent Agreement between Cowen & Company and the
Company.
3.1* Restated Articles of Incorporation of the Company.
3.2** Bylaws, as amended.
4.1** Specimen Common Stock Certificate.
4.2** Amended and Restated Investors' Rights Agreement, dated April 7, 1992.
5.1 Opinion of Pepper, Hamilton & Scheetz.
10.1** Form of Indemnification Agreement.
10.2** Amended and Restated 1992 Incentive and Non-Qualified Stock Option
Plan and forms of agreements thereunder.
10.3** 1996 Outside Directors Stock Option Plan and forms of agreements
thereunder.
10.4** 1996 Employee Stock Purchase Plan and form of agreement thereunder.
10.5** Stock Purchase Agreement, dated October 22, 1993, between Cobe
Laboratories, Inc. and the Company and amendment thereto dated October
29, 1996.
10.6**+ Distribution Agreement, dated October 22, 1993, between Cobe BCT, Inc.
and the Company and amendments thereto dated March 29, 1995, September
11, 1995 and October 29, 1996.
10.7** Lease Agreement, dated May 18, 1992, between Domino's Farms Holdings,
L.P. and the Company and amendments thereto dated February 26, 1993,
October 3, 1994, November 16, 1994 and July 29, 1996.
10.8** Promissory Note, dated November 18, 1993, for $120,000 loan by the
Company to R. Douglas Armstrong, Ph.D. and amendment thereto dated
October 30, 1996.
10.9** Promissory Note, dated October 20, 1993, for $47,303 loan by the
Company to Stephen G. Emerson, M.D., Ph.D. and amendment thereto dated
October 30, 1996.
10.10** Clinical Trial Agreement dated August 28, 1996 between the Company and
Loyola University Medical Center Cancer Center.
10.11** Stock Purchase Commitment Agreement, dated October 15, 1996, between
the State Treasurer of the State of Michigan and the Company.
10.12** Convertible Loan Commitment Agreement, dated October 15, 1996, between
the State Treasurer of the State of Michigan and the Company.
10.13** Letter Agreement, dated November 11, 1996, between the Company and
Cobe Laboratories, Inc.
10.14** Termination Agreement, dated November 14, 1996, between the Company
and Rhone-Poulenc Rorer Inc.
10.15** Stock Purchase Agreement, dated November 14, 1996, between the Company
and Rhone-Poulenc Rorer Inc.
10.16** Collaborative Supply Agreement, dated December 16, 1996, between the
Company and Anchor Advanced Products, Inc. Mid-State Plastics
Division.
10.17** 1989 Stock Option Plan and form of agreement thereunder.
10.18** Ancillary Stock Option Plan and form of agreement thereunder.
10.19** 401(k) Plan.
10.20** Form of Employment Agreement.
10.21** License Agreement, dated July 17, 1992, between J.G. Cremonese and the
Company and related addenda thereto dated July 14, 1992 and July 7,
1993.
</TABLE>
II-6
<PAGE>
<TABLE>
<C> <S>
10.22**+ Collaborative Product Development Agreement, dated May 10, 1994,
between SeaMED Corporation and the Company.
10.23**+ Collaborative Product Development Agreement, dated November 8, 1994,
between Ethox Corporation and the Company.
10.24**+ License and Supply Agreement, dated April 1, 1996, between Immunex
Corporation and the Company.
10.25** Clinical Trial Agreement, dated April 19, 1996, between the Company
and the University of Texas M.D. Anderson Cancer Center.
10.26** License Agreement, dated March 13, 1992, between the Company and the
University of Michigan and amendments thereto dated March 13, 1992,
October 8, 1993 and June 21, 1995.
10.27** Employee Proprietary Information and Invention Agreement, effective
June 1, 1991, between the Company and R. Douglas Armstrong, Ph.D.
10.28** Employment Agreement, dated June 19, 1992, between the Company and
James Maluta.
10.29** Employment Agreement, dated December 8, 1995, between the Company and
Todd E. Simpson.
10.30** Employment Agreement, dated February 10, 1994, between the Company
and Walter C. Ogier.
10.31** Employment Agreement, dated April 19, 1994, between the Company and
Thomas E. Muller, Ph.D.
10.32** Employment Agreement, dated October 26, 1995, between the Company and
Alan K. Smith, Ph.D.
10.33** Consulting Agreement, dated June 1, 1995, between the Company and
Stephen G. Emerson, M.D., Ph.D.
10.34** Form of Subscription Agreement for the purchase of Series D Preferred
Stock (Enterprise Development Fund L.P., Enterprise Development Fund
II, L.P. and Northwest Ohio Venture Fund Limited Partnership).
10.35** Stock Purchase Agreement, dated January 8, 1996, among the Company,
SBIC Partners, L.P. and the State Treasurer of the State of Michigan.
10.36** Form of Subscription Agreement for the purchase of Series D Preferred
Stock (Brentwood Associates V, L.P., Candice E. Appleton Family
Trust, Candis J. Stern, Helmut F. Stern, H&Q Life Science Technology
Fund, H&Q London Ventures, State Treasurer of the State of Michigan
and Windpoint Partners II, Limited Partnership).
10.37** Subscription Agreement, dated December 11, 1995, between the Company
and Northwest Ohio Venture Fund Limited Partnership.
10.38# Second Amendment to Promissory Note payable to the Company by Stephen
G. Emerson, M.D., Ph.D., dated June 30, 1997.
10.39# Second Amendment to Promissory Note payable to the Company by R.
Douglas Armstrong, Ph.D., dated June 30, 1997.
10.40# Amendment to License and Supply Agreement, dated August 25, 1997,
between Immunex Corporation and the Company.
10.41 Strategic Planning Consulting Services and Collaboration Agreement,
dated October 7, 1997, between Burrill & Company, LLC and the
Company.
11.1# Statement regarding computation of net loss per share.
16.1*** Letter from Coopers & Lybrand L.L.P., dated July 15, 1997.
23.1 Consent of Price Waterhouse LLP (see page II-5).
23.2 Consent of Pepper, Hamilton & Scheetz (included in Exhibit 5.1).
23.3 Consent of Oblon, Spivak, McClelland, Maier & Neustadt, P.C.
</TABLE>
II-7
<PAGE>
<TABLE>
<C> <S>
24.1 Power of Attorney (see page II-4).
27.1# Financial Data Schedule.
</TABLE>
- --------
* Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1996, as filed on March 7, 1997.
** Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 333-15415), declared effective on February 3, 1997.
*** Incorporated by reference to the Company's Current Report on Form 8-K, as
filed on July 16, 1997.
# Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended June 30, 1997, as filed on September 25, 1997.
+ Confidential treatment has been granted as to a portion of this exhibit.
II-8
<PAGE>
EXHIBIT 1.1
1,500,000 Shares
AASTROM BIOSCIENCES, INC.
COMMON STOCK
PLACEMENT AGREEMENT
-------------------
, 1997
COWEN & COMPANY
Financial Square
New York, New York 10005
Ladies and Gentlemen:
1. Introductory. Aastrom Biosciences, Inc., a Michigan corporation (the
------------
``Company''), hereby engages Cowen & Company (the ``Agent'') upon the terms and
conditions set forth herein, as the Company's agent in connection with the
proposed offering to the entities identified on Exhibit A of the number of
shares set forth opposite such entity's name on Exhibit A (the ``Specified
Placement Shares'') of the Company's authorized but unissued common stock, no
par value (the ``Common Stock'').
2. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to, and agrees with, the Agent that:
(a) A registration statement on Form S-1 (File No. 333- )
in the form in which it became or becomes effective and also in such
form as it may be when any post-effective amendment thereto shall
become effective with respect to the Specified Placement Shares,
including any preeffective prospectuses included as part of the
registration statement as originally filed or as part of any amendment
or supplement thereto, or filed pursuant to Rule 424 under the
Securities Act of 1933, as amended (the "Securities Act"), and the
rules and regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission") thereunder, copies of which
have heretofore been delivered to you, has been carefully prepared by
the Company in conformity with the requirements of the Securities Act
and has been filed with the Commission under the Securities Act; one
or more amendments to such registration statement, including in each
case an amended preeffective prospectus, copies of which
<PAGE>
amendments have heretofore been delivered to you, have been so
prepared and filed. The term "Registration Statement" means the
registration statement as amended at the time it became or becomes
effective, including the information (if any) deemed to be a part of
the registration statement at the time of effectiveness pursuant to
Rule 430 of the Rules and Regulations. However, if it is
contemplated, at the time this Agreement is executed, that a post-
effective amendment to the registration statement will be filed and
must be declared effective before the offering of the Specified
Placement Shares may commence, the term "Registration Statement" as
used in this Agreement means the registration statement as amended by
said post-effective amendment. The term "Registration Statement" as
used in this Agreement shall also include any registration statement
relating to the Specified Placement Shares that is filed and declared
effective pursuant to Rule 462(b) under the Securities Act. The term
"Prospectus" as used in this Agreement means the prospectus in the
form included in the Registration Statement, or, (A) if the prospectus
included in the Registration Statement omits information in reliance
on Rule 430A under the Securities Act and such information is included
in a prospectus filed with the Commission pursuant to Rule 424(b)
under the Securities Act, the term "Prospectus" as used in this
Agreement means the prospectus in the form included in the
Registration Statement as supplemented by the addition of the Rule
430A information contained in the prospectus filed with the Commission
pursuant to Rule 424 (b) and (B) if prospectuses that meet the
requirements of Section 10(a) of the Securities Act are delivered
pursuant to Rule 434 under the Securities Act, then (i) the term
"Prospectus" as used in this Agreement means the "prospectus subject
to completion" (as such term is defined in Rule 434(g) under the
Securities Act) as supplemented by (a) the addition of Rule 430A
information or other information contained in the form of prospectus
delivered pursuant to Rule 434(b)(2) under the Securities Act or (b)
the information contained in the term sheets described in Rule
434(b)(3) under the Securities Act, and (ii) the date of such
prospectuses shall be deemed to be the date of the term sheets. The
term "Preeffective Prospectus" as used in this Agreement means the
prospectus subject to completion in the form included in the
Registration Statement at the time of the initial filing of the
Registration Statement with the Commission, and as such prospectus
shall have been amended from time to time prior to the date of the
Prospectus.
(b) The Commission has not issued or, to the knowledge of the
Company, threatened to issue any order preventing or suspending the
use of any Preeffective Prospectus, and, at its date of issue, each
Preeffective Prospectus conformed in all material respects with the
requirements of the Securities Act and did not include 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 under which they were made, not misleading;
and, when the Registration Statement becomes effective and at all
times subsequent thereto up to and including the Closing Date, the
Registration Statement and the Prospectus and any amendments or
supplements thereto contained and will contain all
-2-
<PAGE>
material statements and information required to be included therein by
the Securities Act and conformed and will conform in all material
respects to the requirements of the Securities Act and neither the
Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, included or will include any untrue statement of a
material fact or omit to state any 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; provided,
however, that the foregoing representations, warranties and agreements
shall not apply to information contained in or omitted from any
Preeffective Prospectus or the Registration Statement or the
Prospectus or any such amendment or supplement thereto in reliance
upon, and in conformity with, written information furnished to the
Company by or on behalf of the Agent, directly or through you,
specifically for use in the preparation thereof; there is no
franchise, lease, contract, agreement or document required to be
described in the Registration Statement or Prospectus or to be filed
as an exhibit to the Registration Statement which is not described or
filed therein as required; and all descriptions of any such
franchises, leases, contracts, agreements or documents contained in
the Registration Statement are accurate and complete descriptions of
such documents in all material respects.
(c) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, and except as
set forth or contemplated in the Prospectus, the Company has not
incurred any material liabilities or obligations, direct or
contingent, nor entered into any material transactions (in all cases
other than in the ordinary course of business), and there has not been
any material adverse change in the condition (financial or otherwise),
properties, business, management, prospects, net worth (other than
ordinary course changes) or results of operations of the Company or
any change in the capital stock, short-term or long-term debt of the
Company.
(d) The financial statements, together with the related notes
and schedules, set forth in the Prospectus and elsewhere in the
Registration Statement fairly present, on the basis stated in the
Registration Statement, the financial position and the results of
operations and changes in financial position of the Company at the
respective dates or for the respective periods therein specified.
Such statements and related notes and schedules have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis except as may be set forth in the Prospectus.
(e) Price Waterhouse LLP, who have expressed their opinions on
the audited financial statements and related schedules included in the
Registration Statement and the Prospectus are independent public
accountants as required by the Securities Act and the Rules and
Regulations.
