<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) December 8, 1999
----------------
Aastrom Biosciences, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Michigan 0-22025 94-3096597
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
24 Frank Lloyd Wright Drive, P.O. Box 376, Ann Arbor Michigan 48106
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (734) 930-5555
--------------
Not Applicable
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 5. OTHER EVENTS.
Aastrom's independent public accountants, PricewaterhouseCoopers LLP, have
determined that based on subsequent events occurring subsequent to their report
dated August 13, 1999 on Aastrom's financial statements for the year ended June
30, 1999, they will be issuing a revised opinion which includes explanatory
language as to the Company's ability to continue as a going concern.
See Aastrom's current financial statements attached hereto as Exhibit 99.1
and the report of PricewaterhouseCoopers attached hereto as Exhibit 99.2.
ITEM 7. EXHIBITS.
(a) Financial statements of business acquired.
Not applicable.
(b) Pro forma financial information.
Not applicable.
(c) Exhibits.
Exhibit
No. Description
------------ -------------------------------------
23.1 Consent of PricewaterhouseCoopers LLP
99.1 Opinion of PricewaterhouseCoopers LLP
99.2 Company Financial Statements
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AASTROM BIOSCIENCES, INC.
Date: December 8, 1999 By: /s/ Todd E. Simpson
--------------------------------------
Vice President, Finance and
Administration and Chief Financial
Officer (Principal Financial and
Accounting Officer)
3
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
No. Description
- ---------- -------------------------------------
23.1 Consent of PricewaterhouseCoopers LLP
99.1 Opinion of PricewaterhouseCoopers LLP
99.2 Company Financial Statements
<PAGE>
EXHIBIT 23.1
------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in each
Registration Statement on Form S-3 (Nos. 333-60125 and 333-81399) and Form S-8
(No. 333-25021) of Aastrom Biosciences, Inc. of our report dated December 8,
1999, appearing in this Current Report on Form 8-K dated December 10, 1999.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
December 10, 1999
<PAGE>
EXHIBIT 99.1
------------
Report of Independent Accountants
To the Board of Directors and Shareholders of
Aastrom Biosciences, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of shareholders' equity and cash
flows present fairly, in all material respects, the consolidated financial
position of Aastrom Biosciences, Inc. (a development stage company) at June 30,
1998 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended June 30, 1999, and for the period from March
24, 1989 (inception) to June 30, 1999, 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has an insufficient amount of cash to fund its planned operations through
June 30, 2000. These factors raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
December 8, 1999
<PAGE>
EXHIBIT 99.2
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONSOLIDATED BALANCE SHEETS
June 30,
----------------------------
1998 1999
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......... $ 2,078,000 $ 7,528,000
Short-term investments ............. 9,134,000 --
Receivables ........................ 167,000 113,000
Inventory .......................... -- 1,144,000
Prepaid expenses ................... 270,000 253,000
------------ ------------
Total current assets .............. 11,649,000 9,038,000
PROPERTY, NET ....................... 725,000 502,000
------------ ------------
Total assets ...................... $ 12,374,000 $ 9,540,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and
accrued expenses .................. $ 1,313,000 $ 836,000
Accrued employee expenses .......... 150,000 193,000
Current portion of capital
lease obligations ................. 65,000 --
------------ ------------
Total current liabilities ......... 1,528,000 1,029,000
COMMITMENTS (Note 8)
SHAREHOLDERS' EQUITY:
Preferred Stock, no par
value; shares authorized -
5,000,000; shares issued
and outstanding - 2,200,000
and 7,000, respectively
(Note 4) ........................... 9,930,000 6,588,000
Common Stock, no par value;
shares authorized -
40,000,000; shares issued
and outstanding -
13,639,817 and 16,980,161,
respectively ....................... 59,474,000 72,257,000
Deficit accumulated during the
development stage .................. (58,897,000) (70,334,000)
Stock purchase warrants ............. 335,000 --
Accumulated other
comprehensive income ............... 4,000 --
------------ ------------
Total shareholders' equity ......... 10,846,000 8,511,000
------------ ------------
Total liabilities and shareholders'
equity ........................... $ 12,374,000 $ 9,540,000
============ ============
