AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 8, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
STEMCELLS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 2836 94-3078125
(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
------------------------
525 DEL REY AVENUE, SUITE C
SUNNYVALE, CA 94085
(408)731-8670
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------------
IRIS BREST, ESQ.
STEMCELLS, INC.
525 DEL REY AVENUE, SUITE C
SUNNYVALE, CA 94085
(408)731-8670
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
GEOFFREY B. DAVIS, ESQ.
Ropes & Gray
One International Place
Boston, Massachusetts 02110
(617) 951-7000
(617) 951-7050 (fax)
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) REGISTRATION FEE
Common Stock, par value $.01 per share....... 3,205,486 Shares $8.22 $26,349,094 $6,956.16
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. The maximum price
per share information is based on the average of the high and low sale
prices on the Nasdaq National Market on September 7, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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SUBJECT TO COMPLETION--SEPTEMBER 8, 2000
PROSPECTUS
, 2000
STEMCELLS, INC.
SHARES OF COMMON STOCK
---------------
This prospectus relates to the resale of 3,205,486 shares of our common
stock acquired by the selling stockholders listed on page 39 of this prospectus
or in an accompanying supplement to this prospectus.
The selling stockholders identified in this prospectus, or their pledgees,
donees, transferees or other successors-in-interest, may offer the shares from
time to time through public or private transactions at prevailing market prices,
at prices related to prevailing market prices or at privately negotiated prices.
Our common stock is traded on the Nasdaq National Market under the symbol
"STEM."
We will not receive any proceeds from the sale of the shares.
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THIS INVESTMENT INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4.
------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
TABLE OF CONTENTS
PAGE
--------
Prospectus Summary..................... 2
Risk Factors........................... 4
Forward-Looking Statements............. 10
Industry and Market Data............... 10
Use of Proceeds........................ 10
Dividend Policy........................ 10
Capitalization......................... 11
Dilution............................... 12
Selected Consolidated Financial Data... 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 14
Business............................... 20
Management............................. 36
Executive Compensation................. 37
Selling Stockholders................... 39
PAGE
--------
Security Ownership of Certain
Beneficial Owners and Management..... 39
Relationships and Transactions with
Related Parties...................... 42
Description of Capital Stock........... 44
Plan of Distribution................... 48
Legal Matters.......................... 49
Experts................................ 49
Where You Can Find More Information.... 49
Index to Financial Statements.......... F-1
Condensed Consolidated Balance
Sheets............................... F-22
Condensed Consolidated Statements of
Operations........................... F-23
Condensed Consolidated Statements of
Cash Flows........................... F-24
Notes to Condensed Consolidated
Financial Statements................. F-25
i
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS IMPORTANT INFORMATION REGARDING OUR BUSINESS AND
THIS OFFERING. BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL THE
INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS
CAREFULLY, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS AND RELATED
NOTES, BEFORE DECIDING TO INVEST IN OUR COMMON STOCK.
STEMCELLS, INC.
We are a leader in the development of therapies that use stem cells to treat
degenerative human diseases and disorders. Stem cells are the key cells in the
body that produce all the functional mature cell types found in normal, healthy
individuals. Our research and development efforts focus on the identification,
isolation and expansion of stem cells as the underlying technology for
developing potential cell transplant therapies. These stem cell based therapies
could be used to repopulate or repair tissues, such as the brain, pancreas or
liver, that have been damaged or lost as a result of disease or injury.
Many diseases result from organ failure in situations where whole organs
cannot be transplanted to cure the disease (e.g., Alzheimer's, Parkinson's and
other degenerative diseases of the nervous system) or where there are
constraints due to a short supply of organs for transplant (e.g., liver failure
from hepatitis or other causes and pancreatic failure from diabetes). These
conditions, many of which cannot be treated effectively, affect more than
18 million people in the United States and account for more than $160 billion
annually in health care costs according to associations for the various diseases
and government sources.
We believe our stem cell technologies can provide the basis for effective
therapies for these and other conditions. Our aim is to replace lost or damaged
cells or regenerate organs, returning patients to productive lives and
significantly reducing health care costs. Our current leadership position is a
result of fundamental advances we have made in stem cell therapy for the nervous
system through our research and development program for the isolation,
purification and transplantation of neural stem cells. We also have made
significant advances in our search for the stem cells of the pancreas and of the
liver.
We have established a broad intellectual property position with respect to
stem cell therapies in all three areas by patenting our discoveries and entering
into exclusive licensing arrangements. Our portfolio of issued patents includes
a method of culturing normal human neural stem cells in our proprietary medium,
and our published studies show that our cultured and expanded cells give rise to
all three major cell types of the central nervous system (i.e., neurons,
astrocytes and oligodendrocytes). In addition, the Company recently announced
the results of a new study that showed that human brain stem cells can be
successfully isolated with the use of markers present on the surface of freshly
obtained brain cells. We believe this is the first reproducible process for
isolating highly purified populations of well-characterized normal human neural
stem cells, and we have applied for a composition of matter patent. We also have
filed an improved process patent for the growth and expansion of these purified
normal human neural cells.
Historical Note: StemCells was formerly known as CytoTherapeutics and was
incorporated in Delaware in 1988. We currently have one subsidiary, StemCells
California, Inc., a California corporation we acquired in September 1997. Until
mid-1999, we had programs in encapsulated cell therapy as well as stem cell
programs. In 1999, we embarked on a major restructuring of our research and
development operations and sold the encapsulated cell therapy technology. We now
focus exclusively on the discovery, development and commercialization of our
proprietary platform stem cell technologies.
2
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes the consolidated financial data for our
business. This table should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and notes thereto included elsewhere in this
prospectus.
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA
Revenue from collaborative agreements................ $11,761 $ 7,104 $ 10,617 $ 8,803 $ 5,022 $ 5,022 $ --
Research and development expenses.................... 14,730 17,130 18,604 17,659 9,991 6,847 1,660
Acquired research and development.................... 8,344
ECT wind-down expenses............................... 6,048
Net loss............................................. $(8,891) $(13,759) $(18,114) $(12,628) $(15,709) $(3,773) $(2,326)
======= ======== ======== ======== ======== ======= =======
Basic and diluted net loss per share................. $ (0.69) $ (0.89) $ (1.08) $ (0.69) $ (0.84) $ (0.20) $ (0.12)
Shares used in computing basic and diluted net loss
per share.......................................... 12,799 15,430 16,704 18,291 18,706 18,483 19,419
The following table provides a summary of our consolidated balance sheets.
The pro-forma column is based on our historical unaudited financial statements
and also reflects our August 3, 2000 sale of 923,521 shares of common stock to
Millennium Partners, L.P for $4,000,000 and the sale as of August 30, 2000 of
180,914 shares of common stock to Millennium Partners, L.P., for $1,000,000, net
of a stock subscription receivable of $1,250,000.
AS OF DECEMBER 31 AS OF JUNE 30
---------------------------------------------------- --------------------
1995 1996 1997 1998 1999 2000 2000
-------- -------- -------- -------- -------- -------- ---------
ACTUAL PRO-FORMA
-------- ---------
BALANCE SHEET DATA
Cash, cash equivalents and marketable securities.... $44,192 $42,607 $29,050 $17,386 $4,760 $5,535 $9,285
Restricted investments.............................. 19,220 19,220
Total assets........................................ 56,808 58,397 44,301 32,866 16,081 32,388 36,138
Long-term debt, including capitalized leases........ 5,441 8,223 4,108 3,762 2,937 2,775 2,775
Redeemable common stock............................. 8,159 5,583 5,249 5,249
Stockholders' equity................................ 45,391 34,747 28,900 17,897 3,506 27,606 31,356
The results shown at, and for the six months ended, June 30, 2000 reflect a
restructuring of the Company to focus solely on our stem cell technology which
was implemented by terminating all activities related to its former encapsulated
cell technology and relocating all activities to Sunnyvale, California. For more
information on this restructuring see "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and notes thereto included elsewhere in
this prospectus.
During the second quarter 2000 the Company realized a $1,427,686 gain and
recognized an increase in value related to its remaining holdings of $19,220,165
in connection with its investment in Modex Therapeutics Ltd. ("Modex"), a Swiss
biotechnology company that completed an initial public offering on June 23,
2000. For more information on Modex see "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and notes thereto included elsewhere in
this prospectus.
3
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision regarding StemCells, Inc. (the "Company" or "we" or "us").
Furthermore, the risks described are not the only ones facing the Company.
Additional risks not presently known to us or that we currently deem immaterial
may also impair our business operations.
Our business, financial condition or results of operations could be
materially adversely affected by any of these risks. Consequentially, the
trading price of our common stock could decline, resulting in the loss of all or
part of your investment.
OUR TECHNOLOGY IS AT AN EARLY STAGE OF DISCOVERY AND DEVELOPMENT AND WE MAY
FAIL TO DEVELOP ANY PRODUCTS.
Our stem cells technology is at the early pre-clinical stage for the neural
stem cell and at the discovery phase for the liver and pancreas stem cells and
has not yet led to the development of any proposed product. We may fail to
discover the stem cells we are seeking, to develop any products, to obtain
regulatory approvals, to enter clinical trials, or to commercialize any
products. Any product utilizing stem cell technology may fail to (i) survive and
persist in the desired location, (ii) provide the intended therapeutic benefits,
(iii) properly differentiate and integrate into existing tissue in the desired
manner, or (iv) achieve benefits therapeutically equal to or better than the
standard of treatment at the time of testing. In addition, any such product may
cause undesirable side effects. Results obtained in early pre-clinical research
may not be indicative of the results that will be obtained in later stages of
preclinical or clinical research. If any products we develop do not receive
regulatory approval, or if we are unable to maintain regulatory compliance, we
will be limited in our ability to commercialize them, and our business and
results of operations would be harmed. Furthermore, since stem cells represent a
novel form of therapy, the marketplace may not accept any products we may
develop.
If we do succeed in developing products, we will face many potential
obstacles such as the need to obtain regulatory approvals, and to develop or
obtain manufacturing, marketing and distribution capabilities. In addition, we
will face substantial additional risks such as product liability.
WE HAVE LIMITED LIQUIDITY AND CAPITAL RESOURCES AND MAY NOT OBTAIN THE
SIGNIFICANT CAPITAL RESOURCES WE WILL NEED TO SUSTAIN OUR RESEARCH AND
DEVELOPMENT EFFORTS.
We have limited liquidity and capital resources and must obtain substantial
additional capital to support our research and development programs, for
acquisition of technology and intellectual property rights, and, to the extent
we decide to undertake these activities ourselves, for pre-clinical and clinical
testing of our anticipated products, pursuit of regulatory approvals,
establishment of production capabilities, establishment of marketing and sales
capabilities and distribution channels, and general administrative expenses.
Even though we owned 126,193 shares of Modex Therapeutics Ltd., stock with
an estimated fair market value of $19,220,165 based on the share price of
$247.50 Swiss francs on June 30, 2000, we are restricted from selling them until
January 2001, and the value of our holdings is subject to change. The
performance of Modex stock since Modex's initial public offering does not
predict its future value.
We intend to pursue our needed capital resources through equity and debt
financings, corporate alliances, grants and collaborative research arrangements.
Our ability to complete any such arrangements successfully will depend upon
market conditions and, more specifically, on continued progress in our research
and development efforts. We may fail to obtain the necessary capital resources
from any such sources when needed or on terms acceptable to us. Lack of
necessary funds may require us to delay, reduce or eliminate some or all of our
research and development program or to license our technology or any potential
products resulting therefrom to third parties rather than commercializing it
ourselves.
4
WE MAY NEED BUT FAIL TO OBTAIN A PARTNER OR PARTNERS TO SUPPORT OUR STEM
CELL DEVELOPMENT EFFORTS.
Equity and other funds alone may not be sufficient to fund the cost of
developing our stem cell technologies and we may be dependent on our ability to
reach partnering arrangements that will provide support for our stem cell
discovery and development efforts. While we have engaged, and expect to continue
to engage, in discussions regarding such arrangements, we have not reached any
agreement regarding any such arrangement and we may fail to obtain any such
agreement on terms acceptable to us, if at all.
WE HAVE A HISTORY OF OPERATING LOSSES AND THERE CAN BE NO ASSURANCE THAT WE
WILL DEVELOP PRODUCTS, OBTAIN PRODUCT REVENUES OR BECOME PROFITABLE.
We have incurred substantial operating losses and expect to continue to
incur substantial operating losses in the future in order to conduct our
research and development activities, and if those are successful, to fund
clinical trials and other expenses. We have not earned any revenue from sales of
any product. Substantially all of our past revenues have been derived from, and
any future revenues we may obtain for the foreseeable future are expected to be
derived from, cooperative agreements, research grants, investments and interest
on invested capital. We have no cooperative agreements and only one research
grant currently in place for our stem cell technology, and we may not obtain any
such agreements or additional grants in the future, or receive any revenues from
them.
WE HAVE SUBSTANTIAL PAYMENT OBLIGATIONS RESULTING FROM REAL PROPERTY OWNED
OR LEASED BY US IN RHODE ISLAND, WHICH ADVERSELY AFFECT OUR ABILITY TO FUND OUR
STEM CELL RESEARCH AND DEVELOPMENT.
Prior to our reorganization in 1999 and the resulting consolidation of all
functions in California, we carried out our former encapsulated cell therapy
programs at facilities in Lincoln, Rhode Island, where our administrative
offices were also located. Although we have vacated these facilities, we have
continuing obligations for lease payments and operating costs of approximately
$950,000 per year for our former Science and Administrative Facility ("SAF") and
debt service payments and operating costs of approximately $1,000,000 per year
for our former encapsulated cell therapy pilot manufacturing facility. We are
currently seeking to sublease the SAF and to sell the pilot manufacturing
facility, but may not be able to do so. These continuing costs significantly
reduce our cash resources and adversely affect our ability to fund further
development of our stem cell technology.
WE DO NOT ANTICIPATE RECEIVING FUTURE REVENUES FROM THE SALE OF OUR
ENCAPSULATED CELL TECHNOLOGY.
In December 1999, we sold our encapsulated cell therapy technology to
Neurotech S.A. While under the terms of the sale, we may receive royalty and
other payments from Neurotech under certain circumstances, we do not anticipate
receiving any material payments from Neurotech in the near future, if at all.
FOUNDERS OF STEMCELLS CALIFORNIA, INC. HAVE THE RIGHT TO CONTROL OUR STEM
CELL RESEARCH AND TO REACQUIRE OUR STEM CELL TECHNOLOGY UNDER CERTAIN
CIRCUMSTANCES.
The agreement by which StemCells, Inc. acquired StemCells California in
September 1997, provides for our stem cell research to be conducted in
accordance with the provisions of an agreement between StemCells, Inc. and Drs.
Irving Weissman and Fred Gage, founders of StemCells California, pursuant to a
research plan. As long as the goals of the research plan are accomplished, the
stem cell research will continue to be conducted under an extension of such
research plan approved by a Research Committee. Increases in stem cell research
funding of not more than 25% a year approved by the Committee must be funded by
StemCells, Inc. as long as the goals of the research plan are being met, but
StemCells, Inc. has the option of ceasing or reducing neural stem cell research
even if all research plan goals are being met. Under those circumstances all
unvested but still-achievable performance-based options granted to Drs. Weissman
and Gage in connection with the acquisition of StemCells California would vest.
However, if we do cease or reduce non-neural stem cell research
5
although all research plan goals are being met, Drs. Weissman and Gage would
have the right to continue development of the non-neural stem cell research by
licensing the technology related to such research in exchange for a payment to
StemCells, Inc. equal to all prior funding for such research plus royalty
payments, which might not reflect fair market value for such technology at such
time.
WE DEPEND ON PATENTS AND PROPRIETARY RIGHTS TO PROTECT OUR INTELLECTUAL
PROPERTY FROM INFRINGEMENT. NEVERTHELESS, SUCH PROTECTION IS UNCERTAIN AND, IF
GAINED, MAY OFFER ONLY LIMITED PROTECTION. IF WE ARE UNABLE TO PROTECT OUR
PATENTS AND PROPRIETARY RIGHTS, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATION WILL BE HARMED.
Patent protection for products such as those we propose to develop is highly
uncertain and involves complex and continually evolving factual and legal
questions. The coverage sought in a patent application can be denied or
significantly reduced before or after the patent is issued. Consequently, we do
not know whether any of our pending applications will result in the issuance of
patents, or if any existing or future patents a) will provide significant
protection or commercial advantage or b) will be circumvented by others. Since
patent applications are secret until patents are issued in the United States or
until the applications are published in foreign countries, and since publication
of discoveries in the scientific or patent literature often lags behind actual
discoveries, we cannot be certain that we were the first to make the inventions
covered by each of our pending patent applications or that we were the first to
file patent applications for such inventions. Our patents may not issue from our
pending or future patent applications or, if issued, may not be of commercial
benefit to us, afford us adequate protection from competing products or may be
challenged or declared invalid. In the event that a third party has also filed a
patent application relating to inventions claimed in our patent applications, we
may have to participate in interference proceedings declared by the United
States Patent and Trademark Office to determine priority of invention. This
could result in substantial uncertainties and cost for us, even if the eventual
outcome is favorable to us, and it might not be. Even if our patent issues, a
court of competent jurisdiction could hold the patent to be issued.
IF OTHERS ARE FIRST TO DISCOVER AND PATENT ANY STEM CELLS WE ARE SEEKING TO
DISCOVER, WE COULD BE BLOCKED FROM FURTHER WORK ON THAT STEM CELL, AND OUR
BUSINESS WOULD BE HARMED.
Because the first person or entity to discover and obtain a valid patent to
a particular stem or progenitor cell may effectively block all others, it will
be important to our development efforts for us or our collaborators to be the
first to discover any stem cell that we are seeking; failure to do so could
prevent us from commercializing all of our research and development related to
such stem cell and have a material adverse effect on the Company.
WE MAY NEED TO OBTAIN LICENSES TO THIRD PARTY PATENTS, AND MAY NOT BE ABLE
TO GET THEM.
A number of pharmaceutical, biotechnology and other companies, universities
and research institutions have filed patent applications or have been issued
patents relating to cell therapy, stem cells and other technologies potentially
relevant to or required by our expected products. We cannot predict which, if
any, of such applications will issue as patents or the claims that might be
allowed. We are aware that a number of companies have filed applications
relating to stem cells. We are also aware of a number of patent applications and
patents claiming use of genetically modified cells to treat disease, disorder or
injury. We are aware of two patents issued to a competitor claiming certain
methods for enriching central nervous system (CNS) stem cells through gene
modification of in vitro cultured cells. These genetically modified cells can
then be used to treat defective, diseased or damaged CNS tissue.
If third party patents or patent applications contain claims infringed by
our technology and such claims or claims in issued patents are ultimately
determined to be valid, we may be unable to obtain licenses to these patents at
a reasonable cost, if at all, and may also be unable to develop or obtain
alternative technology. If we are unable to obtain such licenses at a reasonable
cost, our business could be significantly harmed. We could be obligated to
defend ourselves in court against allegations of
6
infringement of third party patents. Patent litigation is very expensive and
could consume substantial resources and create significant uncertainties. An
adverse outcome in such a suit could subject us to significant liabilities to
third parties, require disputed rights to be licensed from third parties, or
require us to cease using such technology.
Proprietary trade secrets and unpatented know-how are also important to our
research and development activities. We cannot be certain that others will not
independently develop the same or similar technologies on their own, gain access
to our trade secrets or disclose such technology, or that we will be able to
meaningfully protect our trade secrets and unpatented know-how and keep them
secret.
We require our employees, consultants, and significant scientific
collaborators and sponsored researchers to execute confidentiality agreements
upon the commencement of an employment or consulting relationship with us. These
agreements may, however, fail to provide meaningful protection or adequate
remedies for us in the event of unauthorized use, transfer or disclosure of such
information or inventions.
We have obtained rights from universities and research institutions to
technologies, processes and compounds that we believe may be important to the
development of our products. Our licenses may be canceled or converted to
non-exclusive licenses if we fail to use the relevant technology or otherwise
breach these agreements. Loss of such licenses could expose us to the risks of
third party patents and/or technology. There can be no assurance that any of
these licenses will provide effective protection against our competitors.
WE COMPETE WITH SUBSTANTIAL COMPANIES THAT HAVE SIGNIFICANT ADVANTAGES OVER
US.
The market for therapeutic products that address degenerative diseases is
large, and competition is intense and is expected to increase. Our most
significant competitors are expected to be fully integrated pharmaceutical
companies and more established biotechnology companies with significantly
greater capital resources and expertise in research and development,
manufacturing, testing, obtaining regulatory approvals and marketing. Many of
these potential competitors have significant products approved or in development
that could be competitive with our potential products, and also operate large,
well-funded research and development programs.
Our competitors may succeed in developing technologies and products that
a) are more effective than those being developed by us, or that b) would render
our technology obsolete or non-competitive.
The relative speed with which we and our competitors can develop products,
complete the clinical testing and approval processes, and supply commercial
quantities of a product to market will affect our ability to gather market
acceptance and market share. With respect to clinical testing, competition may
delay progress by limiting the number of clinical investigators and patients
available to test our potential products.
DEVELOPMENT OF OUR TECHNOLOGY WILL BE SUBJECT TO EXTENSIVE GOVERNMENT
REGULATION.
Our research and development efforts, as well as any future clinical trials,
and the manufacturing and marketing of any products we may develop, will be
subject to extensive regulation by governmental authorities in the United States
and other countries. The process of obtaining FDA and other required regulatory
approvals is lengthy, expensive and uncertain. We or our collaborators may fail
to obtain the necessary approvals to commence or continue clinical testing or to
manufacture or market our potential products in reasonable time frames, if at
all. In addition, the United States Congress and other legislative bodies may
enact regulatory reforms or restrictions on the development of new therapies
that could adversely affect the regulatory environment in which we operate or
the development of any products we may develop.
7
We may apply for status under the Orphan Drug Act for certain of our
therapies, in order to gain a seven year period of marketing exclusivity for
those therapies. Legislation has been introduced in the U.S. Congress in the
past, and is likely to be introduced again in the future, that would restrict
the extent and duration of the market exclusivity of an orphan drug. If enacted,
such legislation could prevent us from obtaining some or all of the benefits
offered under the existing statute even if we were to apply for and be granted
orphan drug status with respect to a potential product.
ACQUISITION OF CELLS AND OTHER MATERIALS CRITICAL TO OUR BUSINESS MAY BE
DIFFICULT.
Our research and development is based on the use of human stem and
progenitor cells that are currently obtained from fetal tissue. The federal and
state governments and other jurisdictions impose restrictions on the use of
fetal tissue. These restrictions change from time to time and there can be no
assurance that they will not become more onerous. Additionally, there can be no
assurance that we will successfully identify or develop reliable and ethical
sources of the cells required for our potential products and obtain such cells
in quantity or quality sufficient to satisfy the commercial requirements of our
potential products.
WE ARE SIGNIFICANTLY DEPENDENT ON A LIMITED NUMBER OF KEY PERSONNEL.
We are highly dependent on the principal members of our management and
scientific staff and certain of our outside consultants. We currently have
outside consultants and interim personnel in key management and scientific
positions who are not permanent employees. Loss of services of any of these
individuals could have a material adverse effect on our operations. In addition,
our operations are dependent upon our ability to attract and retain additional
qualified scientific and management personnel. We may not be able to attract and
retain personnel we need on acceptable terms given the competition for
experienced personnel among pharmaceutical, biotechnology and health care
companies, universities and research institutions.
WE MAY BE SIGNIFICANTLY DEPENDENT ON THIRD PARTIES.
In order to successfully develop and commercialize our technology, we may
need to enter into a wide variety of arrangements with corporate sponsors,
pharmaceutical companies, universities, research groups and others. We may not
be able to establish and maintain such arrangements on terms acceptable to us,
or to successfully perform our obligations under such arrangements. Furthermore,
these arrangements may require us to grant certain rights to third parties,
including exclusive marketing rights to one or more products, or may have other
terms that are burdensome to us, and may involve the acquisition of our
securities. If any of our collaborators terminates its relationship with us or
fails to perform its obligations in a timely manner, the development or
commercialization of our technology and any product candidates we may develop
may be adversely affected.
WE MAY NOT BE ABLE TO KEEP PACE WITH TECHNOLOGICAL CHANGE OR WITH THE
ADVANCES OF OUR COMPETITORS.
Competitors of the Company are numerous and include major pharmaceutical and
chemical companies, biotechnology companies, universities and other research
institutions. In addition, we have competitors with substantially greater
capital resources, experience in obtaining regulatory approvals and, in the case
of commercial entities, experience in manufacturing and marketing pharmaceutical
products. There can be no assurance that our competitors will not succeed in
developing technologies and products that are more effective than those we are
developing or that would render our technology and products obsolete or
non-competitive.
8
HEALTHCARE INSURERS AND OTHER ORGANIZATIONS MAY NOT PAY FOR OUR PRODUCTS OR
MAY IMPOSE LIMITS ON REIMBURSEMENTS.
In both domestic and foreign markets, sales of potential products are likely
to depend in part upon the availability and amounts of reimbursement from third
party health care payor organizations, including government agencies, private
health care insurers and other health care payors such as health maintenance
organizations and self-insured employee plans. There is considerable pressure to
reduce the cost of therapeutic products, and government and other third party
payors are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new therapeutic products, and by
refusing, in some cases, to provide any coverage for uses of approved products
for disease indications for which the FDA has not granted marketing approval.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products. There can be no assurance that reimbursement will be
provided by such payors at all or without substantial delay, or, if such
reimbursement is provided, that the approved reimbursement amounts will provide
sufficient funds to enable us to sell products we may develop on a profitable
basis. Changes in reimbursement policy could also adversely affect the
willingness of pharmaceutical companies to collaborate with the Company on the
development of our stem cell technology.
In certain foreign markets, pricing or profitability of prescription
pharmaceuticals is subject to government control. We expect that there will
continue to be a number of Federal and state proposals to implement government
control over health care costs. Efforts at healthcare reform are likely to
continue in future legislative sessions. We do not know what legislative
proposals will be adopted or what actions Federal, state or private payers for
healthcare goods and services may take in response to healthcare reform
proposals or legislation. We cannot predict the effect government control and
other healthcare reforms may have on our .
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.
Our operating results have varied, and may in the future continue to vary,
significantly from quarter to quarter due to a variety of factors. These factors
include the receipt of one-time license or milestone payments under
collaborative agreements, costs associated with winddown of our encapsulated
cell therapy programs, variation in the level of expenses related to our
research and development efforts, receipt of grants or other support for our
research and development efforts, and other factors. Quarterly comparisons of
our financial results are not necessarily meaningful and should not be relied
upon as an indication of future performance.
OUR STOCK PRICE MAY BE VOLATILE.
The market price for our Common Stock has been volatile and could decline
below the offering price for the shares. We believe that the market price for
our common stock could fluctuate substantially due to some or all of the risk
factors enumerated above.
The stock market has recently experienced extreme price and volume
fluctuations. These fluctuations have especially affected the market price of
the stock of many high technology and health care-related companies. Such
fluctuations have often been unrelated to the operating performance of these
companies. Nonetheless, these broad market fluctuations may negatively affect
the market price of our Common Stock.
EVENTS WITH RESPECT TO OUR SHARE CAPITAL COULD CAUSE THE PRICE OF OUR COMMON
STOCK TO DECLINE.
Sales of substantial amounts of our Common Stock on the open market, or the
availability of such shares for sale, could adversely affect the price of our
Common Stock. In particular, as of August 15, 2000, stock options to purchase
approximately 2,556,486 shares of Common Stock were outstanding, at an average
exercise price of approximately $4.209 per share (subject to adjustment in
certain circumstances); of this total, options covering approximately 608,976
shares are currently exercisable at an average exercise price of approximately
$4.693 per share.
9
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. You can identify these
statements by forward-looking words such as "may," "will," "possibly," "expect,"
"anticipate," "project," "believe," "estimate" and "continue" or similar words.
You should read statements that contain these words carefully because they
discuss our future expectations, contain projections of our future results of
operations or of our financial condition, or state other "forward-looking"
information. We believe that it is important to communicate our future
expectations to our investors. However, there will be events in the future that
we have not been able to accurately predict or control and that may cause our
actual results to differ materially from those discussed. For example,
contaminations at our facilities, changes in the pharmaceutical or biotechnology
industries, competition and changes in government regulations or general
economic or market conditions could all have significant effects on our results.
These factors should be considered carefully and readers should not place undue
reliance on our forward-looking statements. Before you invest in our common
stock, you should be aware that the occurrence of the events described in the
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" sections and elsewhere in this prospectus
could harm our business, operating results and financial condition. All forward
looking statements attributable to us or persons acting on our behalf are
expressly qualified in their entirety by the cautionary statements and risk
factors contained throughout this prospectus. We are under no duty to update any
of the forward-looking statements after the date of this prospectus or to
conform these statements to actual results.
INDUSTRY AND MARKET DATA
In this prospectus, we rely on and refer to information and statistics
regarding disease occurrences, costs of treatment, biotechnology, and the market
sectors in which we may compete in the future. We obtained this information and
statistics from various third party sources, discussions with our consultants
and/or our own internal estimates. We believe that these sources and estimates
are reliable, but we have not independently verified them.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares offered
pursuant to this prospectus.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings to fund the development and
growth of our business. We do not, therefore, anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay dividends
will be at the discretion of our board of directors and will be dependent on
then existing conditions, including our financial stability, results of
operations, contractual restrictions, capital requirements, business prospects
and other factors our board of directors deems relevant.
10
CAPITALIZATION
The following table presents our consolidated capitalization as of June 30,
2000 on a historical basis and as adjusted to reflect the $4,000,000 aggregate
proceeds from our August 3, 2000 sale of 923,521 shares of common stock and
$1,000,000 aggregate proceeds from our sale as of August 30, 2000 of 180,914
shares to Millennium Partners, L.P., net of a stock subscription receivable of
$1,250,000. This table excludes
- 2,852,973 shares of common stock issuable upon the exercise of outstanding
stock options and warrants as follows:
a) as of August 15, 2000, 2,556,486 shares of common stock upon the
exercise of stock options pursuant to our stock option plans at a
weighted average price of $4.209 per share.
b) 101,587 shares of common stock upon the exercise of a warrant held by
Millennium Partners, L.P in conjunction with the aforementioned
August 3, 2000 financing at an exercise price of $4.725 per share.
c) 19,900 shares of common stock upon the exercise of a warrant held by
Millennium Partners, L.P. in conjunction with the aforementioned
August 30, 2000 financing at an exercise price of $6.03 per share.
d) 100,000 shares of common stock upon the exercise of warrants granted to
May Davis Group, Inc. and four of its affiliates in connection with the
aforementioned financing at an exercise price of $5.0375 per share.
e) 75,000 shares of common stock upon the exercise of warrants at $6.58125
per share held by holders of our 6% cumulative convertible preferred
stock purchased on April 13, 2000 for $1,500,000.
- the right under certain circumstances for holders of our 6% cumulative
convertible preferred stock to acquire up to a total of 1,126 additional
shares of our 6% cumulative convertible preferred stock, which is
convertible at the option of the holders into common stock at $6.33 per
share subject to customary antidilution protection.
- Millennium Partners, L.P. option to purchase up to an additional
$2,000,000 of common stock through August 3, 2001.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and notes thereto included elsewhere in this prospectus.
AS OF JUNE 30, 2000
---------------------------
ACTUAL AS ADJUSTED
------------ ------------
Stockholders' equity:
Convertible Preferred Stock, par value $0.01 per share,
1,000,000 shares authorized, 2,626 designated as 6%
Cumulative Convertible Preferred Stock, 1,500 shares
issued.................................................. $ 1,500,000 $ 1,500,000
Common stock, par value $0.01 per share, 45,000,000 shares
authorized, 19,612,677 (actual) and 20,717,112 (as
adjusted) shares issued................................. 196,127 207,171
Additional paid-in-capital................................ 129,525,509 134,514,465
Stock subscription receivable............................. (1,250,000)
Accumulated deficit....................................... (121,698,674) (121,698,674)
Accumulated other comprehensive income.................... 19,220,165 19,220,165
Deferred compensation..................................... (1,137,500) (1,137,500)
------------ ------------
Total stockholders' equity.............................. $ 27,605,627 $ 31,355,627
============ ============
11
DILUTION
This offering is for sales of stock by existing StemCells, Inc. stockholders
on a continuous or delayed basis in the future. Sales of common stock by
stockholders will not result in any substantial change to the net tangible book
value per share before and after the distribution of shares by the selling
stockholders. There will be no change in net tangible book value per share
attributable to cash payments made by purchasers of the shares being offered.