(f) The Company has been duly organized and is validly existing
and in good standing as a corporation under the laws of the state of
Michigan, with
-3-
<PAGE>
power and authority (corporate and other) to own or lease its
properties and to conduct its business as described in the Prospectus;
except as otherwise described in the Prospectus, the Company is in
possession of and operating in compliance with all franchises, grants,
authorizations, licenses, permits, easements, consents, certificates
and orders required for the conduct of its business as contemplated by
the Prospectus, all of which are valid and in full force and effect,
expect for such franchises, grants, authorizations, licenses, permits,
easements, consents, certificates or orders the absence of which,
alone or in the aggregate, do not or would not have a material adverse
effect on the Company; and the Company is duly qualified to do
business and in good standing as a foreign corporation in all other
jurisdictions where its ownership or leasing of properties or the
conduct of its business requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on
the Company. The Company has all requisite power and authority, and
all necessary consents, approvals, authorizations, orders,
registrations, qualifications, licenses and permits of and from all
public regulatory or governmental agencies and bodies to own, lease
and operate its properties and conduct its business as now being
conducted and as described in the Prospectus, and no such consent,
approval, authorization, order, registration, qualification, license
or permit contains a materially burdensome restriction not adequately
disclosed in the Registration Statement and the Prospectus. The
Company does not own or control, directly or indirectly, any other
corporations, associations or other entities.
(g) The Company's authorized and outstanding capital stock is on
the date hereof, and will be on the Closing Date, as set forth under
the caption "Capitalization" in the Prospectus (excluding such changes
as result solely from the exercise, after the date hereof, of options
outstanding on the date hereof); the outstanding shares of common
stock (including the outstanding shares of the Specified Placement
Shares) of the Company conform to the description thereof in the
Prospectus and have been duly authorized and validly issued and are
fully paid and nonassessable; and have been issued in compliance with
all federal and state securities laws and were not issued in violation
of or subject to any preemptive rights or similar rights to subscribe
for or purchase securities (except such rights as have been validly
waived). Except as disclosed in and or contemplated by the
Registration Statement and the Prospectus and the financial
statements of the Company and related notes thereto included in the
Prospectus, the Company does not have outstanding any options or
warrants to purchase, or any preemptive rights or other rights to
subscribe for or to purchase any securities or obligations convertible
into, or any contracts or commitments to issue or sell, shares of its
capital stock or any such options, rights, convertible securities or
obligations, except for options granted subsequent to the date of
information provided in the Prospectus pursuant to the Company's
employee and stock option plans as disclosed in the Prospectus. The
description of the Company's stock option and other stock plans or
arrangements, and the options or other rights granted or exercised
thereunder, as set forth in the Prospectus, accurately and
-4-
<PAGE>
fairly presents in all material respects the information required to
be shown with respect to such plans, arrangements, options and rights.
(h) The Specified Placement Shares to be issued and sold by the
Company to the Agent hereunder have been duly and validly authorized
and, when issued and delivered against payment therefor as provided
herein, will be duly and validly issued, fully paid and nonassessable
and free of any preemptive or similar rights and will conform to the
description thereof in the Prospectus.
(i) Except as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company is a party or of
which any property of the Company is subject, which, if determined
adversely to the Company might individually or in the aggregate (i)
prevent or adversely affect the transactions contemplated by this
Agreement, (ii) suspend the effectiveness of the Registration
Statement, (iii) prevent or suspend the use of the Preeffective
Prospectus in any jurisdiction or (iv) result in a material adverse
change in the condition (financial or otherwise), properties,
business, management, prospects, net worth or results of operations of
the Company; and to the best of the Company's knowledge no such
proceedings are threatened or contemplated against the Company by
governmental authorities or others. The Company is not a party nor
subject to the provisions of any material injunction, judgment, decree
or order of any court, regulatory body or other governmental agency or
body. The description of the Company's litigation under the heading
"Legal Proceedings" in the Prospectus is true and correct and complies
with the Rules and Regulations.
(j) The execution, delivery and performance of this Agreement
and the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms or provisions of
or constitute a default under any indenture, mortgage, deed of trust,
note or other agreement or instrument to which the Company is a party
or by which it or any of its properties is or may be bound other than
any such indenture, mortgage, deed of trust, note or other agreement
or instrument which, alone or in the aggregate, is not material to the
Company, the Articles of Incorporation, By-laws or other
organizational documents of the Company, or any law, order, rule or
regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its properties, other than any
such law, order, rule or regulation which, alone or in the aggregate,
is not material to the Company, or will result in the creation of a
lien.
(k) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the
Company of the transactions contemplated by this Agreement, except
such as may be required by the National Association of Securities
Dealers, Inc. (the "NASD") or under the Securities Act or the
securities or "Blue Sky" laws of any jurisdiction in connection with
the purchase and distribution of the Specified Placement Shares
-5-
<PAGE>
by the Agent, all of which requirements have been satisfied in all
material respects.
(l) The Company has the full corporate power and authority to
enter into this Agreement and to perform its obligations hereunder
(including to issue, sell and deliver the Specified Placement Shares),
and this Agreement has been duly and validly authorized, executed and
delivered by the Company and is a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms,
except to the extent that rights to indemnity and contribution
hereunder may be limited by federal or state securities laws or the
public policy underlying such laws and except as enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws relating to or affecting creditors' rights generally or
by general equitable principles.
(m) The Company is in all material respects in compliance with,
and conducts its business in conformity with, all applicable federal,
state, local and foreign laws, rules and regulations or any court or
governmental agency or body; to the knowledge of the Company,
otherwise than as set forth in the Registration Statement and the
Prospectus, no prospective change in any of such federal or state
laws, rules or regulations has been adopted which, when made
effective, would have a material adverse effect on the operations of
the Company.
(n) The Company has filed all necessary federal, state, local
and foreign income, payroll, franchise and other tax returns, subject
to allowable extension periods, and has paid all taxes shown as due
thereon or with respect to any of its properties, and there is no tax
deficiency that has been, or to the knowledge of the Company is likely
to be, asserted against the Company or any of its properties or assets
that would materially adversely affect the financial position,
business or operations of the Company.
(o) Except as disclosed in the Registration Statement and the
Prospectus, the Company is in compliance with all applicable existing
federal, state, local and foreign laws and regulations relating to the
protection of human health or the environment or imposing liability or
requiring standards of conduct concerning any Hazardous Materials
("Environmental Laws"), except for such instances of noncompliance
which, either singly or in the aggregate, would not have a material
adverse effect on the Company. The term "Hazardous Material" means
(i) any "hazardous substance" as defined by the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as
amended, (ii) any "hazardous waste" as defined by the Resource
Conservation and Recovery Act, as amended, (iii) any petroleum or
petroleum product, (iv) any polychlorinated biphenyl and (v) any
pollutant or contaminant or hazardous, dangerous or toxic chemical,
material, waste or substance regulated under or within the meaning of
any other Environment Law.
-6-
<PAGE>
(p) No person or entity has the right to require registration,
as part of the Registration Statement, of shares of Common Stock or
other securities of the Company because of the filing or effectiveness
of the Registration Statement or otherwise, except for persons and
entities who have expressly waived such right, who have been given
proper notice and have failed to exercise such right within the time
or times required under the terms and conditions of such right or who
are not entitled to participate due to properly invoked cut-back
rights of the Company.
(q) Neither the Company nor, to the Company's best knowledge
after reasonable inquiry, any of its officers, directors or affiliates
has taken or will take, directly or indirectly, any action designed or
intended to stabilize or manipulate the price of any security of the
Company, or which caused or resulted in, or which might in the future
reasonably be expected to cause or result in, stabilization or
manipulation of the price of any security of the Company.
(r) The Company has provided you with all financial statements
of the Company requested by the Agent.
(s) The Company owns or possesses license rights to all patents,
trademarks, trademark registrations, service marks, service mark
registrations, tradenames, copyrights, licenses, inventions, trade
secrets and rights as described in the Prospectus as being owned or
licensed by it, as being proprietary to the Company or, except as
described in the Prospectus, as necessary for the conduct of its
business as presently conducted or contemplated by the Prospectus, and
the Company is not aware of any claim to the contrary or any challenge
by any other person to the rights of the Company with respect to the
foregoing. Without limiting the foregoing, each of the license
agreement between the Company and Joseph G. Cremonese dated July 17,
1992 and relating to U.S. Patent No. 4,839,292, Canadian Patent No.
1,306,714 and European Patent Convention Patent No. 0.307.048 and the
license agreement between the Company and the University of Michigan
dated March 13, 1992, as amended, and relating to U.S. Patent No.
4,839,292, is a valid and binding agreement of Joseph G. Cremonese and
of the University of Michigan, respectively, enforceable in accordance
with its terms, except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to or
affecting creditors' rights generally or by general equitable
principles; and the Company is not in material breach or violation of
any of the terms or provisions of either such agreement, and to the
Company's knowledge, no default exists under either such agreement.
Except as described in the Prospectus, the Company's business as now
conducted and as proposed to be conducted does not and will not
infringe or conflict with in any material respect patents, trademarks,
service marks, trade names, copyrights, trade secrets, licenses or
other intellectual property or franchise right existing on the date
hereof of any person. Except as described in the Prospectus, no claim
has been made against the Company alleging the infringement by the
Company of any patent, trademark, service mark, tradename,
-7-
<PAGE>
copyright, trade secret, license in or other intellectual property
right or franchise right of any person.
(t) The Company has performed all material obligations currently
required to be performed by it under all contracts required by Item
601(b)(10) of Regulation S-K under the Securities Act to be filed as
exhibits to the Registration Statement, and neither the Company nor,
to the Company's knowledge, any other party to such contract is in
default under or in breach of any such obligations. The Company has
not received any notice of such default or breach.
(u) The Company is not involved in any labor dispute nor is any
such dispute threatened. The Company is not aware that (A) any
executive, key employee or significant group of employees of the
Company plans to terminate employment with the Company or (B) any such
executive or key employee is subject to any noncompete, nondisclosure,
confidentiality, employment, consulting or similar agreement that
would be violated by the present or proposed business activities of
the Company. The Company does not have or expect to have any
liability for any prohibited transaction or funding deficiency or any
complete or partial withdrawal liability with respect to any pension,
profit sharing or other plan which is subject to the "Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), to which
the Company makes or ever has made a contribution and in which any
employee of the Company is or has ever been a participant. With
respect to such plans, the Company is in compliance in all material
respects with all applicable provisions of ERISA.
(v) The Company has obtained the written agreement described in
Section 9(n) of this Agreement from each of its officers and
directors.
(w) The Company has and the Company as of the Closing Date will
have, good and marketable title in fee simple to all real property and
good and marketable title to all personal property owned or proposed
to be owned by it which is material to the business of the Company, in
each case free and clear of all liens, encumbrances and defects except
such as are described the Prospectus or such as would not have a
material adverse effect on the Company; and any real property and
buildings and personal property held under lease by the Company or
proposed to be held after giving effect to the transactions described
in the Prospectus are, or will be as of the Closing Date, held by it
under valid, subsisting and enforceable leases with such exceptions as
would not have a material adverse effect on the Company, in each case
except as described in or contemplated by the Prospectus.
(x) The Company is insured by Chubb Insurance Company, CNA
Insurance Companies and UniEurope against such losses and risks and in
such amounts as are customary in the businesses in which it is engaged
or proposes to engage after giving effect to the transactions
described in the Prospectus; and the Company does not have any reason
to believe that it will not be able to renew its
-8-
<PAGE>
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 except as described in
or contemplated by the Prospectus.
(y) Other than as contemplated by this Agreement, there is no
broker, finder or other party that is entitled to receive from the
Company any brokerage or finder's fee or other fee or commission as a
result of any of the transactions contemplated by this Agreement.
(z) The Company has complied with all provisions of Section
517.075 Florida Statutes (Chapter 92-198; Laws of Florida).
(aa) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain
accountability for assets; (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 existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(ab) To the Company's knowledge, neither the Company nor any
employee or agent of the Company has made any payment of funds of the
Company or received or retained any funds in violation of any law,
rule or regulation, which payment, receipt or retention of funds is of
a character required to be disclosed in the Prospectus.
(ac) The Company is not an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in
the Investment Company Act of 1940, as amended.
(ad) Each certificate signed by any officer of the Company and
delivered to the Agent or counsel for the Agent shall be deemed to be
a representation and warranty by the Company as to the matters covered
thereby.