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
March 24, 1989
Year ended June 30, (Inception) to
------------------------------------------------ June 30,
1997 1998 1999 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Product sales .......................... $ -- $ -- $ 34,000 $ 34,000
Research and development
agreements ............................ 230,000 3,000 -- 2,020,000
Grants ................................. 148,000 246,000 847,000 3,236,000
------------ ------------ ------------ ------------
Total revenues ........................ 378,000 249,000 881,000 5,290,000
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of product sales .................. -- -- 6,000 6,000
Research and development ............... 13,357,000 15,498,000 10,871,000 64,801,000
Selling, general and
administrative ........................ 1,953,000 2,858,000 2,836,000 14,736,000
------------ ------------ ------------ ------------
Total costs and expenses .............. 15,310,000 18,356,000 13,713,000 79,543,000
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS .................... (14,932,000) (18,107,000) (12,832,000) (74,253,000)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Other income ........................... -- -- 1,237,000 1,237,000
Interest income ........................ 676,000 886,000 571,000 3,709,000
Interest expense ....................... (32,000) (12,000) (4,000) (267,000)
------------ ------------ ------------ ------------
Total other income .................... 644,000 874,000 1,804,000 4,679,000
------------ ------------ ------------ ------------
NET LOSS ................................ $(14,288,000) $(17,233,000) $(11,028,000) $(69,574,000)
============ ============ ============ ============
COMPUTATION OF NET LOSS
APPLICABLE TO COMMON SHARES:
Net loss ............................... $(14,288,000) $(17,233,000) $(11,028,000)
Dividends and yields on
preferred stock ....................... -- (351,000) (409,000)
Charge related to issuance
of preferred stock .................... -- (3,439,000) (70,000)
------------ ------------ ------------
Net loss applicable to
Common Shares .......................... $(14,288,000) $(21,023,000) $(11,507,000)
============ ============ ============
NET LOSS PER COMMON SHARE (Basic and
Diluted) ............................... $ (1.27) $ (1.57) $ (.75)
============ ============ ============
Weighted average number of common shares
outstanding ............................ 11,228,000 13,363,000 15,342,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------------- -----------------------------
Shares Amount Shares Amount
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
BALANCE, MARCH 24, 1989 (Inception)............. -- $ -- -- $ --
Net loss, comprehensive loss..................
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 cash and services 33,333 33,000
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
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
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..................... 1,398,601 93,000
Issuance of Stock Purchase Rights for cash
in September 1995 and March 1996............
Principal payment received under shareholder
note receivable............................. 31,000
---------- ------------ ---------- -----------
BALANCE, JUNE 30, 1996.......................... 9,451,766 34,218,000 1,886,479 157,000
Net loss......................................
Unrealized losses on investments..............
Comprehensive loss..........................
Exercise of stock options..................... 40,307 26,000
Issuance of Series E Preferred Stock at
$17.00 per share............................ 205,882 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
---------- ------------ ---------- -----------
BALANCE, JUNE 30, 1997.......................... -- -- 13,275,208 57,906,000
Net loss......................................
Unrealized gains on investments...............
Comprehensive loss..........................
Exercise of stock options..................... 68,500 83,000
Issuance of 5.5% Convertible Preferred Stock
at $5.00 per share, net of issuance costs
of $1,070,000............................... 2,200,000 9,930,000
Dividend paid on 5.5% Convertible Preferred
Stock....................................... 72,940 351,000
Issuance of Common Stock...................... 253,340 1,144,000
Repurchase and retirement of Common Shares
outstanding................................. (32,171) (73,000)
Compensation expense related to stock options
and warrants granted........................ 63,000
---------- ------------ ---------- -----------
BALANCE, JUNE 30, 1998.......................... 2,200,000 9,930,000 13,639,817 59,474,000
Net loss......................................
Unrealized gains on investments...............
Comprehensive loss..........................