Prospective investors should be aware, however, that the price of
StemCells, Inc. shares may not bear any rational relationship to net tangible
book value per share.
12
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and notes
to those statements and other financial information included elsewhere in this
prospectus.
The consolidated historical financial data presented below as of
December 31, 1995, 1996, 1997, 1998, and 1999 and for the years then ended are
derived from StemCells, Inc. (formerly CytoTherapeutics, Inc.) consolidated
financial statements, which have been audited by Ernst & Young LLP, our
independent auditors. The selected consolidated financial data as of June 30,
1999 and 2000, and for the six months then ended are derived from the unaudited
financial statements of StemCells, Inc. In the opinion of management, the
unaudited financial statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position and results of operations for such
periods. The selected consolidated financial data for the six months ended
June 30, 2000 are not necessarily indicative of the results that may be expected
for the year ended December 31, 2000 or any other future period.
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA
Revenue from collaborative agreements................ $11,761 $ 7,104 $ 10,617 $ 8,803 $ 5,022 $ 5,022 $ --
Research and development expenses.................... 14,730 17,130 18,604 17,659 9,991 6,847 1,660
Acquired research and development.................... 8,344
ECT wind-down expenses............................... 6,048
Net loss............................................. $(8,891) $(13,759) $(18,114) $(12,628) $(15,709) $(3,773) $(2,326)
======= ======== ======== ======== ======== ======= =======
Basic and diluted net loss per share................. $ (0.69) $ (0.89) $ (1.08) $ (0.69) $ (0.84) $ (0.20) $ (0.12)
Shares used in computing basic and diluted net loss
per share.......................................... 12,799 15,430 16,704 18,291 18,706 18,483 19,419
The following table provides a summary of our consolidated balance sheets.
The pro-forma column is based on our historical unaudited financial statements
and also reflects our August 3, 2000 sale of 923,521 shares of common stock to
Millennium Partners, L.P for $4,000,000 and the August 30, 2000 sale of 180,914
shares of common stock to Millennium Partners L.P. for $1,000,000, net of a
stock subscription receivable of $1,250,000.
AS OF DECEMBER 31, AS OF JUNE 30,
---------------------------------------------------- ------------------------
1995 1996 1997 1998 1999 2000 2000
-------- -------- -------- -------- -------- --------- ------------
ACTUAL PRO-FORMA
--------- ------------
BALANCE SHEET DATA
Cash, cash equivalents and
marketable securities........ $44,192 $42,607 $29,050 $17,386 $ 4,760 $ 5,535 $ 9,285
Restricted investments......... 19,220 19,220
Total assets................... 56,808 58,397 44,301 32,866 16,081 32,388 36,138
Long-term debt, including
capitalized leases........... 5,441 8,223 4,108 3,762 2,937 2,775 2,775
Redeemable common stock........ 8,159 5,583 5,249 5,249
Stockholders' equity........... 45,391 34,747 28,900 17,897 3,506 27,606 31,356
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations for the six months ended June 30, 2000 and 1999 and the years ended
December 31, 1999, 1998, and 1997 should be read in conjunction with our
consolidated financial statements and notes to those statements and other
financial information included elsewhere in this prospectus.
RESULTS OF OPERATIONS
OVERVIEW
Since our inception in 1988, we have been primarily engaged in research and
development of human therapeutic products. As a result of a restructuring in the
second half of 1999, our sole focus is now on our stem cell technology. At the
beginning of last year, by contrast, our corporate headquarters, most of our
employees, and main focus of our operations were primarily devoted to a
different technology (encapsulated cell technology, or "ECT"). Since that time,
we terminated a clinical trial of the ECT then in progress, we wound down our
other operations relating to the ECT, we terminated the employment of those who
worked on the ECT, we sold the ECT and we relocated from Rhode Island to
Sunnyvale, California. Comparisons with last year's results are correspondingly
less meaningful than they may be under other circumstances.
We have not derived any revenues from the sale of any products, and we do
not expect to receive revenues from product sales for at least several years. We
have not commercialized any product and in order to do so we must, among other
things, substantially increase our research and development expenditures as
research and product development efforts accelerate and clinical trials are
initiated. We have incurred annual operating losses since inception and expect
to incur substantial operating losses in the future. As a result, we are
dependent upon external financing from equity and debt offerings and revenues
from collaborative research arrangements with corporate sponsors to finance its
operations. There presently are no such collaborative research arrangements and
there can be no assurance that such financing or partnering revenues will be
available when needed or on terms acceptable to us.
Our results of operations have varied significantly from year to year and
quarter to quarter and may vary significantly in the future due to the
occurrence of material, nonrecurring events, including without limitation the
receipt of one-time, nonrecurring licensing payments, and the initiation or
termination of research collaborations, in addition to the winding-down of
terminated research and development programs referred to above.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
For the six months ended June 30, 2000 and 1999, revenues from collaborative
agreements totaled $0 and $5,021,707, respectively. The decrease in revenues
resulted from the June 1999 termination of a Development, Marketing and License
Agreement related to our former encapsulated cell technology. We have not yet
entered into revenue-producing collaborations with respect to our platform stem
cell technology. During the second quarter 2000 we realized a $1,427,686 gain in
connection with its investment in Modex Therapeutics Ltd. ("Modex"), a Swiss
biotechnology company that completed an initial public offering on June 23,
2000. At June 30, 2000, we owned 126,193 shares with an estimated fair value of
$19,220,165 based on the share price of $247.50 Swiss francs on that date.
Research and development expenses totaled $1,659,932 for the six months
ended June 30, 2000, compared with $6,847,383 for the same period in 1999. The
decrease of $5,187,451, or 76%, from 1999 to 2000 was primarily attributable to
the wind-down of research activities relating to the ECT. General and
administrative expenses were $2,078,286 for the six months ended June 30, 2000,
compared with $2,168,315 for the same period in 1999. The decrease of $90,029,
or 4%, from 1999 to 2000 was
14
primarily attributable to the establishment of a smaller corporate office in
California. Interest income for the six months ended June 30, 2000 and 1999 was
$138,232 and $406,331, respectively. The decrease in interest income in 2000 was
attributable to the lower average investment balances during such period.
Interest expense was $142,566 for the six months ended June 30, 2000, compared
with $185,054 for the same period in 1999. The decrease in 2000 was attributable
to lower outstanding debt and capital lease balances in 2000 compared to 1999.
Net loss for the six months ended June 30, 2000 was $2,325,964, or ($0.12)
per share, as compared to net loss of $3,772,714, or ($0.20) per share, for the
comparable period in 1999. The decrease in net loss of $1,446,750 from the same
period in 1999 primarily reflects a gain from the sale of certain shares of our
stock in Modex, as the reductions in expenses were offset by the decrease in
revenues from collaboration agreements. The Company (then known as
CytoTherapeutics, Inc.) was one of the founders of Modex, a Swiss
biotherapeutics company established in 1996 to pursue encapsulated cell
technologies related to former programs of the Company. After Modex' initial
public offering on the Swiss Neue Market in late June, we own 126,193 shares of
Modex common stock. The IPO price was 168.00 Swiss Francs, and the share price
on June 30 was 247.50 Swiss Francs. The shares are subject to a lockup for
6 months from the date of the IPO.
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Revenues from collaborative agreements totaled $5,022,000, $8,803,000 and
$10,617,000 for the years ending December 31, 1999, 1998 and 1997, respectively.
We earned revenues primarily from a Development, Marketing and License Agreement
with AstraZeneca Group plc, which we signed in March 1995 (the "Astra
Agreement"). The decrease in revenues from 1998 to 1999 resulted primarily from
the June 1999 termination of the Astra Agreement. 1997 revenues included a
$3,000,000 milestone payment from Astra related to the Phase II clinical program
for our pain control implant.
Research and development expenses totaled $9,984,000 in 1999, as compared to
$17,659,000 in 1998 and $18,604,000 in 1997. The decrease of $7,668,000, or 43%,
from 1998 to 1999 was primarily attributable to the wind-down of research
activities relating to our encapsulated cell technology, precipitated by
termination of the Astra Agreement. The decrease of $945,000, or 5%, from 1997
to 1998 was primarily attributable to a reduction in spending on research
agreements and a reduction in research and development personnel.
Acquired research and development consists of a one-time charge of
$8,344,000 related to the acquisition of StemCells California, Inc., in 1997.
Commercialization of this technology will require significant incremental
research and development expenses over a number of years. With the recent
completion of the restructuring of our research operations, we are now focused
solely on the research and development of its platform stem cell technology,
which encompasses the technology acquired upon the acquisition of StemCells
California, Inc. and related technology developed or licensed in by us.
General and administrative expenses were $4,927,303 for the year ended
December 31, 1999, compared with $4,603,000 in 1998 and $6,158,000 in 1997. Due
to the wind-down of the Company's encapsulated cell technology and relocation of
our headquarters in October, the 1999 expenses are less than they would have
been had these events not occurred. The reduction of $1,555,000, or 25%, from
1997 to 1998 was primarily attributable to a reduction in legal fees, recruiting
and relocation expenses, as well as a reduction in employees.
Wind-down expenses totaled $6,047,806 for the year ended December 31, 1999;
no such expenses were incurred in 1998 and 1997. These expenses relate to the
wind-down of our encapsulated cell technology research and our other Rhode
Island operations, the transfer of our corporate headquarters to Sunnyvale,
California and an accrual for our estimate of the costs of settlement of a 1989
funding agreement with the Rhode Island Partnership for Science and Technology
("RIPSAT").
15
Interest income for the years ended December 31, 1999, 1998 and 1997 totaled
$564,000, $1,254,000 and $1,931,000, respectively. The average cash and
investment balances were $10,663,000, $21,795,000 and $33,343,000 in 1999, 1998
and 1997, respectively. The decrease in interest income from 1997 to 1998 to
1999 was attributable to lower average balances.
In 1999, interest expense was $335,000, compared with $472,000 in 1998 and
$438,000 in 1997. The decrease from 1998 to 1999 was attributable to lower
outstanding debt and capital lease balances. The increase from 1997 to 1998 was
primarily attributable to capitalization of $210,000 of interest on the new
facility in 1997.
In October 1997, we recognized a gain in the amount of $3,387,000 related to
the sale of 50 percent of our interest in Modex Therapeutiques.
The net loss in 1999, 1998 and 1997 was $15,709,000, $12,628,000, and
$18,114,000, respectively. The loss per share was $0.84, $.69 and $1.08 in 1999,
1998 and 1997, respectively. The increase from 1998 to 1999 is primarily
attributable to the elimination of revenue from the Astra Agreement, which was
terminated in June 1999, as well as expenses related to the wind-down of our
encapsulated cell technology research and our other Rhode Island operations, the
transfer of our corporate headquarters to Sunnyvale, California and an accrual
for our estimate of the costs of settlement of a funding agreement with RIPSAT.
The decrease from 1997 to 1998 was attributable to a one-time charge of
$8,344,000 for acquired research and development related to the purchase of
StemCells California, Inc. offset by a $3,387,000 gain on a partial sale of our
interest in Modex in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, we have financed our operations through the sale of
common and preferred stock, the issuance of long-term debt and capitalized lease
obligations, revenues from collaborative agreements, research grants and
interest income.
We had unrestricted cash and cash equivalents totaling $5,535,264 at
June 30, 2000. Cash equivalents are invested in money market funds.
Our 126,193 shares of Modex stock are subject to a lock-up agreement for six
months in connection with Modex' initial public offering. The actual sale price
for the shares may vary significantly from the initial public offering price of
168.00 Swiss francs and the share price at June 30, 2000 of 247.50 Swiss francs.
Our liquidity and capital resources were, in the past, significantly
affected by its relationships with corporate partners, which were related to our
former ECT. These relationships are now terminated, and we have not yet
established corporate partnerships with respect to its stem cell technology.
In March 1995, we signed a collaborative research and development agreement
with AstraZeneca for the development and marketing of certain encapsulated-cell
products to treat pain. AstraZeneca made an initial, nonrefundable payment of
$5,000,000, included in revenue from collaborative agreements in 1995, a
milestone payment of $3,000,000 in 1997 and was to remit up to an additional
$13,000,000 subject to achievement of certain development milestones. Under the
agreement, we were obligated to conduct certain research and development
pursuant to a four-year research plan agreed upon by the parties. Over the term
of the research plan, we originally expected to receive annual payments of
$5 million to $7 million from AstraZeneca, which was to approximate the research
and development costs incurred by us under the plan. Subject to the successful
development of such products and obtaining necessary regulatory approvals,
AstraZeneca was obligated to conduct all clinical trials of products arising
from the collaboration and to seek approval for their sale and use. AstraZeneca
had the exclusive worldwide right to market products covered by the agreement.
Until the later of either the expiration of all patents included in the licensed
technology or a specified fixed term, we were entitled to a royalty on the
worldwide net sales of such products in return for the marketing
16
license granted to AstraZeneca and our obligation to manufacture and supply
products. AstraZeneca had the right to terminate the original agreement
beginning April 1, 1998. On June 24, 1999, AstraZeneca informed us of the
results of AstraZeneca's analysis of the double-blind, placebo-controlled trial
of our encapsulated bovine cell implant for the treatment of severe, chronic
pain in cancer patients. AstraZeneca determined that, based on criteria it
established, the results from the 85-patient trial did not meet the minimum
statistical significance for efficacy established as a basis for continuing
worldwide trials for the therapy. AstraZeneca therefore indicated that it did
not intend to further develop the bovine cell-containing implant therapy and
exercised its right to terminate the agreement. (SEE ALSO NOTE 17--"RESEARCH
AGREEMENTS" TO THE ACCOMPANYING FINANCIAL STATEMENTS)
In the third quarter of 1999, we announced restructuring plans for the
wind-down of operations relating to its encapsulated cell technology and to
focus its resources on the research and development of its proprietary stem cell
technology platform. We terminated approximately 68 full time employees and, in
October 1999, relocated its corporate headquarters to Sunnyvale, California. We
recorded approximately $5.7 million of wind-down expenses including employee
separation and relocation costs during 1999.
On December 30, 1999 we sold our encapsulated cell technology ("ECT") to
Neurotech S.A. for a payment of $3,000,000, royalties on future product sales,
and a portion of certain Neurotech revenues from third parties in return for the
assignment to Neurotech of intellectual property assets relating to ECT. In
addition, we retained certain non-exclusive rights to use ECT in combination
with its proprietary stem cell technology and in the field of vaccines for
prevention and treatment of infectious diseases. We received $2,800,000 of the
initial payment on January 3, 2000 with a remaining balance of $200,000 placed
in escrow, to be received by us upon demonstration satisfactory to Neurotech
that certain intellectual property is not subject to other claims.
As part of our restructuring of operations and relocation of corporate
headquarters to Sunnyvale, California, we identified a significant amount of
excess fixed assets. In December of 1999, we completed the disposition of those
excess fixed assets, from which we received more than $746,000. The proceeds are
being used to fund our continuing operations.
In July 1999, the Rhode Island Partnership for Science and Technology
("RIPSAT") alleged that we were in default under a June, 1989 Funding Agreement
(the "Funding Agreement"), and demanded payment of approximately $2.6 million.
While we believe we were not in default under the Funding Agreement, we deemed
it best to resolve the dispute without litigation and, on March 3, 2000, entered
into a settlement agreement with RIPSAT, the Rhode Island Industrial
Recreational Building Authority ("IRBA") and the Rhode Island Industrial
Facilities Corporation ("RIIFC"). We agreed to pay RIPSAT $1,172,000 in full
satisfaction of all of our obligations to RIPSAT under the Funding Agreement. At
the same time, IRBA agreed to return to us the full amount of our debt service
reserve ("Reserve Funds"), comprising approximately $610,000 of principal and
interest, relating to the bonds we have with IRBA and RIIFC. The Reserve Funds
were transferred directly to RIPSAT, so the net cash paid by us was
approximately $562,000. We made this payment in March of 2000.
Our liquidity and capital resources could have also been affected by a claim
by Genentech, Inc., arising out of the their collaborative development and
licensing agreement relating to the development of products for the treatment of
Parkinson's disease; however, the claim was resolved with no effect on our
resources. On May 21, 1998, Genentech exercised its right to terminate the
Parkinson's collaboration and demanded that we redeem, for approximately
$3,100,000, certain shares of our redeemable Common Stock held by Genentech.
Genentech's claim was based on provisions in the agreement requiring us to
redeem, at the price of $10.01 per share, the shares representing the difference
between the funds invested by Genentech to acquire such stock and the amount
expended by us on the terminated program less an additional $1,000,000. In
March 2000, we and Genentech entered into a Settlement Agreement under which
Genentech released the Company from any obligation to
17
redeem any shares of our Common Stock held by Genentech, without cost to us.
Accordingly, the $5.2 million of redeemable common stock shown as a liability in
our December 31, 1999 balance sheet was transferred to equity in March, 2000,
and use of our liquidity and capital resources was not necessary. We and
Genentech also agreed that all collaborations between us were terminated, and
that neither of us had any rights to the intellectual property of the other.
In May 1996, we secured an equipment loan facility with a bank (the
"Lender") in the amount of $2,000,000 (the "Credit Facility"). On August 5, 1999
we made a payment of approximately $752,000 of principal and interest to the
Lender to retire the Credit Facility rather than seek a waiver by the Lender of
our violation of a loan covenant requiring us to maintain unrestricted liquidity
in an amount equal to or in excess of $10 million.
We continue to have substantial outstanding obligations in regard to its
facilities in Lincoln, Rhode Island, including lease payments and operating
costs of approximately $950,000 per year associated with its former research
laboratory and corporate headquarters building, and debt service payments and
operating costs of approximately $1,000,000 per year with respect to the its
pilot manufacturing and cell processing facility. We are actively seeking to
sublease, assign or sell its interests in these facilities. Failure to do so
within a reasonable period of time will have a material adverse effect on our
liquidity and capital resources.
On April 13, 2000, we sold 1,500 shares of 6% cumulative convertible
preferred stock plus warrants for a total of 75,000 shares of our common stock
to two members of our Board of Directors for $1,500,000, on terms more favorable
to us than it was then able to obtain from outside investors. The shares of
preferred stock are convertible at the option of the holders into common stock
at $3.77 per share. The holders of the preferred stock have liquidation rights
equal to their original investments plus accrued but unpaid dividends. The
investors would be entitled to make additional investments in the Company on the
same terms as those on which we complete offerings of its securities with third
parties within 6 months, if any such offerings are completed. They have waived
that right with respect to the common stock transaction described below. If
offerings totaling at least $6 million are not completed during the 6 months,
the investors have the right to acquire up to a total of 1,126 additional shares
of convertible preferred stock which are convertible at the option of the
holders into common stock at $6.33 per share. Any unconverted preferred stock is
converted, at the applicable conversion price, on April 13, 2002 in the case of
the original stock and two years after the first acquisition of any of the
additional 1,126 shares, if any are acquired. The warrants expire on April 13,
2005.
On August 3, 2000, we completed a $4 million common stock financing
transaction with Millennium Partners, LP, or the Fund, an investment fund with
more than a billion dollars in assets under management. StemCells received
$3 million of the purchase price at the closing and will receive the remaining
$1 million upon effectiveness of a registration statement covering the shares
purchased by the Fund. The Fund purchased our common stock at $4.33 per share.
The Fund may be entitled to receive additional shares of common stock on eight
dates beginning six months from the closing and every three months thereafter.
The number of additional shares the Fund will be entitled to on each date will
be based on the number of shares of common stock the Fund continues to hold on
each date and the market price of our common stock over a period prior to each
date. We will have the right, under certain circumstances, to cap the number of
additional shares by purchasing part of the entitlement from the Fund. The Fund
also received a warrant to purchase up to 101,587 shares of common stock at
$4.725 per share.
This warrant is callable by us at $7.875 per underlying share. In addition,
the Fund had the option for twelve months to purchase up to $3 million of
additional common stock. On August 30, 2000 the Fund exercised $1,000,000 of its
option to purchase additional common stock at $5.53 per share. We received
$750,000 of the purchase price at the closing, and will receive the remaining
$250,000 upon effectiveness of a registration statement covering the shares
owned by the Fund. The Fund may be
18
entitled to receive additional shares of common stock on eight dates beginning
six months from the closing and every three months thereafter. The number of
additional shares the Fund will be entitled to on each date will be based on the
number of shares of common stock the Fund continues to hold on each date and the
market price of our common stock over a period prior to each date. We will have
the right, under certain circumstances, to cap the number of additional shares
by purchasing part of the entitlement from the Fund. The Fund also received a
warrant to purchase up to 19,900 shares of common stock at $6.03 per share. This
warrant is callable by StemCells at $10.05 per underlying share.
We have limited liquidity and capital resources and must obtain significant
additional capital resources in the future in order to sustain its product
development efforts. Substantial additional funds will be required to support
our research and development programs, for acquisition of technologies and
intellectual property rights, for preclinical and clinical testing of its
anticipated products, pursuit of regulatory approvals, acquisition of capital
equipment, laboratory and office facilities, establishment of production
capabilities and for general and administrative expenses. Our ability to obtain
additional capital will be substantially dependent on its ability to obtain
partnering support for its stem cell technology and, in the near term, on its
ability to realize proceeds from the sale, assignment or sublease of its
facilities in Rhode Island. Failure to do so will have a material effect on our
liquidity and capital resources. Until our operations generate significant
revenues from product sales, we must rely on cash reserves and proceeds from
equity and debt offerings, proceeds from the transfer or sale of its
intellectual property rights, equipment, facilities or investments, government
grants and funding from collaborative arrangements, if obtainable, to fund its
operations.
We intend to pursue opportunities to obtain additional financing in the
future through equity and debt financings, grants and collaborative research
arrangements. The source, timing and availability of any future financing will
depend principally upon market conditions, interest rates and, more
specifically, on our progress in its exploratory, preclinical and future
clinical development programs. Lack of necessary funds may require us to delay,
reduce or eliminate some or all of its research and product development programs
or to license its potential products or technologies to third parties. Funding
may not be available when needed--at all, or on terms acceptable to us.
While our cash requirements may vary, as noted above, we currently expect
that our existing capital resources, including income earned on invested
capital, will be sufficient to fund its operations into the first quarter of
2001. Our cash requirements may vary, however, depending on numerous factors.
Lack of necessary funds may require us to delay, scale back or eliminate some or
all of its research and product development programs and/or its capital
expenditures or to license its potential products or technologies to third
parties.
19
BUSINESS
OVERVIEW
We are engaged in the development of therapies that use tissue-derived (that
is, non-embryonic) stem and progenitor cells to treat, and possibly cure, human
diseases and injuries such as Parkinson's disease, hepatitis, diabetes, and
spinal cord injuries. Stem cells are the key cells that the body uses to produce
all the functional mature cell types found in normal organs of healthy
individuals. Progenitor cells are cells that have already developed from the
stem cells, but can still give rise to one or more mature cell types within the
organ.
Many diseases, such as Alzheimer's, Parkinson's, and other degenerative
diseases of the nervous system, result from the destruction of particular types
of mature cells or their failure to function adequately within an organ which,
like the brain, cannot be transplanted to effect a cure. In other diseases
caused by impaired cellular function (e.g., pancreatic failure from diabetes and
liver failure from hepatitis or other causes), the scarcity of organs and other
difficulties constrain treatment or cure by transplant. These conditions, many
of which cannot be treated effectively by other means, affect more than
18 million people in the United States and account for more than $160 billion
annually in health care costs according to associations for the various diseases
and government sources.
Our therapies are based on the transplantation of healthy human stem and
progenitor cells to repair or replace neural, pancreatic or liver tissue that
has been damaged or lost as a result of disease or injury, potentially returning
patients to productive lives and significantly reducing health care costs. We
believe that we have achieved a leadership position in the neural stem cell
therapy area through the advances we have made in the isolation, purification
and transplantation of neural stem and progenitor cells. We have also made
advances in our research programs to discover the stem cells of the pancreas and
of the liver. We have established a broad intellectual property position with
respect to stem and progenitor cell therapies in all three areas by patenting
our discoveries and entering into exclusive licensing arrangements. Successful
development and commercialization of our platform stem cell technologies may
create the opportunity for therapies that address a number of conditions with
significant unmet medical needs.
CELL THERAPY BACKGROUND
ROLE OF CELLS IN HUMAN HEALTH AND TRADITIONAL THERAPIES
Cells maintain normal physiological function in healthy individuals by
secreting or metabolizing substances, such as sugars, amino acids,
neurotransmitters and hormones, which are essential to life. When cells are
damaged or destroyed, they no longer produce, metabolize or accurately regulate
those substances. Impaired cellular function is associated with the progressive
decline common to many neurodegenerative diseases, such as Parkinson's disease,
Alzheimer's disease and amyotrophic lateral sclerosis ("ALS").
Recent advances in medical science have identified cell loss or impaired
cellular function as leading causes of degenerative diseases. Biotechnology
advances have led to the identification of some of these specific substances or
proteins that are deficient. While administering these substances or proteins as
medication does overcome some of the limitations of traditional pharmaceuticals
(such as lack of specificity) there is no existing technology that can deliver
them to the precise sites of action and in the appropriate physiological
quantities or for the duration required to cure the degenerative condition.
Cells, however, do this naturally. As a result, investigators have
considered replacing failing cells that are no longer producing the needed
substances or proteins by implanting stem or progenitor cells capable of
regenerating the cell that the degenerative condition has damaged or destroyed.
Where there has been irreversible tissue damage or organ failure,
transplantation of stem cells offers the
20
possibility of generating new and healthy tissue, thus potentially restoring the
organ function and the patient's health.
THE POTENTIAL OF OUR STEM CELL-BASED THERAPY
Stem cell-based therapy--the use of stem or progenitor cells to treat
diseases--has the potential to provide a broad therapeutic approach comparable
in importance to traditional pharmaceuticals and genetically engineered
biologics.
Stem cells are rare and only available in limited supply, whether from the
patients themselves (autologous) or from donors (allogeneic). Since autologous
cells are obtained from the same person who will receive them, they may be
abnormal if the patient is ill or the tissue is contaminated with
disease-causing cells. Also, the cells can often be obtained only through
significant surgical procedures. The challenge, therefore, has been three-fold:
1) to identify the stem cells;
2) to create techniques and processes that can be used to expand these rare
cells in sufficient quantities for effective transplants; and
3) to establish a bank of normal human stem or progenitor cells that can be
used for allogeneic transplants into individuals whose own cells are not
suitable because of disease or other reasons.
We have developed and demonstrated a process, based on a proprietary IN
VITRO culture system in chemically defined media, that reproducibly grows normal
human brain stem and progenitor cells. We believe this is the first reproducible
process for growing normal human neural stem cells. More recently, we have
discovered cell surface markers that identify the human neural stem cells. This
allows us to purify them and eliminate other unwanted cell types. Together,
these discoveries enable us to select normal human neural stem cells and to
expand them in culture to produce a large number of pure stem cells.
Because these cells have not been genetically modified, they may be
especially suitable for transplantation and may provide a safer and more
effective alternative to therapies that are based on cells derived from cancer
cells, from cells modified by a cancer gene to make them grow, from an
unpurified mixture of many different cell types, or from animal derived cells
(xenotransplants).
We believe our proprietary stem cell technologies may enable therapies to
replace specific cells that have been damaged or destroyed, permitting the
restoration of function through the replacement of normal cells where this has
not been possible in the past. Recent advances in our research have shown that
neural stem cells transplanted into hosts successfully engraft, migrate, and
differentiate to produce mature neurons and glial cells.
Because the stem cell is the pivotal cell that produces all the functional
mature cell types in an organ, we believe this cell serves as a platform for
five major areas of regenerative medicine and biotechnology:
- tissue repair and replacement,
- correction of genetic disorders,
- drug discovery and screening,
- genomics, and
- diagnostics.
We will be pursuing key alliances in these areas.
21
OUR STEM CELL TECHNOLOGY PLATFORM
Stem cells have two defining characteristics:
- they are themselves undifferentiated, but some of their progeny are
differentiated cells that give rise to successively more specialized cell
types until all the kinds of mature cells making up the particular organ
are produced; and
- they "self renew"--that is, some of their progeny are themselves new stem
cells, thus permitting the process to continue again and again.
Stem cells are known to exist for many systems of the human body, including
hematopoietic, neural (both central and peripheral), hepatic, pancreatic
endocrine, and mesenchymal systems. These cells are responsible for organ
regeneration during normal cell replacement and, to a more or less limited
extent, after injury. We believe that they can be cultivated and administered in
ways that enhance their natural function, so as to form the basis of therapies
that will replace specific subsets of cells that have been damaged or lost
through disease, injury or genetic defect.
We also believe that the person or entity that first identifies and isolates
a stem cell and defines methods to culture of any of the finite number of
different types of human stem cells will be able to obtain patent protection for
the methods and the composition, making the commercial development of stem cell
treatment and possible cure of currently intractable diseases financially
feasible.
Our strategy is to be the first to identify, isolate and patent multiple
types of human stem and progenitor cells with commercial importance. Our
portfolio of issued patents includes a method of culturing normal human neural
stem and progenitor cells in our proprietary chemically defined medium, and our
published studies show that these cultured and expanded cells give rise to all
three major cell types of the central nervous system (i.e., neurons, astrocytes,
and oligodendrocytes). Also, a separate study sponsored by us using these
cultured stem and progenitor cells showed that the cells are capable of
transplantation into hosts, with successful engraftment, migration and
differentiation to produce neurons and glial cells.
More recently, we announced the results of a new study that showed that
human brain stem cells can be successfully isolated by cell surface markers
present on freshly obtained brain cells. We believe this is the first
reproducible process for isolating highly purified populations of
well-characterized normal human neural stem cells, and have applied for a
composition of matter patent. Because the cells are highly purified and have not
been genetically modified, they may be especially suitable for transplantation
and may provide a safer and more effective alternative than therapies that are
based on cells derived from cancer cells, or from cells modified by a cancer
gene to make them grow, or from an unpurified mixture of many different cell
types or cells derived from animals (xenogeneic cells). We have also filed an
improved process patent for the growth and expansion of these purified normal
human neural cells.
Neurological disorders (such as Parkinson's disease, epilepsy, Alzheimer's
disease, and the side effects of stroke) affect a significant portion of the
U.S. population and there currently are no effective long-term therapies. We
believe that therapies based on our process for identifying, isolating and
culturing neural stem and progenitor cells may be useful in treating such
diseases. We are continuing our research into, and have initiated the
development of, human neural stem and progenitor cell-based therapies for these
diseases.
We continue to advance our research programs to discover the human
pancreatic islet stem cell and the liver stem cell. Pancreatic islet stem cells
may be useful in the treatment of Type 1 diabetes and those cases of Type 2
diabetes where insulin secretion is defective. Liver stem cells may be useful in
the treatment of diseases such as hepatitis, cirrhosis of the liver and liver
cancer.
22
EXPECTED ADVANTAGES OF OUR STEM CELL TECHNOLOGY
NO OTHER TREATMENT
To the best of our knowledge, no one has developed an FDA-approved method
for replacing lost or damaged tissues from the human nervous system. Replacement
of tissues in other areas of the human body is limited to those few areas (such
as bone marrow or peripheral blood cell transplants) where autologous
transplantation is now feasible. In a few additional areas, including the liver,
allogeneic transplantation is now used, but is limited by the scarcity of organs
available through donation. We believe that our stem cell technologies have the
potential to reestablish function in at least some of the patients who have
suffered the losses referred to above.
REPLACED CELLS PROVIDE NORMAL FUNCTION
Because stem cells can duplicate themselves, or self-renew, and
differentiate into the multiple kinds of cells that are commonly lost in various
diseases, including neurodegenerative diseases, transplanted stem cells may be
able to migrate limited distances to the proper location within the body, to
expand and differentiate and to replace damaged or defective cells, facilitating
the return to proper function. We believe that such replacement of damaged or
defective cells by functional cells is unlikely to be achieved with any other
treatment.
RESEARCH EFFORTS AND PRODUCT DEVELOPMENT PROGRAMS
OVERVIEW OF RESEARCH AND PRODUCT DEVELOPMENT STRATEGY
We have devoted substantial resources to our research programs to isolate
and develop a series of stem and progenitor cells that we believe can serve as a
basis for replacing diseased or injured cells. Our efforts to date have been
directed at methods to identify, isolate and culture large varieties of stem and
progenitor cells of the human nervous system, liver and pancreas and to develop
therapies utilizing these stem and progenitor cells.