(ae) The letter agreement between the Company and Cobe
Laboratories, Inc. ("Cobe") dated November 11, 1996 (the "Cobe
Agreement") is a valid and binding agreement of Cobe, enforceable in
accordance with its terms; and the Company is not in material breach
or violation of any of the terms or provisions of such agreement, and
to the Company's knowledge, no default exists under such agreement.
-9-
<PAGE>
(af) No transfer taxes are required to be paid in connection with
the sale and delivery of the Specified Placement Shares hereunder.
(ag) The Specified Placement Shares have been duly authorized,
upon official notice of issuance, for quotation on the Nasdaq National
Market.
3. Representations and Warranties of the Agent. The Agent
-------------------------------------------
represents and warrants to the Company that (A) it is duly registered as a
broker/dealer pursuant to the Securities Exchange Act of 1934 and is a member in
good standing of the National Association of Securities Dealers, Inc. (the
"NASD"), (B) it is licensed and qualified as a broker/dealer in each
jurisdiction in which the Agent offers, or has offered any of the Specified
Placement Shares, including without limitation, each jurisdiction in which the
entities listed on Exhibit A are located, (C) its participation in the offering
and sale of the Specified Placement Shares will be in accordance with the
provisions of the Act, the regulations promulgated pursuant thereto, all other
regulations of the Commission, and the rules and regulations of the NASD, and
(D) it has not distributed and will not distribute prior to the Closing Date any
offering material in connection with the offering and sale of the Specified
Placement Shares, or any other shares, other than the Preliminary Prospectus,
the Registration Statement and other materials permitted by the Act.
4. Purchase Sale and Delivery of the Specified Placement Shares.
------------------------------------------------------------
The purchase price per share to be paid by the several purchasers to the Company
shall be determined by seperate agreement among the Company and the purchasers.
The Company agrees to pay the Agent at the Closing Date a commission on each
Specified Placement Shares sold equal to 6% of the purchase price.
The Agent acknowledges and agrees that the Company is under no
obligation to sell, or attempt to sell, any of the Specified Placement Shares,
and that the Company shall have no liability to you as a result of the Company's
failure to sell any of the Specified Placement Shares.
Delivery of certificates for the Specified Placement Shares shall be
made as agreed by the purchasers and the Company.
5. Covenants and Agreements of the Company. The Company covenants
---------------------------------------
and agrees with the Agent that:
(a) The Company will (i) if the Company and the Agent have
determined not to proceed pursuant to Rule 430A, use its best efforts
to cause the Registration Statement to become effective, (ii) if the
Company and the Agent have determined to proceed pursuant to Rule
430A, use its best efforts to comply with the provisions of and make
all requisite filings with the Commission pursuant to Rule 430A and
Rule 424 of the Rules and Regulations and (iii) if the Company and the
Agent have determined to deliver Prospectuses pursuant to Rule 434 of
the Rules and Regulations, to use its best efforts to comply with all
the applicable provisions thereof. The Company will advise the Agent
promptly as
-10-
<PAGE>
to the time at which the Registration Statement becomes effective,
will advise the Agent promptly of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration
Statement or of the institution of any proceedings for that purpose,
and will use its best efforts to prevent the issuance of any such stop
order and to obtain as soon as possible the lifting thereof, if
issued. The Company will advise the Agent promptly of the receipt of
any comments of the Commission or any request by the Commission for
any amendment of or supplement to the Registration Statement or the
Prospectus or for additional information and will not at any time file
any amendment to the Registration Statement or supplement to the
Prospectus which shall not previously have been submitted to the Agent
a reasonable time prior to the proposed filing thereof or to which the
Agent shall reasonably object in writing or which is not in compliance
with the Securities Act and the Rules and Regulations.
(b) The Company will prepare and file with the Commission,
promptly upon the request of the Agent, any amendments or supplements
to the Registration Statement or the Prospectus which in the
reasonable opinion of the Agent may be necessary to enable the Agent
to continue the distribution of the Specified Placement Shares and
will use its best efforts to cause the same to become effective as
promptly as possible.
(c) If at any time after the effective date of the Registration
Statement when a prospectus relating to the Specified Placement Shares
is required to be delivered under the Securities Act, including under
the Rules and Regulations, any event relating to or affecting the
Company occurs as a result of which the Prospectus or any other
prospectus as then in effect would include an untrue statement of a
material fact, or omit to state any material fact necessary to make
the statements therein, in light of the circumstances under which they
were made, not misleading, or if it is necessary at any time to amend
the Prospectus to comply with the Securities Act, the Company will
promptly notify the Agent thereof and will prepare an amended or
supplemented prospectus which will correct such statement or omission;
and in case the Agent is required to deliver a prospectus relating to
the Specified Placement Shares nine (9) months or more after the
effective date of the Registration Statement, the Company upon the
request of the Agent and at the expense of such Agent will prepare
promptly such prospectus or prospectuses as may be necessary to permit
compliance with the requirements of Section 10(a)(3) of the Securities
Act.
(d) The Company will deliver to the Agent, at or before the
Closing Date, copies of the Registration Statement, as originally
filed with the Commission, and all amendments thereto including all
financial statements and exhibits thereto and will deliver to the
Agent such number of copies of the Registration Statement, including
such financial statements but without exhibits, and all amendments
thereto, as the Agent may reasonably request. The Company will
deliver or mail to or upon the order of the Agent, from time to time
until the effective date of the Registration Statement, as many copies
of the Preeffective
-11-
<PAGE>
Prospectus as the Agent may reasonably request. The Company will
deliver or mail to or upon the order of the Agent on the date of the
public offering, and thereafter from time to time during the period
when delivery of a prospectus relating to the Specified Placement
Shares is required under the Securities Act, including under the Rules
and Regulations, as many copies of the Prospectus, in final form or as
thereafter amended or supplemented as the Agent may reasonably
request; provided, however, that the expense of the preparation and
delivery of any prospectus required for use nine (9) months or more
after the effective date of the Registration Statement shall be borne
by the Agent required to deliver such prospectus.
(e) The Company will make generally available to its shareholders
as soon as practicable, but not later than fifteen (15) months after
the effective date of the Registration Statement, an earnings
statement which will be in reasonable detail (but which need not be
audited) and which will comply with Section 11(a) of the Securities
Act, covering a period of at least twelve (12) months beginning after
the "effective date" (as defined in Rule 158 under the Securities Act)
of the Registration Statement.
(f) The Company will cooperate with the Agent to enable the
Specified Placement Shares to be registered or qualified for offering
and sale by dealers under the securities laws of such jurisdictions as
the Agent may reasonably designate and at the request of the Agent
will make such applications and furnish such consents to service of
process or other documents as may be required of it as the issuer of
the Specified Placement Shares for that purpose; provided, however,
that the Company shall not be required to qualify to do business or to
file a general consent (other than that arising out of the offering or
sale of the Specified Placement Shares) to service of process in any
such jurisdiction where it is not now so subject. The Company will,
from time to time, prepare and file such statements and reports as are
or may be required of it as the issuer of the Specified Placement
Shares to continue such qualifications in effect for so long a period
as the Agent may reasonably request for the distribution of the
Specified Placement Shares. The Company will advise the Agent
promptly after the Company becomes aware of the suspension of the
qualifications or registration of (or any such exception relating to)
the Specified Placement Shares of the Company for offering, sale or
trading in any jurisdiction or of any initiation or threat of any
proceeding for any such purpose, and in the event of the issuance of
any orders suspending such qualifications, registration or exception,
the Company will, with the cooperation of the Agent use its best
efforts to obtain the withdrawal thereof.
(g) The Company will furnish to its shareholders annual reports
containing financial statements certified by independent public
accountants and will make available to its shareholders quarterly
summary financial information in reasonable detail which may be
unaudited. During the period of five (5) years from the date hereof,
the Company will deliver to the Agent and, upon request,
-12-
<PAGE>
as soon as they are available, copies of each annual report of the
Company and each other report furnished by the Company to its
shareholders and will deliver to the Agent, (i) as soon as they are
available, copies of any other reports (financial or other) which the
Company shall publish or otherwise make available to any of its
shareholders generally, (ii) as soon as they are available, copies of
any reports and financial statements furnished to or filed with the
Commission or any national securities exchange and (iii) from time to
time such other information concerning the Company as you may
reasonably request.
(h) The Company will use its best efforts to list the Specified
Placement Shares, subject to official notice of issuance, on the
Nasdaq National Market.
(i) The Company will maintain a transfer agent and registrar for
its Common Stock.
(j) Prior to filing its quarterly statements on Form 10-Q, the
Company will have its independent auditors review the Form 10-Q.
(k) Prior to the Closing Date the Company will issue no press
release or other communications directly or indirectly and hold no
press conference with respect to the Company, the financial condition,
results of operation, business, prospects, assets or liabilities of
the Company, or the offering of the Specified Placement Shares,
without your prior written consent, which shall not be unreasonably
withheld.
(l) Without the prior written consent of Cowen, the Company will
not offer, sell, assign, transfer, encumber, contract to sell, grant
an option to purchase or otherwise dispose of, directly or
indirectly, any shares of Common Stock or securities convertible into
or exercisable or exchangeable for Common Stock or warrants or other
rights to purchase Common Stock (including, without limitation, Common
Stock of the Company which may be deemed to be beneficially owned by
the undersigned in accordance with the Rules and Regulations) during
the 90 days following the date on which the price of the Specified
Placement Shares is set, other than the Company's sale of Common Stock
hereunder and the Company's issuance of Common Stock upon the exercise
of warrants or stock options, or pursuant to contractual rights, in
each case which are presently outstanding and described in the
Prospectus or subsequently granted as contemplated by the Prospectus.
(m) The Company will apply the net proceeds from the sale of the
Specified Placement Shares substantially in the manner set forth in
the description under "Use of Proceeds" in the Prospectus, in light of
the totality of the disclosure in the Prospectus, which "Use of
Proceeds" description complies in all respects with the requirements
of Item 504 of Regulation S-K.
-13-
<PAGE>
(n) The Company will supply you with copies of all correspondence
to and from, and all documents issued to and by, the Commission in
connection with the registration of the Specified Placement Shares
under the Securities Act.
(o) Prior to the Closing Date the Company will furnish to you, as
soon as they have been prepared, copies of any unaudited interim
consolidated financial statements of the Company for any periods
subsequent to the periods covered by the financial statements
appearing in the Registration Statement and the Prospectus.
6. Payment of Expenses. (a) The Company will pay (directly or by
-------------------
reimbursement) all costs, fees and expenses incurred in connection with expenses
incident to the performance of its obligations under this Agreement and in
connection with the transactions contemplated hereby, including but not limited
to (i) all expenses and taxes incident to the issuance and delivery of the
Specified Placement Shares; (ii) all expenses incident to the registration of
the Specified Placement Shares under the Securities Act; (iii) the costs of
preparing stock certificates (including printing and engraving costs); (iv) all
fees and expenses of the registrar and transfer agent of the Specified Placement
Agent; (v) all necessary issue, transfer and other stamp taxes in connection
with the issuance and sale of the Specified Placement Shares; (vi) fees and
expenses of the Company's counsel and the Company's independent accountants;
(vii) all costs and expenses incurred in connection with the preparation,
printing, filing, shipping and distribution of the Registration Statement, each
Preeffective Prospectus and the Prospectus (including all exhibits and financial
statements) and all amendments and supplements provided for herein; (viii) all
filing fees, attorneys fees, and expenses incurred by the Company or the Agent
in connection with exemptions from the qualifying or registering (or obtaining
qualification or registration of) all or any part of the Specified Placement
Shares for offer and sale and determination of its eligibility for investment
under the Blue Sky or other securities laws of such jurisdictions as the Agent
may reasonably designate; (ix) all fees and expenses paid or incurred in
connection with filings made with the NASD; (x) all fees and expenses of the
escrow agent related to closing the offering contemplated hereby; and (xi) all
other costs and expenses incident to the performance of its obligations
hereunder which are not otherwise specifically provided for in this Section.
(b) In addition to its other obligations under Section 7(a) hereof,
the Company agrees that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding arising out of, or based
upon, (i) any statement or omission or any alleged statement or omission or (ii)
any breach or inaccuracy in its representations and warranties, it will
reimburse the Agent on a quarterly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Company's obligation to reimburse the Agent for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Agent shall promptly
return it to the Company together with interest, compounded daily, determined on
the basis of the prime rate (or other commercial lending rate for borrowers of
the highest credit standing) announced from
-14-
<PAGE>
time to timed by The Chase Manhattan Bank, New York, New York (the "Prime
Rate"). Any such interim reimbursement payments which are not made to the Agent
in a timely manner as provided below shall bear interest at the Prime Rate from
the due date for such reimbursement. This expense reimbursement agreement will
be in addition to any other liability which the Company may otherwise have. The
request for reimbursement will be sent to the Company.