Dividend and yields on preferred stock........ 258,000 75,628 151,000
Exercise of stock options..................... 24,043 28,000
Issuance of 1998 Series I Convertible
Preferred Stock at $1,000 per share, net of
issuance costs of $460,000.................. 5,000 4,540,000 40,404 149,000
Issuance of 1999 Series III Convertible
Preferred Stock at $1,000 per share, net of
issuance costs of $280,000.................. 3,000 2,720,000 49,994 90,000
Issuance of Common Stock...................... 451,906 1,159,000
Conversion of 5.5% Convertible Preferred
Stock....................................... (2,200,000) (9,930,000) 2,240,326 9,930,000
Conversion of Series I Convertible Preferred
Stock....................................... (1,000) (930,000) 458,043 930,000
Expiration of stock purchase warrant.......... 335,000
Compensation expense related to stock options
granted..................................... 11,000
---------- ------------ ---------- -----------
BALANCE, JUNE 30, 1999.......................... 7,000 $ 6,588,000 16,980,161 $72,257,000
========== ============ ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Deficit
Stock accumulated Accumulated
purchase during the other Total
rights and development comprehensive shareholders'
warrants stage income equity
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
BALANCE, MARCH 24, 1989 (Inception)............. $ -- $ -- $ -- $ --
Net loss, comprehensive loss.................. (27,025,000) (27,025,000)
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 cash and services 33,000
Issuance of Series C Preferred Stock in
October 1993 at $1,000 per share, net of
issuance costs of $175,000.................. 9,825,000
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
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..................... 93,000
Issuance of Stock Purchase Rights for cash
in September 1995 and March 1996............ 3,500,000 3,500,000
Principal payment received under shareholder
note receivable............................. 31,000
---------- ------------ ---------- -----------
BALANCE, JUNE 30, 1996.......................... 3,500,000 (27,025,000) -- 10,850,000
Net loss...................................... (14,288,000) (14,288,000)
Unrealized losses on investments.............. (10,000) (10,000)
------------
Comprehensive loss.......................... (14,298,000)
Exercise of stock options..................... 26,000
Issuance of Series E Preferred Stock at
$17.00 per share............................ (3,500,000) --
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
---------- ------------ ---------- -----------
BALANCE, JUNE 30, 1997.......................... -- (41,313,000) (10,000) 16,583,000
Net loss...................................... (17,233,000) (17,233,000)
Unrealized gains on investments............... 14,000 14,000
-----------
Comprehensive loss.......................... (17,219,000)
Exercise of stock options..................... 83,000
Issuance of 5.5% Convertible Preferred Stock
at $5.00 per share, net of issuance costs
of $1,070,000............................... 9,930,000
Dividend paid on 5.5% Convertible Preferred
Stock....................................... (35,100) --
Issuance of Common Stock...................... 1,144,000
Repurchase and retirement of Common Shares
outstanding................................. (73,000)
Compensation expense related to stock options
and warrants granted........................ 335,000 398,000
---------- ------------ ---------- -----------
BALANCE, JUNE 30, 1998.......................... 335,000 (58,897,000) 4,000 10,846,000
Net loss...................................... (11,028,000) (11,028,000)
Unrealized gains on investments............... (4,000) (4,000)
-----------
Comprehensive loss.......................... (11,032,000)
Dividend and yields on preferred stock........ (409,000) --
Exercise of stock options..................... 28,000
Issuance of 1998 Series I Convertible
Preferred Stock at $1,000 per share, net of
issuance costs of $460,000.................. 4,689,000
Issuance of 1999 Series III Convertible
Preferred Stock at $1,000 per share, net of
issuance costs of $280,000.................. 2,810,000
Issuance of Common Stock...................... 1,159,000
Conversion of 5.5% Convertible Preferred
Stock....................................... --
Conversion of Series I Convertible Preferred
Stock....................................... --
Expiration of stock purchase warrant.......... (335,000) --
Compensation expense related to stock options
granted..................................... 11,000
---------- ------------ ---------- -----------
BALANCE, JUNE 30, 1999.......................... $ -- $(70,334,000) $ -- $ 8,511,000
========== ============ ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
March 24, 1989
Year ended June 30, (Inception) to
------------------------------------------------ June 30,