The following table lists the potential therapeutic indications for and
current status of our primary research and product development programs and
projects and is qualified in its entirety by reference to the more detailed
descriptions of such programs and projects appearing elsewhere in this
prospectus. We continually evaluate our research and product development efforts
and reallocate resources among existing programs or to new programs in light of
experimental results, commercial potential, availability of third party funding,
likelihood of near-term efficacy, collaboration success or significant
technology
23
enhancement, as well as other factors. Our research and product development
programs are at relatively early stages of development and will require
substantial resources to commercialize.
RESEARCH AND PRODUCT DEVELOPMENT PROGRAMS
-----------------------------------------------------------------------
PROGRAM DESCRIPTION STAGE/STATUS(1)
- ------------------- -----------------------------------------------------------------------
HUMAN NEURAL STEM CELL PRECLINICAL
Repair or replace damaged CNS - In vitro ability to initiate and expand stem cell-containing
tissue (including degenerated human neural cultures and differentiation into three types
retinas and tissue affected by of CNS cells
certain genetic disorders)
- Direct isolation of neurosphere-initiating stem cells from
brain
- In vivo demonstration of proper differentiation and
engraftment of cultured human neural cell containing CNS
stem cells in rodent CNS
PANCREATIC ISLET STEM CELL RESEARCH
Repair or replace damaged - Identified cell surface markers used to identify, isolate
pancreatic islet tissue and culture pancreatic islet stem cells
- Commenced small animal testing
LIVER STEM CELL RESEARCH
Repair or replace damaged liver - Defined the generation of hepatocytes from purified mouse
tissue (including the results hematopoietic stem cells
of certain metabolic genetic
diseases)
- Identified in vitro culture assay for growth of human
bipotent liver cells
- ------------------------
(1) "Research" refers to early stage research and product development activities
IN VITRO, including the selection and characterization of product candidates
for preclinical testing. "Preclinical" refers to further testing of a
defined product candidate IN VITRO and in animals prior to clinical studies.
RESEARCH AND DEVELOPMENT PROGRAMS
Our portfolio of stem cell technology results from our exclusive licensing
of neural, stem and progenitor cell technology, animal models for the
identification and/or testing of stem and progenitor cells and our own research
and development efforts to date. We believe that therapies using stem cells
represent a fundamentally new approach to the treatment of diseases caused by
lost or damaged tissue. We have assembled an experienced team of scientists and
scientific advisors to consult with and advise our scientists on their
continuing research and development of stem and progenitor cells. This team
includes, among others, Irving L. Weissman, M.D., of Stanford University, Fred
H. Gage, Ph.D., of The Salk Institute and David Anderson, Ph.D., of the
California Institute of Technology.
NEURAL STEM AND PROGENITOR CELL RESEARCH AND DEVELOPMENT PROGRAM
We began our work with neural stem and progenitor cell cultures in
collaboration with NeuroSpheres, Ltd., in 1992. We believe that NeuroSpheres was
the first to invent these cultures. We are the exclusive, worldwide licensee
from NeuroSpheres to such inventions and associated patents and patent
applications for transplantation in the human body as embodied in these patents.
See "License Agreements and Sponsored Research Agreements--NeuroSpheres, Ltd."
In 1997, our scientists invented a reproducible method for growing human
neural stem and progenitor cells in cultures. In preclinical IN VITRO and early
IN VIVO studies, we demonstrated that these
24
cells differentiate into all three of the cell types of the CNS. Based on these
results, we believe that these cells may form the basis for replacement of cells
lost in certain degenerative diseases. We are continuing research into, and have
initiated the development of, our human neural stem and progenitor cell
cultures. We have initiated the cultures and demonstrated that these cultures
can be expanded for a number of generations IN VITRO in chemically defined
media. In collaboration with us, Dr. Anders Bjorklund has shown that cells from
these cultures can be successfully engrafted into the brains of rodents where
they subsequently migrated and differentiated into the appropriate cell lineages
for the site of the brain into which they were transplanted.
In 1998, we expanded our preclinical efforts in this area by initiating
programs aimed at the discovery and use of specific monoclonal antibodies to
facilitate identification and isolation of neural and other stem and progenitor
cells or their differentiated progeny. Also in 1998, our researchers devised
methods to advance the IN VITRO culture and passage of human neural stem cells
that resulted in a 100-fold increase in neural stem and progenitor cell
production after 6 passages. We are expanding our preclinical efforts toward the
goal of selecting the proper indications to pursue.
In December 1998, we announced that the US Patent and Trademark Office had
granted patent No. 5,851,832, covering our methods for the human neural cell
cultures containing central nervous system stem cells, for compositions of human
neural cells expanded by these methods, and for use of these cultures in, e.g.,
human transplantation. These human neural stem and progenitor cells expanded in
culture may be useful for repairing or replacing damaged central nervous system
tissue, including the brain and the spinal cord.
In October 1999, the US Patent and Trademark Office granted patent number
5,968,829 entitled "Human CNS Neural Stem Cells," covering our composition of
matter patent for human CNS neural stem cells, and also allowed a separate
patent application for our media for culturing human CNS neural stem cells.
Also in 1999, we announced the filing of a US patent application covering
our proprietary process for the direct isolation of normal human neural stem
cells based on the cell surface markers found to be present on freshly obtained
brain cells. Since the filing of this patent application, our researchers have
completed a study designed to identify, isolate and culture human neural stem
cells utilizing this proprietary process. In November 1999, we announced the
study's first results: Our researchers, by using our proprietary cell surface
markers, had succeeded in identifying, isolating and purifying human neural stem
cells from brain tissue, and were able to expand the number of these cells in
culture.
We believe that this is the first study to show a reproducible process for
isolating highly purified populations of well-characterized normal human neural
stem cells. Because the cells are normal human neural stem cells and have not
been genetically modified, they may be especially suitable for transplantation
and may provide a safer and more effective alternative to therapies that are
based on cells derived from cancer cells or from an unpurified mix of many
different cell types, or from animal derived cells (xenogenic).
In January 2000, we reported what we regard as an even more important
result: In long term animal studies, our researchers were able to take these
purified and expanded stem cells and transplant them into normal mouse brain
hosts, where they engraft and grow into neuronal and glial cells.
During the course of the study, the transplanted human neural stem cells
survived for as long as one year and migrated to specific functional domains of
the host brain, with no sign of tumor formation or adverse effects on the animal
recipients; moreover, the cells were still dividing. These findings show that
when neural stem cells isolated and cultured with our proprietary processes are
transplanted, they adopt the characteristics of the host brain and act like
normal stem cells. In other words, the study suggests the possibility of a
continual replenishment of normal human neural cells.
25
As noted above, human neural stem and progenitor cells harvested and
purified and expanded using our proprietary processes may be useful for creating
therapies for the treatment of neurodegenerative diseases such as Parkinson's,
Huntington's and Alzheimer's disease. These conditions affect more than
5 million people in the United States and there are no effective long-term
therapies currently available. We believe the ability to purify human brain stem
cells directly from fresh, tissue is important because:
- it provides an enriched source of normal stem cells, not contaminated by
other unwanted or diseased cell types that can be expanded in culture
without fear of expanding some unwanted cell type(s);
- it opens the way to a better understanding of the properties of these
cells and how they might be manipulated to treat specific diseases. For
example, in certain genetic diseases such as Tay Sachs and Gaucher's, a
key metabolic enzyme required for normal development/function of the brain
is absent; stem cell-derived neural cultures might be genetically modified
to produce those proteins. The modified neural stem cells could be
transplanted into patients with these genetic diseases;
- the efficient engraftment of these non-transformed normal human stem cells
into host brains means that the cell product can be tested in animal
models for its ability to correct deficiencies caused by various human
neurological diseases. This technology could also provide a unique animal
model for the testing of drugs that act on human brain cells either for
effectiveness of the drug against the disease or its toxicity to human
neural cells.
PANCREATIC STEM CELLS DISCOVERY RESEARCH PROGRAMS
Our discovery program directed to the identification, isolation and
culturing of the pancreatic stem and progenitor cell is currently being
conducted by Nora Sarvetnick, Ph.D., of The Scripps Research Institute, in
collaboration with some of our senior researchers.
According to diabetes and juvenile diabetes foundations, between 800,000 and
1.5 million Americans have Type 1 diabetes (often called "juvenile diabetes" and
most commonly diagnosed in childhood); and 30,000 new patients are diagnosed
with the disease every year. It is a costly, serious, lifelong condition,
requiring constant attention and insulin injections every day for survival.
About 15 million other people in the United States have Type 2 diabetes
mellitus, which is also a chronic and potentially fatal condition; and more than
700,000 new patients are diagnosed annually.
Diabetes is widely recognized as one of the leading causes of death and
disability in the United States and is associated with long term complications
that affect almost every major part of the body. Diabetes-related treatment
costs exceed $100 billion annually.
In 1998, we obtained an exclusive, worldwide license from The Scripps
Research Institute to novel technology, developed by Dr. Sarvetnick which may
facilitate the identification and isolation of pancreatic stem and progenitor
cells by using a mouse model that continuously regenerates the pancreas. We
believe that stem cells produce the regeneration, in which case this animal
model may be useful for identifying specific cell surface markers unique to the
stem cells. We believe this may lead to the development of cell-based treatments
for Type 1 diabetes and that portion of Type 2 diabetes characterized by
defective secretion of insulin.
In 1999, advances in the research sponsored by us resulted in our obtaining
additional exclusive, worldwide licenses from The Scripps Research Institute to
novel cell surface markers identified by Dr. Sarvetnick and her research team as
being unique to the pancreatic islet stem cell for which we have now filed a US
patent application. In collaboration with Dr. Sarvetnick, we continue to advance
26
the discovery program directed at the identification, isolation and culturing of
the pancreatic stem and progenitor cell utilizing this technology.
LIVER STEM CELLS DISCOVERY RESEARCH PROGRAMS
We initiated our discovery work for the liver stem and progenitor cell
through a sponsored research agreement with Markus Grompe, Ph.D., of Oregon
Health Sciences University. Dr. Grompe's work focuses on the discovery and
development of a suitable method for identifying and assessing liver stem and
progenitor cells for use in transplantation. We have also obtained a worldwide
exclusive license to a novel mouse model of liver failure for evaluating cell
transplantation developed by Dr. Grompe.
Approximately 1 in 10 Americans suffers from diseases and disorders of the
liver for which there are currently no effective, long-term treatments.
In 1998, our researchers continued to advance methods for establishing
enriched cell populations suitable for transplantation in preclinical animal
models. We are focused on discovering and utilizing our proprietary methods to
identify, isolate and culture liver stem and progenitor cells and to evaluate
these cells in preclinical animal models.
In 1999, the researchers devised a culture assay for facilitating the
identification of a liver stem and progenitor cell. In addition to supporting
the growth of an early human liver stem and progenitor cell, it is also possible
to infect this culture with human hepatitis virus, providing a valuable system
for study of the virus. This technology could also provide a unique animal model
for the testing of drugs that act on, or are metabolized by, human liver cells.
An important element of our stem cell discovery program is the further
development of intellectual property positions with respect to stem and
progenitor cells. We have also obtained rights to certain inventions relating to
stem cells from, and are conducting stem cell related research at, several
academic institutions. We expect to expand our search for new stem and
progenitor cells and to seek to acquire rights to additional inventions relating
to stem and progenitor cells from third parties.
WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAMS
Until mid-1999, we engaged in research and development in encapsulated cell
therapy technology, or ECT, including a pain control program funded by Astra
(later AstraZeneca Group plc). The results from the 85-patient double-blind,
placebo-controlled trial of our encapsulated bovine cell implant for the
treatment of severe, chronic pain in cancer patients did not, however, meet the
criteria AstraZeneca had established for continuing trials for the therapy. In
June 1999, AstraZeneca terminated the collaboration.
Consequently, in July 1999, we announced plans for the restructuring of our
research operations to abandon all further ECT research and to concentrate our
resources on the research and development of our proprietary stem cell
technology platform. We reduced our workforce by approximately 68 full-time
employees who had been focused on ECT programs, wound down our research and
manufacturing operations in Lincoln, Rhode Island, and relocated our remaining
research and development activities, and our corporate headquarters, to the
facilities of our wholly owned subsidiary, StemCells California, Inc., in
Sunnyvale, California. We are actively marketing the facility we occupied in
Rhode Island and seeking to sublease, assign or sell our interest in our former
corporate headquarters building and our pilot manufacturing and cell processing
facility there.
In December 1999 we sold our intellectual property assets related to our ECT
to Neurotech S.A., a privately held French company, in exchange for a payment of
$3 million, royalties on future product sales, and a portion of certain revenues
Neurotech may in the future receive from third parties. We retained certain
non-exclusive rights to use the ECT in combination with our proprietary stem
cell technology, and in the field of vaccines for prevention and treatment of
infectious diseases.
27
In a related development, by mutual consent we and the Advanced Technology
Program of the National Institute of Standards and Technology terminated two
grants previously awarded to us for our encapsulated cell therapy and stem
cell-related research. The encapsulated cell therapy grant was obviated by the
sale of the technology to Neurotech. The funding agency has invited us to
resubmit a proposal consistent with the new directions we are taking in our
research and development of our platform stem cell technology.
SUBSIDIARY
STEMCELLS CALIFORNIA, INC.
On September 26, 1997, we acquired by merger StemCells, Inc. (now StemCells
California, Inc.), a California corporation. We acquired that corporation in
exchange for 1,320,691 shares of our common stock and options and warrants for
the purchase of 259,296 common shares. Simultaneously with the acquisition, its
President, Richard M. Rose, M.D., became our President, Chief Executive Officer
and a director, and Irving L. Weissman, M.D., a founder of the California
corporation, became a member of our board of directors. We, as the sole
stockholder of our subsidiary voted on February 23, 2000, to amend its
Certificate of Incorporation to change its name to StemCells California, Inc.
CORPORATE INVESTMENT
In July 1996, we, together with certain founding scientists, established
Modex Therapeutiques SA ("Modex"), a Swiss biotherapeutics company, to pursue
extensions of our former technology of encapsulated-cell therapy for certain
applications outside the central nervous system. Modex, headquartered in
Lausanne, Switzerland, was formed to integrate technologies developed by us and
by several other institutions to develop products to treat non-CNS diseases such
as diabetes, obesity and anemia. After our disposition of the encapsulated cell
technology in December 1999, we no longer had common research or development
interests with Modex, but we held approximate 17% of its stock. Modex completed
an initial public offering on June 23, 2000, in the course of which we realized
a gain of approximately $1.4 million from the sale of certain shares. We now own
126,193 shares, or approximately 9% of Modex's equity, subject to a lockup until
December 23, 2000. The closing market price of Modex stock on the Swiss New
Market Exchange on August 15, 2000, was 298.5 Swiss Francs (or approximately
$174) per share.
LICENSE AGREEMENTS AND SPONSORED RESEARCH AGREEMENTS
We have entered into a number of license agreements with commercial as well
as non-profit institutions, as well as a number of research-plus-license
agreements with academic organizations. The research agreements provide that we
will fund certain research costs, and in return, will have a license or an
option for a license to the resulting inventions. Under the license agreements,
we will typically be subject to obligations of due diligence and the requirement
to pay royalties on products that use patented technology licensed under such
agreements.
NEUROSPHERES, LTD.
In March 1994, we entered into a Contract Research and License Agreement
with NeuroSpheres, Ltd., which was clarified in License Agreement dated as of
April 1, 1997. Under the agreement as clarified, we obtained an exclusive patent
license from NeuroSpheres in the field of transplantation (subject to a limited
right of NeuroSpheres to purchase a nonexclusive license from us, which right
was not exercised and has expired). We have developed additional intellectual
property relating to the subject matter of the license.
28
SIGNAL PHARMACEUTICALS, INC.
In December 1997, we entered into two license agreements with Signal
Pharmaceuticals, Inc. under which each party licensed to the other certain
patent rights and biological materials for use in defined fields. An initial
disagreement as to the interpretation of the licensed rights was resolved by the
parties, and the agreements are operating in accordance with their terms. Signal
has now been acquired by Celgene.
SPONSORED RESEARCH AGREEMENTS
Under Sponsored Research Agreements with The Scripps Research Institute and
Oregon Health Sciences University, we funded certain research in return for
licenses or options to license the inventions resulting from the research. We
have also entered into license agreements with the California Institute of
Technology. All of these agreements relate largely to stem or progenitor cells
and or to processes and methods for the isolation, identification, expansion or
culturing of stem or progenitor cells.
MANUFACTURING
The keys to successful commercialization of neural stem/progenitor cells are
efficacy, safety, consistency of the product, and economy of the process. We
expect to address these issues by appropriate testing and banking representative
vials of large-scale cultures. Commercial production is expected to involve
expansion of banked cells and packaging them in appropriate containers after
formulating the cells in an effective carrier (which may also be used to affect
the stability and engrafting of the stem cells or their progeny). Because of the
early stage of our stem and progenitor cell programs, all of the issues that
will affect manufacture of stem and progenitor cell products are not yet clear.
MARKETING
We expect to market and sell our products primarily through co-marketing,
licensing or other arrangements with third parties. There are a number of
substantial companies with existing distribution channels and large marketing
resources who are well equipped to market and sell our products. It is our
intent to have the marketing of our products undertaken by such partners,
although we may seek to retain limited marketing rights in specific narrow
markets where the product may be addressed by a specialty or niche sales force.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
We believe that proprietary protection of our inventions will be of major
importance to our future business. We have an aggressive program of vigorously
seeking and protecting our intellectual property which we believe might be
useful in connection with our products. We believe that our know-how will also
provide a significant competitive advantage, and we intend to continue to
develop and protect our proprietary know-how. We may also from time to time seek
to acquire licenses to important externally developed technologies.
We have exclusive or non-exclusive rights to a portfolio of patents and
patent applications related to various stem and progenitor cells and methods of
deriving and using them. These patents and patent applications relate mainly to
compositions of matter, methods of obtaining such cells, and methods for
preparing, transplanting and utilizing such cells. Currently, our U.S. patent
portfolio in the stem cell therapy area includes nineteen issued U.S. patents,
six of which have issued within the last year. An additional ten patent
applications are pending, one of which has been allowed.
29
We also rely upon trade-secret protection for our confidential and
proprietary information and take active measures to control access to that
information.
Our policy is to require our employees, consultants and significant
scientific collaborators and sponsored researchers to execute confidentiality
agreements upon the commencement of an employment or consulting relationship
with us. These agreements generally provide that all confidential information
developed or made known to the individual by us during the course of the
individual's relationship with us is to be kept confidential and not disclosed
to third parties except in specific circumstances. In the case of employees and
consultants, the agreements generally provide that all inventions conceived by
the individual in the course of rendering services to us shall be our exclusive
property.
We have obtained rights from universities and research institutions to
technologies, processes and compounds that we believe may be important to the
development of our products. These agreements typically require us to pay
license fees, meet certain diligence obligations and, upon commercial
introduction of certain products, pay royalties. These include exclusive license
agreements, with NeuroSpheres, The Scripps Institute, the California Institute
of Technology and the Oregon Health Sciences University, to certain patents and
know-how regarding present and certain future developments in neural and
pancreatic stem cells.
COMPETITION
The targeted disease states for our initial products in some instances
currently have no effective long-term therapies. However, we do expect that our
initial products will have to compete with a variety of therapeutic products and
procedures. Major pharmaceutical companies currently offer a number of
pharmaceutical products to treat neurodegenerative, pancreatic and liver
diseases, and other diseases for which our technologies may be applicable. Many
pharmaceutical and biotechnology companies are investigating new drugs and
therapeutic approaches for the same purposes, which may achieve new efficacy
profiles, extend the therapeutic window for such products, alter the prognosis
of these diseases, or prevent their onset. We believe that our products, when
successfully developed, will compete with these products principally on the
basis of improved and extended efficacy and safety and their overall economic
benefit to the health care system.
The market for therapeutic products that address degenerative diseases is
large, and competition is intense and is expected to increase. Our most
significant competitors are expected to be fully integrated pharmaceutical
companies and more established biotechnology companies. Smaller companies may
also be significant competitors, particularly through collaborative arrangements
with large pharmaceutical or biotechnology companies. Many of these competitors
have significant products approved or in development that could be competitive
with our potential products.
Competition for our stem and progenitor cell products may be in the form of
existing and new drugs, other forms of cell transplantation, ablative and
simulative procedures, and gene therapy. We believe that some of our competitors
are also trying to develop stem and progenitor cell-based technologies. We
expect that all of these products will compete with our potential stem and
progenitor cell products based on efficacy, safety, cost and intellectual
property positions.
We may also face competition from companies that have filed patent
applications relating to the use of genetically modified cells to treat disease,
disorder or injury. We may be required to seek licenses from these competitors
in order to commercialize certain of our proposed products.
Once our products are developed and receive regulatory approval, they must
then compete for market acceptance and market share. For certain of our
potential products, an important success factor will be the timing of market
introduction of competitive products. This is a function of the relative speed
with which we and our competitors can develop products, complete the clinical
testing and
30
approval processes, and supply commercial quantities of a product to market.
These competitive products may also impact the timing of clinical testing and
approval processes by limiting the number of clinical investigators and patients
available to test our potential products.
While we believe that the primary competitive factors will be product
efficacy, safety, and the timing and scope of regulatory approvals, other
factors include, in certain instances, obtaining marketing exclusivity under the
Orphan Drug Act, availability of supply, marketing and sales capability,
reimbursement coverage, price, and patent and technology position.
GOVERNMENT REGULATION
Our research and development activities and the future manufacturing and
marketing of our potential products are, and will continue to be, subject to
regulation for safety and efficacy by numerous governmental authorities in the
United States and other countries.
In the United States, pharmaceuticals, biologicals and medical devices are
subject to rigorous FDA regulation. The Federal Food, Drug and Cosmetic Act, as
amended, and the Public Health Service Act, as amended, the regulations
promulgated thereunder, and other Federal and state statutes and regulations
govern, among other things, the testing, manufacture, safety, efficacy,
labeling, storage, export, record keeping, approval, marketing, advertising and
promotion of our potential products.
Product development and approval within this regulatory framework takes a
number of years and involves significant uncertainty combined with the
expenditure of substantial resources. In addition, the federal, state, and other
jurisdictions have restrictions on the use of fetal tissue.
FDA APPROVAL
The steps required before our potential products may be marketed in the
United States include:
STEPS CONSIDERATIONS
1. Preclinical laboratory and animal tests Preclinical tests include laboratory
evaluation of the product and animal studies
to assess the potential safety and efficacy
of the product and our formulation as well as
the quality and consistency of the
manufacturing process.
2. Submission to the FDA of an application The results of the preclinical tests are
for an Investigational New Drug Exemption, or submitted to the FDA as part of an IND, and
IND, which must become effective before U.S. the IND becomes effective 30 days following
human clinical trials may commence our receipt by the FDA, absent questions,
requests for delay or objections from the
FDA.
31
3. Adequate and well-controlled human Clinical trials involve the evaluation of the
clinical trials to establish the safety and product in healthy volunteers or, as may be
efficacy of the product the case with our potential products, in a
small number of patients under the
supervision of a qualified physician.
Clinical trials are conducted in accordance
with protocols that detail the objectives of
the study, the parameters to be used to
monitor safety and the efficacy criteria to
be evaluated. Any product administered in a
U.S. clinical trial must be manufactured in
accordance with clinical Good Manufacturing
Practices, cGMP, determined by the FDA. Each
protocol is submitted to the FDA as part of
the IND. The protocol for each clinical study
must be approved by an independent
Institutional Review Board, or IRB, at the
institution at which the study is conducted
and the informed consent of all participants
must be obtained. The IRB will consider,
among other things, the existing information
on the product, ethical factors, the safety
of human subjects, the potential benefits of
the therapy and the possible liability of the
institution.
Clinical development is traditionally
conducted in three sequential phases, which
may overlap:
- In Phase I, products are typically
introduced into healthy human subjects or
into selected patient populations to test
for safety (adverse reactions), dosage
tolerance, absorption and distribution,
metabolism, excretion and clinical
pharmacology.
- Phase II involves studies in a limited
patient population to (i) determine the
efficacy of the product for specific
targeted indications and populations, (ii)
determine optimal dosage and dosage
tolerance and (iii) identify possible
adverse effects and safety risks. When a
dose is chose and a candidate product is
found to be effective and to have an
acceptable safety profile in Phase II
evaluations.
- Phase III trials are undertaken to
conclusively demonstrate clinical efficacy
and to test further for safety within an
expanded patient population, generally at
multiple study sites.
The FDA continually reviews the clinical
trial plans and results and may suggest
changes or may require discontinuance of the
trials at any time if significant safety
issues arise.
4. Submission to the FDA of a marketing The results of the preclinical studies and
authorization applications(s) clinical studies are submitted to the FDA in
the form of a marketing approval
authorization application.
32
5. FDA approval of the application(s) prior The testing and approval process will require
to any commercial sale or shipment of the substantial time, effort and expense. The
drug. Biologic product manufacturing time for approval is affected by a number of
establishments located in certain states also factors, including relative risks and
may be subject to separate regulatory and benefits demonstrated in clinical trials, the
licensing requirement availability of alternative treatments and
the severity of the disease. Additional
animal studies or clinical trials may be
requested during the FDA review period which
might add to that time.
After FDA approval for the initial indications and requisite approval of the
manufacturing facility, further clinical trials may be required to gain approval
for the use of the product for additional indications. The FDA may also require
unusual or restrictive post-marketing testing and surveillance to monitor for
adverse effects, which could involve significant expense, or may elect to grant
only conditional approvals.
FDA MANUFACTURING REQUIREMENTS
Among the conditions for product licensure is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to cGMP. Even after product licensure approval, the manufacturer must comply
with cGMP on a continuing basis, and what constitutes cGMP may change as the
state of the art of manufacturing changes. Domestic manufacturing facilities are
subject to regular FDA inspections for cGMP compliance (normally at least every
two years), and foreign manufacturing facilities are subject to periodic FDA
inspections or inspections by the foreign regulatory authorities with reciprocal
inspection agreements with the FDA. Domestic manufacturing facilities may also
be subject to inspection by foreign authorities.
ORPHAN DRUG ACT
The Orphan Drug Act provides incentives to drug manufacturers to develop and
manufacture drugs for the treatment of diseases or conditions that affect fewer
than 200,000 individuals in the United States. Orphan drug status can also be
sought for treatments for diseases or conditions that affect more than 200,000
individuals in the United States if the sponsor does not realistically
anticipate our product becoming profitable from sales in the United States. We
may apply for orphan drug status for certain of our therapies.
Under the Orphan Drug Act, a manufacturer of a designated orphan product can
seek tax benefits, and the holder of the first FDA approval of a designated
orphan product will be granted a seven-year period of marketing exclusivity in
the United States for that product for the orphan indication. While the
marketing exclusivity of an orphan drug would prevent other sponsors from
obtaining approval of the same compound for the same indication, it would not
prevent other types of products from being approved for the same use including
in some cases, slight variations on the originally designated orphan product.
PROPOSED FDA REGULATIONS
Proposed regulations of the FDA and other governmental agencies would place
restrictions, including disclosure requirements, on researchers who have a
financial interest in the outcome of their research. Under the proposed
regulations, the FDA could also apply heightened scrutiny to, or exclude the
results of, studies conducted by such researchers when reviewing applications to
the FDA, which contain such research. Certain of our collaborators have stock
options or other equity interests in us that could subject such collaborators
and us to the proposed regulations.
Our research and development is based on the use of human stem and
progenitor cells. The FDA has published a "Proposed Approach to Regulation of
Cellular and Tissue-Based Products" which
33
relates to the use of human cells. We cannot now determine the effects of that
approach or what regulatory actions might be taken from it. Restrictions exist
on the testing or use of cells, whether human or non-human.
OTHER REGULATIONS
In addition to safety regulations enforced by the FDA, we are also subject
to regulations under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act and other present and potential
future supranational, foreign, Federal, state and local regulations.
Outside the United States, we will be subject to regulations which govern
the import of drug products from the United States or other manufacturing sites
and foreign regulatory requirements governing human clinical trials and
marketing approval for our products. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursements vary widely from
country to country. In particular, the European Union, or EU, is revising its
regulatory approach to high tech products, and representatives from the United
States, Japan and the EU are in the process of harmonizing and making more
uniform the regulations for the registration of pharmaceutical products in these
three markets.
REIMBURSEMENT AND HEALTH CARE COST CONTROL
Reimbursement for the costs of treatments and products such as ours from
government health administration authorities, private health insurers and others
both in the United States and abroad is a key element in the success of new
health care products. Significant uncertainty often exists as to the
reimbursement status of newly approved health care products.
The revenues and profitability of some health care-related companies have
been affected by the continuing efforts of governmental and third party payers
to contain or reduce the cost of health care through various means. Payers are
increasingly attempting to limit both coverage and the level of reimbursement
for new therapeutic products approved for marketing by the FDA, and are
refusing, in some cases, to provide any coverage for uses of approved products
for disease indications for which the FDA has not granted marketing approval.
For example, in certain foreign markets, pricing or profitability of
prescription pharmaceuticals is subject to government control. In the United
States, there have been a number of Federal and state proposals to implement
government control over health care costs.
EMPLOYEES
As of August 15, 2000, we had twenty full-time employees, of whom five have
Ph.D. degrees, as well as two half-time employees. The equivalent of fifteen
full-time employees work in research and development and laboratory support
services. A number of our employees have held positions with other biotechnology
or pharmaceutical companies or have worked in university research programs. No
employees are covered by collective bargaining agreements.
SCIENTIFIC ADVISORY BOARD
Members of our Scientific Advisory Board provide us with strategic guidance
in regard to our research and product development programs, as well as
assistance in recruiting employees and collaborators. Each Scientific Advisory
Board member has entered into a consulting agreement with us. These consulting
agreements specify the compensation to be paid to the consultant and require
that all information about our products and technology be kept confidential. All
of the Scientific Advisory Board members are employed by employers other than us
and may have commitments to or consulting or advising agreements with other
entities that limit their availability to us. The Scientific Advisory Board
members have generally agreed, however, for so long as they serve as consultants
to us, not to
34
provide any services to any other entities which would conflict with the
services the member provides to us. Members of the Scientific Advisory Board
offer consultation on specific issues encountered by us as well as general
advice on the directions of appropriate scientific inquiry for us. In addition,
Scientific Advisory Board members assist us in assessing the appropriateness of
moving our projects to more advanced stages. The following persons are members
of our Scientific Advisory Board:
- Irving L. Weissman, M.D., is the Karel and Avice Beekhuis Professor of
Cancer Biology, Professor of Pathology and Professor of Developmental
Biology at Stanford University. Dr. Weissman was a cofounder of
SyStemix, Inc., and Chairman of its Scientific Advisory Board. He has
served on the Scientific Advisory Boards of Amgen Inc., DNAX and T-Cell
Sciences, Inc. Dr. Weissman is Chairman of the Scientific Advisory Board
of StemCells, Inc.
- David J. Anderson, Ph.D., is Professor of Biology, California Institute of
Technology, Pasadena, California and Investigator, Howard Hughes Medical
Institute.
- Fred H. Gage, Ph.D., is Professor, Laboratory of Genetics, The Salk
Institute for Biological Studies, La Jolla, California and Adjunct
Professor, Department of Neurosciences, University of California, San
Diego, California.
35
MANAGEMENT
The following table sets forth the name, age and position of each of our
executive officers, key members of management, and directors.
NAME AGE POSITION
- ---- -------- --------
John J. Schwartz, Ph.D.................... 66 Director, Chairman of the Board
George W. Dunbar, Jr...................... Acting President and Chief Executive
54 Officer
Donald Kennedy, Ph.D...................... 69 Director
Mark J. Levin............................. 50 Director
Irving L. Weissman, M.D................... 60 Director
The Company's Restated Certificate of Incorporation and Amended and Restated
By-laws provide for the classification of the Board of Directors into three
classes, as nearly equal in number as possible, with the term of office of one
class expiring each year. There are no family relationships between any of our
directors or executive officers. Our executive officers are elected by, and
serve at the discretion of, the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has an audit committee and compensation committee.
The board may also establish other committees to assist in the discharge of its
responsibilities.
The audit committee oversees the Company's financial reporting process on
behalf of the Board of Directors, makes recommendations to the Board regarding
the independent auditors to be nominated for election by the stockholders,
reviews the independence of such auditors, approves the scope of their annual
audit activities, reviews their audit results, assures that the Company's
financial reporting is of high quality, and reviews the interim financial
statements with Management and the independent auditors prior to the filing of
the Company's Quarterly Report on Form 10-Q. The audit committee is currently
comprised of Dr. Schwartz and Dr. Kennedy.
The duties of the compensation committee are to make recommendations to the
Board and the Company's management concerning salaries in general, determine
executive compensation, and approve incentive compensation for the Company. The
compensation committee is currently comprised of Mr. Levin and Dr. Schwartz.