(c) In addition to its other obligations under Section 6(b) hereof,
the Agent agrees that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
Section 7(b) hereof which relates to information furnished to the Company
pursuant to Section 7(d) hereof, it will reimburse the Company (and, to the
extent applicable, each officer, director or controlling person) on a quarterly
basis for all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Agent, obligation to reimburse the
Company (and, to the extent applicable, each officer, director or controlling
person) for such expenses and the possibility that such payments might later be
held to have been improper by a court of competent jurisdiction. To the extent
that any such interim reimbursement payment is so held to have been improper,
the Company (and, to the extent applicable, each officer, director or
controlling person) shall promptly return it to the Agent together with
interest, compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments which are not made to the Company within thirty
(30) days of a request for reimbursement shall bear interest at the Prime Rate
from the date of such request. This indemnity agreement will be in addition to
any liability which such Agent may otherwise have.
(d) It is agreed that any controversy arising out of the operation
of the interim reimbursement arrangements set forth in paragraph (b) and/or (c)
of this Section 6, including the amounts of any requested reimbursement payments
and the method of determining such amounts, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Such an arbitration would be limited to the operation of
the interim reimbursement provisions contained in paragraph (b) and/or (c) of
this Section 6, as the case may be, and would not resolve the ultimate propriety
or enforceability of the obligation to reimburse expenses which is created by
the provisions of Section 7.
7. Indemnification and Contribution. (a) The Company agrees to
--------------------------------
indemnify and hold harmless the Agent and each person, if any, who controls the
Agent within the meaning of the Securities Act and the respective officers,
directors, partners, employees, representatives and agents of the Agent
(collectively, the "Agent Indemnified Parties" and, each, an "Agent Indemnified
Party"), against any losses, claims, damages, liabilities or expenses (including
the reasonable cost of investigating and defending against any claims therefor
and counsel fees
-15-
<PAGE>
incurred in connection therewith), joint or several, which may be based in whole
or in part upon the Securities Act, the Exchange Act or any other federal,
state, local or foreign statute or regulation, or at common law, on the ground
or alleged ground that any Preeffective Prospectus, the Registration Statement
or the Prospectus (or any Preeffective Prospectus, the Registration Statement or
the Prospectus as from time to time amended or supplemented) includes or
allegedly includes an untrue statement of a material fact or omits 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, unless such statement or omission was made in solely reliance
upon, and in conformity with, written information furnished to the Company by
the Agent specifically for use in the preparation thereof provided, however,
-------- -------
that in no case is the Company to be liable with respect to any claims made
against any Agent Indemnified Party against whom the action is brought unless
such Agent Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon the Agent
Indemnified Party, but failure to notify the Company of such claim shall not
relieve the Company from any liability which it may have to any Agent
Indemnified Party otherwise than on account of its indemnity agreement contained
in this paragraph and, provided, further, that the indemnity agreement provided
-------- -------
in this Section 7(a) with respect to any Preeffective Prospectus shall not inure
to the benefit of the Agent from whom the person asserting any losses, claims,
damages, liabilities or expenses based upon any untrue statement or alleged
untrue statement of material fact or omission or alleged omission to state
therein a material fact purchased Specified Placement Shares, if a copy of the
Prospectus in which such untrue statement or alleged untrue statement or
omission or alleged omission was corrected had not been sent or given to such
person within the time required by the Securities Act and the Rules and
Regulations, unless such failure is the result of noncompliance by the Company
with Section 4(d) hereof. The Company will be entitled to participate at its
own expense in the defense or, if it so elects, to assume the defense of any
suit brought to enforce any such liability, but if the Company elects to assume
the defense, such defense shall be conducted by counsel chosen by it. In the
event the Company elects to assume the defense of any such suit and retain such
counsel, any Agent Indemnified Parties, defendant or defendants in the suit, may
retain additional counsel but shall bear the fees and expenses of such counsel
unless (i) the Company shall have specifically authorized the retaining of such
counsel or (ii) the parties to such suit include any such Agent Indemnified
Parties, and the Company and such Agent Indemnified Parties at law or in equity
have been advised by counsel to the Agent that one or more legal defenses may be
available to it or them which may not be available to the Company, in which case
the Agent Indemnified Party or Parties shall have the right to select a single
separate counsel to assume such legal defenses and to otherwise participate in
the defense of such action on behalf of such indemnified party or parties and
the Company shall not be entitled to assume the defense of such suit
notwithstanding its obligation to bear the fees and expenses of such counsel.
The Company shall not be liable to indemnify any person for any settlement of
any such claim effected without its consent. This indemnity agreement is not
exclusive and will be in addition to any liability which the Company might
otherwise have and shall not limit any rights or remedies which may otherwise be
available at law or in equity to each Agent Indemnified Party.
(b) The Agent severally agrees to indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed the
Registration Statement and each
-16-
<PAGE>
person, if any, who controls the Company within the meaning of the Securities
Act (collectively, the "Company Indemnified Parties"), against any losses,
claims, damages, liabilities or expenses (including, unless the Agent elects to
assume the defense, the reasonable cost of investigating and defending against
any claims therefor and counsel fees incurred in connection therewith), joint or
several, which arise out of or are based in whole or in part upon the Securities
Act, the Exchange Act or any other federal, state, local or foreign statute or
regulation, or at common law, on the ground or alleged ground that any
Preeffective Prospectus, the Registration Statement or the Prospectus (or any
Preeffective Prospectus, the Registration Statement or the Prospectus, as from
time to time amended and supplemented) includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
in which they were made, not misleading, but only insofar as any such statement
or omission was made in reliance upon, and in conformity with, written
information furnished to the Company by such Agent, specifically for use in the
preparation thereof; provided, however, that in no case is such Agent to be
liable with respect to any claims made against any Company Indemnified Party
against whom the action is brought unless such Company Indemnified Party shall
have notified such the Agent in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
claim shall have been served upon the Company Indemnified Party, but failure to
notify the Agent of such claim shall not relieve it from any liability which it
may have to any Company Indemnified Party otherwise than on account of its
indemnity agreement contained in this paragraph. The Agent shall be entitled to
participate at its own expense in the defense, or, if it so elects, to assume
the defense of any suit brought to enforce any such liability, but, if the Agent
elects to assume the defense, such defense shall be conducted by counsel chosen
by it. In the event that the Agent elects to assume the defense of any such
suit and retain such counsel, the Company Indemnified Parties and the Agent or
controlling person or persons, defendant or defendants in the suit, shall bear
the fees and expenses of any additional counsel retained by them, respectively,
unless (i) the Agent shall have specifically authorized the retaining of such
counsel or (ii) the parties to such suit include any such Company Indemnified
Parties, and the Agent such Company Indemnified Parties at law or in equity have
been advised by counsel to the Company that one or more legal defenses may be
available to it or them which conflict with the defenses of the Agent, in which
case the Company Indemnified Party or Parties shall have the right to select a
single separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. The Agent against whom indemnity may be sought shall not be liable to
indemnify any person for any settlement of any such claim effected without such
Agent's consent. This indemnity agreement is not exclusive and will be in
addition to any liability which the Agent might otherwise have and shall not
limit any rights or remedies which may otherwise be available at law or in
equity to any Company Indemnified Party.
(c) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages,
liabilities or expenses (or actions in respect thereof) referred to herein, then
each indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Agent on the other from the offering of the Specified
-17-
<PAGE>
Placement Shares. If however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law, then each indemnifying
party shall contribute to such amount paid or payable by such indemnified party
in such proportion as is appropriate to reflect not only such relative benefits
but also the relative fault of the Company on the one hand and the Agent on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Agent on the other
shall be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Agent, in each case as
set forth in the table on the cover page of the Prospectus. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Agent and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
the Agent agree that it would not be just and equitable if contribution were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to above. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or expenses (or actions in respect thereof)
referred to above shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating,
defending, settling or compromising any such claim. Notwithstanding the
provisions of this subsection (d), no Agent shall be required to contribute any
amount in excess of the amount by which the total price at which the Specified
Placement Shares placed by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Agent has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(d) The information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Agent) and under the caption
``Plan of Distribution'' in any Preeffective Prospectus and in the Prospectus
constitutes the only information furnished by the Agent to the Company for
inclusion in any Preeffective Prospectus, the Prospectus or the Registration
Statement.
(e) No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnification could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on all claims that are the subject matter
of such proceeding.
8. Survival of Indemnities, Representations, Warranties, etc. The
----------------------------------------------------------
respective indemnities, covenants, agreements, representations, warranties and
other statements of the Company and the Agent, as set forth in this Agreement or
made by them respectively, pursuant to this Agreement, shall remain in full
force and effect, regardless of any investigation made by
-18-
<PAGE>
or on behalf of the Agent, the Company or any of its officers or directors or
any controlling person, and shall survive delivery of and payment for the
Specified Placement Shares.
9. Conditions of Agent, Obligations. The obligations of the Agent
--------------------------------
hereunder shall be subject to the accuracy, at and (except as otherwise stated
herein) as of the date hereof and at and as of the Closing Date, of the
representations and warranties made herein by the Company, to compliance at and
as of the Closing Date by the Company with its covenants and agreements herein
contained and other provisions hereof to be satisfied at or prior to the Closing
Date, and to the following additional conditions:
(a) The Registration Statement shall have become effective and no
stop order suspending the effectiveness thereof shall have been issued
and no proceedings for that purpose shall have been initiated or, to
the knowledge of the Company or the Agent, shall be threatened by the
Commission, and any request for additional information on the part of
the Commission (to be included in the Registration Statement or the
Prospectus or otherwise) shall have been complied with to the
reasonable satisfaction of the Agent. Any filings of the Prospectus,
or any supplement thereto, required pursuant to Rule 424 (b) or Rule
434 of the Rules and Regulations, shall have been made in the manner
and within the time period required by Rule 424(b) and Rule 434 of the
Rules and Regulations, as the case may be.
(b) The Agent shall have been satisfied that there shall not have
occurred any change prior to the Closing Date in the condition
(financial or otherwise) properties, business, management, prospects,
net worth or results of operations of the Company or any change in the
capital stock, short-term or long-term debt of the Company, such that
(i) the Registration Statement or the Prospectus, or any amendment or
supplement thereto, contains an untrue statement of fact which, in the
opinion of the Agent, is material, or omits to state a fact which, in
the opinion of the Agent is required to be stated therein or is
necessary to make the statements therein not misleading, or (ii) it is
impracticable in the reasonable judgment of the Agent to proceed with
the public offering or purchase the Specified Placement Shares as
contemplated hereby.
(c) The Agent shall be satisfied that no legal or governmental
action, suit or proceeding affecting the Company which is material and
adverse to the Company or which affects or may affect the Company's
ability to perform its obligations under this Agreement shall have
been instituted or threatened and there shall have occurred no
material adverse development in any existing such action, suit or
proceeding.
(d) At the time of execution of this Agreement, the Agent shall
have received from Price Waterhouse LLP, independent certified public
accountants, a letter, dated the date hereof, in form and substance
satisfactory to the Agent.
-19-
<PAGE>
(e) The Agent shall have received from Price Waterhouse LLP,
independent certified public accountants, a letter, dated the Closing
Date, to the effect that such accountants reaffirm, as of the Closing
Dates, and as though made on the Closing Dates, the statements made in
the letter furnished by such accountants pursuant to paragraph (d) of
this Section 9.
(f) The Agent shall have received from Gray Cary Ware &
Freidenrich, counsel for the Company, an opinion, dated the Closing
Date, to the effect set forth in Exhibit I hereto.
(g) The Agent shall have received from Pepper, Hamilton &
Scheetz, counsel for the Company, an opinion, dated the Closing Date,
to the effect set forth in Exhibit II hereto.
(h) The Agent shall have received from Oblon, Spivak, McClelland,
Maier & Neustadt, P.C., patent counsel for the Company, an opinion,
dated the Closing Date, to the effect set forth in Exhibit III hereto.
(i) The Agent shall have received from Sheppard, Mullin, Richter
& Hampton, patent counsel for the Company, an opinion, dated the
Closing Date, to the effect set forth in Exhibit IV hereto.