1997 1998 1999 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss .......................................... $(14,288,000) $(17,233,000) $(11,028,000) $(69,574,000)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization .................. 564,000 557,000 296,000 2,684,000
Loss on property held for resale ............... -- -- -- 110,000
Amortization of discounts and premiums
on investments ................................ (84,000) (180,000) (70,000) (453,000)
Stock compensation expense ..................... 120,000 398,000 11,000 539,000
Stock issued pursuant to license agreement ..... -- 1,100,000 1,100,000 2,200,000
Changes in assets and liabilities:
Receivables ................................... (148,000) 38,000 54,000 (137,000)
Inventory ..................................... -- -- (1,144,000) (1,144,000)
Prepaid expenses .............................. 311,000 (144,000) 17,000 (253,000)
Accounts payable and accrued expenses ......... 316,000 (195,000) (477,000) 836,000
Accrued employee expenses ..................... 33,000 20,000 43,000 193,000
Deferred revenue .............................. (122,000) -- -- --
------------ ------------ ------------ ------------
Net cash used for operating activities .......... (13,298,000) (15,639,000) (11,198,000) (64,999,000)
------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Organizational costs .............................. -- -- -- (73,000)
Purchase of short-term investments ................ (19,190,000) (12,326,000) (1,000,000) (44,464,000)
Maturities of short-term investments .............. 4,200,000 18,450,000 10,200,000 44,917,000
Capital purchases ................................. (424,000) (234,000) (73,000) (2,449,000)
Proceeds from sale of property held for resale .... -- -- -- 400,000
------------ ------------ ------------ ------------
Net cash provided by (used for)
investing activities ............................ (15,414,000) 5,890,000 9,127,000 (1,669,000)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Issuance of preferred stock ....................... -- 9,930,000 7,499,000 51,647,000
Issuance of Common Stock .......................... 19,911,000 127,000 87,000 20,241,000
Repurchase of Common Stock ........................ -- (49,000) -- (49,000)
Payments received for stock purchase rights ....... -- -- -- 3,500,000
Payments received under shareholder notes ......... -- -- -- 31,000
Principal payments under capital lease obligations (223,000) (124,000) (65,000) (1,174,000)
------------ ------------ ------------ ------------
Net cash provided by financing activities ........ 19,688,000 9,884,000 7,521,000 74,196,000
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,024,000) 135,000 5,450,000 7,528,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ... 10,967,000 1,943,000 2,078,000 --
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......... $ 1,943,000 $ 2,078,000 $ 7,528,000 $ 7,528,000
============ ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ................................... $ 32,000 $ 12,000 $ 4,000 $ 267,000
Additions to capital lease obligations .......... -- -- -- 1,174,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Aastrom Biosciences, Inc. (Aastrom) was incorporated in March 1989 (Inception)
and is in the development stage at June 30, 1999. The Company operates its
business in one reportable segment - research and product development, conducted
both on its own behalf and in connection with various collaborative research and
development agreements with others, involving the development and sale of
processes and products for the ex vivo production of human cells for use in cell
and ex vivo gene therapy.
Successful future operations are subject to several technical and business
risks, including the Company's continued ability to obtain future funding,
satisfactory product development, obtaining regulatory approval and market
acceptance for its products. As described in Note 7, Aastrom formed its German-
based subsidiary, Zellera AG (Zellera), in an effort to provide access to new
sources of capital. Funding obtained by Zellera, if any, is now expected to
fund only the operations of Zellera and not expected to be available to fund the
operations of Aastrom. As a result, in October 1999, management began
implementation of significant organizational changes designed to reduce
headcount and operating expenses and to align Aastrom's resources with its focus
on pursuing corporate strategic alternatives, including a possible merger or
acquisition, to provide operating capital. Management has concluded that
further deferral of operations, including additional reductions in workforce,
would negatively impact the process of identifying potential collaborative
partners and initiating an alliance. Accordingly, management has not implemented
further cost reduction measures. If additional funding can not be obtained on
a timely basis, it is likely that Aastrom could not continue its operations
through June 30, 1999.