36
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to its
Chief Executive Officer during the three most recent fiscal years ended
December 31, and the two other most highly compensated executive officers who
served in such capacities during the fiscal year ended December 31, 1999 but who
were not serving in such capacities as of the end of such fiscal year. There
were no other persons serving as executive officers at the end of such fiscal
year.
SUMMARY COMPENSATION TABLE
AWARDS
------------------------
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------- ------------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION ($) AWARDS($) OPTIONS (#) COMPENSATION
- --------------------------- -------- --------- -------- ---------------- ---------- ----------- ------------
Richard M. Rose M.D...... 1999 279,974 0 0 0 0 4667(2)
Chief Executive 1998 286,553 0 0 0 150,000(3) 11,330(4)
Officer(1) 1997 68,750 0 0 0 300,000(5) 76,268(6)
Phillip K. Yachmetz...... 1999 406,731(8) 0 0 0 12,000 71,355(9)
Senior Vice President 1998 155,780 10,000 0 0 75,000 86,695(10)
And General Counsel
Acting Chief Financial
Officer and Treasurer(7)
Moses Goddard, M.D....... 1999 195,176(2) 0 0 0 18,000 7,921(3)
Vice President, Chief 1998 188,957 0 0 0 67,875(4) 0
Technical Officer Cell
Encapsulation (1)
- ------------------------
(1) Dr. Rose became Chief Executive Officer on September 26, 1997. Dr. Rose
resigned as a director and officer of the Company and its wholly owned
subsidiary effective as of January 31, 2000.
(2) Represents the personal portion of the use of a Company vehicle, as well
as$5,000 of fair market value of the Company matching contributions of
Common Stock to Dr. Rose's account in the Company's 401(k) Plan.
(3) Represents the regrant of an option in the original amount of 200,000 shares
which was reduced to 150,000 shares as a result of the employee equity
incentive repricing plan approved by the Board of Directors on
July 10,1998.
(4) Represents $4,666.56 of fair market value of the Company matching
contributions of Common Stock to Dr. Rose's account in the Company's
401(k)Plan.
(5) One option grant for 200,000 shares was reduced to 150,000 shares upon there
pricing of the grant effective as of July 10, 1998 at a price of $1.28 per
share.
(6) Represents advance for relocation expenses of $75,000 and fair market value
of $1,268 of Company matching contributions of Common Stock to Dr. Rose's
account in the Company's 401(k) plan.
(7) Mr. Yachmetz was appointed Acting Chief Financial Officer and Treasurer
effective as of April 2, 1999. The term of Mr. Yachmetz' Employment
Agreement expired on October 31, 1999.
37
(8) Includes $204,807 of compensation and accrued and unused vacation paid upon
the expiration of Mr. Yachmetz' Employment Agreement in accordance with the
terms of such agreement.
(9) Represents $15,304 as the fair market value of 9,601 shares of the Company's
Common Stock earned in 1998 and issued in 1999, $3,990 of fair market value
of Company matching contributions of Common Stock to Mr. Yachmetz' account
in the Company's 401(k) Plan and $52,061 of temporary living and relocation
expenses adjusted for taxes.
(10) Represents $14,724 of temporary living and relocation expenses adjusted for
taxes paid to Mr. Yachmetz and personal use of a Company vehicle. Also
represents $1,827 of fair market value of Company matching contributions of
Common Stock to Mr. Yachmetz' account in the Company's 401(k) Plan.
(11) Dr. Goddard resigned as a director and officer of the Company effective as
of August 30, 1999 and served as a consultant to the Company through
March 28, 2000.
(12) Includes $70,945 of compensation paid to Dr. Goddard in accordance with the
severance agreement entered into with the Company.
(13) Represents the fair market value of 4,687 shares of the Company's Common
Stock granted to Dr. Goddard through the Company's 1992 Equity Incentive
Plan.
(14) Represents the regrant of options in the total original amount of 90,500
shares which was reduced to 67,875 shares as a result of the employee equity
incentive repricing plan approved by the Board of Directors on July 10,
1998.
38
SELLING STOCKHOLDERS
SALES BY MEMBERS OF THE COMPANY'S BOARD
Dr. Irving Weissman and Mark J. Levin, two members of the Company's Board of
Directors, will be selling shares of common stock in this offering.
Dr. Weissman and Mr. Levin acquired their shares pursuant to a 6% cumulative
convertible preferred stock financing in April, 2000, which is described in the
section titled "Relationships and Transactions with Certain Related Parties."
Both Dr. Weissman and Mr. Levin are party to a registration rights agreement in
which we agreed to register their shares of Common Stock upon their request and
to use our best efforts to keep the registration statement effective for five
(5) years, or until all of their registered shares of StemCells, Inc. Common
Stock are sold, whichever comes first. Registration of these shares does not
necessarily mean that the selling stockholders will sell all or any of the
shares.
The material relationships between Dr. Weissman, Mr. Levin and
StemCells, Inc. are as follows: Mark J. Levin is a Class I Director of the
Company, and from inception until January 1990 and from May 1990 until
February 1991, he served as the Company's President and acting Chief Executive
Officer. Irving L. Weissman, M.D. is a Class II Director of the Company. In
addition, both Dr. Weissman and Mr. Levin may donate or transfer as gifts some
or all of their StemCells, Inc. shares, or may transfer their shares for no
value to other beneficial owners. The selling stockholders will include these
donees or transferees as selling stockholders in a prospectus supplement if the
donees or transferees wish to use this prospectus to re-offer the shares.
SALES BY MILLENNIUM PARTNERS, L.P.
Millennium Partners, L.P. and May Davis Group, Inc. and four of its
affiliates also will be selling shares in this offering. On August 3, 2000, we
issued 923,521 shares of Common Stock to Millennium Partners, L.P., or the Fund.
At the same time we also issued to Millennium Partners a callable warrant to
purchase 101,587 shares of Common Stock and an adjustable warrant for a number
of shares, to be determined on eight dates beginning six months after the
closing and then every three months thereafter. On August 30, 2000 we issued an
additional 180,914 shares to the Fund, together with a callable warrant to
purchase 19,900 shares of Common Stock and an adjustable warrant for a number of
shares, to be determined on eight dates beginning six months after the closing
and then every three months thereafter. In connection with the Millennium
Partners transaction, we issued warrants for a total of 100,000 shares of Common
Stock to May Davis Group, Inc., who acted as placement agent for the
transaction, and four of its affiliates. These warrants expire on August 3,
2005.
We entered into a registration rights agreement with Millennium Partners in
which we agreed to register the shares of Common Stock purchased by Millennium
partners and issuable upon exercise of the warrants issued to Millennium
Partners. We agreed to use commercially reasonable efforts to keep the
registration statement in effect for five years, until all shares covered by the
registration statement are eligible for resale pursuant to Rule 144(k), or until
Millennium Partners and its transferees no longer hold the shares covered by the
registration statement, whichever occurs first. We also agreed to include in
this registration statement the shares issuable upon exercise of the warrants
issued to May Davis and its affiliates.
SECURITY OWNERSHIP OF THE SELLING STOCKHOLDERS, CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table shows information regarding the beneficial ownership of
our common stock as of August 30, 2000 for:
- each person or group of affiliated persons known by us to own beneficially
more than 5% of the outstanding shares of common stock;
39
- each selling stockholder;
- each director and named executive officer; and
- all directors and executive officers as a group.
The address for each listed director and officer is c/o StemCells, Inc., 525
Del Rey Avenue, Suite C, Sunnyvale, CA 94085.
We have determined beneficial ownership in the table in accordance with the
rules of the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percentage ownership of that
person, we have deemed to be outstanding shares of common stock subject to
options or warrants held by that person that are currently exercisable or will
become exercisable within 60 days of August 15, 2000, assuming that this
offering occurs in that 60-day period, but we have not deemed these shares to be
outstanding for computing the percentage ownership of any other person. The
shares listed below for the selling stockholders represent all of the shares
that each selling stockholder currently beneficially owns, the number of shares
each of them may offer and the number of shares each of them will own after the
offering assuming they sell all of the shares. To our knowledge, except as set
forth in the footnotes below, each stockholder identified in the table possesses
sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by that stockholder. Beneficial ownership percentage
is based on 20,538,742 shares of our common stock outstanding on August 15, 2000
and as adjusted for unexercised options and warrants as of that date as noted
below and 180,914 shares and 19,900 warrants issued to one of the Selling
Shareholders on August 30, 2000.
The number of shares of our Common Stock that will be issuable upon exercise
of the warrants issued to Millennium Partners is based upon fluctuations in the
market price and the number of shares of our Common Stock that will be issuable
upon conversion of the Preferred Stock held by Messrs. Weissman and Levin is
subject to anti-dilution provisions, so the actual number of shares of our
Common Stock that will be issuable and beneficially owned upon exercise of the
warrants and conversion of the Preferred Stock cannot be determined at this
time. As a result, we have agreed to register a number of shares of Common Stock
that is greater than the number of shares of Common Stock currently beneficially
owned by the selling stockholders.
The selling stockholders may offer all or some of their shares. All numbers
in the following table are based on information obtained by questionnaires
received by the company.
SHARES OF COMMON
STOCK BENEFICIALLY
SHARES OF COMMON STOCK SHARES OF COMMON OWNED AFTER THIS
BENEFICIALLY OWNED PRIOR TO STOCK OFFERED OFFERING*
THIS OFFERING HEREBY ---------------------
---------------------------- ---------------- NUMBER
NUMBER OF NUMBER OF OF
NAME OF BENEFICIAL OWNER SHARES PERCENTAGE SHARES SHARES PERCENTAGE
- ------------------------ -------------- ----------- ---------------- -------- ----------
Donald Kennedy, Ph.D............... 9,234(1) * -- 9,234 *
Mark J. Levin...................... 390,726(2) 1.9 472,743 154,287 0.7
John J. Schwartz, Ph.D............. 139,180(3) 0.7 -- 139,180 0.7
Irving Weissman, M.D............... 600,298(4) 2.9 472,743 363,859 1.8
George W. Dunbar, Jr............... 50,000(5) * -- 50,000 *
All directors and executive
officers as a group (5
persons)......................... 1,189,439(6) 5.6 945,486 716,561 3.4
Millennium Partners, L.P........... 1,225,922(7) 5.9 2,160,000 -- --
May Davis Group.................... 100,000(8) 0.5 100,000 -- --
- ------------------------
* Less than 0.1%
40
(1) Includes 9,234 shares issuable upon exercise of stock options exercisable
within 60 days.
(2) Includes 27,555 shares issuable upon exercise of stock options exercisable
within 60 days. Includes 198,871 shares issuable upon conversion of
cumulative convertible preferred shares at the currently applicable
conversion price, and a warrant to purchase 37,500 shares.
(3) Includes 139,180 shares issuable upon exercise of stock options exercisable
within 60 days.
(4) Includes 31,250 shares issuable upon exercise of stock options exercisable
within 60 days and 7,160 shares issuable upon exercise of warrants
exercisable within 60 days. Includes 198,871 shares issuable upon conversion
of 6% cumulative convertible preferred shares at the currently applicable
conversion price. Includes a total of 50,791 shares owned by trusts for the
benefit of Dr. Weissman's children as to which he disclaims beneficial
ownership. Also includes a warrant to purchase 37,500 shares.
(5) Includes 50,000 shares issuable upon exercise of stock options exercisable
within 60 days. Mr. Dunbar was appointed Acting President and Chief
Executive Officer of the Company's wholly owned subsidiary, StemCells
California, Inc., effective as of November 8, 1999, and was appointed Acting
President and Chief Executive Officer of the Company effective as of
February 1, 2000.
(6) Includes 339,379 shares exercisable upon exercise of warrants and stock
options exercisable within 60 days.
(7) Includes 180,914 shares issued as of August 30, 2000 and 19,900 shares
issuable upon exercise of warrants issued together with those shares.
Includes 101,587 shares issuable upon exercise of warrants issued August 3,
2000.
(8) Includes shares issuable upon exercise of warrants held by four affiliates
of May Davis Group.
41
RELATIONSHIP AND TRANSACTIONS WITH RELATED PARTIES
Dr. Schwartz, a member and Chairman of the Board of Directors, was retained
in July 1998 to serve as a consultant to the Company rendering strategic
business advice and consulting services, including assistance in the negotiation
and consummation of strategic collaboration transactions specified by the
Company. During Dr. Schwartz's service on the Board, his duties and compensation
under the Consulting Services Agreement are included within his duties and
considered part of his compensation for service as Chairman and Board member. To
compensate Dr. Schwartz for his services rendered to the Company during the
period of September 1997 through July 1998, the Consulting Services Agreement
provided for the payment to Dr. Schwartz of $50,000 and the grant of a fully
vested option to purchase 20,000 shares of the Company's Common Stock at $1.281,
the fair market value of the Company's Common Stock at the time of the grant.
Further, in the event that, at a time when he was not Chairman and member of the
Board of Trustees and the Consulting Services Agreement was in effect,
Dr. Schwartz materially participated in the negotiation and consummation of a
strategic collaboration transaction specified by the Company, he would have been
entitled to receive additional compensation equal to three percent of the
transaction consideration (as defined) when it was actually received by the
Company, such additional compensation payable half in cash and half in the form
of an option or warrant to purchase shares of the Company's Common Stock at $.20
per share, the number of shares being calculated based on the fair market value
of the Company's Common Stock ten days prior to the first public announcement of
the consummation of, the execution of a letter of intent for, or the existence
of discussions concerning the collaboration transaction. The Consulting Services
Agreement expired under its terms on July 27, 2000 and has not at this time been
renewed.
Dr. Weissman, a member of the Board of Directors, was retained in
September 1997 to serve as a consultant to the Company. Pursuant to his
Consulting Agreement, Dr. Weissman has agreed to provide consulting services to
the Company and serve on the Company's Scientific Advisory Board. The Company
agreed to pay Dr. Weissman $50,000 per year for his services and granted him an
option to purchase 500,000 shares of Common Stock for $5.25 per share, of which
31,250 shares vested at the date of grant and the remainder of which will vest
upon the occurrence of certain milestones related to the Company's stem cell
research program and in the event of certain changes of control. The Company
also agreed to nominate Dr. Weissman for a position on the Board of Directors.
The Consulting Agreement contains confidentiality, noncompetition, and
assignment of invention provisions and is for a term of ten years, subject to
earlier termination by the Company for cause or frustration of purpose and
earlier termination by Dr. Weissman for good reason. Dr. Weissman receives no
compensation as a member of the Board of Directors or for attending meetings of
the Board or its committees or meetings of the Company's Scientific Advisory
Board, but is reimbursed for reasonable expenses he incurs in attending such
meetings.
George W. Dunbar, Jr., Acting President and Chief Executive Officer of the
Company as of February 1, 2000, was a founding member of iCEO, LLC ("iCEO") in
September 1999 and has maintained this position through the present. Mr. Dunbar
joined the Company as Acting President of StemCells California, Inc., the
Company's wholly owned subsidiary, and he still holds this position currently.
Under the terms of two agreements dated as of November 17, 1999 and effective as
of November 8, 1999, the first between the Company and iCEO and the second
between the Company and Mr. Dunbar, Mr. Dunbar agreed to serve as Acting
President of StemCells California, Inc., the Company's wholly owned subsidiary.
Pursuant to the terms of his agreement with the Company, Mr. Dunbar is entitled
to an annual salary of $175,000 and was granted a stock option to purchase
48,000 shares of the Company's common stock that will vest at the rate of 4,000
shares per month commencing on December 6, 1999 and continuing until fully
vested so long as he continues to serve as Acting President. The vesting under
the option will be accelerated in the event of certain changes of control of the
Company. Additionally, the agreement provides that the Board will consider once
per
42
quarter the grant of an option for an additional 3,000 shares if it is
determined that the services rendered by Mr. Dunbar during the preceding quarter
exceeded expectations. Mr. Dunbar is an at-will employee of the Company and as
such may resign or be terminated with or without reason. There are no provisions
for any severance payments or other benefits upon Mr. Dunbar's resignation or
termination. Pursuant to the terms of the agreement between iCEO and the
Company, iCEO is entitled to receive annual compensation of $75,000 for so long
as Mr. Dunbar continues to serve in his role as Acting President of StemCells
California, Inc. or in any other interim role with the Company. In addition,
iCEO was granted a stock option to purchase 48,000 shares of the Company's
common stock that will vest at the rate of 4,000 shares per month commencing on
December 6, 1999 and continuing until fully vested so long as Mr. Dunbar
continues to serve as Acting President of StemCells California, Inc. or in any
other interim role with the Company. Additionally, the iCEO agreement provides
that the Board will consider once per quarter the grant of an option to iCEO for
an additional 3,000 shares if it is determined that the services rendered by
Mr. Dunbar during the preceding quarter exceeded expectations. As a member of
iCEO, Mr. Dunbar is entitled to receive, once annually, a distribution of his
assigned allocable percentage of net taxable income and net long-term gain with
respect to the pooled income and gain from shares of stock or exercised options
received by iCEO from its clients, including that received from the Company.
When Mr. Dunbar was appointed Acting President and Chief Executive Officer of
the Company effective as of February 1, 2000, there was no adjustment to his or
iCEO's compensation or stock options. In the event that during the period of his
service as Acting President and Chief Executive Officer or within 120 days from
the termination of such services, Mr. Dunbar was to become a permanent employee
of the Company in any capacity, the Company is obligated under the iCEO
agreement to pay iCEO a fee equal to one-third of the then targeted first year's
compensation for Mr. Dunbar.
In April 2000, the Company sold 750 shares of its 6% cumulative convertible
preferred stock plus a warrant to purchase 37,500 shares of the Company's common
stock to each of Dr. Weissman and Mr. Levin for $750,000 (i.e., a total of
$1,500,000), on terms more favorable to the Company than the Company was able to
obtain from outside investors. The shares are convertible at the option of the
holder into common stock at $3.77 per share. The holder of the preferred stock
have liquidation rights equal to their original investments plus accrued but
unpaid dividends. The investors would be entitled to make additional investments
in the Company on the same terms as those on which the Company completes
offerings of its securities with third parties within 6 months, if any such
offerings are completed. If offerings totaling at least $6 million are not
completed during the 6 months, the investors have the right to acquire up to a
total of 1,126 additional shares of convertible preferred stock that are
convertible at the option of the holder into common stock at $6.33 per share.
Any unconverted preferred stock will be converted into common stock on
April 13, 2002 in the case of the original stock issued and two years after the
first acquisition of any of the additional 1,126 shares, if any are acquired.
The warrants expire on April 13, 2005.
43
DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
Upon completion of this offering, the total amount of our authorized capital
stock will consist of 45,000,000 shares of common stock, $.01 par value per
share, and 1,000,000 shares of undesignated preferred stock, $.01 par value per
share, to be issued from time to time in one or more series, with such
designations, powers, preferences, rights, qualifications, limitations and
restrictions as our board of directors may determine. As of August 15, 2000, we
had outstanding 20,538,928 shares of common stock and 1,500 shares of 6%
cumulative convertible preferred stock.
As of August 15, 2000, we had 249 stockholders of record with respect to our
Common Stock and outstanding options to purchase 2,556,486 shares of our Common
Stock, of which 608,976 were currently exercisable. The following summary of
provisions of our capital stock describes all material provisions of, but does
not purport to be complete and is subject to, and qualified in its entirety by,
our restated certificate of incorporation and our amended and restated by-laws,
which are included as exhibits to the registration statement of which this
prospectus forms a part, and by the provisions of applicable law.
COMMON STOCK
The issued and outstanding shares of Common Stock are, and the shares of
Common Stock to be issued by us in connection with the offering will be, validly
issued, fully paid and nonassessable. Holders of our Common Stock are entitled
to any and all dividends as such dividends are declared by the Board of
Directors. This right is not cumulative, and no right shall accrue to holders of
Common Stock by reason of the fact that dividends on said shares were not
declared in any prior period. The shares of Common Stock are not convertible and
the holders thereof have no preemptive or subscription rights to purchase any of
our securities. Upon liquidation, dissolution or winding up of our company, the
holders of Common Stock are entitled to an amount equal to $1.00 per share,
subject to the rights of the holders of the Preferred Stock. After payment to
the holders of the Common Stock of the full preferential amounts due to them,
the holders of Common Stock have the right to share equally in the distribution
of the entire remaining assets of the company legally available for
distribution, subject to the rights of the holders of the Preferred Stock. Each
outstanding share of Common Stock is entitled to one vote on all matters
submitted to a vote of stockholders, such voting rights to be counted together
with all other shares of capital stock having voting powers and not as a
separate class, except as otherwise required by law.
Our Common Stock is traded on the Nasdaq National Market under the symbol
"STEM."
PREFERRED STOCK
Our board of directors may from time to time direct the issuance of shares
of preferred stock in series and may, at the time of issuance, determine the
rights, preferences and limitations of each series. Shares of preferred stock of
any one series shall be identical with each other in all respects except as to
the dates from which dividends shall accrue and/or cumulate. In the event of any
liquidation, dissolution or winding up of the company, the holders of
Undesignated Preferred Stock of each series are entitled to receive an amount
fixed by the company's Restated Certificate of Incorporation or by the
resolution(s) of the board of directors providing for the issuance of such
series.
The board of directors designated 2,626 shares, $.01 par value per share, as
6% cumulative convertible preferred stock, 1,500 shares of which are issued and
outstanding. The holders of these preferred shares are entitled to receive
cumulative dividends at a per share rate of 6% of the liquidation preference of
each share, per annum accruing daily and compounding quarterly, with priority
over payment of any dividend on common stock or any other class or series of
equity security
44
of the company. In the event of any liquidation, dissolution or winding up of
the company, the holders of the 6% cumulative convertible preferred stock are
entitled to receive in preference to holders of any other class or series of
equity securities, an amount equal to $1,000 per share plus (i) dividends added
to the liquidation preference, (ii) all accrued but unpaid dividends and
(iii) all "Monthly Delay Payments" under the Registration Rights Agreement. The
6% cumulative convertible preferred stock was issued pursuant to a Securities
Purchase Agreement. Each holder of the 6% cumulative convertible preferred stock
has at any time the right to convert any or all 6% cumulative convertible
preferred stock held by such holder into fully paid, validly issued and
nonassessable shares of common stock, $.01 par value per share, at which point
the rights of the holders of converted 6% cumulative convertible preferred stock
shall be treated as having become the owners of such common stock. The
affirmative vote of a majority in interest of the outstanding 6% cumulative
convertible preferred stock is required for (i) any amendment, modification or
repeal of the Certificate of Designations, Certificate of Incorporation or
by-laws that may amend or change or adversely affect any of the rights or
preference of the 6% cumulative convertible preferred stock; provided, however,
that the holders of 6% cumulative convertible preferred stock who are affiliates
of the company shall not participate in such votes, and such shares shall be
deemed not to be outstanding for purposes of such votes. We have no current
intention to issue any more of our unissued, authorized shares of undesignated
preferred stock. However, the issuance of any shares of undesignated preferred
stock in the future could adversely affect the rights of the holders of common
stock.
WARRANTS
As of August 31, 2000, we had outstanding warrants to purchase 296,487
shares of common stock at an average exercise price of $5.3876 per share,
subject to customary antidilution adjustment. The warrants were issued at
various times during this year to four different parties as described below.
As of April 13, 2000 (the "Effective Date"), we issued to each of Irving
Weissman and Mark Levin (each an "Investor") a warrant in connection with a
Securities Purchase Agreement dated as of April 13, 2000. Each warrant is to
purchase 37,500 shares of the Company's common stock ("Common Stock"), $0.01 par
value per share, at an exercise price of $6.58125 per share. Each warrant is
exercisable, in whole or in part, at any time on or after the Effective Date and
on or prior to the fifth year anniversary of the Effective Date. The exercise
price is subject to adjustment for subdivisions, combinations, stock dividends,
reorganizations and various other issuances. Under the terms of the warrants,
during any time that the warrant shares are not subject to an effective
registration statement, Investor may elect to receive a reduced number of
warrant shares in lieu of tendering the exercise price in cash. An Investor is
not entitled to any rights as a shareholder until he exercises the warrant. In
the event of a transaction by the Company in which more than 50% of the voting
power of the Company is disposed of, each Investor shall have the right to
purchase, by exercise of the warrant and payment of the exercise price, the kind
and amount of shares and other securities and property which he would have owned
or have been entitled to receive after the occurrence of the transaction had the
warrant been exercised immediately prior thereto, subject to the adjustment of
the exercise price as described in the warrant and above. The Company may, at
any time during the term of the warrant, reduce (but not increase) the exercise
price to any amount for any period of time deemed appropriate by the Board of
Directors of the Company. Under the terms of the warrants, the number of shares
of Common Stock that an Investor may acquire upon exercise cannot exceed a
number that, when added to the total number of shares of Common Stock Investor
is deemed to beneficially own, together with all shares of Common Stock deemed
beneficially owned by the Investor's affiliates (as defined by Rule 144 of the
Securities Act of 1933), would exceed 9.99% of the total issued and outstanding
shares of the Common Stock.
We issued a warrant to Millennium Partners L.P., or Millennium as of
August 3, 2000, which may entitle them to receive additional shares of common
stock on eight dates beginning six months from
45
that date and every three months thereafter On August 30, 2000 we issued a
second warrant to Millennium which may entitle them to receive additional shares
of common stock on eight dates beginning six months from the August 30, 2000
closing and every three months thereafter. The number of additional shares
Millennium will be entitled to receive on each date will be based on the number
of shares of common stock Millennium continues to hold on each date and the
market price of the Company's common stock over a period prior to each date. The
Company will have the right, under certain circumstances, to limit the number of
additional shares by purchasing part of the entitlement from Millennium. Each of
these warrants is exercisable, in whole or in part, at any time on or prior to
30 days after the last date which may entitle them to receive additional shares.
Each warrant is subject to adjustment for subdivisions, combinations, stock
dividends, reorganizations and various other issuances of common stock. During
any period of time that the shares of common stock underlying a warrant are not
subject to an effective registration statement, Millennium may elect to exercise
the warrant by receiving a reduced number of shares in lieu of tendering the
exercise price in cash. In the event of certain mergers, asset sales and tender
or exchange offers, Millennium shall have the right to purchase, by exercise of
the warrants and payment of the exercise price, the kind and amount of shares
and other securities and property it would have owned or have been entitled to
receive after the occurrence of the transaction had the warrant been exercised
immediately before the transaction, subject to the adjustment of the exercise
price as described in the warrant and above, or, if applicable, the right to
receive a substitute warrant after a merger or the right to tender the Warrant
for the consideration that would have been received if the warrant had been
exercised and the shares issued upon exercise had been tendered. Under the terms
of the warrants, the number of shares of common stock that Millennium may
acquire upon exercise cannot exceed a number that, when added to the total
number of shares of common stock Millennium is deemed to beneficially own,
together with all shares of common stock deemed beneficially owned by
Millennium's affiliates (as defined by Rule 144 of the Securities Act of 1933),
would exceed 9.99% of the total issued and outstanding shares of the Common
Stock.
Millennium also received a warrant on August 3, 2000 to purchase up to
101,587 shares of common stock at $4.725 per share, which is callable by
StemCells at $7.875 per underlying share. On August 30, 2000 the Company issued
an additional warrant to purchase up to 19,900 shares of common stock at $6.03
per share which is callable by StemCells at $10.05 per underlying share. These
warrants are referred to herein as the "Callable Warrant". Each Callable Warrant
is exercisable, in whole or in part, at any time on or after the Effective Date
and on or prior to the fifth year anniversary of the Effective Date. The
exercise price and number of shares are subject to adjustment for subdivisions,
combinations, stock dividends, reorganizations and various other issuances.
Under the terms of the Callable Warrants, during any time that the warrant
shares are not subject to an effective registration statement, Millennium may
elect to receive a reduced number of warrant shares in lieu of tendering the
exercise price in cash. Millennium is not entitled to any rights as a
shareholder until it exercises the warrant. In the event of certain mergers,
asset sales and tender or exchange offers, Millennium shall have the right to
purchase, by exercise of the Callable Warrant and payment of the exercise price,
the kind and amount of shares and other securities and property it would have
owned or have been entitled to receive after the occurrence of the transaction
had the warrant been exercised immediately prior thereto, subject to the
adjustment of the exercise price as described in the warrant and above, or, if
applicable, the right to receive a substitute warrant after a merger or the
right to tender the Warrant for the consideration that would have been received
if the warrant had been exercised and the shares issued upon exercise had been
tendered. Under the terms of the Callable Warrants, the number of shares of
Common Stock that Millennium may acquire upon exercise cannot exceed a number
that, when added to the total number of shares of Common Stock Millennium is
deemed to beneficially own, together with all shares of Common Stock deemed
beneficially owned by the Millennium's affiliates (as defined by Rule 144 of the
Securities Act of 1933), would exceed 9.99% of the total issued and outstanding
shares of the Common Stock.
46
On August 3, 2000 the Company issued a warrant to the May Davis Group and
four of its affiliates to purchase up to 100,000 shares of common stock at
$5.0375 per share. The warrant is exercisable, in whole or in part, at any time
on or after the Effective Date and on or prior to the fifth year anniversary of
the Effective Date. The exercise price and number of shares are subject to
adjustment for subdivisions, combinations, stock dividends, reorganizations and
various other issuances.
PROVISIONS OF DELAWARE LAW GOVERNING BUSINESS COMBINATIONS
We are subject to the "business combination" provisions of the Delaware
General Corporation Law. In general, such provisions prohibit a publicly held
Delaware corporation from engaging in various "business combination"
transactions with any "interested stockholder" for a period of three years after
the date of the transaction in which the person became an "interested
stockholder," unless:
- the transaction is approved by the board of directors prior to the date
the "interested stockholder" obtained such status;
- upon consummation of the transaction which resulted in the stockholder
becoming an "interested stockholder," the "interested stockholder" owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by (a) persons who are
directors and also officers and (b) employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- on or subsequent to such date the "business combination" is approved by
the board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the "interested
stockholder."
A "business combination" is defined to include mergers, asset sales and
other transactions resulting in financial benefit to a stockholder. In general,
an "interested stockholder" is a person who, together with affiliates and
associates, owns 15% or more of a corporation's voting stock or within three
years did own 15% or more of a corporation's voting stock. The statute could
prohibit or delay mergers or other takeover or change in control attempts.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our Common Stock is EquiServe Trust
Company, N.A.
47
PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds from the sale by the
Selling Stockholders of the Common Stock offered hereby.
The shares of the Common Stock offered hereby (the "Shares") may be sold
from time to time by the Selling Stockholders, or by pledgees, donees,
transferees or other successors in interest (i) to or through underwriters or
dealers, (ii) directly to one or more other purchasers, (iii) through agents on
a best-efforts basis, or (iv) through a combination of any such methods of sale.
Such sales may be made on one or more exchanges or in the over-the-counter
market, or otherwise at prices and at terms then prevailing or at prices related
to the then current market price, or in privately negotiated transactions. The
Shares may be sold by one or more of the following: (a) a block trade in which
the broker or dealer so engaged will attempt to sell the Shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus; (c) an exchange
distribution in accordance with the rules of such exchange; and (d) ordinary
brokerage transactions and transactions in which the broker solicits purchasers;
and (e) privately negotiated transactions without a broker or dealer. In
effecting sales, brokers or dealers engaged by the Selling Stockholders may
arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from Selling Stockholders in amounts to be
negotiated prior to the sale. In addition, any securities covered by this
Prospectus which qualify for sale pursuant to Rule 144 may be sold under
Rule 144 rather than pursuant to this Prospectus.
In addition, the Selling Stockholders may engage in short sales and other
transactions in the common stock or derivatives thereof, and may pledge, sell,
deliver or otherwise transfer the common stock offered under this prospectus in
connection with such transactions.
If we are notified by a Selling Stockholder that a material arrangement has
been entered into with a broker-dealer for the sale of shares through a block
trade, special offering, exchange distribution or secondary distribution, or a
purchase by a broker-dealer as a principal, a supplemental prospectus will be
filed listing:
- the name of each selling stockholder and of the participating
broker-dealer(s);
- the number of shares involved;
- the price at which such shares were sold;
- the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable; and
- other facts material to the transaction.
We have agreed to pay the cost of registering the shares covered by this
prospectus and the costs of preparing this prospectus and the registration
statement under which it is filed. We will provide the estimated total of these
expenses by amendment.
StemCells, Inc. and the Selling Stockholders have agreed to indemnify each
other against certain liabilities, including liabilities arising under the
Securities Act.