(j) The Agent shall have received from Campbell & Flores, patent
counsel for the Company, an opinion, dated the Closing Date, to the
effect set forth in Exhibit V hereto.
(k) The Agent shall have received from Hyman, Phelps & McNamara,
regulatory counsel for the Company, an opinion, dated the Closing
Date, to the effect set forth in Exhibit VI hereto.
(l) The Agent shall have received a certificate, dated the
Closing Date, signed on behalf of the Company by its chief executive
officer or the President and the chief financial or accounting officer
of the Company to the effect that:
(i) No stop order suspending the effectiveness of the
Registration Statement has been issued, and, to the best of the
knowledge of the signers, no proceedings for that purpose have
been instituted or are pending or contemplated under the
Securities Act;
(ii) Neither any Preeffective Prospectus, as of its date,
nor the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, as of the time when the
Registration Statement became effective and at all times
subsequent thereto up to the delivery of such certificate,
included any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or
necessary
-20-
<PAGE>
to make the statements therein, in light of the circumstances
under which they were made, not misleading;
(iii) Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus, and except as set forth or contemplated in the
Prospectus, the Company has not incurred any material liabilities
or obligations, direct or contingent, nor entered into any
material transactions not in the ordinary course of business and
there has not been any material adverse change in the condition
(financial or otherwise), properties, business, management,
prospects, net worth (other than ordinary course changes) or
results of operations of the Company, or any change in the
capital stock (other than through the exercise of stock options),
short-term or long-term debt of the Company;
(iv) The representations and warranties of the Company in
this Agreement are true and correct at and as of the Closing
Date, and the Company has complied with all the agreements and
performed or satisfied all the conditions on its part to be
performed or satisfied at or prior to the Closing Date; and
(v) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, and
except as disclosed in or contemplated by the Prospectus, (i)
there has not been any material adverse change or a development
involving a material adverse change in the condition (financial
or otherwise), properties, business, management, prospects, net
worth or results of operations of the Company; (ii) the business
and operations conducted by the Company have not sustained a loss
by strike, fire, flood, accident or other calamity (whether or
not insured) of such a character as to interfere materially with
the conduct of the business and operations of the Company; (iii)
no legal or governmental action, suit or proceeding is pending or
threatened against the Company which is material to the Company,
whether or not arising from transactions in the ordinary course
of business, or which may materially and adversely affect the
transactions contemplated by this Agreement; (iv) since such
dates and except as so disclosed, the Company has not incurred
any material liability or obligation, direct, contingent or
indirect, made any change in its capital stock (except pursuant
to its stock plans), made any material change in its short-term
or funded debt or repurchased or otherwise acquired any of the
Company's capital stock; and (v) the Company has not declared or
paid any dividend, or made any other distribution, upon its
outstanding capital stock payable to stockholders of record on a
date prior to the Closing Date.
(m) The Company shall have furnished to the Agent such additional
certificates as the Agent may have reasonably requested as to the
accuracy, at and as of the Closing Date, of the representations and
warranties made herein by it
-21-
<PAGE>
and as to compliance at and as of the Closing Date by it with its
covenants and agreements herein contained and other provisions hereof
to be satisfied at or prior to the Closing Date, and as to
satisfaction of the other conditions to the obligations of the Agent
hereunder.
(n) Cowen shall have received the written agreements of the
officers, directors and holders of Common Stock listed in Schedule B
that each will not offer, sell, assign, transfer, encumber, contract
to sell, grant an option to purchase or otherwise dispose of, directly
or indirectly, any shares of Common Stock or securities convertible
into or exchangeable for Common Stock or warrants or other rights to
purchase Common Stock (including, without limitation, Common Stock of
the Company which may be deemed to be beneficially owned by the
undersigned in accordance with the Rules and Regulations) during the
90 days following the date of the final Prospectus, other than (i) by
operation of law, (ii) as a bona fide gift or gifts, provided the
donee or donees thereof agree in writing to be bound by this
restriction or (iii) as a distribution to partners or stockholders of
such person provided that the distributees thereof agree in writing to
be bound by the terms of this restriction.
All opinions, certificates, letters and other documents will be in
compliance with the provisions hereunder only if they are satisfactory in form
and substance to the Agent. The Company will furnish to the Agent conformed
copies of such opinions, certificates, letters and other documents as the Agent
shall reasonably request. If any of the conditions hereinabove provided for in
this Section shall not have been satisfied when and as required by this
Agreement, this Agreement may be terminated by the Agent by notifying the
Company of such termination in writing or by telegram at or prior to the Closing
Dates, but Cowen shall be entitled to waive any of such conditions.
10. Termination. (a) This Agreement (except for the provisions of
-----------
Section 6) may be terminated by the Company at any time before it becomes
effective in accordance with Section 9 by notice to the Agent and may be
terminated by the Agent at any time before it becomes effective in accordance
with Section 9 by notice to the Company. In the event of any termination of this
Agreement under this or any other provision of this Agreement, there shall be no
liability of any party to this Agreement to any other party, other than as
provided in Sections 6 and 7.
This Agreement shall also terminate at 5:00 p.m., California time, on
the twentieth full business day after the Registration Statement shall have
become effective if no sale of the Specified Placement Shares shall have
occurred at or prior to such time. Any termination pursuant to this subsection
(b) shall be without liability on the part of the Agent to the Company or on the
part of the Company to the Agent except to the extent provided in Section 8
hereof.
11. Notices. All communications hereunder shall be in writing and, if
-------
sent to the Agent shall be mailed, delivered or telegraphed and confirmed to
Cowen & Company at Financial Square, New York, New York 10005 or, if sent to the
Company, shall be mailed, delivered or telegraphed and confirmed c/o Douglas
Armstrong.
-22-
<PAGE>
12. Successors. This Agreement shall inure to the benefit of and be
----------
binding upon the Agent, the Company and their respective successors and legal
representatives. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person other than the persons mentioned in the
preceding sentence any legal or equitable right, remedy or claim under or in
respect of this Agreement, or any provisions herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of such persons and for the benefit of no other
person; except that the representations, warranties, covenants, agreements and
indemnities of the Company contained in this Agreement shall also be for the
benefit of the person or persons, if any, who control any Agent within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act,
and the indemnities of the Agent shall also be for the benefit of each director
of the Company, each of its officers who has signed the Registration Statement
and the person or persons, if any, who control the Company within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act.
13. Applicable Law. This Agreement shall be governed by and construed
--------------
in accordance with the laws of the State of New York.
14. Partial Unenforceability. The invalidity or unenforceability of
------------------------
any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
15. General. This Agreement constitutes the entire agreement of the
-------
parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company and the Agent.
16. Counterparts. This Agreement may be signed in two (2) or more
------------
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
-23-
<PAGE>
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter and your acceptance shall constitute a binding agreement
between us.
Very truly yours,
AASTROM BIOSCIENCES, INC.
By:
-------------------------------------
R. Douglas Armstrong, Ph.D.
President and Chief Executive Officer
Accepted and delivered in
New York, New York as of
the date first above written.
COWEN & COMPANY
By: Cowen Incorporated,
its general partner
By:
-----------------------------
Title:
-24-
<PAGE>
SCHEDULE A
Number
of Specified
Placement
Shares
to be
Name Purchased
---- -----------
<PAGE>
SCHEDULE B
<PAGE>
EXHIBIT I
OPINION OF GRAY CARY WARE & FREIDENRICH
(a) The Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which the
ownership or leasing of its properties or the conduct of its business requires
such qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition (financial
or otherwise), earnings, operations or business of the Company and its
subsidiaries considered as one enterprise. To such counsel's knowledge, the
Company does not own or control, directly or indirectly, any corporation,
association or other entity;
(b) To such counsel's knowledge, the Specified Placement Shares to
be issued by the Company pursuant to the terms of this Agreement will not have
been issued in violation of or subject to any co-sale right, registration
right, right of first refusal or other similar right.
(c) The license agreement between the Company and Joseph G.
Cremonese dated July 17, 1992 and relating to U.S. Patent No. 4,839,292,
Canadian Patent No. 1,306,714 and European Patent Convention Patent No.
0.307.048 is a valid and binding agreement of the Company, enforceable in
accordance with its terms; and to such counsel's knowledge, the Company is not
in material breach or violation of any of the terms or provisions of such
agreement, and no default exists under such agreement;
(d) The license agreement between the Company and the University of
Michigan dated March 13, 1992, as amended, and relating to U.S. Patent No.
4,839,292 is a valid and binding agreement of the Company, enforceable in
accordance with its terms; and to such counsel's knowledge, the Company is not
in material breach or violation of any of the terms or provisions of such
agreement and no default exists under such agreement;
(e) This Agreement, assuming due authorization, execution and
delivery by the Company and you, is a valid and binding agreement of the
Company, enforceable in accordance with its terms, except insofar as
indemnification and contribution provisions may be limited by applicable law
and except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting creditors'
rights generally or by general equitable principles;
(f) The Registration Statement has become effective under the Act
and, to such counsel's knowledge, no stop order suspending the effectiveness
of the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened under the Act;
(g) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial statements
(including supporting schedules) and financial data derived therefrom as to
which such counsel need express no
-2-
<PAGE>
opinion), as of the effective date of the Registration Statement, complied as
to form in all material respects with the requirements of the Act and the
applicable Rules and Regulations;
(h) The description in the Registration Statement and the Prospectus
of statutes other than Michigan Law are accurate and fairly present the
information required to be presented by the Act and the applicable Rules and
Regulations;
(i) To such counsel's knowledge, there are no agreements, contracts,
leases or documents to which the Company is a party of a character required to
be described or referred to in the Registration Statement or Prospectus or to
be filed as an exhibit to the Registration Statement which are not described
or referred to therein or filed as required;
(j) The performance of this Agreement and the consummation of the
transactions herein contemplated (other than performance of the Company's
indemnification and contribution obligations hereunder, concerning which no
opinion need be expressed) will not, to such counsel's knowledge, result in a
material breach or violation of any of the terms and provisions of, or
constitute a default under, any bond, debenture, note or other evidence of
indebtedness, or any lease, contract, indenture, mortgage, deed of trust, loan
agreement, joint venture or other agreement or instrument known to such
counsel to which the Company is a party or by which its properties are bound,
or any applicable statute, rule or regulation known to such counsel or, to
such counsel's knowledge, any order, writ or decree of any court, government
or governmental agency or body having jurisdiction over the Company or over
any of its properties or operations;
(k) No consent, approval, authorization or order of or qualification
with any court, government or governmental agency or body having jurisdiction
over the Company, or over any of its properties or operations is necessary in
connection with the consummation by the Company of the transactions herein
contemplated, except such as have been obtained under the Act or such as may
be required under state or other securities or Blue Sky laws in connection
with the transactions contemplated hereby;
(l) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company of a character required
to be disclosed in the Registration Statement or the Prospectus by the Act or
the Rules and Regulations, other than those described therein;
(m) To such counsel's knowledge, the Company is not presently (a) in
material violation of its charter or bylaws, or (b) in material breach of any
applicable statute, rule or regulation known to such counsel or, to such
counsel's knowledge, any order, writ or decree of any court or governmental
agency or body having jurisdiction over the Company or over any of its
properties or operations; and
(n) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or other
securities of the Company have registration rights with respect to securities
of the Company and, except as set forth in the Registration Statement and
Prospectus, all holders of securities of the Company having rights
-3-
<PAGE>
known to such counsel to registration of such shares of Common Stock or other
securities as part of the offering contemplated by the Registration Statement
have, with respect to the offering contemplated thereby, waived such rights or
such rights have expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Agent, the Agent's Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not independently checked or verified the accuracy or
completeness of the statements contained in the Registration Statement or the
Prospectus, nothing has come to the attention of such counsel which leads them
to believe that, (i) at the time the Registration Statement became effective,
the Registration Statement and any amendment or supplement thereto (other than
the financial statements including supporting schedules and other financial and
statistical information derived therefrom, as to which such counsel need express
no comment) contained any 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 (ii) at the Closing Date the Prospectus
and any amendment or supplement thereto (except as aforesaid) contained any
untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading. Such counsel may state that they do
not assume any responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or Prospectus.
Counsel rendering the foregoing opinion may rely as to questions of
fact upon representations or certificates of officers of the Company and of
government officials, in which case their opinion is to state that they are so
relying and that they have no knowledge of any material misstatement or
inaccuracy in any such opinion, representation or certificate. Copies of any
opinion, representation or certificate so relied upon shall be delivered to you,
and to Agent's Counsel.