SIGNIFICANT REVENUE RELATIONSHIPS - One company accounted for 52% of total
revenues for the year ended June 30, 1997. One company accounted for 34% of
total revenues for the period from Inception to June 30, 1999. Grant revenues
consist of grants sponsored by the U.S. government.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Aastrom and its wholly-owned subsidiary, Zellera, which is located
in Berlin, Germany, (collectively, the Company). All significant inter-company
transactions and accounts have been eliminated in consolidation.
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
and 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.
INVENTORY - Inventory is valued at the lower of cost (specific identification)
or market and consists primarily of finished components of the Company's
products.
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 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. Revenue from product sales is recognized upon shipment
or transfer of title, whichever occurs later.
5
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED 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 $154,000 and $3,000 for the years ended
June 30, 1997 and 1998, respectively, and $1,645,000 for the period from
Inception to June 30, 1999.
STOCK COMPENSATION - The Company has adopted the disclosure provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). 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 and does not recognize
compensation expense for its employee stock-based compensation plans as allowed
by SFAS 123.
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 COMMON SHARE - Net loss per common share is computed using the
weighted-average number of common 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. Upon the completion of the Company's
initial public offering, all outstanding shares of preferred stock at that time
were automatically converted into common stock. Accordingly, such shares of
preferred stock are assumed to have been converted into common stock at the time
of issuance.
The computation of net loss per common share for the years ended June 30, 1998
and 1999 reflects dividends, yields and other adjustments relating to Company's
preferred stock which affect only the computation of net loss per common share
and are not included in the computation of net loss for the period.
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 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. No significant impairment losses have been identified by the
Company for any of the periods presented in the accompanying financial
statements.
NEW ACCOUNTING STANDARDS - The Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) as of July 1,
1998 which sets forth additional requirements for companies to report in the
financial statements Comprehensive Income in addition to Net Income. Adoption
of SFAS 130 did not have a material effect on the accompanying financial
statements.
Effective June 30, 1999, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("SFAS 131"). This statement establishes new standards for
reporting information about operating segments and related disclosures about
products, geographic areas, and major customers in annual and interim financial
statements. Under SFAS 131, operating segments are determined consistent with
the way management organizes and evaluates financial information internally for
making decisions and assessing performance. The Company's adoption of SFAS 131
had no effect on the Company's results of operations, cash flows or financial
position.
6
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
June 30, 1998:
U.S. Government Securities...................... $ 7,157,000 $ 4,000 $ - $7,161,000
Commercial Paper................................ 1,973,000 - - 1,973,000
---------- ---------- --------- ----------
$ 9,130,000 $ 4,000 $ - $9,134,000
=========== =========== ========= ==========
</TABLE>
3. PROPERTY
Property consists of the following:
June 30,
-------------------------
1998 1999
---------- -----------
Machinery and equipment.......................... $ 1,473,000 $ 1,477,000
Office equipment................................. 903,000 883,000
Leasehold improvements........................... 621,000 622,000
---------- ----------
2,997,000 2,982,000
Less accumulated depreciation and amortization... (2,272,000) (2,480,000)
---------- ----------
$ 725,000 $ 502,000
=========== ==========
Equipment under capital leases totaled $240,000 at June 30, 1998, with related
accumulated amortization of $159,000.
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 underwriters' commissions and expenses, were
$19,885,000.
PREFERRED STOCK - In connection with the Company's initial public offering, all
9,657,648 shares of then outstanding preferred stock were automatically
converted into 8,098,422 shares of Common Stock.
In December 1997, the Company completed a directed placement of 2,200,000 shares
of its 5.5% Convertible Preferred Stock at a price of $5.00 per share. Proceeds
from the offering, net of placement agent commissions and expenses, were
$9,930,000. In December 1998, all 2,200,000 shares of 5.5% Convertible
Preferred Stock were converted into 2,240,326 shares of Common Stock.