48
LEGAL MATTERS
The validity of the shares of our common stock offered hereby will be passed
upon for us by Ropes & Gray, Boston, Massachusetts.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1999 and 1998 and for each of the three
years in the period ended December 31, 1999, as set forth in their report. We
have included our financial statements in the prospectus and elsewhere in the
Registration Statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock to be sold in this offering.
This prospectus does not contain all the information included in the
registration statement and the related exhibits and schedules. You will find
additional information about us and our common stock in the registration
statement. The registration statement and the related exhibits and schedules may
be inspected and copied at the public reference facilities maintained by the SEC
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the public reference facilities of the SEC's Regional Offices: New York
Regional Office, Seven World Trade Center, Suite 1300, New York, New York 10048;
and Chicago Regional Office, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661. Copies of this material may also be obtained from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549
at prescribed rates. You can obtain information on the operation of the public
reference facilities by calling 1-800-SEC-0330. The SEC also maintains a site on
the World Wide Web (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants, including
us, that file electronically with the SEC. Statements made in this prospectus
about legal documents may not necessarily be complete and you should read the
documents which are filed as exhibits or schedules to the registration statement
or otherwise filed with the SEC.
49
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets at December 31, 1999 and 1998... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.......................... F-4
Consolidated Statements of Changes in Redeemable Common
Stock and Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997.......................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... F-8
Notes to Consolidated Financial Statements.................. F-9
Condensed Consolidated Balance Sheets at June 30, 2000 and
December 31, 1999 (unaudited)............................. F-24
Condensed Consolidated Statements of Operations for the six
months ended June 30, 2000 and June 30, 1999
(unaudited)............................................... F-25
Condensed Statements of Cash Flows for the six months ended
June 30, 2000 and June 30, 1999 (unaudited)............... F-26
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... F-27
Additional schedules are not provided either because they are inapplicable
or because the required information is included in the accompanying financial
statements.
F-1
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
StemCells, Inc., (formerly CytoTherapeutics, Inc.)
We have audited the accompanying consolidated balance sheets of
StemCells, Inc. (formerly CytoTherapeutics, Inc.) as of December 31, 1999 and
1998, and the related consolidated statements of operations, changes in
redeemable common stock and stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
StemCells, Inc. (formerly CytoTherapeutics, Inc.) at December 31, 1999 and 1998,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Providence, Rhode Island
April 14, 2000
F-2
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------
1999 1998
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,760,064 $ 7,864,788
Marketable securities..................................... -- 9,520,939
Accrued interest receivable............................... 42,212 206,609
Technology sale receivable................................ 3,000,000 --
Other current assets...................................... 1,168,579 841,674
------------- -------------
Total current assets........................................ 8,970,855 18,434,010
Property, plant and equipment, net.......................... 5,251,376 8,356,009
Other assets, net........................................... 1,858,768 6,075,663
------------- -------------
Total assets................................................ $ 16,080,999 $ 32,865,682
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 631,315 $ 710,622
Accrued expenses.......................................... 2,905,068 1,020,119
Deferred revenue.......................................... -- 2,500,000
Current maturities of capitalized lease obligations....... 324,167 317,083
Current maturities of long-term debt...................... -- 1,000,000
------------- -------------
Total current liabilities................................... 3,860,550 5,547,824
Capitalized lease obligations, less current maturities...... 2,937,083 3,261,667
Long-term debt, less current maturities..................... 500,000
Deposits.................................................... 26,000 --
Deferred Rent............................................... 502,353 222,673
Commitments and contingencies
Redeemable common stock, $.01 par value; 524,337 shares
issued and outstanding at December 31, 1999 and 1998...... 5,248,610 5,248,610
Common stock to be issued................................... -- 187,500
Stockholders' equity:
Convertible preferred stock, $.01 par value; 1,000,000
shares authorized; no shares issued and outstanding..... -- --
Common stock, $.01 par value; 45,000,000 shares
authorized; 18,635,565 and 17,800,323 shares issued and
outstanding at December 31, 1999 and 1998,
respectively............................................ 186,355 178,003
Additional paid-in capital................................ 123,917,758 122,861,606
Accumulated deficit....................................... (119,372,710) (103,664,084)
Unrealized losses on marketable securities................ -- (5,198)
------------- -------------
Accumulated other comprehensive loss...................... (119,372,710) (103,669,282)
------------- -------------
Deferred compensation..................................... (1,225,000) (1,472,919)
------------- -------------
Total stockholders' equity.................................. 3,506,403 17,897,408
------------- -------------
Total liabilities and stockholders' equity.................. $ 16,080,999 $ 32,865,682
============= =============
See accompanying notes to consolidated financial statements.
F-3
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
Revenue from collaborative agreements............... $ 5,021,707 $ 8,803,163 $ 10,617,443
Operating expenses:
Research and development.......................... 9,984,027 17,658,530 18,603,523
Acquired research and development................. -- -- 8,343,684
General and administrative........................ 4,927,303 4,602,758 6,158,410
Encapsulated Cell Therapy Wind down and Corporate
Relocation...................................... 6,047,806 -- --
------------ ------------ ------------
20,959,136 22,261,288 33,105,617
------------ ------------ ------------
Loss from operations................................ (15,937,429) (13,458,125) (22,488,174)
Other income (expense):
Interest income................................... 564,006 1,253,781 1,931,260
Interest expense.................................. (335,203) (472,400) (437,991)
Gain on partial sale of Modex..................... -- -- 3,386,808
Loss on sale/leaseback............................ -- -- (342,014)
Loss on equity investment......................... -- -- (105,931)
Other income (expense)............................ -- 48,914 (57,538)
------------ ------------ ------------
228,803 830,295 4,374,594
------------ ------------ ------------
Net loss............................................ $(15,708,626) $(12,627,830) $(18,113,580)
============ ============ ============
Basic and diluted net loss per share................ $ (.84) $ (.69) $ (1.08)
============ ============ ============
Shares used in computing basic and diluted net loss
per share......................................... 18,705,838 18,290,548 16,704,144
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY
REDEEMABLE
COMMON STOCK COMMON STOCK ADDITIONAL
---------------------- --------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
-------- ----------- ---------- -------- ------------ -------------
Balances, December 31, 1996........ 815,065 $ 8,158,798 15,614,333 $156,144 $107,649,659 $ (72,922,674)
Issuance of common stock........... -- -- 307,548 3,074 1,552,432 --
Issuance of common stock under the
stock purchase plan.............. -- -- 31,822 319 180,103 --
Deferred compensation recorded in
connection with the granting of
stock options.................... -- -- -- -- 1,750,000 --
Common stock issued pursuant to
employee benefit plan............ -- -- 25,588 256 169,196 --
Issuance of common
stock--StemCells................. -- -- 1,219,381 12,194 7,381,206 --
Redeemable common stock lapses..... (257,311) (2,575,688) 257,311 2,573 2,573,115 --
Exercise of stock options.......... -- -- 75,237 752 244,427 --
Deferred compensation--amortization
and cancellations -- -- (5,000) (50) (27,294) --
Change in unrealized losses on
marketable securities............ -- -- -- -- -- --
Change in cumulative translation
adjustment....................... -- -- -- -- -- --
Net loss........................... -- -- -- -- -- (18,113,580)
Comprehensive loss
-------- ----------- ---------- -------- ------------ -------------
Balances, December 31, 1997........ 557,754 $ 5,583,110 17,526,220 $175,262 $121,472,844 $ (91,036,254)
Issuance of common stock........... -- -- -- -- -- --
Issuance of common stock under the
stock purchase plan.............. -- -- 43,542 436 83,622
Deferred compensation recorded in
connection with the granting of
stock options.................... -- -- -- -- -- --
Common stock issued pursuant to
employee benefit plan............ -- -- 84,812 848 143,025 --
Issuance of common
stock--StemCells................. -- -- 101,320 1,013 505,587 --
Redeemable common stock lapses..... (33,417) (334,500) 33,417 334 334,166 --
Exercise of stock options.......... -- -- 11,012 110 1,254 --
Deferred compensation--amortization
and cancellations................ -- -- -- -- 321,108 --
Change in unrealized losses on
marketable securities............ -- -- -- -- -- --
Net loss........................... -- -- -- -- -- (12,627,830)
Comprehensive loss.................
-------- ----------- ---------- -------- ------------ -------------
Balances, December 31, 1998........ 524,337 $ 5,248,610 17,800,323 $178,003 $122,861,606 $(103,664,084)
Issuance of common stock........... -- -- 196,213 1,962 318,221 --
Issuance of common stock under the
stock purchase plan.............. -- -- 57,398 574 41,619
Deferred compensation recorded in
connection with the granting of
stock options.................... -- -- -- -- -- --
Common stock issued pursuant to
employee benefit plan............ -- -- 90,798 908 102,502 --
Issuance of common
stock--StemCells................. -- -- -- -- -- --
Redeemable common stock lapses..... -- -- -- --
Exercise of stock options.......... -- -- 490,833 4,908 513,534 --
Deferred compensation--amortization
and cancellations................ -- -- -- -- 80,276 --
Change in unrealized losses on
marketable securities............ -- -- -- -- -- --
Net loss........................... -- -- -- -- -- (15,708,626)
Comprehensive loss.................
-------- ----------- ---------- -------- ------------ -------------
Balances, December 31, 1999........ 524,337 $ 5,248,610 18,635,565 $186,355 $123,917,758 $(119,372,710)
======== =========== ========== ======== ============ =============
OTHER COMPREHENSIVE
INCOME
---------------------------
UNREALIZED
GAINS
(LOSSES) CUMULATIVE TOTAL
ON MARKETABLE TRANSLATION DEFERRED STOCKHOLDERS'
SECURITIES ADJUSTMENTS COMPENSATION EQUITY
------------- ----------- ------------- -------------
Balances, December 31, 1996........ $ 14,760 $(60,416) $ (90,118) $ 34,747,355
Issuance of common stock........... -- -- -- 1,555,506
Issuance of common stock under the
stock purchase plan.............. -- -- -- 180,422
Deferred compensation recorded in
connection with the granting of
stock options.................... -- -- (1,750,000) --
Common stock issued pursuant to
employee benefit plan............ -- -- -- 169,452
Issuance of common
stock--StemCells................. -- -- -- 7,393,400
Redeemable common stock lapses..... -- -- -- 2,575,688
Exercise of stock options.......... -- -- -- 245,179
Deferred compensation--amortization
and cancellations -- -- 137,298 109,954
Change in unrealized losses on
marketable securities............ (23,637) -- -- (23,637)
Change in cumulative translation
adjustment....................... -- 60,416 -- 60,416
Net loss........................... -- -- -- (18,113,580)
Comprehensive loss (18,076,081)
-------- -------- ----------- ------------
Balances, December 31, 1997........ $ (8,877) $ -- $(1,702,820) $ 28,900,155
Issuance of common stock........... -- -- -- --
Issuance of common stock under the
stock purchase plan.............. -- 84,058
Deferred compensation recorded in
connection with the granting of
stock options.................... -- -- -- --
Common stock issued pursuant to
employee benefit plan............ -- -- -- 143,873
Issuance of common
stock--StemCells................. -- -- -- 506,600
Redeemable common stock lapses..... -- -- -- 334,500
Exercise of stock options.......... -- -- -- 1,364
Deferred compensation--amortization
and cancellations................ -- -- 229,901 551,009
Change in unrealized losses on
marketable securities............ 3,679 -- -- 3,679
Net loss........................... -- -- -- (12,627,830)
Comprehensive loss................. (12,624,151)
-------- -------- ----------- ------------
Balances, December 31, 1998........ $ (5,198) $ -- $(1,472,919) $ 17,897,408
Issuance of common stock........... -- -- -- 320,183
Issuance of common stock under the
stock purchase plan.............. -- 42,193
Deferred compensation recorded in
connection with the granting of
stock options.................... -- -- -- --
Common stock issued pursuant to
employee benefit plan............ -- -- -- 103,410
Issuance of common
stock--StemCells................. -- -- -- --
Redeemable common stock lapses..... --
Exercise of stock options.......... -- -- -- 518,442
Deferred compensation--amortization
and cancellations................ -- -- 247,919 328,195
Change in unrealized losses on
marketable securities............ 5,198 -- -- 5,198
Net loss........................... -- -- -- (15,708,626)
Comprehensive loss................. -- (15,703,428)
-------- -------- ----------- ------------
Balances, December 31, 1999........ $ -- $ -- $(1,225,000) $ 3,506,403
======== ======== =========== ============
See accompanying notes to consolidated financial statements.
F-5
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY (CONTINUED)
UNREALIZED
REDEEMABLE GAINS
COMMON STOCK COMMON STOCK ADDITIONAL (LOSSES)
--------------------- --------------------- PAID-IN ACCUMULATED ON MARKETABLE DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SECURITIES COMPENSATION
-------- ---------- ---------- -------- ------------ ------------- ------------- ------------
Issuance of common
stock.............. -- -- 196,213 $ 1,962 $ 318,221 -- -- --
Issuance of common
stock under the
stock purchase
plan............... -- -- 57,398 574 41,619 42,193
Deferred compensation
recorded in
connection with the
granting of stock
options............ -- -- -- -- -- -- -- --
Common stock issued
pursuant to
employee benefit
plan............... -- -- 90,798 908 102,502 -- -- --
Issuance of common
stock--StemCells... -- -- -- -- -- -- -- --
Redeemable common
stock lapses....... -- -- -- --
Exercise of stock
options............ -- -- 490,833 4,908 513,534 -- -- --
Deferred
compensation--
amortization and
cancellations...... -- -- -- -- 80,276 -- -- 247,919
Change in unrealized
losses on
marketable
securities......... -- -- -- -- -- -- 5,198 --
Net loss............. -- -- -- -- -- (15,708,626) -- --
Comprehensive loss...
------- ---------- ---------- -------- ------------ ------------- ------ -----------
Balances, December
31, 1999........... 524,337 $5,248,610 18,635,565 $186,355 $123,917,758 $(119,372,710) $ -- $(1,225,000)
======= ========== ========== ======== ============ ============= ====== ===========
TOTAL
STOCKHOLDERS'
EQUITY
-------------
Issuance of common
stock.............. $ 320,183
Issuance of common
stock under the
stock purchase
plan...............
Deferred compensation
recorded in
connection with the
granting of stock
options............ --
Common stock issued
pursuant to
employee benefit
plan............... 103,410
Issuance of common
stock--StemCells... --
Redeemable common
stock lapses.......
Exercise of stock
options............ 518,442
Deferred
compensation--
amortization and
cancellations...... 328,195
Change in unrealized
losses on
marketable
securities......... 5,198
Net loss............. (15,708,626)
Comprehensive loss... (15,703,428)
-----------
Balances, December
31, 1999........... $ 3,506,403
===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
Cash flows from operating Activities:
Net loss................................................. $(15,708,626) $(12,627,830) $(18,113,580)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 1,717,975 2,244,146 1,968,234
Acquired research and development...................... -- 551,009 8,343,684
Amortization of deferred compensation.................. 328,195 -- 109,954
Other non-cash charges................................. 320,183 410,173 105,931
Gain on investment..................................... -- -- (3,386,808)
Loss on sale of fixed assets........................... 1,117,286 -- 413,856
Loss on sale of intangibles............................ 440,486
Changes in operating assets and liabilities:
Accrued interest receivable.......................... 164,397 346,577 100,004
Other current assets................................. 276,940 (265,665) (232,604)
Accounts payable and accrued expenses................ 1,644,142 (2,378,613) (1,233,501)
Deferred rent........................................ 279,680 -- --
Deferred revenue..................................... (2,500,000) 2,483,856 (1,842,948)
------------ ------------ ------------
Net cash used in operating activities.................... (12,489,342) (9,236,347) (13,767,778)
Cash flows from investing activities:
Proceeds from sale of Modex, net of cash disposed........ -- -- 2,958,199
Purchases of marketable securities....................... (4,397,676) (18,982,387) (14,182,521)
Proceeds from sales of marketable securities............. 13,923,813 22,573,625 23,736,242
Purchases of property, plant and equipment............... (192,747) (2,153,525) (7,710,126)
Proceeds on sale of fixed assets......................... 746,448 -- 8,003,926
Purchase of other investment............................. -- -- (250,000)
Acquisition of other assets.............................. (552,251) (400,219) (1,599,418)
Disposal of other assets................................. 440,485 -- --
Acquisition of StemCells assets.......................... -- -- (640,490)
Advance to Cognetix...................................... -- -- (250,000)
Repayment from Cognetix.................................. -- -- 250,000
------------ ------------ ------------
Net cash provided by investing activities................ 9,968,073 1,037,494 10,315,812
Cash flows from financing activities:
Proceeds from issuance of redeemable common stock........ -- -- --
Proceeds from issuance of common stock................... 145,603 227,931 1,905,380
Proceeds from the exercise of stock options and
warrants............................................... 518,442 1,364 245,179
Proceeds from debt financings............................ -- 1,259,300 --
Repayments of debt and lease obligations................. (1,817,500) (1,366,655) (2,496,849)
------------ ------------ ------------
Net cash provided by (used in) financing activities...... (1,153,455) 121,940 (346,290)
Effect of exchange rate changes on cash and cash
equivalents............................................ -- -- (181,627)
------------ ------------ ------------
Decrease in cash and cash equivalents.................... (3,104,724) (8,076,913) (3,979,883)
Cash and cash equivalents, January 1..................... 7,864,788 15,941,701 19,921,584
------------ ------------ ------------
Cash and cash equivalents, December 31................... $ 4,760,064 $ 7,864,788 $ 15,941,701
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid........................................ $ 335,203 $ 444,047 $ 436,461
See accompanying notes to consolidated financial statements.
F-7
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. NATURE OF BUSINESS
StemCells, Inc. (formerly CytoTherapeutics, Inc.) (the "Company") is a
biopharmaceutical company engaged in the development of novel stem cell
therapies designed to treat human diseases and disorders.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include accounts of the Company and
StemCells California, Inc., a wholly owned subsidiary. Significant intercompany
accounts have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents include funds held in investments with original maturities
of three months or less when purchased. The Company's policy regarding selection
of investments, pending their use, is to ensure safety, liquidity, and capital
reservation while obtaining a reasonable rate of return. Marketable securities
consist of investments in agencies of the U.S. government, investment grade
corporate notes and money market funds. The fair values for marketable
securities are based on quoted market prices.
The Company determines the appropriate classification of cash equivalents
and marketable securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The Company classifies such holdings
as available-for-sale securities, which are carried at fair value, with
unrealized gains and losses reported as a separate component of stockholders'
equity.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including that held under capitalized lease
obligations, is stated at cost and depreciated using the straight-line method
over the estimated life of the respective asset, as follows:
Building and improvements................................... 3 -- 15 years
Machinery and equipment..................................... 3 -- 10 years
Furniture and fixtures...................................... 3 -- 10 years
PATENT COSTS
The Company capitalizes certain patent costs related to patent applications.
Accumulated costs are amortized over the estimated economic life of the patents,
not to exceed 17 years, using the straight-line method, commencing at the time
the patent is issued. Costs related to patent applications
F-8
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
are written off to expense at the time such patents are deemed to have no
continuing value. At December 31, 1999 and 1998, total costs capitalized were
$718,000 and $4,285,000 and the related accumulated amortization were $9,000 and
$347,000, respectively. Patent expense totaled $539,000, $3,000, and $365,000 in
1999, 1998 and 1997, respectively.
In December 1999, the Company sold its Encapsulated Cell Technology ("ECT")
to Neurotech, S.A. for an initial payment of $3,000,000, royalties on future
product sales, and a portion of certain Neurotech revenues from third parties in
return for the assignment to Neurotech of intellectual property assets relating
to ECT. In addition, the Company retained certain non-exclusive rights to use
ECT in combination with its proprietary stem cell technology and in the field of
vaccines for prevention and treatment of infectious diseases. The patent
portfolio that was sold had a net book value of $3,180,000.
STOCK BASED COMPENSATION
The Company grants qualified stock options for a fixed number of shares to
employees with an exercise price equal to the fair market value of the shares at
the date of grant. The Company accounts for stock option grants in accordance
with APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and,
accordingly, recognizes no compensation expense for qualified stock option
grants.
For certain non-qualified stock options granted, the Company recognizes as
compensation expense the excess of the deemed fair value of the common stock
issuable upon exercise of such options over the aggregate exercise price of such
options. The compensation is amortized over the vesting period of each option or
the recipient's term of employment, if shorter.
INCOME TAXES
The liability method is used to account for income taxes. Deferred tax
assets and liabilities are determined based on differences between financial
reporting and income tax bases of assets and liabilities as well as net
operating loss carry forwards and are measured using the enacted tax rates and
laws that are expected to be in effect when the differences reverse. Deferred
tax assets may be reduced by a valuation allowance to reflect the uncertainty
associated with their ultimate realization.
REVENUE FROM COLLABORATIVE AGREEMENTS
Revenues from collaborative agreements are recognized as earned upon either
the incurring of reimbursable expenses or the achievement of certain milestones.
Payments received in advance of research performed are designated as deferred
revenue.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares from stock options and
warrants are excluded, as their effect is antidilutive.
F-9
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Securities Exchange Commission's recently issued Staff Accounting
Bulletin No. 101 provides guidance on revenue recognition that may impact the
Company's future reporting relative to revenues received from collaborative and
similar agreements.
3. SALE OF 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK
On April 13, 2000, the Company completed arrangements to sell 1,500 shares
of 6% cumulative convertible preferred stock plus a warrant for 75,000 shares of
the Company's common stock to two members of its Board of Directors for
$1,500,000, on terms more favorable to the Company than it was then able to
obtain from outside investors. The shares are convertible at the option of the
holders into common stock at $3.77 per share. The conversion price may be below
the trading market price of the stock at the time of conversion. The holders of
the preferred stock have liquidation rights equal to their original investment
plus accrued but unpaid dividends. The investors would be entitled to make
additional investments in the Company on the same terms as those on which the
Company completes offerings of its securities with third parties within
6 months, if any such offerings are completed. If offerings totaling at least
$6 million are not completed during the 6 months, the investors have the right
to acquire up to 1,126 additional shares of convertible preferred stock at $6.33
per share. Any unconverted preferred stock is converted, at the applicable
conversion price, on April 13, 2002 in the case of the original stock and two
years after the first acquisition of any of the additional 1,126 shares, if any
are acquired. The warrant expires on April 13, 2005.
4. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
Wind-down expenses totaled $6,048,000 for the year ended December 31, 1999;
no such expenses were incurred in 1998 and 1997. These expenses relate to the
wind-down of the Company's encapsulated cell technology research and development
program and the Company's other Rhode Island operations, the transfer of the
Company's corporate headquarters to Sunnyvale, California and an accrual for the
Company's estimate of the costs of settlement of a 1989 funding agreement with
the Rhode Island Partnership for Science and Technology ("RIPSAT") associated
with the Company's pilot manufacturing facility.
5. STEMCELLS CALIFORNIA, INC.
In September 1997, a merger of a wholly owned subsidiary of the Company and
StemCells California, Inc. was completed in the form of a purchase. Through the
merger, the Company acquired StemCells for a purchase rice totaling
approximately $9,475,000, consisting of 1,320,691 shares of the Company's common
stock and options and warrants for the purchase of 259,296 common shares at
nominal consideration, valued at $7,900,000 in the aggregate, the assumption of
certain liabilities of $934,000 and transaction costs of $641,000. The purchase
price was allocated, through a valuation, to license agreements valued at
$1,131,000 to be amortized over three years and acquired research and
development of $8,344,000, which was expensed. As part of the acquisition of
StemCells, Richard M. Rose, M.D., became President, Chief Executive Officer and
director of the Company and Dr. Irving Weissman became a director of the
Company.
F-10
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
5. STEMCELLS CALIFORNIA, INC. (CONTINUED)
Upon consummation of the merger, the Company entered into consulting
arrangements with the principal scientific founders of StemCells: Dr. Irving
Weissman, Dr. Fred H. Gage and Dr. David Anderson. Additionally, in connection
with the merger, the Company was granted an option by the former shareholders of
StemCells to repurchase 500,000 of the Company's shares of Common Stock
exchanged for StemCells shares, upon the occurrence of certain events.
To attract and retain Drs. Rose, Weissman, Gage and Anderson, and to
expedite the progress of the Company's stem cell program, the Company awarded
these individuals options to acquire a total of approximately 1.6 million shares
of the Company's common stock, at an exercise price of $5.25 per share, the
quoted market price at the grant date; approximately 100,000 of these options
were exercisable immediately, 1,031,000 of these options vest and become
exercisable only upon the achievement of specified milestones related to the
Company's stem cell development program and the remaining 469,000 options vest
over eight years. In connection with the 469,000 options issued to a
non-employee, Dr. Anderson, the Company recorded deferred compensation of
$1,750,000, the fair value of such options at the date of grant, which will be
amortized over an eight-year period. If the milestones specified relating to the
1,031,000 option grant are achieved, at that time the Company will record
compensation expense for the excess of the quoted market price of the common
stock over the exercise price of $5.25 per share for 562,000 options and the
fair market value for 469,000 of such options determined using the Black-Scholes
method. The Company has also designated a pool of 400,000 options to be granted
to persons in a position to make a significant contribution to the success of
the stem cell program.
Stem cell research will be conducted pursuant to the provisions of an
agreement between the Company and Drs. Weissman and Gage providing for a
two-year research plan. If the goals of the research plan are accomplished, the
Company has agreed to fund continuing stem cell research. Increases in stem
cells research funding of not more than 25% a year will be funded by the Company
as long as the goals of the research plan are being met. However, the Company
will retain the option of (i) ceasing or reducing neural stem cell research even
if all research plan goals are met, but will be required to accelerate the
vesting of all still-achievable performance based stock options, and
(ii) ceasing or reducing non-neural stem cell research even if all plan goals
are being met by affording the scientific research founders the opportunity to
continue development of the non-neural stem cell research by licensing the
technology related to such research to the founders in exchange for a payment to
the Company equal to all prior Company funding for such research, plus royalty
payments.
6. MODEX
In October 1997, the Company completed a series of transactions, which
resulted in the establishment of its previously 50%-owned Swiss subsidiary,
Modex Therapeutiques, S.A., (Modex) as an independent company. In the
transactions, the Company reduced its ownership interest from 50% to
approximately 25% in exchange for $4 million cash and elimination of its prior
contingent obligation to contribute an additional Sfr 2.4 million (approximately
$1.7 million) to Modex in July 1998. In the transactions, all of the put and
call arrangements between the Company and other stockholders of Modex were
eliminated and the Company forgave $463,000 due from Modex to the Company. The
Company recorded a gain on the transactions of $3,387,000.
F-11
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
6. MODEX (CONTINUED)
In April 1998, Modex completed an additional equity offering, in which the
Company did not participate. This resulted in a reduction in the Company's
ownership to less than 20% ownership; therefore, the Company accounts for this
investment under the cost method.
The pre-existing royalty-bearing Cross License Agreement between the Company
and Modex was assigned by the Company to Neurotech S.A., a privately held French
company, as part of the sale of the intellectual property assets related to the
Company's encapsulated cell therapy technology to Neurotech. Under the terms of
the sale to Neurotech, the Company will receive a portion of revenues Neurotech
receives from Modex under the Cross License Agreement.
7. MARKETABLE SECURITIES
During 1999, the Company sold all of its remaining marketable equitable
securities. At December 31, 1999, all of the Company's available funds were held
in cash and cash equivalents. The following is a summary of available-for-sale
securities held at December 31, 1998:
DECEMBER 31, 1998
---------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST LOSSES GAINS FAIR VALUE
----------- ---------- ---------- -----------
U.S. government securities..................... $ 1,500,994 $1,720 $ (504) $ 1,502,210
U.S. corporate securities...................... 9,225,095 3,244 (9,658) 9,218,681
----------- ------ -------- -----------
Total debt securities.......................... $10,726,089 $4,964 $(10,162) 10,720,891
=========== ====== ========
Debt securities included in cash and cash
equivalents.................................. (1,199,952)
===========
Debt securities included in marketable
securities................................... $ 9,520,939
===========
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
DECEMBER 31,
------------------------
1999 1998
---------- -----------
Building and improvements........................... $5,666,987 $ 5,665,077
Machinery and equipment............................. 3,144,107 9,887,251
Furniture and fixtures.............................. 219,260 869,831
---------- -----------
9,030,354 16,422,159
Less accumulated depreciation and amortization...... 3,778,978 8,066,150
---------- -----------
$5,251,376 $ 8,356,009
========== ===========
Depreciation and amortization expense was $1,436,000, $1,720,000, and
$1,778,000 for the years ending December 31, 1999, 1998 and 1997, respectively.
As part of the Company's restructuring of its operations, sale of its
encapsulated cell technology ("ECT"), and relocation of its corporate
headquarters to Sunnyvale, California, the Company identified
F-12
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
8. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
fixed assets associated with the ECT or otherwise no longer needed. In December
of 1999, the Company disposed of these excess fixed assets, realizing proceeds
of approximately $746,000. These assets had a net book value of approximately
$1,063,000 after a third quarter write-down of $800,000.
Certain property, plant and equipment have been acquired under capitalized
lease obligations. These assets totaled $5,827,000 and $6,587,000, at
December 31, 1999 and 1998, respectively, with related accumulated amortization
of $2,747,000 and $2,860,000 at December 31, 1999 and 1998, respectively.
9. OTHER ASSETS
Other assets are as follows:
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
Patents, net......................................... $ 708,823 $3,938,755
License agreements, net.............................. 282,750 659,750
Security deposit--building lease..................... 750,000 750,000
Restricted cash...................................... -- 603,467
Deferred financing costs, net........................ 117,195 123,701
---------- ----------
$1,858,768 $6,075,663
========== ==========
At December 31, 1999 and 1998, accumulated amortization was $857,000 and
$818,000, respectively, for patents and license agreements.
10. ACCRUED EXPENSES
Accrued expenses are as follows:
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
External services.................................... $2,031,961 $ 412,253
Employee compensation................................ 306,342 262,679
Collaborative research............................... 222,140 196,505
Other................................................ 344,625 148,682
---------- ----------
$2,905,068 $1,020,119
========== ==========
11. LEASES
The Company has undertaken direct financing transactions with the State of
Rhode Island and received proceeds from the issuance of industrial revenue bonds
totaling $5,000,000 to finance the construction of its pilot manufacturing
facility. The related leases are structured such that lease payments will fully
fund all semiannual interest payments and annual principal payments through
maturity in August 2014. Fixed interest rates vary with the respective bonds'
maturities, ranging from
F-13
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
11. LEASES (CONTINUED)
5.1% to 9.5%. The bonds contain certain restrictive covenants which limit, among
other things, the payment of cash dividends and the sale of the related assets.
In addition, the Company was required to maintain a debt service reserve until
December 1999. On March 3, 2000 the Company entered into a settlement agreement
with RIPSAT, the Rhode Island Industrial Recreational Building Authority
("IRBA") and the Rhode Island Industrial Facilities Corporation ("RIIFC"). The
Company agreed to pay RIPSAT $1,172,000 in full satisfaction of all obligations
of the Company to RIPSAT under the Funding Agreement dated as of June 22, 1989.
On execution and delivery of this Agreement, IRBA agreed to return to the
Company the full amount of the Company's debt serve reserve ("Reserve Funds"),
approximately $610,000 of principal and interest, relating to the bonds the
Company has with IRBA and RIIFC. In order to avoid the loss of interest on the
Reserve Funds due to early termination of certain investments, the parties
agreed that the Company would render a net payment to RIPSAT in the amount of
approximately $562,000.
In 1997, the Company completed construction of a new headquarters and
laboratory facility. In November 1997, the Company entered into sale and
leaseback agreements with a real estate investment trust. Under the terms of
these agreements, the Company sold its new facility for $8,000,000, incurring a
$342,000 loss on the sale. The Company simultaneously entered into a
fifteen-year lease for the facility. The lease agreement calls for minimum rent
of $750,000 for the first five years, $937,500 for years six to ten, $1,171,900
for years eleven to fourteen and $1,465,000 in year fifteen, with a $750,000
security deposit held for the term of the lease. The Company is recognizing rent
expense on a straight line basis. At December 31, 1999, the Company had incurred
$426,790 in deferred rent expense.
Future minimum capitalized lease obligations with non-cancelable terms in
excess of one year at December 31, 1999, are as follows:
2000........................................................ $ 606,268
2001........................................................ 589,217
2002........................................................ 519,719
2003........................................................ 436,909
2004........................................................ 425,713
Thereafter.................................................. 2,577,826
----------
Total minimum lease payments................................ 5,302,407
Less amounts representing interest.......................... 2,041,157
----------
Present value of minimum lease payments..................... 3,261,250
Less current maturities..................................... 324,167
----------
Capitalized lease obligations, less current maturities...... $2,937,083
==========
Rent expense for the years ended December 31, 1999, 1998 and 1997, was
$947,000, $1,052,000 and $499,000, respectively.