-4-
<PAGE>
EXHIBIT II
OPINION OF PEPPER, HAMILTON & SCHEETZ
(a) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the state of Michigan;
(b) The Company has the corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectus;
(c) The Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which the
ownership or leasing of its properties or the conduct of its business requires
such qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition (financial
or otherwise), earnings, operations or business of the Company and its
subsidiaries considered as one enterprise. To such counsel's knowledge, the
Company does not own or control, directly or indirectly, any corporation,
association or other entity;
(d) The Specified Placement Shares to be issued by the Company
pursuant to the terms of this Agreement have been duly authorized and, upon
issuance and delivery against payment therefor in accordance with the terms
hereof, will be duly and validly issued and fully paid and nonassessable, and
will not have been issued in violation of or subject to any preemptive right,
co-sale right, registration right, right of first refusal or other similar
right.
(e) The Company has the corporate power and authority to enter into
this Agreement and to issue, sell and deliver the Specified Placement Shares
to be issued and sold by it hereunder;
(f) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under the caption "Capitalization"
as of the dates stated therein, the issued and outstanding shares of capital
stock of the Company have been duly and validly issued and are fully paid and
nonassessable, and, to such counsel's knowledge, will not have been issued in
violation of or subject to any preemptive right, co-sale right, registration
right, right of first refusal or other similar right;
(g) This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed and
delivered by the Company and, assuming due authorization, execution and
delivery by you, is a valid and binding agreement of the Company, enforceable
in accordance with its terms, except insofar as indemnification provisions may
be limited by applicable law and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or affecting creditors' rights generally or by general equitable principles;
(h) The information in the Prospectus under the caption "Description
of Capital Stock," to the extent that it constitutes matters of law or legal
conclusions, has been
-1-
<PAGE>
reviewed by such counsel and is a fair summary of such matters and
conclusions; and the forms of certificates evidencing the Common Stock and
filed as exhibits to the Registration Statement comply with Michigan law;
(i) The description in the Registration Statement and the Prospectus
of the charter and bylaws of the Company and of statutes are accurate and
fairly present the information required to be presented by the Act and the
applicable Rules and Regulations;
(j) To such counsel's knowledge, there are no agreements, contracts,
leases or documents to which the Company is a party of a character required to
be described or referred to in the Registration Statement or Prospectus or to
be filed as an exhibit to the Registration Statement which are not described
or referred to therein or filed as required;
(k) The performance of this Agreement and the consummation of the
transactions herein contemplated (other than performance of the Company's
indemnification obligations hereunder, concerning which no opinion need be
expressed) will not (a) result in any violation of the Company's charter or
bylaws or (b) to such counsel's knowledge, result in a material breach or
violation of any of the terms and provisions of, or constitute a default
under, any bond, debenture, note or other evidence of indebtedness, or any
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument known to such counsel to which the
Company is a party or by which its properties are bound, or any applicable
statute, rule or regulation known to such counsel or, to such counsel's
knowledge, any order, writ or decree of any court, government or governmental
agency or body having jurisdiction over the Company or over any of its
properties or operations;
(l) No consent, approval, authorization or order of or qualification
with any court, government or governmental agency or body having jurisdiction
over the Company, or over any of its properties or operations is necessary in
connection with the consummation by the Company of the transactions herein
contemplated, except such as have been obtained under the Act or such as may
be required under state or other securities or Blue Sky laws in connection
with the purchase and the distribution of the Specified Placement Shares;
(m) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company of a character required
to be disclosed in the Registration Statement or the Prospectus by the Act or
the Rules and Regulations, other than those described therein;
(n) To such counsel's knowledge, the Company is not presently (a) in
material violation of its charter or bylaws, or (b) in material breach of any
applicable statute, rule or regulation known to such counsel or, to such
counsel's knowledge, any order, writ or decree of any court or governmental
agency or body having jurisdiction over the Company or over any of its
properties or operations; and
(o) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or other
securities of the Company have registration rights with respect to securities
of the Company and, except as set forth in the
-2-
<PAGE>
Registration Statement and Prospectus, all holders of securities of the
Company having rights known to such counsel to registration of such shares of
Common Stock or other securities, because of the filing of the Registration
Statement by the Company have, with respect to the offering contemplated
thereby, waived such rights or such rights have expired by reason of lapse of
time following notification of the Company's intent to file the Registration
Statement or have included securities in the Registration Statement pursuant
to the exercise of and in full satisfaction of such rights.
In addition, such counsel shall state that although they have not
verified the accuracy or completeness of the statements contained in the
Registration Statement or the Prospectus, nothing has come to the attention of
such counsel which leads them to believe that, at the time the Registration
Statement became effective and at all times subsequent thereto up to and on the
Closing Date, Registration Statement and any amendment or supplement thereto
(other than the financial statements including supporting schedules and other
financial and statistical information derived therefrom, as to which such
counsel need express no comment) contained any 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 at the Closing Date
the Registration Statement, the Prospectus and any amendment or supplement
thereto (except as aforesaid) contained any untrue statement of a material fact
or omitted to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States or the State of Michigan upon
opinions of local counsel, and as to questions of fact upon representations or
certificates of officers of the Company and of government officials, in which
case their opinion is to state that they are so relying and that they have no
knowledge of any material misstatement or inaccuracy in any such opinion,
representation or certificate. Copies of any opinion, representation or
certificate so relied upon shall be delivered to you, and to Agent's Counsel.
-3-
<PAGE>
EXHIBIT III
OPINION OF OBLON, SPIVAK, MCCLELLAND, MAIER & NEUSTADT, P.C.
Attached
-1-
<PAGE>
EXHIBIT IV
OPINION OF SHEPPARD, MULLIN, RICHTER & HAMPTON
Attached
-1-
<PAGE>
EXHIBIT V
OPINION OF CAMPBELL & FLORES
Attached
-1-
<PAGE>
EXHIBIT VI
OPINION OF HYMAN, PHELPS & MCNAMARA
a. The statements in the Registration Statement and Prospectus
under the captions "Risk Factors -- Uncertainty of Regulatory Approval;
Extensive Government Regulation" and "Business -- Government Regulation,"
insofar as such statements purport to summarize applicable provisions of the
United Stated food and drug laws (the "Food and Drug Laws"), have been
reviewed by such counsel and are accurate as to, and fairly describe, the
regulatory status of the Company under the Food and Drug Laws; and to such
counsel's knowledge, there are no presently existing Food and Drug Laws
applicable to the Company and/or the Company's products that are required to
be described or referred to in the Registration Statement and Prospectus that
are not so described or referred to therein.
b. To such counsel's knowledge, the Company is currently
conducting its business in material compliance with all applicable provisions
of the Food and Drug Laws.
c. There are no judicial or administrative proceedings pending
or, to such counsel's knowledge, threatened against the Company that may cause
any regulatory permit that is material to the business of the Company, to be
revoked, withdrawn, cancelled, suspended or not renewed.
In rendering the foregoing opinions, such counsel may state that they
have not independently verified nor do they take any responsibility for nor are
they addressing in any way any statements of fact or statements of belief
attributable to the Company.
In addition to the foregoing opinions, counsel shall state that:
During the course of preparation of the Registration Statement, such
counsel participated in certain discussions with officers of the Company as to
the regulatory matters dealt with under the captions "Risk Factors --
Uncertainty of Regulatory Approval; Extensive Government Regulation" and
"Business -- Government Regulation" in the Prospectus. While such counsel has
not undertaken to determine independently and such counsel does not assume any
responsibility for, the accuracy, completeness or fairness of the statements
under such captions in the Prospectus, such counsel shall state on the basis of
these discussions that no facts have come to their attention which cause them to
believe that the statements in the Prospectus under the captions "Risk Factors -
- - Uncertainty of Regulatory Approval; Extensive Government Regulation" and
"Business -- Government Regulation," insofar as such statements relate to
regulatory matters, at the time the Registration Statement became effective, or
at the Closing Date the Prospectus 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 as of the date
hereof contains an untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
-1-
<PAGE>
EXHIBIT 5.1
[Letterhead of Pepper, Hamilton & Scheetz]
October 7, 1997
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Aastrom Biosciences, Inc. Registration
Statement on Form S-1
File No. 333- _____________
Dear Gentlemen:
We have acted as special counsel to Aastrom Biosciences, Inc., a
Michigan corporation (the "Company"), in connection with the preparation and
filing with the Securities and Exchange Commission (the "Commission") of a
registration statement (the "Registration Statement") of the Company on Form S-1
under the Securities Act of 1933, as amended (the "Act"). The Registration
Statement relates to the proposed offer and sale by the Company of shares (the
"Shares") of the Company's Common Stock (the "Common Stock") covered by the
Registration Statement.
In this connection, we have examined the Registration Statement,
including the exhibits thereto, the originals or copies, certified or otherwise
identified to our satisfaction, of the Articles of Incorporation and the By-Laws
of the Company amended to date, resolutions of the Company's Board of Directors
and such other documents and corporate records relating to the Company, and the
issuance and sale of the Shares as we have deemed appropriate. The opinion
expressed herein is based exclusively on the applicable provisions of the
Michigan Business Corporation Act as in effect on the date hereof.
On the basis of the foregoing, we are of the opinion that the Shares
identified in the above-referenced Registration Statement be issued and sold by
the Company will be, upon effectiveness of the Registration Statement and
receipt by the Company of payment therefor, duly authorized, validly issued,
fully paid, and non-assessable.
<PAGE>
Securities and Exchange Commission
October 7, 1997
Page 2
We hereby consent to the reference to our firm under caption "Legal
Matters" in the Registration Statement and to the filing of this opinion as an
exhibit to the Registration Statement. Such consent does not constitute a
consent under Section 7 of the Act, since we have not certified any part of such
Registration Statement and do not otherwise come within the categories of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission promulgated thereunder.
Very truly yours,
PEPPER, HAMILTON & SCHEETZ
By: /s/ Michael B. Staebler
--------------------------------
A Partner
1mf
<PAGE>
EXHIBIT 10.41
STRATEGIC PLANNING CONSULTING SERVICES
AND COLLABORATION AGREEMENT
This Agreement is made as of October 7, 1997 (the "Effective Date"), by and
between AASTROM BIOSCIENCES, INC., a Michigan corporation ("Aastrom"), and
BURRILL & COMPANY, LLC, a California limited liability company ("Burrill").
RECITALS
A. Burrill is a merchant bank engaged in the business, among other things,
of identifying and creating strategic alliances between companies.
B. Aastrom is a medical and biological products and technology company,
and Aastrom desires to obtain one or more strategic alliances ("Strategic
Alliances") with one or more companies in the pharmaceutical, biotechnology or
medical device industry ("Strategic Partners"), and Aastrom wishes to engage the
services of Burrill to assist Aastrom with planning and entering into Strategic
Alliances.
NOW THEREFORE, the parties agree as follows:
1. Definitions.
-----------
Board is defined in Section 3.1.
-----
Effective Date shall mean the date first written above.
--------------
Initial Warrant is defined in Section 4.3.1.
---------------
Monthly Retainer is defined in Section 4.1.
----------------
Percentage Success Fee is defined in Section 4.2.
------------------
Potential Partners are defined in Section 3.1.
------------------
Proceeds shall mean the aggregate of the net cash received by Aastrom
--------
from Strategic Partners in connection with a Strategic Alliance prior to the
fifth anniversary of the effective date of the Strategic Alliance for licensing
fees, milestone payments, research and development funding, equity and like
payments. Said proceeds to not include loan proceeds (other than loans which are
converted into equity securities of Aastrom prior to the fifth anniversary of
the effective date of the Strategic Alliance), royalties, or proceeds from any
sale of the Aastrom products. (For a Strategic Alliance which does not include
"Proceeds" but which does include some unique value to Aastrom, which unique
value does not come within the definition of "Proceeds," Aastrom will give good
faith consideration to placing a fair and reasonable monetary value on said
unique value so that it can be treated as "Proceeds" pursuant to this
Agreement.)
Services are defined in Section 3.
--------
1
<PAGE>
Strategic Alliance shall mean any transaction or series or combination
------------------
of transactions whereby one or more Strategic Partners enters into a transaction
with Aastrom with the assistance of Burrill, pursuant to which transaction the
Strategic Partner invests in Aastrom equity securities, or the Strategic Partner
enters into an agreement with Aastrom in the form of a major license,
collaboration, joint venture, partnership, merger, acquisition, or similar
arrangement. Excluded from this Strategic Alliance definition are minor license
agreements for technology, customary manufacturing or supply agreements that do
not involve equity investment in Aastrom, and any performance pursuant to Cobe's
existing agreements with Aastrom. (For avoidance of doubt, if Aastrom and Cobe
enter into a new transaction, as distinguished from implementing or making minor
modifications, to any of their existing agreements, then such a new transaction
is included as a Strategic Alliance.)