7
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 1998, the Company completed the sale of 5,000 shares of its 1998 Series
I Convertible Preferred Stock, yielding 5.5% per annum (1998 Preferred Stock).
Proceeds from the sale, net of finder's fees and expenses, were $4,540,000. The
conversion price of the 1998 Preferred Stock is based on the market price of the
Company's common stock during a pricing period preceding conversion, up to a
maximum conversion price of $4.81 per share and automatically converts in July
2001 or earlier upon certain events. During the year ending June 30, 1999, 1,000
shares of 1998 Preferred Stock were converted into 458,043 shares of Common
Stock. The 1998 Preferred Stock outstanding as of June 30, 1999 has a
preference in liquidation equal to $4,219,000.
In May 1999, the Company completed the sale of 3,000 shares of its 1999 Series
III Convertible Preferred Stock, yielding 5.5% per annum (1999 Preferred Stock).
Proceeds from the sale, net of finder's fees and expenses, were $2,720,000. The
conversion price of the 1999 Preferred Stock is based on the market price of the
Company's common stock during a pricing period preceding conversion, up to a
maximum conversion price of $2.34 per share and automatically converts in May
2002, or earlier upon certain events. The 1999 Preferred Stock has a preference
in liquidation as of June 30, 1999 equal to $3,015,000.
With certain exceptions, until November 23, 1999, the 1999 Preferred Stock is
convertible upon the market price of the Company's common stock reaching $2.34
per share, or if there is a 17% increase in the market price of the Company's
common stock. Additionally, conversions of the 1998 Preferred Stock are subject
to certain limitations through September 1998, unless the Company's common stock
reaches $4.81 per share, or if there is a 17% increase in the market price of
the Company's common stock.
No cash dividends have ever been declared or paid; however, during the years
ended June 30, 1998 and 1999, the Company issued 72,940 shares and 75,628 shares
of Common Stock valued at $351,000 and $151,000, respectively, in payment of the
dividends on the 5.5% Preferred Stock.
STOCK OPTION PLANS - The Company has various stock option plans and agreements
that provide for the issuance of nonqualified and incentive stock options to
acquire up to 3,099,927 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.
The Company also has an outside directors' stock option plan that 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 or upon their appointment as a director. These
options generally vest over a one-year period and expire ten years after 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 years ended June 30, 1997, 1998
and 1999 compensation expense totaling $120,000, $63,000 and $11,000,
respectively, has been charged with respect to these options. Additional future
compensation expense with respect to the issuance of such options totals $14,000
and will be recognized through December 2001.
8
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If the Company had elected to recognize compensation expense based upon the fair
value at the grant dates for stock option awards granted in 1997, 1998 and 1999,
in accordance with SFAS No. 123, the pro forma net loss and net loss per common
share would be as follows.
June 30,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
Net loss:
As reported................. $14,288,000 $17,233,000 $11,028,000
Pro forma................... 14,793,000 18,042,000 11,935,000
Net loss per common share:
As reported................. $ (1.27) $ (1.57) $ (.75)
Pro forma................... (1.32) (1.63) (.78)
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 4.2% to 6.8% and expected
option lives of three to five years.
The following table summarizes option activity:
<TABLE>
<CAPTION>
Weighted Average Options
Options Options Available Exercise Price Exercisable
Outstanding For Grant Per Share At Period End
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
March 24, 1989 (Inception)
Options authorized......... - 2,849,927
Options canceled........... (208,884) 208,884 $ .61
Options granted............ 1,937,781 (1,937,781) $ .43
Options exercised.......... (1,398,601) - $ .21
---------- ----------
Balance, June 30, 1996....... 330,296 1,121,030 $1.20 101,021
Options canceled........... (16,818) 16,818 $1.83
Options authorized......... - 150,000
Options granted............ 785,200 (785,200) $6.78
Options exercised.......... (40,307) - $ .65
---------- ----------
Balance, June 30, 1997....... 1,058,371 502,648 $5.36 483,376
Options canceled........... (199,873) 199,873 $5.79
Options granted............ 372,520 (372,520) $4.41
Options exercised.......... (68,500) - $1.21
---------- ----------
Balance, June 30, 1998....... 1,162,518 330,001 $5.12 593,930
Options authorized......... - 100,000
Options canceled........... (569,881) 569,881 $6.40
Options granted............ 738,700 (738,700) $3.12
Options exercised.......... (24,043) - $1.18
---------- ----------
Balance, June 30, 1999....... 1,307,294 261,182 $3.60 729,786
========== ==========
</TABLE>
9
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock-based compensation plans
as of June 30, 1999:
<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 - $1.91 184,418 6.8 $1.26 124,959 $1.12
$2.38 - $3.56 856,876 9.0 $3.28 463,327 $3.34
$4.63 - $7.00 266,000 8.0 $6.21 141,500 $6.37
--------- -------
1,307,294 729,786
========= =======
</TABLE>
The weighted average fair value of options granted during the year ended June
30, 1999 was $1.33 per share.