F-14
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
12. LONG-TERM DEBT
Long-term debt is as follows:
DECEMBER 31,
---------------------
1999 1998
-------- ----------
Term note payable, interest at the prime rate plus 1/2%
(8.75% at December 31, 1998), principal payments commence
in August 1998, due ratably through May 2000; secured by
certain equipment (prepaid during 1999)................... $ -- $1,500,000
Current maturities of long-term debt........................ -- 1,000,000
---- ----------
Long-term debt, less current maturities..................... -- $ 500,000
==== ==========
13. REDEEMABLE COMMON STOCK
In November 1996, the Company signed certain collaborative development and
licensing agreements with Genentech, Inc, including one under which Genentech
purchased 829,171 shares of redeemable common stock for $8.3 million to fund
development of products to treat Parkinson's disease. The Agreement also
provided that Genentech had the right, at its discretion, to terminate the
Parkinson's program at specified milestones in the program, and that if the
program were terminated, Genentech had the right to require the Company to
repurchase from Genentech the shares of the Company's common stock having a
value equal to the amount by which the $8.3 million exceeded the expenses
incurred by the Company in connection with such studies by more than
$1 million, based upon the share price paid by Genentech. Accordingly, the
common stock is classified as redeemable common stock until such time as the
related funds are expended. At December 31, 1998, $3,051,000 had been spent on
the collaboration with Genentech and, accordingly, the Company has reclassified
those common shares and related value to stockholders' equity. On May 21, 1998,
Genentech exercised its right to terminate the collaboration and negotiations
ensued with respect to the amount of redeemable common stock to be redeemed in
accordance with the agreement and the method of such redemption. In March 2000,
the Company reached a settlement of this matter with Genentech. Under the
settlement agreement, Genentech released the Company from any obligation to
redeem any shares of the Company's Common Stock held by Genentech. Accordingly,
the Company reclassified the amount recorded at December 31, 1999 as Redeemable
Common Stock ($5,248,000) to Stockholders' Equity in March 2000. The Company and
Genentech also agreed that all of the agreements between them were terminated
and that neither had any claim to the intellectual property of the other.
14. COMMON STOCK TO BE ISSUED
In 1998, the Company entered into an agreement with a Company advisor, under
which the advisor prepared a strategic and business overview and provided
related implementation support for the Company. The advisor agreed to accept
cash and the Company's common stock as partial payment for its services. In
1999, the Company issued the $187,500 of common stock due to the advisor.
F-15
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
15. STOCKHOLDERS' EQUITY
STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
The Company has adopted several stock plans that provide for the issuance of
incentive and nonqualified stock options, performance awards and stock
appreciation rights, at prices to be determined by the Board of Directors, as
well as the purchase of Common Stock under an employee stock purchase plan at a
discount to the market price. In the case of incentive stock options, such price
will not be less than the fair market value on the date of grant. Options
generally vest ratably over four years and are exercisable for ten years from
the date of grant or within three months of termination. At December 31, 1999,
the Company had reserved 2,603,736 shares of common stock for the exercise of
stock options.
The following table presents the combined activity of the Company's stock
option plans (exclusive of the plans noted below) for the years ended
December 31:
1999 1998 1997
-------------------------- --------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- -------------- ---------- -------------- --------- --------------
Outstanding at January 1...... 1,654,126 $3.62 2,446,573 $7.48 2,423,025 $8.34
Granted....................... 536,078 1.08 1,174,118 1.70 679,074 5.33
Exercised..................... (604,362) 1.50 (11,012) .12 (82,737) 2.96
Canceled...................... (646,507) 5.31 (1,955,553) 7.08 (572,789) 9.21
--------- ----- ---------- ----- --------- -----
Outstanding at December 31.... 939,335 $2.65 1,654,126 $3.62 2,446,573 $7.48
========= ===== ========== ===== ========= =====
Options exercisable at
December 31................. 594,216 $3.44 1,108,936 $4.33 1,338,163 $7.79
========= ===== ========== ===== ========= =====
In addition to the options noted above, in conjunction with the StemCells
California merger, StemCells California options originally issued under a prior
StemCells California options plan were exchanged for options to purchase 250,344
shares of the Company's common stock at $.01 per share; 75,384 of these options
are exercisable at December 31, 1997, 96,750 of these options vest and become
exercisable only upon achievement of specified milestones, and the remaining
78,210 options vest over three years from the date of grant. Additionally, the
Company adopted the 1997 CytoTherapeutics, Inc. StemCells California Research
Stock Option Plan (the StemCells California Research Plan) whereby an additional
2,000,000 shares of Common Stock have been reserved. During 1997, the Company
awarded options under the StemCells Research Plan to purchase 1.6 million shares
of the Company's common stock to the Chief Executive Officer and scientific
founders of StemCells at an exercise price of $5.25 per share; approximately
100,000 of these options are exercisable immediately, 1,031,000 of these options
vest and become exercisable only upon achievement of specified milestones and
the remaining 469,000 options vest over eight years.
FAS 123 DISCLOSURES
The Company has adopted the disclosure provisions only of Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
("FAS 123") and
F-16
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
15. STOCKHOLDERS' EQUITY (CONTINUED)
accounts for its stock option plans in accordance with the provisions of APB 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
The following table presents weighted average price and life information
about significant option groups outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YRS.) PRICE EXERCISABLE PRICE
- ------------------------------------------ ----------- ----------- -------- ----------- --------
Less than $5.00........................... 755,398 8.50 $ 1.12 411,945 $ 1.02
$5.01-$10.00.............................. 90,687 4.56 6.55 89,021 6.55
Greater than $10.00....................... 93,250 2.54 11.18 93,250 11.18
------- -------
939,335 594,216
======= =======
Pursuant to the requirements of FAS 123, the following are the pro forma net
loss and net loss per share amounts for 1999, 1998, and 1997, as if the
compensation cost for the option plans and the stock purchase plan had been
determined based on the fair value at the grant date for grants in 1999, 1998,
and 1997, consistent with the provisions of FAS 123:
1999 1998 1997
--------------------------- --------------------------- ---------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------ ------------ ------------ ------------ ------------ ------------
Net loss............. $(15,708,626) $(15,764,569) $(12,627,830) $(14,919,389) $(18,113,580) $(19,924,437)
Net loss per share... $(.84) $(.84) $(.69) $(.82) $(1.08) $(1.19)
The weighted average fair value per share of options granted during 1999,
1998 and 1997 was $.88, $.82 and $3.40, respectively. The fair value of options
and shares issued pursuant to the stock purchase plan at the date of grant were
estimated using the Black-Scholes model with the following weighted average
assumptions:
OPTIONS STOCK PURCHASE PLAN
------------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
Expected life (years)................................. 5 5 5 5 .5 .5
Interest rate......................................... 5.5% 5.2% 6.2% 5.0% 4.64% 5.5%
Volatility............................................ 96.7% 63.5% 59.0% 96.7% 63.5% 59.0%
The Company has never declared nor paid dividends on any of its capital
stock and does not expect to do so in the foreseeable future.
The effects on 1999, 1998 and 1997 pro forma net loss and net loss per share
of expensing the estimated fair value of stock options and shares issued
pursuant to the stock purchase plan are not necessarily representative of the
effects on reporting the results of operations for future years as the period
presented includes only four, three or two years, respectively, of option grants
under the
F-17
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
15. STOCKHOLDERS' EQUITY (CONTINUED)
Company's plans. As required by FAS 123, the Company has used the Black-Scholes
model for option valuation, which method may not accurately value the options
described.
STOCK WARRANTS
In conjunction with StemCells California merger, the Company exchanged
StemCells California warrants for warrants to purchase 8,952 shares of Company
common stock at $4.71 per share. In conjunction with various equipment leasing
agreements, the Company has outstanding warrants to purchase 31,545 shares of
common stock at prices ranging from $4.00 to $9.00 per share. The warrants
expire through October 2000.
In connection with a public offering of common stock in April 1995, the
Company issued warrants to purchase 434,500 shares of common stock at $8 per
share. The warrants are nontransferable and expire in April 2000, subject to
certain required exercise provisions. In addition to the foregoing rights, the
holder of such warrants has the right, in the event the Company issues
additional shares of common stock or other securities convertible into common
stock, to purchase at the then market price of such common stock, sufficient
additional shares of common stock to maintain the warrant holder's percentage
ownership of the Company's common stock at 15%. This right, subject to certain
conditions and limitations, expires in April 2000.
COMMON STOCK RESERVED
The Company has reserved 6,461,846 shares of common stock for the exercise
of options, warrants and other contingent issuances of common stock.
16. RESEARCH AGREEMENTS
In November 1997, StemCells California, Inc., a wholly owned subsidiary of
the Company, signed a Research Funding and Option Agreement with The Scripps
Research Institute ("Scripps") relating to certain stem cell research. Under the
terms of the Agreement, StemCells agreed to fund research in the total amount of
approximately $931,000 at Scripps over a period of three years. StemCells paid
Scripps approximately $77,000 in 1997, $307,000 in 1998, and $309,000 in 1999.
In addition, the Company agreed to issue to Scripps 4,837 shares of the
Company's common stock and a stock option to purchase 9,674 shares of the
Company's Common Stock with an exercise price of $.01 per share upon the
achievement of specified milestones. Under the Agreement, StemCells has an
option for an exclusive license to the inventions resulting from the sponsored
research, subject to the payment of royalties and certain other amounts, and is
obligated to make payments totaling $425,000 for achievement of certain
milestones.
In April 1997, the Company entered into an agreement with
Neurospheres, Ltd., which superseded all previous licensing agreements and
settled a dispute with Neurospheres. Under the terms of the settlement, the
Company has an exclusive royalty bearing license for growth-factor responsive
stem cells for transplantation. Neurospheres had an option to acquire
co-exclusive rights but did not exercise by the April 1998 deadline. The Company
retains exclusive rights for transplantation. The parties have no further
research obligations to each other.
F-18
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
16. RESEARCH AGREEMENTS (CONTINUED)
In February 1997, CytoTherapeutics and Cognetix, Inc. entered into a
Collaboration and Development Agreement related to the Company's former
encapsulated cell technology. As part of the agreement with Cognetix, the
Company purchased $250,000 of Cognetix preferred stock and, subject to certain
milestones, was obligated to purchase as much as $1,500,000 of additional
Cognetix stock over the next year. In July 1997, the Company loaned $250,000 to
Cognetix which was repaid with interest in October 1997. In October 1998, the
Company sold the $250,000 of preferred stock back to Cognetix for $298,914.
Under the terms of one of those agreements, Genentech purchased 829,171
shares of redeemable common stock for $8.3 million to fund development of
products to treat Parkinson's disease. Genentech had the right, at its
discretion, to terminate the Parkinson's program at specified milestones in the
program. The Agreement also provided that if the Parkinson's program were
terminated and the funds of the Company received from the sale of stock to
Genentech pursuant to the Parkinson's agreement exceeded the expenses incurred
by the Company in connection with such studies by more than $1 million,
Genentech had the right to require the Company to repurchase from Genentech
shares of the Company's common stock having a value equal to the over funding,
based upon the share price paid by Genentech. As such, the common stock
purchased by Genentech has been classified as redeemable common stock until the
funds are expended on the program. On May 21, 1998, Genentech exercised its
right to terminate the collaboration and negotiations ensued with respect to the
amount of redeemable common stock to be redeemed in accordance with the
agreement and the method of such redemption. In March 2000 the Company announced
the settlement of this matter with Genentech. (SEE NOTE 18--"SUBSEQUENT EVENTS"
RELATING TO THE SETTLEMENT OF AND TERMINATION OF THE GENENTECH AGREEMENTS.)
In March 1995, the Company signed a collaborative research and development
agreement with AstraZeneca for the development and marketing of certain
encapsulated-cell products to treat pain. AstraZeneca made an initial,
nonrefundable payment of $5,000,000, included in revenue from collaborative
agreements in 1995, a milestone payment of $3,000,000 in 1997 and was to remit
up to an additional $13,000,000 subject to achievement of certain development
milestones. Under the agreement, the Company was obligated to conduct certain
research and development pursuant to a four-year research plan agreed upon by
the parties. Over the term of the research plan, the Company originally expected
to receive annual payments of $5 million to $7 million from AstraZeneca, which
was to approximate the research and development costs incurred by the Company
under the plan. Subject to the successful development of such products and
obtaining necessary regulatory approvals, AstraZeneca was obligated to conduct
all clinical trials of products arising from the collaboration and to seek
approval for their sale and use. AstraZeneca had the exclusive worldwide right
to market products covered by the agreement. Until the later of either the
expiration of all patents included in the licensed technology or a specified
fixed term, the Company was entitled to a royalty on the worldwide net sales of
such products in return for the marketing license granted to AstraZeneca and the
Company's obligation to manufacture and supply products. AstraZeneca had the
right to terminate the original agreement beginning April 1, 1998. On June 24,
1999, AstraZeneca informed the Company of the results of AstraZeneca's analysis
of the double-blind, placebo-controlled trial of the Company's encapsulated
bovine cell implant for the treatment of severe, chronic pain in cancer
patients. AstraZeneca determined that, based on criteria it established, the
results from the 85-patient trial did not meet the minimum statistical
significance for efficacy established as a basis for continuing
F-19
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
16. RESEARCH AGREEMENTS (CONTINUED)
worldwide trials for the therapy. AstraZeneca therefore indicated that it did
not intend to further develop the bovine cell-containing implant therapy and
executed its right to terminate the agreement.
The Company has entered into other collaborative research agreements whereby
the Company funds specific research programs. Pursuant to such agreements, the
Company is typically granted rights to the related intellectual property or an
option to obtain such rights on terms to be agreed, in exchange for research
funding and specified royalties on any resulting product revenue. The Company's
principal academic collaborations had been with Brown University and
Dr. Aebischer and Centre Hospitalier Universitaire Vaudois in Switzerland.
However, with the termination of the Company's Encapsulated Cell Technology
program and its focusing on the stem cell field, its principal academic
collaborations are now with the Scripps Institute and the Oregon Health Science
University. Research and development expenses incurred under these
collaborations amounted to approximately $868,000, $1,259,000, and $1,326,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
17. INCOME TAXES
Due to net losses incurred by the Company in each year since inception, no
provision for income taxes has been recorded. At December 31, 1999, the Company
had tax net operating loss carry forwards of $96,195,000 and research and
development tax credit carry forwards of $4,035,000 which expire at various
times through 2019. Due to the "change in ownership" provisions of the Tax
Reform Act of 1986, the Company's utilization of its net operating loss carry
forwards and tax credits may be subject to annual limitation in future periods.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
Deferred tax assets:
Capitalized research and development costs................ $ 4,331,000 $ 28,124,000
Net operating losses...................................... 38,478,000 10,786,000
Research and development credits.......................... 4,035,000 3,646,000
Other..................................................... 928,000 235,000
------------ ------------
47,772,000 42,791,000
Deferred tax liabilities:
Patents................................................... (246,000) (1,537,000)
------------ ------------
47,526,000 41,254,000
Valuation allowance....................................... (47,526,000) (41,254,000)
------------ ------------
Net deferred tax assets..................................... $ -- $ --
============ ============
Since there is uncertainty relating to the ultimate use of the loss carry
forwards and tax credits, a valuation allowance has been recognized at
December 31, 1999 and 1998, to fully offset the Company's deferred tax assets.
The valuation allowance increased $6,272,000 in 1999, due primarily to the
F-20
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
17. INCOME TAXES (CONTINUED)
increases in net operating loss carry forwards and tax credits offset by
reduction in capitalized research and development costs.
18. EMPLOYEE RETIREMENT PLAN
The Company has a qualified defined contribution plan covering substantially
all employees. Participants are allowed to contribute a fixed percentage of
their annual compensation to the plan and the Company may match a percentage of
that contribution. The Company matches 50% of employee contributions, up to 6%
of employee compensation, with the Company's common stock. The related expense
was $103,000, $146,000, and $169,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
19. CONTINGENCIES
The Company is routinely involved in arbitration, litigation and other
matters as part of the ordinary course of its business. While the resolution of
any matter may have an impact on the Company's financial results for a
particular reporting period, management believes the ultimate disposition of
these matters will not have a materially adverse effect on the Company's
consolidated financial position or results of operations.
20. SUBSEQUENT EVENTS
On April 13, 2000, the Company completed arrangements to sell 1,500 shares
of 6% cumulative convertible preferred stock plus a warrant for 75,000 shares of
the Company's common stock to two members of its Board of Directors for
$1,500,000, on terms more favorable than it was then able to obtain from outside
investors. (SEE NOTE 3--"SALE OF 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK.")
F-21
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 DECEMBER 31, 1999
(UNAUDITED) (NOTE 1)
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,535,264 $ 4,760,064
Technology sale receivable................................ 200,000 3,000,000
Other current assets...................................... 718,145 1,210,791
------------- -------------
Total current assets........................................ 6,453,409 8,970,855
Restricted Investments...................................... 19,220,165 --
Property, plant and equipment, net.......................... 5,028,141 5,251,376
Intangible assets, net...................................... 936,745 1,108,768
Other assets................................................ 750,000 750,000
------------- -------------
Total assets................................................ $ 32,388,460 $ 16,080,999
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 144,269 $ 631,315
Accrued expenses.......................................... 915,092 2,905,068
Current maturities of capitalized lease obligations....... 326,250 324,167
------------- -------------
Total current liabilities................................... 1,385,611 3,860,550
Capitalized lease obligations, less current maturities...... 2,775,000 2,937,083
Deposits.................................................... 26,000 26,000
Deferred rent............................................... 596,222 502,353
Redeemable stock............................................ -- 5,248,610
Stockholders' equity
Convertible Preferred Stock............................... 1,500,000 --
Common stock.............................................. 196,127 186,355
Additional paid in capital................................ 129,525,509 123,917,758
Accumulated deficit....................................... (121,698,674) (119,372,710)
Accumulated other comprehensive income.................... 19,220,165 --
Deferred compensation..................................... (1,137,500) (1,225,000)
------------- -------------
Total stockholders' equity.................................. 27,605,627 3,506,403
------------- -------------
Total liabilities and stockholders' equity.................. $ 32,388,460 $ 16,080,999
============= =============
See accompanying notes to condensed consolidated financial statements.
F-22
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30
-------------------------
2000 1999
----------- -----------
Revenue from collaborative arrangements..................... $ -- $ 5,021,707
Operating expenses:
Research and development.................................. 1,659,932 6,847,383
General and administrative................................ 2,078,286 2,168,315
----------- -----------
3,738,218 9,015,698
----------- -----------
Loss from operations........................................ (3,738,218) (3,993,991)
Other income (expense):
Investment income......................................... 138,232 406,331
Interest expense.......................................... (142,566) (185,054)
Other Gain................................................ 1,416,588 --
----------- -----------
1,412,254 221,277
----------- -----------
Net Loss.................................................... $(2,325,964) $(3,772,714)
=========== ===========
Basic and Diluted Net Loss per share........................ $ (0.12) $ (0.20)
=========== ===========
Shares used in computing Basic and Diluted Net Loss per
share..................................................... 19,419,236 18,483,437
=========== ===========
See accompanying notes to condensed consolidated financial statements.
F-23
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
----------- -----------
Cash flows from operating activities:
Net Income................................................ $(2,325,964) $(3,772,714)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization........................... 407,634 1,163,295
Deferred stock compensation............................. 87,500 189,650
Net changes in operating assets and liabilities......... 909,492 (2,075,873)
----------- -----------
Net cash used in operating activities..................... (921,338) (4,495,642)
----------- -----------
Cash flows from investing activities:
Proceeds from marketable securities....................... -- 6,891,026
Purchases of marketable securities........................ -- (4,397,676)
Purchase/Sale of property, plant and equipment............ 8,005 (131,113)
Acquisition of other assets............................... (20,380) (274,510)
----------- -----------
Net cash provided by investing activities................. (12,375) 2,087,727
----------- -----------
Cash flows from financing activities:
Proceeds from the exercise of stock options............... 368,913 176,545
Proceeds from issuance of Preferred Stock................. 1,500,000 --
Principal payments under capitalized lease obligations
and mortgage payable.................................. (160,000) (881,250)
----------- -----------
Net cash provided by financing activities................. 1,708,913 (704,705)
----------- -----------
Net increase/(decrease) in cash and cash equivalents........ 775,200 (3,112,620)
Cash and cash equivalents, beginning of period.............. 4,760,064 7,864,788
----------- -----------
Cash and cash equivalents, end of period.................... $ 5,535,264 $ 4,752,168
=========== ===========
See accompanying notes to condensed financial statements.
F-24
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000 AND 1999
NOTE 1. BASIS OF PRESENTATION
On May 23, 2000, the Company's name was changed to StemCells, Inc. from
CytoTherapeutics, Inc., by vote of the shareholders at the Annual Meeting. The
accompanying, unaudited, condensed consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, the
accompanying financial statements include all adjustments, consisting of normal
recurring accruals considered necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods presented.
Results of operations for the six months ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the entire fiscal year ending
December 31, 2000.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required for complete financial statements in accordance with
generally accepted accounting principles.
For the complete financial statements, refer to the audited financial
statements and footnotes thereto as of December 31, 1999 included earlier in
this prospectus.
NOTE 2. EARNINGS PER SHARE
Net loss-per-share is computed using the weighted-average number of shares
of common stock outstanding. Common equivalent shares from stock options and
warrants are excluded, as their effect is antidilutive.
NOTE 3. COMPREHENSIVE INCOME
For the six months ended June 30, 2000 and 1999, total comprehensive
income/(loss) was $16,894,201 and ($3,772,714) respectively. The reported net
loss for the six months ended June 30, 2000 and 1999 was $2,325,964 and
$3,772,714. During the second quarter of 2000, the Company recorded its
ownership of 126,193 shares of Modex Therapeutics Ltd. as available for sale at
an estimated fair value of $19,220,165 (see note 4).
NOTE 4. INVESTMENTS
At June 30, 2000, the Company owned 126,193 shares of Modex
Therapeutics Ltd. ("Modex"), a public Swiss biotechnology company. The
investment is recorded as available-for-sale at estimated fair value with the
unrealized gain reported in other comprehensive income. Estimated fair value at
June 30, 2000 is as follows:
COST GROSS UNREALIZED GAIN FAIR VALUE
- --------------------- --------------------- -----------
$ 0 $19,220,165 $19,220,165
NOTE 5. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY
In the last two quarters of 1999, the Company wound down operations relating
to its former encapsulated cell technology to focus its resources on the
research and development of its proprietary
F-25
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 2000 AND 1999
NOTE 5. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY (CONTINUED)
stem cell technology platform. At the end of 1999 balance in the reserve created
for wind-down expenses was $1,934,569. For the first half of 2000 the
roll-forward of this balance is as follows:
RESERVE AS AT RESERVE AS AT
DESCRIPTION 12/31/99 CASH PAYMENTS 6/30/00
- ----------- ------------- ------------- -------------
Fixed Assets........................................... $ 300,000 $ 0 $300,000
---------- ---------- --------
Facilities, Maintenance and other Expenses............. 462,569 462,569 0
---------- ---------- --------
RIPSAT Settlement...................................... 1,172,000 1,172,000 0
---------- ---------- --------
Totals................................................. $1,934,569 $1,634,569 $300,000
========== ========== ========
NOTE 6. SUBSEQUENT EVENTS
On August 3, 2000, the Company completed a $4 million common stock financing
transaction with Millennium Partners, LP (the "Fund"). StemCells received
$3 million of the purchase price at the closing and will receive the remaining
$1 million upon effectiveness of a registration statement covering the shares
owned by the Fund. The Fund purchased the Company's common stock at $4.33 per
share. The Fund will be entitled to receive additional shares of common stock on
eight dates beginning six months from the closing and every three months
thereafter. The number of additional shares the Fund will be entitled to on each
date will be based on the number of shares of common stock the Fund continues to
hold on each date and the market price of the Company's common stock over a
period prior to each date. The Company will have the right, under certain
circumstances, to cap the number of additional shares by purchasing part of the
entitlement from the Fund. The Fund also received a warrant to purchase up to
101,587 shares of common stock at $4.725 per share. This warrant is callable by
StemCells at $7.875 per underlying share.
On August 30, 2000, the Fund exercised $1,000,000 of its option to purchase
additional common stock. We received $750,000 of the purchase price at the
closing, and will receive the remaining $250,000 upon effectiveness of the
registration statement containing this prospectus. The Fund purchased the
Company's common stock at $5.53 per share. The Fund may be entitled to receive
additional shares of common stock on eight dates beginning six months from the
closing and every three months thereafter. The number of additional shares the
fund will be entitled to on each date will be based on the number of shares of
common stock the Fund continues to hold on each date and the market price of the
Company's common stock over a period prior to each date. The Company will have
the right, under certain circumstances, to limit the number of additional shares
by purchasing part of the entitlement from the Fund. The Fund also received a
warrant to purchase up to 19,900 shares of common stock at $6.03 per share. This
warrant is callable by the Company at $10.05 per underlying share.
F-26
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses payable by the
Registrant in connection with the sale of the securities being registered. All
amounts shown are estimates except the SEC registration fee, the NASD fee and
the NASDAQ listing fee.
SEC registration fee........................................ $6,956.16
NASD filing fee............................................. *
NASDAQ listing fee.......................................... *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue sky fees and expenses.................................. *
Transfer agent and registrar fees........................... *
Miscellaneous............................................... *
---------
Total....................................................... $ *
=========
- ------------------------
* To be provided by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, other than
an action by or in the right of the corporation, by reason of the fact that the
person is or was a director, officer, employee or agent of the corporation or is
or was serving at the corporation's request as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by the person in
connection with the action, suit or proceeding if the person acted in good faith
and in a manner the person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful. The power to indemnify applies to actions brought by or in the right
of the corporation as well, but only to the extent of expenses, including
attorneys' fees but excluding judgments, fines and amounts paid in settlement,
actually and reasonably incurred by the person in connection with the defense or
settlement of the action or suit and with the further limitation that in these
actions no indemnification shall be made in the event of any adjudication of
negligence or misconduct in the performance of his duties to the corporation,
unless a court believes that in light of all the circumstances indemnification
should apply.
Section Ten of our Restated Certificate of Incorporation provides that we
shall, to the maximum extent legally permitted, indemnify and upon request
advance expenses to each person who is or was a party or is threatened to be
made a party to any threatened, pending or completed action, suit proceeding, or
claim (civil, criminal, administrative or investigative) by reason of the fact
that he is or was, or has agreed to become, a director or officer of the
Company, or is or was serving, or has agreed to serve, at the request of the
Company, as a director, officer, partner, employee, agent or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprises, provided, however, that the Company is not required to
indemnify or advance expenses to any person in connection with any action, suit,
proceeding, claim or counterclaim initiated by or on behalf of such person. The
indemnification provided for in Section Ten is expressly not exclusive of any
other rights to
II-1
which those seeking indemnification may be entitled under any by-law, agreement
or vote of directors or stockholders or otherwise, and shall inure to the
benefit of the heirs and legal representatives of such persons.
Section 145(g) of the Delaware General Corporation Law provides that the
Company shall have the power to purchase and maintain insurance on behalf of its
officers, directors, employees and agents, against any liability asserted
against and incurred by such persons in any such capacity.
We have obtained insurance covering our directors and officers against
certain liabilities.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a corporation may eliminate or limit the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provisions shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation Law
of the State of Delaware, or (iv) for any transaction from which the director
derived an improper personal benefit. No such provision shall eliminate or limit
the liability of a director for any act or omission occurring prior to the date
when such provision becomes effective.
Pursuant to the Delaware General Corporation Law, Section Nine of the
Company's Restated Certificate of Incorporation eliminates a director's personal
liability for monetary damages for breach of fiduciary duty as a director,
except in circumstances involving a breach of the director's duty of loyalty to
StemCells, Inc. or its shareholders, acts or omissions not in good faith,
intentional misconduct, knowing violations of the law, self-dealing or the
unlawful payment of dividends or repurchase of stock.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The shares of capital stock and other securities issued in the following
transactions were offered and sold in reliance upon the following exemptions:
(i) in the case of the transactions described in (a) below, Section 4(2) of a
the Securities Act or Regulation D promulgated thereunder relative to sales by
an issuer not involving a public offering; and (ii) in the case of the
transactions (b) below, Section 3(b) of the Securities Act and Rule 701
promulgated thereunder relative to sales pursuant to certain compensatory
benefits plans.
(a) On April 13, 2000, the Registrant sold 1,500 shares of 6% cumulative
convertible preferred stock plus warrants for a total of 75,000 shares of the
Registrant's common stock to two members of its Board of Directors for
$1,500,000, on terms more favorable than it was then able to obtain from outside
investors. The sale was made in reliance on Rule 506 of Regulation D promulgated
under the Securities Act of 1933, as amended. The shares of preferred stock are
convertible at the option of the holders into common stock at $3.77 per share.
The holders of the preferred stock have liquidation rights equal to their
original investments plus accrued but unpaid dividends. The investors would be
entitled to make additional investments in the Company on the same terms as
those on which the Registrant completes offerings of its securities with third
parties within 6 months, if any such offerings are completed. They have waived
that right with respect to the common stock transaction described in Note 5,
Subsequent Events. If offerings totaling at least $6 million are not completed
during the 6 months, the investors have the right to acquire up to a total of
1,126 additional shares of convertible preferred stock at $6.33 per share. Any
unconverted preferred stock is converted, at the applicable conversion price, on
April 13, 2002 in the case of the original stock and two years after the first
acquisition of any of the additional 1,126 shares, if any are acquired. The
warrants, which are exercisable at $6.58 per share, expire on April 13, 2005.
II-2
On August 3, 2000, the Registrant completed a $4 million common stock
financing transaction with Millennium Partners, LP, or the Fund. The sale was
made in reliance on Rule 506 of Regulation D promulgated under the Securities
Act of 1933, as amended. The Registrant received $3 million of the purchase
price at the closing and will receive the remaining $1 million upon
effectiveness of a registration statement covering the shares owned by the Fund.
The Fund purchased the Registrant's common stock at $4.33 per share. The Fund
will be entitled to receive additional shares of common stock on eight dates
beginning six months from the closing and every three months thereafter. The
number of additional shares the Fund will be entitled to on each date will be
based on the number of shares of common stock the Fund continues to hold on each
date and the market price of the Registrant's common stock over a period prior
to each date. The Registrant will have the right, under certain circumstances,
to cap the number of additional shares by purchasing part of the entitlement
from the Fund. The Fund also received a warrant to purchase up to 101,587 shares
of common stock at $4.725 per share. This warrant is callable by the Registrant
at $7.875 per underlying share.
The Fund also had the option for twelve months to purchase up to $3 million
of additional common stock. On August 30, 2000, the Fund exercised $1,000,000 of
that option to purchase Registrant's common stock at $5.53 per share. The
Registrant received $750,000 of the purchase price at the closing and will
receive the remaining $250,000 upon effectiveness of a registration statement
covering the shares owned by the Fund. The Fund may be entitled to receive
additional shares of common stock on eight dates beginning six months from the
closing and every three months thereafter. The number of additional shares the
Fund will be entitled to on each date will be based on the number of shares of
common stock the Fund continues to hold on each date and the market price of the
Registrant's common stock over a period prior to each date. The Registrant will
have the right, under certain circumstances, to limit the number of additional
shares by purchasing part of the entitlement from the Fund. The Fund also
received a warrant to purchase up to 19,900 shares of the Registrant's common
stock at $6.03 per share. This warrant is callable by the Registrant at $10.05
per underlying share.
(b) On May 25, 2000 we issued 2,800 shares of unregistered Rule 144 common
stock to the California Institute of Technology.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS. The following exhibits are filed as part of this registration
statement:
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
3.1* Restated Certificate of Incorporation of the Registrant
3.2++ Amended and Restated By-Laws of the Registrant.
4.1* Specimen Common Stock Certificate.
4.2++++ Form of Warrant Certificate issued to a certain purchaser of
the Registrant's Common Stock in April 1995.
4.3 Warrant to Purchase Common Stock--Mark Angelo
4.4 Warrant to Purchase Common Stock--Robert Farrell
4.5 Warrant to Purchase Common Stock--Joseph Donahue
4.6 Warrant to Purchase Common Stock--Hunter Singer
4.7 Warrant to Purchase Common Stock--May Davis
4.8 Common Stock Purchase Warrant
II-3
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
4.9 Callable Warrant
10.1* Amendment to Registration Rights dated as of February 14,
1992 among the Registrant and certain of its stockholders.