Strategic Partners are defined in Recital B.
------------------
Strategic Plan is defined in Section 3.1.
--------------
Success Warrant is defined in Section 4.3.3.
---------------
Term is defined in Section 2.
----
Term Sheet means the term sheet, letter of intent or memorandum of
----------
understanding signed by Aastrom and the Strategic Partner for a particular
Strategic Alliance.
Vesting Warrant is defined in Section 4.3.2.
---------------
2. Term. The term of this Agreement shall commence on the Effective Date
----
and shall continue until this Agreement is terminated as specified herein (the
"Term"). Upon the expiration of the Term, this Agreement and all rights and
obligations hereunder shall terminate (except the rights and obligations
contained in Sections 5.2 and 6.)
3. Burrill's Services. Aastrom hereby retains Burrill, commencing as of
------------------
the Effective Date, to provide to Aastrom those services typically provided by
Burrill (the "Services") including, but not limited to, the services set forth
in this Section 3. The Services shall include the following:
3.1. Planning for Strategic Alliances. Burrill shall review and
--------------------------------
evaluate Aastrom's current status and prospects, and Burrill shall directly work
with Aastrom to develop a plan for Aastrom's potential Strategic Alliances,
which plan shall include a list of companies which Burrill believes qualify as
potential partners (the "Potential Partners") for a Strategic Alliance with
Aastrom. Burrill will assist Aastrom in the implementation of the plan,
including coordinating contacts with the Potential Partners, preparation of
appropriate materials, negotiations for term sheets and definitive agreements,
and proceeding with activities necessary to close the Strategic Alliance.
Burrill shall facilitate meetings, communications and interactions between the
Potential Partners and Aastrom to pursue negotiations, to make presentations,
and to assist Aastrom in responding to "due diligence" requests. Burrill shall
also, where necessary, based on the type of Strategic Alliance proposed, provide
the Aastrom Board of Directors (the "Board") and/or shareholders with
recommendations regarding any proposed Strategic Alliance.
2
<PAGE>
3.2. Strategic Counsel to Aastrom's Board of Directors. At Aastrom's
-------------------------------------------------
request, Steven Burrill shall attend meetings of the Board and/or Aastrom's
senior management to discuss the performance of Burrill's services under this
Agreement and to consult with the Board and senior management on strategies for
achieving a desirable Strategic Alliance.
3.3. Advisory Boards. Burrill shall also provide Aastrom's President
---------------
with periodic access to Burrill's Business Advisory Board and/or Scientific
Advisory Board, to the same general extent and nature as for Burrill's other
client companies.
3.4. Involvement of Steven Burrill. G. Steven Burrill shall (i) be
-----------------------------
Aastrom's principal contact at Burrill, (ii) remain the principal Burrill
employee involved with Aastrom matters, and (iii) be the principal Burrill
employee to direct or coordinate interactions by Burrill with Potential
Partners, the Board and senior management of Aastrom throughout the Term of this
Agreement.
4. Compensation Payable to Burrill.
-------------------------------
4.1. Monthly Retainer. For the duration of the Term, Aastrom shall pay
----------------
to Burrill a monthly retainer (the "Monthly Retainer") in the sum of Ten
Thousand Dollars ($10,000) cash, payable within ten (10) calendar days after the
beginning of each month during the Term.
4.2. Percentage Success Fee. Following the closing of any Strategic
----------------------
Alliance for which a Term Sheet was signed by both the Strategic Partner and
Aastrom during the Term (or signed within six (6) months after the Term as to a
Proposed Partner with whom Burrill was actively involved during the Term on
behalf of a potential Strategic Alliance with Aastrom), Aastrom shall pay to
Burrill a Percentage Success Fee equal to four percent (4%) of the Proceeds
actually received by Aastrom in connection with such Strategic Alliance prior to
the fifth anniversary of the effective date of the Strategic Alliance. Aastrom
shall pay said Percentage Success Fee by either of the following alternative
methods, at Burrill's option: (i) cash, or (ii) Aastrom Common Stock, with such
stock valued at the average of the closing sale price of Aastrom Common Stock on
the Nasdaq National Market System for the twenty (20) trading days (on which
Aastrom Common Stock actually traded) prior to the date of the closing of such
Strategic Alliance. Percentage Success Fee shall be paid in increments as
Aastrom receives the Proceeds from the Strategic Partner.
4.2.1. Adjustments.
-----------
(a) If the Proceeds of the first two (2) Strategic Alliances
entered into by Aastrom do not exceed fifteen million dollars ($15,000,000)
within eighteen (18) months after the first closing of the first Strategic
Alliance, then the Percentage Success Fee shall be increased to seven and
one-half percent (7.5%) of the Proceeds from such Strategic Alliance and
Burrill shall not be entitled to any Success Warrants as provided in
Section 4.3.3 herein.
(b) In the event that the first Strategic Alliance is for less
than fifteen million dollars ($15,000,000) of Proceeds within the eighteen
(18) months specified in Section 4.2.1(a), and Aastrom pays the seven and
one-half percent (7.5%) Percentage Success
3
<PAGE>
Fee for said first Strategic Alliance, but thereafter within the eighteen
(18) months specified in Section 4.2.1(a) a second Strategic Alliance is
closed which causes the aggregate Proceeds to exceed fifteen million
dollars ($15,000,000) within the eighteen (18) months specified in Section
4.2.1(a), such that the Percentage Success Fee is to be only four percent
(4%), then Burrill and Aastrom shall make such adjustments, payments or
refunds as may be needed so that only the four percent (4%) Success Fee is
paid on the aggregate Proceeds from the first and second Strategic
Alliances received by Aastrom within the 18 months specified in Section
4.2.1(a). Further, once said fifteen million dollar ($15,000,000) level is
reached, the Success Warrant earned pursuant to Section 4.3.3 hereof shall
be issued.
(c) If Aastrom enters into a Strategic Alliance that includes (i) the
merger or consolidation of Aastrom with or into another corporation
pursuant to which the shareholders of Aastrom immediately prior to such
Strategic Alliance shall own less than 50% of the voting securities of the
surviving corporation, or (ii) the sale, transfer or lease (but not
involving a transfer or lease by pledge or mortgage to a bona fide lender)
of all or substantially all of the assets of Aastrom, then the Percentage
Success Fee shall be reduced to the greater of (i) one-half of one percent
(0.5%) of the value of Aastrom in such Strategic Alliance, or (ii)
$1,400,000.
4.3. Stock Warrants.
--------------
4.3.1. Initial Warrant. Promptly after the Effective Date, Aastrom shall
---------------
issue and grant to Burrill a warrant to purchase one hundred thousand (100,000)
shares of Aastrom Common Stock at an exercise price equal to the average of the
closing sale price for Aastrom Common Stock on the Nasdaq National Market System
for the five (5) trading days (on which Aastrom Common Stock actually traded)
prior to the Effective Date (the "Initial Warrant'). The expiration date of the
Initial Warrant shall be the fifth anniversary of the Effective Date.
4.3.2. Vesting Warrant. Promptly after the Effective Date, Aastrom shall
---------------
issue and grant to Burrill a warrant to purchase one hundred thousand (100,000)
shares of Aastrom Common Stock at an exercise price equal to the average of the
closing sale price for Aastrom Common Stock or the Nasdaq National Market System
for the five (5) trading days (on which Aastrom Common Stock actually traded)
prior to the Effective Date (the "Vesting Warrant"). The Vesting Warrant shall
be subject to vesting during the Term, such that half (50,000 shares) shall
become vested and exercisable six (6) months after the Effective Date so long as
the Term of this Agreement has continued to that time, and the other half
(50,000 shares) shall become vested and exercisable on the first anniversary of
the Effective Date so long as the Term of this Agreement has continued to that
time.
4.3.3. Success Warrant. Aastrom shall issue and grant to Burrill one of
---------------
three (3) stock warrants described below (the "Success Warrant") promptly
following the closing of a Strategic Alliance (or the first two (2) Strategic
Alliances) and depending upon the dollar value of the Strategic Alliances, as
follows:
(a) If the Strategic Alliance (or the first two Strategic
Alliances) entered into by Aastrom results in Proceeds to Aastrom exceeding
fifteen million
4
<PAGE>
dollars ($15,000,000) within eighteen (18) months after the effective date
of the Strategic Alliance, Aastrom shall issue to Burrill a warrant to
purchase three hundred thousand (300,000) shares of Aastrom Common Stock.
This warrant shall be exercisable immediately, in whole or in part, at an
exercise price equal to the average of the closing sale price for Aastrom
Common Stock on the Nasdaq National Market System for the twenty (20)
trading days (on which Aastrom Common Stock actually traded) prior to the
date of execution of the Term Sheet for such Strategic Alliances; provided,
however, that if the definitive agreement for such Strategic Alliance is
executed by Aastrom and the Strategic Partner within fifteen (15) months
after the Effective Date, the exercise price shall be based on the average
of the closing sale price on the five (5) trading days (on which Aastrom
Common Stock actually traded) prior to the Effective Date.
(b) If the Strategic Alliance (or the first two Strategic
Alliances) entered into by Aastrom results in Proceeds to Aastrom exceeding
twenty-five million dollars ($25,000,000) within twenty-four (24) months
after the effective date of the Strategic Alliance, Aastrom shall issue to
Burrill a warrant to purchase four hundred thousand (400,000) shares of
Aastrom Common Stock. This warrant shall be exercisable immediately, in
whole or in part, at an exercise price equal to the average of the closing
sale price for Aastrom Common Stock on the Nasdaq National Market System
for the twenty (20) trading days (on which Aastrom Common Stock actually
traded) prior to the date of execution of the Term Sheet for such Strategic
Alliance; provided, however, that if the definitive agreement for such
Strategic Alliance is executed by Aastrom and the Strategic Partner within
fifteen (15) months after the Effective Date, the exercise price shall be
based on the average of the closing sale price on the five (5) trading days
(on which Aastrom Common Stock actually traded) prior to the Effective
Date.
(c) If the Strategic Alliance (or the first two Strategic
Alliances) entered into by Aastrom results (i) in Proceeds to Aastrom
exceeding thirty-five million dollars ($35,000,000) within twenty-four (24)
months after the effective date of the Strategic Alliance, or (ii) in the
immediate merger or consolidation of Aastrom into or with another
corporation in which the shareholders of Aastrom shall own less than fifty
percent (50%) of the voting securities of the surviving corporation, or in
the sale, transfer or lease (but not including a transfer or lease by
pledge or mortgage to a bona fide lender) of all or substantially all of
the assets of Aastrom, then Aastrom shall issue to Burrill a warrant to
purchase five hundred thousand (500,000) shares of Aastrom Common Stock.
This warrant shall be exercisable immediately, in whole or in part, at an
exercise price equal to the average of the closing sale price for Aastrom
Common Stock on the Nasdaq National Market System for the twenty (20)
trading days (on which Aastrom Common Stock actually traded) prior to the
date of execution of the Term Sheet for such Strategic Alliance; provided,
however, that if the definitive agreement for such Strategic Alliance is
executed by Aastrom and the Strategic Partner within fifteen (15) months
after the Effective Date, the exercise price shall be based on the average
of the closing sale price on the five (5) trading days (on which Aastrom
Common Stock actually traded) prior to the Effective Date.
4.3.4. Each of the Vesting Warrants and Success Warrants shall have an
expiration date on the fifth anniversary of the date of grant of the warrant.
If this Agreement is terminated for any reason, then all stock warrants issued
pursuant to this Section 4.3 which are
5
<PAGE>
outstanding at that time shall expire early, if not exercised sooner, on a date
120 days following the date of the termination of this Agreement.
4.3.5 With respect to each of the stock warrants (Initial
Warrant, Vesting Warrant and Success Warrant), Aastrom shall have the right,
upon Burrill's written notice of election to exercise the warrant, to proceed
with a "net issuance" or "cashless exercise" arrangement, such that in lieu of
Burrill paying the warrant exercise price, Aastrom issues to Burrill a number of
shares of Aastrom Common Stock having an aggregate value equal to the value of
the warrant being exercised (i.e., the "spread" between the then current value
per share of the Aastrom Common Stock and the warrant exercise price per share,
multiplied by the number of warrant shares). Said value per share shall be
determined as the average of the closing sale price for Aastrom Common Stock on
Nasdaq National Market System for the twenty (20) trading days (on which Aastrom
Common Stock actually traded) prior to the date of Burrill's written notice of
election to exercise the warrant.