MODIFICATIONS TO STOCK OPTIONS - In November 1998, the Company modified certain
of the terms of stock options held by non-executive officers of the Company.
One modification consisted of a reduction in the exercise price of the stock
options to $3.56, the then current fair market value of the common stock. This
affected options to purchase an aggregate of approximately 152,000 shares of
common stock. In connection with a reduction in work force that also occurred
in November 1998, vesting on stock options held by terminated employees was
accelerated by one year. This modification, along with other concessions
offered to terminated employees, was made in exchange for releases from these
individuals relating to their termination of employment. This modification
affected stock options to purchase approximately 12,000 shares of common stock.
No charge to expense has been reflected in the accompanying financial statements
relating to this modification.
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 beginning 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. During the years ended June 30, 1998
and 1999, 13,900 shares and 26,835 shares of Common Stock were purchased under
this plan.
STOCK PURCHASE WARRANTS - In October 1996, the Company issued warrants to
purchase 69,444 shares of Common Stock which expire on October 15, 2000 in
connection with an equity financing commitment. These warrants may be
exercised, in whole or in part, at a price equal to the lesser of (a) $15.00 per
share (increasing to $18.00 per share in February 2000); or (b) 85% of the fair
market value of the Company's Common Stock at the time of exercise.
In addition, in connection with the issuance of the 1999 Preferred Stock, the
Company has issued warrants to purchase 150,000 shares of common stock at $2.28
per share and will issue warrants to purchase 150,000 shares of common stock at
an exercise price equal to 130% of an average of the trading prices of the
Company's common stock during a period ending on November 15, 1999, subject to
an earlier determination upon certain change in ownership conditions. These
warrants expire in May 2004 if not exercised and contain certain anti-dilution
provisions.
10
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMON SHARES RESERVED - As of June 30, 1999, the Company has reserved shares of
Common Stock for future issuance as follows:
Issuance under stock option plans and agreements .......... 1,568,476
Issuance under 1996 Employee Stock Purchase Plan .......... 209,265
Exercise of Stock Purchase Warrants ....................... 369,444
Conversion of 1998 Series I Convertible Preferred Stock.... 2,253,957
Conversion of 1999 Series III Convertible Preferred Stock.. 3,855,556
---------
8,256,698
=========
5. INCOME TAXES
Deferred tax assets consist of the following:
June 30,
------------------------------
1998 1999
------------ ------------
Net operating loss carryforwards ...... $ 19,950,000 $ 23,740,000
Tax credits and other ................. 1,911,000 2,288,000
------------ ------------
Gross deferred tax assets ............. 21,861,000 26,028,000
Deferred tax assets valuation allowance (21,861,000) (26,028,000)
------------ ------------
$ -- $ --
============ ============
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, 1999, the Company's Federal tax net operating loss and tax credit
carryfowards were $67,800,000 and $1,990,000, respectively, which will expire
from 2004 through 2019, 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 net operating loss carryforward amounting
to $1,153,000 per year. As of June 1999, the portion of the Company's net
operating loss that remains subject to this limitation is $200,000 and therefore
is not expected to ultimately effect the Company's ability to utilize the
benefit. In July 1998, the Company issued shares of 1998 Series I Convertible
Preferred Stock which resulted in an annual limitation of $3,136,000, which
applies to losses incurred between October 1993 and July 1998. As of June 1999,
the portion of the Company's net operating loss that remains subject to this
limitation is $47,200,000. 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). In March 1992, and
as provided for under the research agreement, the Company also 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 Laboratories, Inc. in October 1993, the Company and Cobe BCT, Inc.