10.2* Form of at-will Employment Agreement between the Registrant
and most of its employees.
10.3* Form of Agreement for Consulting Services between the
Registrant and members of its Scientific Advisory Board.
10.4* Form of Nondisclosure Agreement between the Registrant and
its Contractors.
10.5* Master Lease and Warrant Agreement dated April 23, 1991
between the Registrant and PacifiCorp Credit, Inc.
10.6* 1988 Stock Option Plan.
10.7* 1992 Equity Incentive Plan.
10.8* 1992 Stock Option Plan for Non-Employee Directors.
10.9**!!!! 1992 Employee Stock Purchase Plan.
10.10##** Development and Supply Agreement dated December 1993 between
Registrant and AKZO Faser AG.
10.11++ Research Agreement dated as of February 1, 1994 between
Genentech, Inc. and Registrant.
10.12++ Research Agreement dated as of March 16, 1994 between
NeuroSpheres, Ltd. and Registrant.
10.13++ Term Loan Agreement dated as of September 30, 1994 between
The First National Bank of Boston and Registrant.
10.14++ Lease Agreement between the Registrant and Rhode Island
Industrial Facilities Corporation, dated as of August 1,
1992.
10.15 First Amendment to Lease Agreement between Registrant and
The Rhode Island Industrial Facilities Corporation dated as
of September 15, 1994.
10.16 Supplementary Agreement dated as of July 1, 1994 between
Akzo Nobel Faser AG and the Registrant.
10.17**++++ Development, Marketing and License Agreement, dated as of
March 30, 1995 between Registrant and Astra AB.
10.18++++ Form of Unit Purchase Agreement to be executed by the
purchasers of the Common Stock and Warrants offered in April
1995.
10.19+++ Form of Common Stock Purchase Agreement to be executed among
the Registrant and certain purchasers of the Registrant's
Common Stock.
10.20!** Research and Commercialization Agreement dated as of
September 4, 1995 among the Company, Dr. Patrick Aebischer
and Canton of Vaud, Switzerland.
10.21!! Convertible loan agreement dated as of July 10, 1996 between
the Company and Modex Therapeutiques SA.
II-4
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
10.22### Lease Agreement dated as of November 21, 1997 by and between
Hub RI Properties Trust, as Landlord, and CytoTherapeutics,
Inc., as Tenant.
10.23!! Modex Therapeutiques SA stockholders voting agreement dated
as of July 10, 1996 among Modex, the Company, the Societe
Financiere Valoria SA and the other stockholders listed
therein.
10.24!! CTI individual stockholders option agreement dated as of
July 10, 1996 among the Company and the individuals listed
therein.
10.25!! CTI Valoria option agreement dated of July 10, 1996 between
the Company and the Societe Financiere Valoria SA.
10.26!!! Term Loan Agreement dated as of October 22, 1996 between The
First National Bank of Boston and the Registrant.
10.27*** Agreement and Plan of Merger dated as of August 13, 1997
among StemCells, Inc., the Registrant and CTI Acquisition
Corp.
10.28*** Consulting Agreement dated as of September 25, 1997 between
Dr. Irving Weissman and the Registrant.
10.29### Letter Agreement among each of Dr. Irving Weissman and Dr.
Fred H. Gage and the Registrant.
10.30** Amended and Restated Cross License Agreement dated as of
October 29, 1997 between Modex Therapeutiques SA and the
Registrant.
10.31### Letter Agreement dated as of September 30, 1997 between Dr.
Seth Rudnick and the Registrant.
10.32**** StemCells, Inc. 1996 Stock Option Plan.
10.33**** 1997 StemCells Research Stock Option Plan (the "1997 Plan")
10.34**** Form of Performance-Based Incentive Option Agreement issued
under the 1997 Plan.
10.35### Employment Agreement dated as of September 25, 1997 between
Dr. Richard M. Rose and the Registrant.
10.36### Employment agreement dated as of April 17, 1997, between
John S. McBride and the Registrant.
10.37### Loan Agreement dated as of May 15, 1996 between Fleet
National Bank and the Registrant, together with the related
Promissory Note executed by the Registrant, and an
amendatory agreement dated as of May 15, 1997.
10.38'*> Rights Agreement, dated as of July 27, 1998 between Bank
Boston, N.A. as Rights Agent and the Registrant.
10.39Section** Employment Agreement dated as of June 8, 1998 between Philip
K. Yachmetz and the Registrant.
10.40Section** Consulting Services Agreement dated as of July 27, 1998, as
amended December 19, 1998 between Dr. John J. Schwartz and
the Registrant.
10.41Section** Letter Agreement dated as of December 19, 1998 between John
J. Schwartz and the Registrant.
II-5
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
10.42Section** License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant.
10.43Section** License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant.
10.44Section** License Agreement dated as of November 20, 1998 between The
Scripps Research Institute and the Registrant.
10.45SectionSection** Purchase Agreement and License Agreement dated as of
December 29, 1999 between Neurotech S.A. and the Registrant.
10.46** License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant.
10.47** License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant.
10.48 Form of Registration Rights Agreement dated as of July 31,
2000 between StemCells, Inc. and investors.
10.49 Subscription Agreement dated as of July 31, 2000 between
StemCells, Inc. and Millennium Partners, L.P.
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule for fiscal year ended December 31,
1999.
99 Cautionary Factors Relevant to Forward-Looking Information.
- ------------------------
++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-1, File No. 33-85494.
+++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-3, File No. 33-97272.
++++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-1, File No. 33-91228.
* Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, Registration Statement on Form S-1, File
No. 33-45739.
# Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
fiscal year ended December 31, 1992 and filed March 30, 1993.
** Confidential treatment requested as to certain portions. The term
"confidential treatment" and the mark "**" as used throughout the
indicated Exhibits mean that material has been omitted and separately
filed with the Commission.
## Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994 and filed on May 14, 1994.
+ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993 and filed on March 30, 1994.
II-6
! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996.
!! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 and filed on March 31, 1997.
!!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
*** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 and filed on November 14, 1997.
**** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-8, File No. 333-37313.
### Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1997 and filed on March 30, 1998.
[*] Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's current report on Form 8-K filed
on August 3, 1998.
Section Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's annual report on
Form 10-K for the fiscal year ended December 31, 1998 and filed on
March 31, 1999.
SectionSection Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's current report on
Form 8-K on January 14, 2000.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which,
II-7
individually or in the aggregate, represent a fundamental change in
the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
(4) To file a post-effective amendment to the Registration Statement to
include any financial statements required by section 10(a)(3) of the
Securities Act.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Sunnyvale, State of
California, on the 8th day of September, 2000.
STEMCELLS, INC.
BY: /S/ GEORGE W. DUNBAR, JR.
-----------------------------------------
George W. Dunbar, Jr.
Acting Chief Executive Officer and
Acting Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
immediately below constitutes and appoints George W. Dunbar, Jr. and Iris Brest,
or either of them, his or her true and lawful attorney-in-fact and agent, with
full power of substitution, for him or her and in his or her name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and any and all
additional registration statements pursuant to Rule 462(b) under the Securities
Act of 1933, as amended, in connection with or related to the offering
contemplated by this Registration Statement and its amendments, if any, and to
file the same with all exhibits thereto, and other documents in connection
therewith, with the Commission, granting unto said attorney-in-fact and agent
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorney-in-fact and agent or his or her substitute or substitutes may
lawfully 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 indicated on September 8th, 2000.
SIGNATURE TITLE
--------- -----
George W. Dunbar, Jr.,
Acting President, Chief Executive Officer
(Principal Executive Officer) and Chief
Financial Officer (Principal Financial
/s/ GEORGE W. DUNBAR, JR. Officer)
-------------------------------------------
John J. Schwartz, Ph. D.
/s/ JOHN J. SCHWARTZ, PH.D. Director
-------------------------------------------
Donald Kennedy, Ph. D.
/s/ DONALD KENNEDY, PH. D. Director
-------------------------------------------
Mark J. Levin
/s/ MARK J. LEVIN Director
-------------------------------------------
Irving Weissman, M.D.
/s/ IRVING WEISSMAN, M.D. Director
-------------------------------------------
II-9
EXHIBIT INDEX
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
3.1* Restated Certificate of Incorporation of the Registrant
3.2++ Amended and Restated By-Laws of the Registrant.
4.1* Specimen Common Stock Certificate.
4.2++++ Form of Warrant Certificate issued to a certain purchaser of
the Registrant's Common Stock in April 1995.
4.3 Warrant to Purchase Common Stock--Mark Angelo
4.4 Warrant to Purchase Common Stock--Robert Farrell
4.5 Warrant to Purchase Common Stock--Joseph Donahue
4.6 Warrant to Purchase Common Stock--Hunter Singer
4.7 Warrant to Purchase Common Stock--May Davis
4.8 Common Stock Purchase Warrant
4.9 Callable Warrant
10.1* Amendment to Registration Rights dated as of February 14,
1992 among the Registrant and certain of its stockholders.
10.2* Form of at-will Employment Agreement between the Registrant
and most of its employees.
10.3* Form of Agreement for Consulting Services between the
Registrant and members of its Scientific Advisory Board.
10.4* Form of Nondisclosure Agreement between the Registrant and
its Contractors.
10.5* Master Lease and Warrant Agreement dated April 23, 1991
between the Registrant and PacifiCorp Credit, Inc.
10.6* 1988 Stock Option Plan.
10.7* 1992 Equity Incentive Plan.
10.8* 1992 Stock Option Plan for Non-Employee Directors.
10.9**!!!! 1992 Employee Stock Purchase Plan.
10.10##** Development and Supply Agreement dated December 1993 between
Registrant and AKZO Faser AG.
10.11++ Research Agreement dated as of February 1, 1994 between
Genentech, Inc. and Registrant.
10.12++ Research Agreement dated as of March 16, 1994 between
NeuroSpheres, Ltd. and Registrant.
10.13++ Term Loan Agreement dated as of September 30, 1994 between
The First National Bank of Boston and Registrant.
10.14++ Lease Agreement between the Registrant and Rhode Island
Industrial Facilities Corporation, dated as of August 1,
1992.
10.15 First Amendment to Lease Agreement between Registrant and
The Rhode Island Industrial Facilities Corporation dated as
of September 15, 1994.
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
10.16 Supplementary Agreement dated as of July 1, 1994 between
Akzo Nobel Faser AG and the Registrant.
10.17**++++ Development, Marketing and License Agreement, dated as of
March 30, 1995 between Registrant and Astra AB.
10.18++++ Form of Unit Purchase Agreement to be executed by the
purchasers of the Common Stock and Warrants offered in April
1995.
10.19+++ Form of Common Stock Purchase Agreement to be executed among
the Registrant and certain purchasers of the Registrant's
Common Stock.
10.20!** Research and Commercialization Agreement dated as of
September 4, 1995 among the Company, Dr. Patrick Aebischer
and Canton of Vaud, Switzerland.
10.21!! Convertible loan agreement dated as of July 10, 1996 between
the Company and Modex Therapeutiques SA.
10.22### Lease Agreement dated as of November 21, 1997 by and between
Hub RI Properties Trust, as Landlord, and CytoTherapeutics,
Inc., as Tenant.
10.23!! Modex Therapeutiques SA stockholders voting agreement dated
as of July 10, 1996 among Modex, the Company, the Societe
Financiere Valoria SA and the other stockholders listed
therein.
10.24!! CTI individual stockholders option agreement dated as of
July 10, 1996 among the Company and the individuals listed
therein.
10.25!! CTI Valoria option agreement dated of July 10, 1996 between
the Company and the Societe Financiere Valoria SA.
10.26!!! Term Loan Agreement dated as of October 22, 1996 between The
First National Bank of Boston and the Registrant.
10.27*** Agreement and Plan of Merger dated as of August 13, 1997
among StemCells, Inc., the Registrant and CTI Acquisition
Corp.
10.28*** Consulting Agreement dated as of September 25, 1997 between
Dr. Irving Weissman and the Registrant.
10.29### Letter Agreement among each of Dr. Irving Weissman and Dr.
Fred H. Gage and the Registrant.
10.30** Amended and Restated Cross License Agreement dated as of
October 29, 1997 between Modex Therapeutiques SA and the
Registrant.
10.31### Letter Agreement dated as of September 30, 1997 between Dr.
Seth Rudnick and the Registrant.
10.32**** StemCells, Inc. 1996 Stock Option Plan.
10.33**** 1997 StemCells Research Stock Option Plan (the "1997 Plan")
10.34**** Form of Performance-Based Incentive Option Agreement issued
under the 1997 Plan.
10.35### Employment Agreement dated as of September 25, 1997 between
Dr. Richard M. Rose and the Registrant.
10.36### Employment agreement dated as of April 17, 1997, between
John S. McBride and the Registrant.
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
10.37### Loan Agreement dated as of May 15, 1996 between Fleet
National Bank and the Registrant, together with the related
Promissory Note executed by the Registrant, and an
amendatory agreement dated as of May 15, 1997.
10.38'*> Rights Agreement, dated as of July 27, 1998 between Bank
Boston, N.A. as Rights Agent and the Registrant.
10.39Section** Employment Agreement dated as of June 8, 1998 between Philip
K. Yachmetz and the Registrant.
10.40Section** Consulting Services Agreement dated as of July 27, 1998, as
amended December 19, 1998 between Dr. John J. Schwartz and
the Registrant.
10.41Section** Letter Agreement dated as of December 19, 1998 between John
J. Schwartz and the Registrant.
10.42Section** License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant.
10.43Section** License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant.
10.44Section** License Agreement dated as of November 20, 1998 between The
Scripps Research Institute and the Registrant.
10.45SectionSection** Purchase Agreement and License Agreement dated as of
December 29, 1999 between Neurotech S.A. and the Registrant.
10.46** License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant.
10.47** License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant.
10.48 Form of Registration Rights Agreement dated as of July 31,
2000 between StemCells, Inc. and investors.
10.49 Subscription Agreement dated as of July 31, 2000 between
StemCells, Inc. and Millennium Partners, L.P.
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule for fiscal year ended December 31,
1999.
99 Cautionary Factors Relevant to Forward-Looking Information.
- ------------------------
++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-1, File No. 33-85494.
+++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-3, File No. 33-97272.
++++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-1, File No. 33-91228.
* Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, Registration Statement on Form S-1, File
No. 33-45739.
# Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
fiscal year ended December 31, 1992 and filed March 30, 1993.
** Confidential treatment requested as to certain portions. The term
"confidential treatment" and the mark "**" as used throughout the
indicated Exhibits mean that material has been omitted and separately
filed with the Commission.
## Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994 and filed on May 14, 1994.
+ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993 and filed on March 30, 1994.
! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996.
!! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 and filed on March 31, 1997.
!!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
*** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 and filed on November 14, 1997.
**** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-8, File No. 333-37313.
### Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1997 and filed on March 30, 1998.
[*] Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's current report on Form 8-K filed
on August 3, 1998.
Section Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's annual report on
Form 10-K for the fiscal year ended December 31, 1998 and filed on
March 31, 1999.
SectionSection Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's current report on
Form 8-K on January 14, 2000
EXHIBIT 4.3
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW
TOWARD RESALE OR DISTRIBUTION. THIS WARRANT MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE
REASONABLY ACCEPTABLE TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER SAID
ACT.
STEMCELLS, INC.
WARRANT TO PURCHASE COMMON STOCK
Warrant No.: MD-001 Number of Shares Issuable:
20,000
Date of Issuance: August 3, 2000
StemCells, Inc., a Delaware corporation (the "Company"), hereby certifies
that, for good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Mark Angelo, the registered holder hereof or its
permitted assigns, is entitled, subject to the terms set forth below, to
purchase from the Company upon surrender of this Warrant, at any time or times
on or after the date hereof, but not after 5:00 P.M. Eastern Standard Time on
the Expiration Date (as defined herein) twenty thousand (20,000) fully paid,
nonassessable shares of Common Stock (as defined herein) of the Company (the
"Warrant Shares") at the Warrant Exercise Price per share provided in Section
l(b) below;
Section 1.
(a) LETTER AGREEMENT. This Warrant is one of the warrants (the "Warrants")
issued pursuant to Section 3.4 of the Placement Agency Agreement between the
Company and May Davis Group, Inc., dated as of July 31, 2000 (the "AGENCY
AGREEMENT").
(b) DEFINITIONS. The following words and terms as used in this Warrant
shall have the following meanings:
1
(i) "COMMON STOCK" means (i) the Company's common stock, par value
.01 per share, and (ii) any capital stock into which such Common Stock shall
have been changed or any capital stock resulting from a reclassification of
such Common Stock.
(ii) "EXPIRATION DATE" means the date five (5) years from the date
of the issuance of the Warrant or, if such date falls on a Saturday, Sunday
or other day on which banks are required or authorized to be closed in the
City of New York or the State of New York (a "Holiday"), the next preceding
date that is not a Holiday.
(iii) "PERSON" means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
(iv) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(v) "WARRANT" shall mean this warrant and all warrants issued in
exchange, transfer or replacement of any thereof.
(vi) "WARRANT EXERCISE PRICE" shall be equal to $5.0375, subject to
adjustment as hereinafter provided.
(vii) "WARRANT SHARES" means the shares of Common Stock issuable upon
exercise of this Warrant.
(b) OTHER DEFINITIONAL PROVISIONS.
(i) Except as otherwise specified herein, all references herein (A) to
the Company shall be deemed to include the Company's successors and (B) to any
applicable law defined or referred to herein, shall be deemed references to such
applicable law as the same may have been or may be amended or supplemented from
time to time.
(ii) When used in this Warrant, the words "herein," "hereof," and
"hereunder," and words of similar import, shall refer to this Warrant as a
whole and not to any provision of this Warrant, and the words "Section,"
"Schedule," and "Exhibit" shall refer to Sections of, and Schedules and
Exhibits to, this Warrant unless otherwise specified.
(iii) Whenever the context so requires, the neuter gender includes
the masculine or feminine, and the singular number includes the plural, and
vice versa.
Section 2. EXERCISE OF WARRANT.
(a) Subject to the terms and conditions hereof, this Warrant may be
exercised by the holder hereof then registered on the books of the Company, in
whole or in part, at any time on any business day or after the opening of
business on the date hereof and prior to 5:00 P.M. Eastern Standard Time on
2
the Expiration Date by (i) delivery of a written notice, in the form of the
subscription notice attached as Exhibit A hereto, of such holder's election to
exercise this Warrant, which notice shall specify the number of Warrant Shares
to be purchased, (ii) (A) payment to the Company of an amount equal to the
Warrant Exercise Price multiplied by the number of Warrant Shares as to which
the Warrant is being exercised (plus any applicable issue or transfer taxes)
(the "Aggregate Exercise Price") in cash or by check or wire transfer, or (B) by
notifying the Company that it should subtract from the number of Warrant Shares
Issuable to the holder upon such exercise an amount of warrant shares having a
last reported sale price (as reported by Bloomberg), or, if the foregoing is not
appliclable, the fair market value (in either case, the "Per Share Value"), on
the trading day immediately preceding the date of the subscription notice equal
the Aggregate Exercise Price of the Warrant shares for which this warrant is
being exercised (a "Cashless Exercise"), and (iii) the surrender of this
Warrant, to a common carrier for delivery to the Company as soon as practicable
following such date (but in any case prior to 5:00 P.M. Eastern Standard Time on
the Expiration Date), this Warrant (or an indemnification undertaking with
respect to this Warrant in the case of its loss, theft, or destruction);
provided that if such Warrant Shares are to be issued in any name other than
that of the registered holder of this Warrant, such issuance shall be deemed a
transfer and the provisions of Section 7 shall be applicable. In the event of
any exercise of the rights represented by this Warrant in compliance with this
Section 2, a certificate or certificates for the Warrant Shares so purchased, in
such denominations as may be requested by the holder hereof and registered in
the name of, or as directed by, the holder, shall be delivered at the Company's
expense to, or as directed by, such holder as soon as practicable after such
rights shall have been so exercised, and in any event no later than five (5)
business days after the Company's receipt of the Exercise Notice, the Aggregate
Exercise Price and this Warrant (or indemnification undertaking with respect to
this Warrant in the case of its loss, theft or destruction) Upon delivery of the
Exercise Notice, this Warrant (or such indemnification undertaking) and
Aggregate Exercise Price referred to in clause (ii) (A) above or notification to
the Company of a Cashless Exercise referred to in clause (ii) (B) above, the
holder of this Warrant shall be deemed for all corporate purposes to have become
the holder of record of the Warrant Shares with respect to which this Warrant
has been exercised, irrespective of the date of delivery of the certificates
evidencing such Warrant Shares. In the case of a dispute as to the determination
of the Warrant Exercise Price or the Average Market Price of a security or the
arithmetic calculation of the Warrant Shares, the Company shall promptly issue
to the holder the number of shares of Common Stock that is not disputed and
shall submit the disputed determinations or arithmetic calculations to the
holder via facsimile within five (5) business days of receipt of the holder's
subscription notice. If the holder and the Company are unable to agree upon the
determination of the Warrant Exercise Price or Average Market Price or
arithmetic calculation of the Warrant Shares within five (5) business days of
such disputed determination or arithmetic calculation being submitted to the
holder, then the Company shall immediately submit via facsimile (i) the disputed
determination of the Warrant Exercise Price or the Average Market Price to an
independent, reputable investment banking firm or (ii) the disputed arithmetic
calculation of the Warrant Shares to its independent, outside accountant. The
Company shall cause the investment banking firm or the accountant, as the case
may be, to perform the determinations or calculations and notify the Company and
the holder of the results no later than five business days from the time it
receives the disputed determinations or calculations. Such investment bank's or
accountant's determination or calculation, as the case may be, shall be deemed
conclusive absent manifest error and the Company shall be liable for the costs
and expenses related to such determination or calculation.
3
(b) Unless the rights represented by this Warrant shall have expired or
shall have been fully exercised, the Company shall, as soon as practicable and
in any event no later than five (5) business days after any exercise and at its
own expense, issue a new Warrant identical in all respects to the Warrant
exercised except (i) it shall represent rights to purchase the number of Warrant
Shares purchasable immediately prior to such exercise under the Warrant
exercised, less the number of Warrant Shares with respect to which such Warrant
is exercised, and (ii) the holder thereof shall be deemed for all corporate
purposes to have become the holder of record of such Warrant Shares immediately
prior to the close of business on the date on which the Warrant is surrendered
and payment of the amount due in respect of such exercise and any applicable
taxes is made, irrespective of the date of delivery of certificates evidencing
such Warrant Shares, except that, if the date of such surrender and payment is a
date when the stock transfer books of the Company are properly closed, such
person shall be deemed to have become the holder of such Warrant Shares at the
opening of business on the next succeeding date on which the stock transfer
books are open. Upon presentation of a duly executed Subscription Form in the
Form of Exhibit A to this Warrant, the holder shall be entitled to exercise this
Warrant in whole or in part, if the holder shall have previously exercised and
surrendered this Warrant and the Company shall not have issued a new Warrant
representing the number of shares issuable following such prior exercise.
(c) No fractional shares of Common Stock are to be issued upon the exercise
of this Warrant, but rather the number of shares of Common Stock issued upon
exercise of this Warrant shall be rounded down to the nearest whole number and
the Company shall pay to the Holder in lieu of such fractional share cash in an
amount in proportion to the Per Share Value on the date of payment.
(d) If the Company shall fail for any reason or for no reason to issue to
holder on a timely basis as described under this Section 2 a certificate for the
number of shares of Common Stock to which the holder is entitled upon the
holder's exercise of this Warrant, the Company shall, upon notice from the
holder and in lieu of any other remedies under this Agreement or otherwise
available to such holder pay as liquidated damages in cash to such holder for
each day such issuance is not timely effected an amount equal to .25% of the
product of (A) the sum of the number of shares of Common Stock not issued to the
holder on a timely basis and to which the holder is entitled, and (B) the sum
derived by subtracting (1) the Warrant exercise price then in effect, from (2)
the Closing Bid Price of the Common Stock on the last possible date which the
Company could have issued Common Stock to the holder without violating this
Section 2.
(e) The Company shall not affect any exercise of any Warrant and no holder
of any Warrant shall have the right to exercise any Warrant pursuant to Section
2 to the extent that after giving effect to such exercise such person (together
with such Persons affiliates) (A) would beneficially owned in excess of 4.9% of
the outstanding shares of Common Stock following such conversion and (B) would
have acquired, through exercise of any Warrant or otherwise, in excess of 4.9%
of the outstanding shares of the Common Stock following such exercise during the
60-day period ending on and including such exercise date. For purposes of the
foregoing sentence, the number of shares of Common Stock beneficially owned by a
person and its affiliates or acquired by a person and its affiliates, as the
case may be, shall include the number of shares of Common Stock issuable upon
the exercise of the Warrants with respect to which the determination of such
sentence is being made, but shall exclude the number of shares of Common Stock
which would be issuable upon
4
(i) exercise of the remaining, non exercisable Warrants beneficially owned by
such person and its affiliates and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of the Company
subject to limitation on conversion or exercise analogous to the limitation
contained herein beneficially owned by such Person and its affiliates. Except as
set forth in the preceding sentence, for purposes of this section 2(e),
beneficial ownership shall be calculated in accordance with Section 13 (d) of
the Securities Exchange Act of 1934, as amended. Notwithstanding anything to the
contrary contained herein, each Exercise Notice shall constitute a
representation by the holder submitting such Exercise Notice that, after giving
effect to such Exercise Notice (A) the holder will not beneficially own (as
determined in accordance with this Section 2(e)) and (B) during the 60-day
period ending on and including such exercise date, the holder will not have
acquired, through exercise of any Warrant or otherwise, a number of shares of
Common Stock in excess of 4.9% of the outstanding shares of Common Stock as
reflected in the Company's most recent Form 10-Q or Form 10-K, as the case may
be, or more recent public release or other public notice by the Company setting
forth the number of Shares of Common Stock outstanding, but after giving effect
to exercise of any Warrant by such holder since the date as of which such
numbers of outstanding shares of the Common Stock was reported, and the Company
shall be entitled to rely solely on the foregoing representation in complying
with this Section 2(e).
Section 3. COVENANTS AS TO COMMON STOCK. The Company hereby covenants and
agrees as follows:
(a) A Warrant issued in substitution for or replacement of this Warrant
will upon issuance be duly authorized and validly issued.
(b) All Warrant Shares which may be issued upon the exercise as set forth
herein of the rights represented by this Warrant will, upon issuance, be validly
issued, fully paid and nonassessable and free from all taxes, liens and charges
with respect to the issue thereof.
(c) During the period within which the rights represented by this Warrant
may be exercised, the Company will at all times have authorized and reserved at
least the number of shares of Common Stock needed to provide for the exercise of
the rights then represented by this Warrant and the par value of said shares
will at all times be less than or equal to the applicable Warrant Exercise
Price.
(d) The Company shall promptly secure the listing of the shares of Common
Stock issuable upon exercise of this Warrant upon each national securities
exchange or automated quotation system, if any, or over-the-counter-bulletin
board upon which shares of Common Stock are then listed or quoted (subject to
official notice of the over-the-counter bulletin board of issuance upon exercise
of this Warrant) and shall maintain, so long as any other shares of Common Stock
shall be so listed or quoted, such listing or quotation of all shares of Common
Stock from time to time issuable upon the exercise of this Warrant; and the
Company shall so list or obtain quotation on each such national securities
exchange, automated quotation system or over-the-counter bulletin board, as the
case may be, and shall maintain such listing in quotation of, any other shares
of capital stock of the Company issuable upon the exercise of this Warrant if
and so long as any shares of the same class shall be listed on such national
securities exchange, automated quotation system or over-the-counter bulletin
board.
5
(e) The Company will not, by amendment of its Certificate of Incorporation
or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities, or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. Without limiting the generality of the foregoing, the Company (i)
will not increase the par value of any shares of Common Stock receivable upon
the exercise of this Warrant above the Exercise Price then in effect, and (ii)
will take all such actions as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant.
(f) This Warrant will be binding upon any entity succeeding to the Company
by merger, consolidation or acquisition of all or substantially all of the
Company's assets.
(g) If at any time when the registration statement referred to in the
Agency Agreement is not effective the Company proposes to file with the
Securities and Exchange Commission a registration statement relating to an
offering for its own account or the account of others under the Securities Act
of any of its Securities (other than on Form S-4 or Form S-8 (or their
equivalents at such time) relating to securities to be issued solely in
connection with any acquisition of, or strategic transaction with, any entity or
business or equity securities issuable in connection with stock option or other
employee benefit plans) the Company shall promptly send to the Holder's written
notice of the Company's intention to file a registration statement and of the
holder's rights under this section and, if within five (5) days after receipt of
such notice, the holder hereof shall so request in writing, the Company shall
include in such registration statement all or any part of the Common Stock
underlying this Warrant the holder requests to be registered; provided, however,
that the foregoing shall not apply to any registration statement if the holders
of the securities to be registered thereon have a right to exclude the Warrant
Shares from such registration statement. If a registration pursuant this section
is to be an underwritten public offering and the managing underwriters advise
the Company in writing, that in their reasonable good faith opinion, marketing
or other factors dictate that a limitation on the number of shares of Company
common stock which may be included in the registration statement is necessary to
facilitate and not adversely affect the proposed offering, then the Company
shall include in such registration: (1) first, all securities the Company
proposes to sell for its own account, (2) second, up to the full number of
securities proposed to be registered for the account of the holders of
securities entitled to inclusion of their securities requested to be registered
by the holder hereof and other holders of securities entitled to participate in
the registration, as of the date hereof, drawn from them pro rata based on the
number each has requested to be included in such registration. Any holder of a
Warrant or Warrant Shares who wishes to participate in such registration must
execute such agreements and take such actions as are customarily executed or
taken by selling stockholders in connection with a registration.
Section 4. TAXES. The Company shall not be required to pay any tax or taxes
attributable to the initial issuance of the Warrant Shares or any permitted
transfer involved in the issue or delivery
6
of any certificates for Warrant Shares in a name other than that of the
registered holder hereof or upon any permitted transfer of this Warrant.
Section 5. WARRANT HOLDER NOT DEEMED A STOCKHOLDER. Except as otherwise
specifically provided herein, no holder, as such, of this Warrant shall be
entitled to vote or receive dividends or be deemed the holder of shares of the
Company for any purpose, nor shall anything contained in this Warrant be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote, give or withhold consent to any
corporate action (whether any reorganization, issue of stock, reclassification
of stock, consolidation, merger, conveyance or otherwise), receive notice of
meetings, receive dividends or subscription rights, or otherwise, prior to the
issuance to the holder of this Warrant of the Warrant Shares which he or she is
then entitled to receive upon the due exercise of this Warrant.
In addition, nothing contained in this Warrant shall be construed as
imposing any liabilities on such holder to purchase any securities or as a
stockholder of the Company, whether such liabilities are asserted by the Company
or by creditors of the Company. Notwithstanding this Section 5, the Company will
provide the holder of this Warrant with copies of the same notices and other
information given to the stockholders of the Company generally,
contemporaneously with the giving thereof to the stockholders.
Section 6. REPRESENTATIONS OF HOLDER. The holder of this Warrant, by the
acceptance hereof, represents (and any assignor shall represent) that it is
acquiring this Warrant and the Warrant Shares for its own account for investment
purposes and not with a view to, or for sale in connection with, any
distribution hereof, and not with any present intention of distributing any of
the same. The holder of this Warrant further represents (and any assignor shall
represent), by acceptance hereof, that, as of this date, such holder is an
"accredited investor" as such term is defined in Rule 501(a)(1) of Regulation D
promulgated by the Securities and Exchange Commission under the Securities Act
(an "Accredited Investor"). Upon exercise of this Warrant, the holder shall, if
requested by the Company, confirm in writing, in a form satisfactory to the
Company, that the Warrant Shares so purchased are being acquired solely for the
holder's own account and not as a nominee for any other party, for investment,
and not with a view toward distribution or resale and that such holder is an
Accredited Investor. If such holder cannot make such representations because
they would be factually incorrect, it shall be a condition to such holder's
exercise of the Warrant that the Company receive such other representations as
the Company considers reasonably necessary to assure the Company that the
issuance of its securities upon exercise of the Warrant shall not violate any
United States Federal or state securities laws.
Section 7. OWNERSHIP AND TRANSFER.
(a) The Company shall maintain at its principal executive offices (or such
other office or agency of the Company as it may designate by notice to the
holder hereof), a register for this Warrant, in which the Company shall record
the name and address of the person in whose name this Warrant has been issued,
as well as the name and address of each permissible transferee. The Company may
treat the person in whose name any Warrant is registered on the register as the
owner and holder
7
thereof for all purposes, notwithstanding any notice to the contrary, but in all
events recognizing any transfers made in accordance with the terms of this
Warrant.