4.3.6. With respect to all shares of Aastrom Common Stock
acquired upon the exercise of the warrants, Burrill agrees to adhere to all
customary and reasonable resale restrictions and limitations, similar to those
imposed on other large shareholders by Aastrom's underwriters and to those
imposed by applicable securities laws and regulations.
4.4. Reimbursable Expenses. In addition to the fees and compensation
---------------------
described above, Aastrom agrees to reimburse Burrill, in accordance with the
activities reviewed with Aastrom, for reasonable out-of-pocket expenses incurred
by Burrill in connection with its services hereunder, regardless of whether or
not Burrill's efforts result in the consummation of a Strategic Alliance. In
lieu of actual itemized charges for miscellaneous phone, fax, postage and
photocopying, Burrill shall invoice Aastrom for a fair allocable percentage
share of Burrill's costs for such items, which share is estimated to be
approximately $200 per month.
5. Termination.
-----------
5.1. Termination Events. This Agreement and all rights and obligations
------------------
hereunder (except the rights and obligations contained in Sections 1, 5.2 and 6)
shall terminate upon occurrence of any of the following:
5.1.1. The termination of this Agreement by Aastrom, and Aastrom
may terminate this Agreement at any time, without cause, upon written notice to
Burrill. Notwithstanding this right, Aastrom hereby agrees that it will not
exercise this right in order to avoid paying a Percentage Success Fee or a
Successor Warrant which otherwise would have become earned in the near term.
5.1.2. The termination of this Agreement by Aastrom on account
of a material breach by Burrill of any of Burrill's obligations contained in
this Agreement, which breach is not cured within thirty (30) calendar days after
Burrill's receipt of written notice thereof from Aastrom.
5.1.3. The termination of this Agreement by Burrill, and Burrill
may terminate this Agreement at any time, without cause, upon written notice to
Aastrom.
6
<PAGE>
5.1.4. The termination of this Agreement by Burrill on account
of a material breach by Aastrom of any of its obligations contained in this
Agreement, which breach is not cured within thirty (30) calendar days of receipt
after Aastrom's written notice thereof from Burrill.
5.2. Consequences of Termination. If this Agreement is terminated
---------------------------
pursuant to Sections 5.1.1 or 5.1.4, Burrill still shall be entitled to that
compensation which Burrill is entitled to receive pursuant to Sections 4.2 and
4.4 herein upon the closing of a Strategic Alliance (i) for which a Term Sheet
was executed by both parties before said termination, or (ii) for which a Term
Sheet is executed by both parties within six (6) months following such a
termination for such Strategic Alliance or with a Potential Partner with whom
Burrill had been actively involved with discussions or negotiations for such
Strategic Alliance prior to such termination. If this Agreement is terminated,
any unvested warrants shall immediately be forfeited and shall be surrendered to
Aastrom by Burrill. If this Agreement is terminated pursuant to Sections 5.1.2
or 5.1.3, Burrill shall not earn or receive any further compensation pursuant to
Sections 4.2 and 4.3 herein.
6. Confidentiality. Burrill agrees that the "Confidential Information" (as
---------------
defined below) will not be used or disclosed by Burrill for any purpose except
as described herein and that such Confidential Information will be kept
confidential by Burrill and its agents; provided, however, that (1) any such
Confidential Information may be disclosed to Burrill's managers, employees and
representatives who need to know such information for the purpose described in
this Agreement (it being understood that such managers, employees and
representatives shall be informed by Burrill of the confidential nature of such
information and shall be required by Burrill to treat such information
confidentially, and (2) any disclosure of such Confidential Information may be
made to any person which the Company consents in writing. The term "Confidential
Information" means all information concerning Aastrom except such information
that (i) is or becomes publicly available or available to a knowledgeable person
in Aastrom's industry other than as a result of disclosure by Burrill's agents,
representatives or employees, (ii) was known by Burrill prior to its disclosure
to Burrill by Aastrom, or (iii) is to become available to Burrill on a
nonconfidential basis from a source other than Aastrom or its agents which , to
Burrill's knowledge, is not prohibited from disclosing such information by a
legal, contractual or fiduciary obligation to Aastrom.
7. Indemnification.
---------------
7.1. By Aastrom. In connection with the services that Burrill
----------
has agreed to render hereunder, Aastrom hereby agrees to indemnify and hold
harmless Burrill and its controlling persons, directors, officers, employees,
agents and affiliates (each an "indemnified person"), to the full extent lawful,
from and against all losses, claims, damages, liabilities and expenses incurred
by them (including fees and disbursements of counsel, but excluding any lost
profits or consequential damages of any kind) suffered or alleged to have been
suffered by Burrill or any other indemnified person that (a) are related to or
arise out of (i) actions taken or omitted to be taken (including any untrue
statements made or any statements omitted to be made) by Aastrom or (ii) actions
taken or omitted to be taken by an indemnified person with the consent, or upon
the instructions, of Aastrom or (b) are otherwise related to or arise out of
Burrill's activities hereunder, and Aastrom will reimburse Burrill and any other
indemnified person for all
7
<PAGE>
expenses (including fees and disbursements of counsel) as they are incurred by
Burrill or such other indemnified person in connection with investigating,
preparing or defending any such action or claim, whether or not in connection
with pending or threatened litigation in which Burrill or such other indemnified
person is a party. Aastrom will not be responsible, however, for any losses,
claims, damages, liabilities or expenses pursuant to clause (b) of the preceding
sentence that are finally judicially determined to have resulted primarily from
the negligence or willful misconduct of Burrill or of the person seeking
indemnification hereunder. Neither Burrill, nor any of its controlling persons,
directors, officers, employees, agents and affiliates, shall have any liability
to Aastrom in connection herewith except for such liability for losses, claims,
damages, liabilities or expenses incurred by Aastrom as is finally judicially
determined to have resulted primarily from Burrill's negligence or willful
misconduct; provided that in no event will Burrill have any liability to Aastrom
hereunder in excess of the aggregate amount of consideration received by Burrill
from Aastrom hereunder. Aastrom further agrees that it will not, without the
prior written consent of Burrill, settle or compromise or consent to the entry
of any judgment in any pending or threatened claim, action, suit or proceeding
in respect of which indemnification may be sought hereunder (whether or not
Burrill or any other indemnified person is an actual or potential party to such
claim, action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of Burrill and each other indemnified person
from all liability arising out of such claim, action, suit or proceeding.
7.2. Notice and Defense. Promptly after receipt by an indemnified person
------------------
of notice of any complaint or the commencement of any action or proceeding with
respect to which indemnification is being sought hereunder, such person will
notify Aastrom in writing of such complaint or of the commencement of such
action or proceeding, but failure to so notify Aastrom will not relieve Aastrom
from any liability that it may have hereunder or otherwise, except to the extent
that such failure materially prejudices Aastrom rights or its ability to defend
against such complaint, action or proceeding. If Aastrom so elects or is
requested by such indemnified person, Aastrom will assume the defense of such
action or proceeding, including the employment of counsel (which may be counsel
to Aastrom) reasonably satisfactory to Burrill and the payment of the fees and
disbursements of such counsel. In the event, however, such indemnified person
reasonably determines in its judgment that having common counsel would present
such counsel with a conflict of interest, or if Aastrom fails to assume the
defense of the action or proceeding in a timely manner, then such indemnified
person may employ separate counsel to represent or defend it in any such action
or proceeding and Aastrom will pay the fees and disbursements of such counsel;
provided, however, that Aastrom will not be required to pay the fees and
disbursements of more than one separate counsel for all indemnified persons in
any jurisdiction in any single action or proceeding. In any action or proceeding
the defense of which is assumed by Aastrom, any indemnified person will have the
right to participate in such litigation and to retain its own counsel at such
indemnified person's own expense.
7.3. Allocations. Aastrom agrees that if any indemnification sought
-----------
hereunder by an indemnified person in connection with a transaction is held by a
court to be unavailable for any reason other than as specified in the second
sentence of Section 7.1, then (whether or not Burrill is the indemnified
person), Aastrom and Burrill will contribute to the losses, claims, damages,
liabilities and expenses for which such indemnification is held unavailable in
such proportion as is appropriate to reflect (a) the relative benefits to
Aastrom, on the one hand, and
8
<PAGE>
Burrill, on the other hand, in connection with such transaction, (b) the
relative fault of Aastrom, on the one hand, and Burrill, on the other hand, in
connection therewith and (c) any relevant equitable considerations; provided,
however, that in any event Burrill's aggregate contribution to all losses,
claims, damages, liabilities and expenses in connection with a transaction will
not exceed the value of compensation actually received by Burrill from Aastrom
in connection with such transaction. It is hereby agreed that the relative
benefits to Aastrom, on the one hand, and Burrill, on the other hand with
respect to Burrill's engagement in connection with a transaction shall be deemed
to be in the same proportion as (a) the total value paid or proposed to be paid
in such transaction bears to (b) the value of the compensation paid or proposed
to be paid to Burrill in connection with such transaction.
7.4. Other Rights; Waiver of Trial by Jury. The indemnity, reimbursement
-------------------------------------
and contribution obligations under this Agreement shall be in addition to any
rights that Burrill or any other indemnified person may have at common law or
otherwise. Aastrom and Burrill hereby agree, to the extent permitted by
applicable law, to waive any right to trial by jury with respect to any claim,
counter-claim or action arising out of the engagement or the transactions
contemplated hereby.
8. Miscellaneous.
-------------
8.1. Binding Effect. This Agreement shall be binding upon and shall
--------------
inure to the benefit of both parties and their permitted assigns and other
successors; provided, however, that Burrill may not assign its rights or
obligations hereunder to any party, whether by merger, operation of law, or
otherwise, without the express, prior written approval of Aastrom.
8.2. Attorneys' Fees. In the event of any proceeding arising out of or
---------------
related to this Agreement, the prevailing party shall be entitled to recover
from the losing party all of the prevailing party's costs and expenses incurred
in connection with such proceeding, including court costs and reasonable
attorneys' fees whether or not such proceeding is prosecuted to judgment.
8.3. Written Amendments. No amendment or addition to, or modification
------------------
of, any provision contained in this Agreement shall be effective unless fully
set forth in writing and signed by both of the parties hereto.
8.4. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties hereto pertaining to the subject matter hereof, and the
final complete and exclusive expression of the terms and conditions thereof. All
prior agreements, representations, negotiations and understandings of the
parties hereto, oral or written, express or implied, are hereby superseded and
merged herein.
8.5. Governing Law. This Agreement will be governed by and construed in
-------------
accordance with the laws of the State of Michigan, without giving effect to any
choice of law or conflict of law provisions (whether of the State of Michigan]
or any other state, country or jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Michigan.
9
<PAGE>
8.6. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument. Signatures may be delivered and transmitted by
facsimile, and this Agreement shall become binding and effective when both
parties have transmitted a signed copy of this Agreement to the other party.
10
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective
Date.
BURRILL & COMPANY, LLC AASTROM BIOSCIENCES, INC.:
/s/ G. Steven Burrill By: /s/ R. Douglas Armstrong, Ph.D.
- ------------------------- -----------------------------------
G. Steven Burrill R. Douglas Armstrong, Ph.D.
President and Chief Executive Officer
11
<PAGE>
EXHIBIT 23.3
CONSENT OF OBLON SPIVAK MCCLELLAND MAIER & NEUSTADT
PATENT COUNSEL
We consent to the reference of our firm under the caption "Experts"
regarding patents and pending patent applications either owned by or licensed
to Aastrom Biosciences, Inc. ("Aastrom") relating to aspects of Aastrom's
product and process technology, as set forth in this Registration Statement on
Form S-1, and the prospectus which forms a part thereof, and any amendments
thereto, which we have reviewed and approved, as set forth under the captions
"Risk Factors--Uncertainty Regarding Patents and Proprietary Rights" and
"Business--Patents and Proprietary Rights," and the other references therein
concerning such patents and patent applications.
/s/ OBLON SPIVAK MCCLELLAND
MAIER & NEUSTADT
OBLON SPIVAK MCCLELLAND MAIER &
NEUSTADT
Arlington, Virginia
October 7, 1997