(collectively with Cobe Laboratories, Inc referred to as Cobe), an affiliate of
Cobe, entered
11
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
into an agreement which granted to Cobe exclusive worldwide
distribution and marketing rights to the AastromReplicell/TM/ Cell Production
System (System) for stem cell therapy applications (Distribution Agreement). The
Company is implementing the initial European market introduction of the
AastromReplicell/TM/ System and related therapy kits for the production of
either bone marrow derived cells or umbilical cord blood cells used in stem cell
therapy. Following market introduction of the AastromReplicell/TM/ System for
stem cell therapy, development of additional therapy kits can be pursued for a
number of emerging cell therapies being developed by others. Such other cell
therapy applications were outside of the scope of the Distribution Agreement and
outside of Cobe's area of focus. Accordingly, by mutual agreement, the Company
and Cobe terminated the Distribution Agreement in November 1998. In connection
with the termination of the Distribution Agreement, Cobe made a cash payment to
Aastrom totaling $1,237,000, which is reflected as other income in the
accompanying financial statements. Cobe currently owns approximately 2.4
million shares of the Company's common stock, and as part of the termination
agreement, Cobe has agreed not to sell any such shares until at least January 1,
2001.
MANUFACTURE, SUPPLY AND OTHER AGREEMENTS - The Company has entered into various
agreements relating to the manufacture of its products and supply of certain
components. Pursuant to one such agreement, the Company makes annual renewal
fees of $1,000,000, due in March of each year during the term of the agreement,
which ends in 2001 unless extended by the Company. The Company and the licensor
amended this agreement to provide for the issuance of $1,100,000 in Common Stock
by the Company as payment for an annual renewal fees due in March, 1998 and
1999. A similar agreement is in place for the payment due in March 2000. The
accompanying financial statements reflect charges to research and development
expense of $1,000,000 for the year ended June 30, 1997 and $1,100,000 for the
years ended June 30, 1998 and 1999.
In September 1995, the Company entered into a research and development
collaboration which was completed in September 1996. Under this collaboration,
the Company received $3,500,000 in equity payments and recognized $1,538,000 in
research revenue.
7. ZELLERA AG
In May 1999, the Company formed Zellera AG (Zellera) as a wholly-owned
subsidiary based in Berlin, Germany. The formation of Zellera is intended to
provide access to additional funding and collaboration opportunities in new
product areas and to also support Aastrom's European product commercialization
efforts. Initial funding for Zellera is being pursued, which is planned to
consist of a combination of investment capital, loans and subsidies from the
German government. With this potential funding, Zellera will have access to
Aastrom's intellectual property base for human cell therapies and will develop
new product areas. Funding, if any, obtained by Zellera is intended to support
the operations of Zellera and not that of Aastrom. Subsequent to June 30, 1999,
Aastrom has made commitments totaling up to $530,000 related to initial start up
activities for Zellera's operations.
12
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS
The Company leases its facility under an operating lease which expires in August
2000. The Company has the option to renew the lease for an additional period of
up to five years and has certain expansion options.
Future minimum payments under non-cancelable operating leases are as follows:
Operating
Year Ending June 30, Leases
-------------------- --------
2000 ....................................... $540,000
2001 ....................................... 93,000
--------
Total minimum lease payments .............. $633,000
========
Rent expense for the years ended June 30, 1997, 1998 and 1999, was $456,000,
$487,000 and $560,000, respectively, and $2,334,000 for the period from
Inception to June 30, 1999.
9. EMPLOYEE SAVINGS PLAN
The Company has a 401(k) plan that 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, 1999, the Company has made no contributions to the plan.
13