(b) This Warrant and the rights granted to the holder hereof are
transferable, in whole or in part, upon surrender of this Warrant, together with
a properly executed warrant power in the form of Exhibit B attached hereto;
provided, however, that any transfer or assignment shall subject to the
conditions set forth in Section 6 above and Section 7(c) below.
(c) The holder of this Warrant understands that this Warrant and the
Warrant Shares have not been and are not expected to be, registered under the
Securities Act or any state securities laws, and may not be offered for sale,
sold, assigned or transferred unless (a) subsequently registered thereunder, or
(b) such holder shall have delivered to the Company an opinion of counsel,
reasonably satisfactory in form, scope and substance to the Company, to the
effect that the securities to be sold, assigned or transferred may be sold,
assigned or transferred pursuant to an exemption from such registration. Any
sale of such securities made in reliance on Rule 144 promulgated under the
Securities Act may be made only in accordance with the terms of said Rule and
further, if said Rule is not applicable, any resale of such securities under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the Securities
Act) may require compliance with some other exemption under the Securities Act
or the rules and regulations of the Securities and Exchange Commission
thereunder; and neither the Company nor any other person is under any obligation
to register the Series A Preferred Share Warrants under the Securities Act or
any state securities laws or to comply with the terms and conditions of any
exemption thereunder except as set forth in Section 7(d) below. All Warrants and
Warrant Shares shall bear a legend in substantially the form set forth at the
beginning hereof until the Company receives a satisfactory opinion of counsel
that such legend is no longer required.
(d) The Company shall register the Warrant Shares for resale under the
Securities Act pursuant to the Registration Rights Agreement dated as of July
31, 2000, by and between the Company and the Buyers listed on the signature page
thereto (the "Registration Rights Agreement").
Section 8. ADJUSTMENT OF WARRANT EXERCISE PRICE. In order to prevent
dilution of the rights granted under this Warrant, the Warrant Exercise Price
shall be adjusted from time to time as follows:
(a) ADJUSTMENT OF WARRANT EXERCISE PRICE UPON SUBDIVISION OR COMBINATION OF
COMMON STOCK. If the Company at any time after the date of issuance of this
Warrant, subdivides (by any stock split, stock dividend, re-capitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Warrant Exercise Price in effect immediately prior
to such subdivision will be proportionately reduced and the number of shares of
Common Stock obtainable upon exercise of this Warrant will be proportionately
increased. If the Company at any time after the date of issuance of this Warrant
combines (by combination, reverse stock split or otherwise) one or more classes
of its outstanding shares of Common Stock into a smaller number of shares, the
Warrant Exercise Price in effect immediately prior to such combination will be
proportionately increased and the number of shares of Common Stock obtainable
upon exercise of this Warrant will be proportionately decreased.
8
(b) REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. Any
recapitalization, reorganization, reclassification, consolidation, merger, sale
of all or substantially all of the Company's assets to another Person or other
similar transaction which is effected in such a way that holders of Common Stock
are entitled to receive (either directly or upon subsequent liquidation) stock,
securities or assets with respect to or in exchange for Common Stock is referred
to herein as in "Organic Change." Prior to the consummation of any Organic
Change, the Company will make appropriate provision (in form and substance
reasonably satisfactory to the holders of a majority of the Warrants then
outstanding) to insure that, upon the consummation of such Organic Change, each
of the holders of the Warrants will thereafter have the right to acquire and
receive upon exercise hereof in lieu of the Common Stock, such shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for the number of shares of Common Stock immediately theretofore acquirable and
receivable upon exercise of the Warrants had such Organic Change not taken
place. In any such case, the Company will make appropriate provision (in form
and substance reasonably satisfactory to the holders of a majority of the
Warrants then outstanding) with respect to such holders' rights and interests to
insure that the provisions of this Section 8(b) will thereafter be applicable to
the Warrants.
(c) NOTICES.
(i) Immediately upon any adjustment of the Warrant Exercise Price
pursuant to this Section 8, the Company will give written notice thereof to the
holder of this Warrant, setting forth in reasonable detail and certifying the
calculation of such adjustment.
(ii) The Company will give written notice to the holder of this
Warrant at least ten (10) days prior to the date on which the Company closes its
books or takes a record (A) with respect to any dividend or distribution upon
the Common Stock, (B) with respect to any pro rata subscription offer to holders
of Common Stock or (C) for determining rights to vote with respect to any
Organic Change, dissolution or liquidation, except that in no event shall such
notice be provided to such holder prior to such information being made known to
the public.
(iii) The Company will also give written notice to the holder of this
Warrant at least ten (10) days prior to the date on which any Organic Change,
dissolution or liquidation will take place.
Section 10. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT. If this Warrant
is lost, stolen, mutilated or destroyed, the Company shall, on receipt of an
indemnification undertaking, issue a new Warrant of like denomination and tenor
as the Warrant so lost, stolen, mutilated or destroyed.
Section 11. NOTICE. Any notices, consents, waivers, or other communications
required or permitted to be given under the terms of this Warrant must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile, provided a copy
is mailed by U.S. certified mail, return receipt requested; (iii) three (3) days
after being sent by U.S. certified mail, return receipt requested; or (iv) one
(1) day after deposit with a nationally recognized overnight delivery service,
in each case properly addressed to the party to receive the same. The addresses
and facsimile numbers for such communications shall be:
9
If to the Company: StemCells, Inc.
525 Del Rey Avenue
Suite C
Sunnyvale CA. 94086
Attention: George Dunbar, President & CEO
Telephone: (408) 731-8670
Facsimile: (408) 731-8674
With a copy to: Ropes & Gray
One International Place
Boston, MA 02110
Attention: Geoffrey B. Davis, Esq.
Telephone: (617) 951-7000
Facsimile: (617) 951-7050
If to a holder of this Warrant, to it at the address set forth below such
holder's signature on the signature page hereof. Each party shall provide five
(5) days' prior written notice to the other party of any change in address or
facsimile number.
Section 12. AMENDMENTS. This Warrant and any term hereof may be changed,
waived, discharged, or terminated only by an instrument in writing signed by the
party or holder hereof against which enforcement of such change, waiver,
discharge or termination is sought.
Section 13. DATE. The date of this Warrant is August 3, 2000. This Warrant,
in all events, shall be wholly void and of no effect after 5:00 P.M. Eastern
Standard Time on the Expiration Date, except that notwithstanding any other
provisions hereof, the provisions of Section 7 shall continue in full force and
effect after such date as to any Warrant Shares or other securities issued upon
the exercise of this Warrant.
Section 14. AMENDMENT AND WAIVER. Except as otherwise provided herein, the
provisions of the Warrants may be amended and the Company may take any action
herein prohibited, or omitted to perform any act herein required to be performed
by it, only if the Company has obtained the written consent of the holders of
Warrants representing a majority of the shares of Common Stock obtainable upon
exercise of the Warrants then outstanding, provided that no such action may
increase the Warrant Exercise Price of the Warrants or decrease the number of
shares or class of stock obtainable upon exercise of any warrants with out the
written consent of the holder of such warrant.
Section 15. DESCRIPTIVE HEADINGS; GOVERNING LAW. The descriptive headings
of the several sections of this Warrant are for convenience of reference only
and shall not limit or otherwise affect the meaning hereof. This Warrant shall
be governed by and interpreted under the laws of the State of New York, without
giving effect to any choice of law or conflict of law provision.
This Warrant has been duly executed by the Company as of the date first set
forth above.
10
STEMCELLS, INC.
By:
-------------------------------
Name:
Title:
Mark Angelo
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
Address:
--------------------------
11
EXHIBIT A
FORM OF SUBSCRIPTION
(Complete and sign only exercise of the Warrant in whole or in part.)
TO: StemCells, Inc.
The undersigned, the holder of the attached Warrant to which this Form of
Subscription applies, hereby irrevocably elects to exercise the purchase rights
represented by such warrant for and to purchase thereunder _______ shares of
Common Stock, par value $.01 per share (the "Shares"), from StemCells, Inc. (or
such other securities issuable pursuant to the terms of the Warrant) and either:
(i) herewith makes payment of $_______ therefor in cash or by certified or
official bank check or (ii) elects to make payment upon a cashless basis
pursuant to Section 2(b) of the Warrant and hereby exercises ______ Warrants and
the Per Share Value for purposes hereof is $_______. The undersigned hereby
requests that the certificate(s) representing such securities be issued in the
name(s) and delivered t the address(es) as follows:
Name:
---------------------------------------
Address:
---------------------------------------
Social Security Number:
---------------------------------------
Deliver to:
---------------------------------------
Address:
---------------------------------------
This the foregoing subscription evidences an exercise of the Warrant to
purchase fewer than all of the Shares (or other securities issuable pursuant to
the terms of the Warrant) to which the undersigned is entitled under such
warrant, please issue a new warrant, of like tenor, relating to the remaining
portion of the securities issuable upon exercise of such warrant (or other
securities issuable pursuant to the terms of such warrant) in the name(s), and
deliver the same to the address(es), as follow:
Name:
---------------------------------------
Address:
---------------------------------------
---------------------------------------
Dated:
---------------------------------------
- ------------------------- -------------------------------------------
(Name of Holder) (Social Security or Taxpayer Identification
Number of Holder, if applicable)
- -----------------------------
(Signature of Holder or Authorized
Signatory)
Signature Guaranteed:
-------------------------------------
12
EXHIBIT B
FORM OF WARRANT POWER
FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to
____________________________________________ Federal Identification No.______, a
warrant to purchase shares of the capital stock of StemCells, Inc. a Delaware
corporation, represented by warrant certificate No._________, standing in the
name of the undersigned on the books of said corporation. The undersigned does
hereby irrevocably constitute and appoint ____________________________, attorney
to transfer the warrants of said corporation, with full power of substitution in
the premises.
Dated:
---------------------------------
By:
---------------------------
Its:
--------------------------
13
EXHIBIT 4.4
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW
TOWARD RESALE OR DISTRIBUTION. THIS WARRANT MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE
REASONABLY ACCEPTABLE TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER SAID
ACT.
STEMCELLS, INC.
WARRANT TO PURCHASE COMMON STOCK
Warrant No.: MD-002 Number of Shares Issuable:
20,000
Date of Issuance: August 3, 2000
StemCells, Inc., a Delaware corporation (the "Company"), hereby certifies
that, for good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Robert Farrell, the registered holder hereof or its
permitted assigns, is entitled, subject to the terms set forth below, to
purchase from the Company upon surrender of this Warrant, at any time or times
on or after the date hereof, but not after 5:00 P.M. Eastern Standard Time on
the Expiration Date (as defined herein) twenty thousand (20,000) fully paid,
nonassessable shares of Common Stock (as defined herein) of the Company (the
"Warrant Shares") at the Warrant Exercise Price per share provided in Section
l(b) below;
Section 1.
(a) LETTER AGREEMENT. This Warrant is one of the warrants (the "Warrants")
issued pursuant to Section 3.4 of the Placement Agency Agreement between the
Company and May Davis Group, Inc., dated as of July 31, 2000 (the "AGENCY
AGREEMENT").
(b) DEFINITIONS. The following words and terms as used in this Warrant
shall have the following meanings:
1
(i) "COMMON STOCK" means (i) the Company's common stock, par value .01
per share, and (ii) any capital stock into which such Common Stock shall have
been changed or any capital stock resulting from a reclassification of such
Common Stock.
(ii) "EXPIRATION DATE" means the date five (5) years from the date of
the issuance of the Warrant or, if such date falls on a Saturday, Sunday or
other day on which banks are required or authorized to be closed in the City of
New York or the State of New York (a "Holiday"), the next preceding date that is
not a Holiday.
(iii) "PERSON" means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
(iv) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(v) "WARRANT" shall mean this warrant and all warrants issued in
exchange, transfer or replacement of any thereof.
(vi) "WARRANT EXERCISE PRICE" shall be equal to $5.0375, subject to
adjustment as hereinafter provided.
(vii) "WARRANT SHARES" means the shares of Common Stock issuable upon
exercise of this Warrant.
(b) OTHER DEFINITIONAL PROVISIONS.
(i) Except as otherwise specified herein, all references herein (A)
to the Company shall be deemed to include the Company's successors and
(B) to any applicable law defined or referred to herein, shall be deemed
references to such applicable law as the same may have been or may be
amended or supplemented from time to time.
(ii) When used in this Warrant, the words "herein," "hereof," and
"hereunder," and words of similar import, shall refer to this Warrant as
a whole and not to any provision of this Warrant, and the words
"Section," "Schedule," and "Exhibit" shall refer to Sections of, and
Schedules and Exhibits to, this Warrant unless otherwise specified.
(iii) Whenever the context so requires, the neuter gender includes
the masculine or feminine, and the singular number includes the plural,
and vice versa.
Section 2. EXERCISE OF WARRANT.
(a) Subject to the terms and conditions hereof, this Warrant may be
exercised by the holder hereof then registered on the books of the Company, in
whole or in part, at any time on any business day or after the opening of
business on the date hereof and prior to 5:00 P.M. Eastern Standard Time on
2
the Expiration Date by (i) delivery of a written notice, in the form of the
subscription notice attached as Exhibit A hereto, of such holder's election to
exercise this Warrant, which notice shall specify the number of Warrant Shares
to be purchased, (ii) (A) payment to the Company of an amount equal to the
Warrant Exercise Price multiplied by the number of Warrant Shares as to which
the Warrant is being exercised (plus any applicable issue or transfer taxes)
(the "Aggregate Exercise Price") in cash or by check or wire transfer, or (B) by
notifying the Company that it should subtract from the number of Warrant Shares
Issuable to the holder upon such exercise an amount of warrant shares having a
last reported sale price (as reported by Bloomberg), or, if the foregoing is not
appliclable, the fair market value (in either case, the "Per Share Value"), on
the trading day immediately preceding the date of the subscription notice equal
the Aggregate Exercise Price of the Warrant shares for which this warrant is
being exercised (a "Cashless Exercise"), and (iii) the surrender of this
Warrant, to a common carrier for delivery to the Company as soon as practicable
following such date (but in any case prior to 5:00 P.M. Eastern Standard Time on
the Expiration Date), this Warrant (or an indemnification undertaking with
respect to this Warrant in the case of its loss, theft, or destruction);
provided that if such Warrant Shares are to be issued in any name other than
that of the registered holder of this Warrant, such issuance shall be deemed a
transfer and the provisions of Section 7 shall be applicable. In the event of
any exercise of the rights represented by this Warrant in compliance with this
Section 2, a certificate or certificates for the Warrant Shares so purchased, in
such denominations as may be requested by the holder hereof and registered in
the name of, or as directed by, the holder, shall be delivered at the Company's
expense to, or as directed by, such holder as soon as practicable after such
rights shall have been so exercised, and in any event no later than five (5)
business days after the Company's receipt of the Exercise Notice, the Aggregate
Exercise Price and this Warrant (or indemnification undertaking with respect to
this Warrant in the case of its loss, theft or destruction) Upon delivery of the
Exercise Notice, this Warrant (or such indemnification undertaking) and
Aggregate Exercise Price referred to in clause (ii) (A) above or notification to
the Company of a Cashless Exercise referred to in clause (ii) (B) above, the
holder of this Warrant shall be deemed for all corporate purposes to have become
the holder of record of the Warrant Shares with respect to which this Warrant
has been exercised, irrespective of the date of delivery of the certificates
evidencing such Warrant Shares. In the case of a dispute as to the determination
of the Warrant Exercise Price or the Average Market Price of a security or the
arithmetic calculation of the Warrant Shares, the Company shall promptly issue
to the holder the number of shares of Common Stock that is not disputed and
shall submit the disputed determinations or arithmetic calculations to the
holder via facsimile within five (5) business days of receipt of the holder's
subscription notice. If the holder and the Company are unable to agree upon the
determination of the Warrant Exercise Price or Average Market Price or
arithmetic calculation of the Warrant Shares within five (5) business days of
such disputed determination or arithmetic calculation being submitted to the
holder, then the Company shall immediately submit via facsimile (i) the disputed
determination of the Warrant Exercise Price or the Average Market Price to an
independent, reputable investment banking firm or (ii) the disputed arithmetic
calculation of the Warrant Shares to its independent, outside accountant. The
Company shall cause the investment banking firm or the accountant, as the case
may be, to perform the determinations or calculations and notify the Company and
the holder of the results no later than five business days from the time it
receives the disputed determinations or calculations. Such investment bank's or
accountant's determination or calculation, as the case may be, shall be deemed
conclusive absent manifest error and the Company shall be liable for the costs
and expenses related to such determination or calculation.
3
(b) Unless the rights represented by this Warrant shall have expired or
shall have been fully exercised, the Company shall, as soon as practicable and
in any event no later than five (5) business days after any exercise and at its
own expense, issue a new Warrant identical in all respects to the Warrant
exercised except (i) it shall represent rights to purchase the number of Warrant
Shares purchasable immediately prior to such exercise under the Warrant
exercised, less the number of Warrant Shares with respect to which such Warrant
is exercised, and (ii) the holder thereof shall be deemed for all corporate
purposes to have become the holder of record of such Warrant Shares immediately
prior to the close of business on the date on which the Warrant is surrendered
and payment of the amount due in respect of such exercise and any applicable
taxes is made, irrespective of the date of delivery of certificates evidencing
such Warrant Shares, except that, if the date of such surrender and payment is a
date when the stock transfer books of the Company are properly closed, such
person shall be deemed to have become the holder of such Warrant Shares at the
opening of business on the next succeeding date on which the stock transfer
books are open. Upon presentation of a duly executed Subscription Form in the
Form of Exhibit A to this Warrant, the holder shall be entitled to exercise this
Warrant in whole or in part, if the holder shall have previously exercised and
surrendered this Warrant and the Company shall not have issued a new Warrant
representing the number of shares issuable following such prior exercise.
(c) No fractional shares of Common Stock are to be issued upon the exercise
of this Warrant, but rather the number of shares of Common Stock issued upon
exercise of this Warrant shall be rounded down to the nearest whole number and
the Company shall pay to the Holder in lieu of such fractional share cash in an
amount in proportion to the Per Share Value on the date of payment.
(d) If the Company shall fail for any reason or for no reason to issue to
holder on a timely basis as described under this Section 2 a certificate for the
number of shares of Common Stock to which the holder is entitled upon the
holder's exercise of this Warrant, the Company shall, upon notice from the
holder and in lieu of any other remedies under this Agreement or otherwise
available to such holder pay as liquidated damages in cash to such holder for
each day such issuance is not timely effected an amount equal to .25% of the
product of (A) the sum of the number of shares of Common Stock not issued to the
holder on a timely basis and to which the holder is entitled, and (B) the sum
derived by subtracting (1) the Warrant exercise price then in effect, from (2)
the Closing Bid Price of the Common Stock on the last possible date which the
Company could have issued Common Stock to the holder without violating this
Section 2.
(e) The Company shall not affect any exercise of any Warrant and no holder
of any Warrant shall have the right to exercise any Warrant pursuant to Section
2 to the extent that after giving effect to such exercise such person (together
with such Persons affiliates) (A) would beneficially owned in excess of 4.9% of
the outstanding shares of Common Stock following such conversion and (B) would
have acquired, through exercise of any Warrant or otherwise, in excess of 4.9%
of the outstanding shares of the Common Stock following such exercise during the
60-day period ending on and including such exercise date. For purposes of the
foregoing sentence, the number of shares of Common Stock beneficially owned by a
person and its affiliates or acquired by a person and its affiliates, as the
case may be, shall include the number of shares of Common Stock issuable upon
the exercise of the Warrants with respect to which the determination of such
sentence is being made, but shall exclude the number of shares of Common Stock
which would be issuable upon
4
(i) exercise of the remaining, non exercisable Warrants beneficially owned by
such person and its affiliates and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of the Company
subject to limitation on conversion or exercise analogous to the limitation
contained herein beneficially owned by such Person and its affiliates. Except as
set forth in the preceding sentence, for purposes of this section 2(e),
beneficial ownership shall be calculated in accordance with Section 13 (d) of
the Securities Exchange Act of 1934, as amended. Notwithstanding anything to the
contrary contained herein, each Exercise Notice shall constitute a
representation by the holder submitting such Exercise Notice that, after giving
effect to such Exercise Notice (A) the holder will not beneficially own (as
determined in accordance with this Section 2(e)) and (B) during the 60-day
period ending on and including such exercise date, the holder will not have
acquired, through exercise of any Warrant or otherwise, a number of shares of
Common Stock in excess of 4.9% of the outstanding shares of Common Stock as
reflected in the Company's most recent Form 10-Q or Form 10-K, as the case may
be, or more recent public release or other public notice by the Company setting
forth the number of Shares of Common Stock outstanding, but after giving effect
to exercise of any Warrant by such holder since the date as of which such
numbers of outstanding shares of the Common Stock was reported, and the Company
shall be entitled to rely solely on the foregoing representation in complying
with this Section 2(e).
Section 3. COVENANTS AS TO COMMON STOCK. The Company hereby covenants and
agrees as follows:
(a) A Warrant issued in substitution for or replacement of this Warrant
will upon issuance be duly authorized and validly issued.
(b) All Warrant Shares which may be issued upon the exercise as set forth
herein of the rights represented by this Warrant will, upon issuance, be validly
issued, fully paid and nonassessable and free from all taxes, liens and charges
with respect to the issue thereof.
(c) During the period within which the rights represented by this Warrant
may be exercised, the Company will at all times have authorized and reserved at
least the number of shares of Common Stock needed to provide for the exercise of
the rights then represented by this Warrant and the par value of said shares
will at all times be less than or equal to the applicable Warrant Exercise
Price.
(d) The Company shall promptly secure the listing of the shares of Common
Stock issuable upon exercise of this Warrant upon each national securities
exchange or automated quotation system, if any, or over-the-counter-bulletin
board upon which shares of Common Stock are then listed or quoted (subject to
official notice of the over-the-counter bulletin board of issuance upon exercise
of this Warrant) and shall maintain, so long as any other shares of Common Stock
shall be so listed or quoted, such listing or quotation of all shares of Common
Stock from time to time issuable upon the exercise of this Warrant; and the
Company shall so list or obtain quotation on each such national securities
exchange, automated quotation system or over-the-counter bulletin board, as the
case may be, and shall maintain such listing in quotation of, any other shares
of capital stock of the Company issuable upon the exercise of this Warrant if
and so long as any shares of the same class shall be listed on such national
securities exchange, automated quotation system or over-the-counter bulletin
board.
5
(e) The Company will not, by amendment of its Certificate of Incorporation
or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities, or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. Without limiting the generality of the foregoing, the Company (i)
will not increase the par value of any shares of Common Stock receivable upon
the exercise of this Warrant above the Exercise Price then in effect, and (ii)
will take all such actions as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant.
(f) This Warrant will be binding upon any entity succeeding to the Company
by merger, consolidation or acquisition of all or substantially all of the
Company's assets.
(g) If at any time when the registration statement referred to in the
Agency Agreement is not effective the Company proposes to file with the
Securities and Exchange Commission a registration statement relating to an
offering for its own account or the account of others under the Securities Act
of any of its Securities (other than on Form S-4 or Form S-8 (or their
equivalents at such time) relating to securities to be issued solely in
connection with any acquisition of, or strategic transaction with, any entity or
business or equity securities issuable in connection with stock option or other
employee benefit plans) the Company shall promptly send to the Holder's written
notice of the Company's intention to file a registration statement and of the
holder's rights under this section and, if within five (5) days after receipt of
such notice, the holder hereof shall so request in writing, the Company shall
include in such registration statement all or any part of the Common Stock
underlying this Warrant the holder requests to be registered; provided, however,
that the foregoing shall not apply to any registration statement if the holders
of the securities to be registered thereon have a right to exclude the Warrant
Shares from such registration statement. If a registration pursuant this section
is to be an underwritten public offering and the managing underwriters advise
the Company in writing, that in their reasonable good faith opinion, marketing
or other factors dictate that a limitation on the number of shares of Company
common stock which may be included in the registration statement is necessary to
facilitate and not adversely affect the proposed offering, then the Company
shall include in such registration: (1) first, all securities the Company
proposes to sell for its own account, (2) second, up to the full number of
securities proposed to be registered for the account of the holders of
securities entitled to inclusion of their securities requested to be registered
by the holder hereof and other holders of securities entitled to participate in
the registration, as of the date hereof, drawn from them pro rata based on the
number each has requested to be included in such registration. Any holder of a
Warrant or Warrant Shares who wishes to participate in such registration must
execute such agreements and take such actions as are customarily executed or
taken by selling stockholders in connection with a registration.
Section 4. TAXES. The Company shall not be required to pay any tax or taxes
attributable to the initial issuance of the Warrant Shares or any permitted
transfer involved in the issue or delivery
6
of any certificates for Warrant Shares in a name other than that of the
registered holder hereof or upon any permitted transfer of this Warrant.
Section 5. WARRANT HOLDER NOT DEEMED A STOCKHOLDER. Except as otherwise
specifically provided herein, no holder, as such, of this Warrant shall be
entitled to vote or receive dividends or be deemed the holder of shares of the
Company for any purpose, nor shall anything contained in this Warrant be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote, give or withhold consent to any
corporate action (whether any reorganization, issue of stock, reclassification
of stock, consolidation, merger, conveyance or otherwise), receive notice of
meetings, receive dividends or subscription rights, or otherwise, prior to the
issuance to the holder of this Warrant of the Warrant Shares which he or she is
then entitled to receive upon the due exercise of this Warrant.
In addition, nothing contained in this Warrant shall be construed as
imposing any liabilities on such holder to purchase any securities or as a
stockholder of the Company, whether such liabilities are asserted by the Company
or by creditors of the Company. Notwithstanding this Section 5, the Company will
provide the holder of this Warrant with copies of the same notices and other
information given to the stockholders of the Company generally,
contemporaneously with the giving thereof to the stockholders.
Section 6. REPRESENTATIONS OF HOLDER. The holder of this Warrant, by the
acceptance hereof, represents (and any assignor shall represent) that it is
acquiring this Warrant and the Warrant Shares for its own account for investment
purposes and not with a view to, or for sale in connection with, any
distribution hereof, and not with any present intention of distributing any of
the same. The holder of this Warrant further represents (and any assignor shall
represent), by acceptance hereof, that, as of this date, such holder is an
"accredited investor" as such term is defined in Rule 501(a)(1) of Regulation D
promulgated by the Securities and Exchange Commission under the Securities Act
(an "Accredited Investor"). Upon exercise of this Warrant, the holder shall, if
requested by the Company, confirm in writing, in a form satisfactory to the
Company, that the Warrant Shares so purchased are being acquired solely for the
holder's own account and not as a nominee for any other party, for investment,
and not with a view toward distribution or resale and that such holder is an
Accredited Investor. If such holder cannot make such representations because
they would be factually incorrect, it shall be a condition to such holder's
exercise of the Warrant that the Company receive such other representations as
the Company considers reasonably necessary to assure the Company that the
issuance of its securities upon exercise of the Warrant shall not violate any
United States Federal or state securities laws.
Section 7. OWNERSHIP AND TRANSFER.
(a) The Company shall maintain at its principal executive offices (or such
other office or agency of the Company as it may designate by notice to the
holder hereof), a register for this Warrant, in which the Company shall record
the name and address of the person in whose name this Warrant has been issued,
as well as the name and address of each permissible transferee. The Company may
treat the person in whose name any Warrant is registered on the register as the
owner and holder
7
thereof for all purposes, notwithstanding any notice to the contrary, but in all
events recognizing any transfers made in accordance with the terms of this
Warrant.
(b) This Warrant and the rights granted to the holder hereof are
transferable, in whole or in part, upon surrender of this Warrant, together with
a properly executed warrant power in the form of Exhibit B attached hereto;
provided, however, that any transfer or assignment shall subject to the
conditions set forth in Section 6 above and Section 7(c) below.
(c) The holder of this Warrant understands that this Warrant and the
Warrant Shares have not been and are not expected to be, registered under the
Securities Act or any state securities laws, and may not be offered for sale,
sold, assigned or transferred unless (a) subsequently registered thereunder, or
(b) such holder shall have delivered to the Company an opinion of counsel,
reasonably satisfactory in form, scope and substance to the Company, to the
effect that the securities to be sold, assigned or transferred may be sold,
assigned or transferred pursuant to an exemption from such registration. Any
sale of such securities made in reliance on Rule 144 promulgated under the
Securities Act may be made only in accordance with the terms of said Rule and
further, if said Rule is not applicable, any resale of such securities under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the Securities
Act) may require compliance with some other exemption under the Securities Act
or the rules and regulations of the Securities and Exchange Commission
thereunder; and neither the Company nor any other person is under any obligation
to register the Series A Preferred Share Warrants under the Securities Act or
any state securities laws or to comply with the terms and conditions of any
exemption thereunder except as set forth in Section 7(d) below. All Warrants and
Warrant Shares shall bear a legend in substantially the form set forth at the
beginning hereof until the Company receives a satisfactory opinion of counsel
that such legend is no longer required.
(d) The Company shall register the Warrant Shares for resale under the
Securities Act pursuant to the Registration Rights Agreement dated as of July
31, 2000, by and between the Company and the Buyers listed on the signature page
thereto (the "Registration Rights Agreement").
Section 8. ADJUSTMENT OF WARRANT EXERCISE PRICE. In order to prevent
dilution of the rights granted under this Warrant, the Warrant Exercise Price
shall be adjusted from time to time as follows:
(a) ADJUSTMENT OF WARRANT EXERCISE PRICE UPON SUBDIVISION OR COMBINATION OF
COMMON STOCK. If the Company at any time after the date of issuance of this
Warrant, subdivides (by any stock split, stock dividend, re-capitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Warrant Exercise Price in effect immediately prior
to such subdivision will be proportionately reduced and the number of shares of
Common Stock obtainable upon exercise of this Warrant will be proportionately
increased. If the Company at any time after the date of issuance of this Warrant
combines (by combination, reverse stock split or otherwise) one or more classes
of its outstanding shares of Common Stock into a smaller number of shares, the
Warrant Exercise Price in effect immediately prior to such combination will be
proportionately increased and the number of shares of Common Stock obtainable
upon exercise of this Warrant will be proportionately decreased.
8
(b) REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. Any
recapitalization, reorganization, reclassification, consolidation, merger, sale
of all or substantially all of the Company's assets to another Person or other
similar transaction which is effected in such a way that holders of Common Stock
are entitled to receive (either directly or upon subsequent liquidation) stock,
securities or assets with respect to or in exchange for Common Stock is referred
to herein as in "Organic Change." Prior to the consummation of any Organic
Change, the Company will make appropriate provision (in form and substance
reasonably satisfactory to the holders of a majority of the Warrants then
outstanding) to insure that, upon the consummation of such Organic Change, each
of the holders of the Warrants will thereafter have the right to acquire and
receive upon exercise hereof in lieu of the Common Stock, such shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for the number of shares of Common Stock immediately theretofore acquirable and
receivable upon exercise of the Warrants had such Organic Change not taken
place. In any such case, the Company will make appropriate provision (in form
and substance reasonably satisfactory to the holders of a majority of the
Warrants then outstanding) with respect to such holders' rights and interests to
insure that the provisions of this Section 8(b) will thereafter be applicable to
the Warrants.
(c) NOTICES.
(i) Immediately upon any adjustment of the Warrant Exercise Price
pursuant to this Section 8, the Company will give written notice thereof to the
holder of this Warrant, setting forth in reasonable detail and certifying the
calculation of such adjustment.
(ii) The Company will give written notice to the holder of this
Warrant at least ten (10) days prior to the date on which the Company closes its
books or takes a record (A) with respect to any dividend or distribution upon
the Common Stock, (B) with respect to any pro rata subscription offer to holders
of Common Stock or (C) for determining rights to vote with respect to any
Organic Change, dissolution or liquidation, except that in no event shall such
notice be provided to such holder prior to such information being made known to
the public.
(iii) The Company will also give written notice to the holder of this
Warrant at least ten (10) days prior to the date on which any Organic Change,
dissolution or liquidation will take place.
Section 10. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT. If this Warrant
is lost, stolen, mutilated or destroyed, the Company shall, on receipt of an
indemnification undertaking, issue a new Warrant of like denomination and tenor
as the Warrant so lost, stolen, mutilated or destroyed.
Section 11. NOTICE. Any notices, consents, waivers, or other communications
required or permitted to be given under the terms of this Warrant must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile, provided a copy
is mailed by U.S. certified mail, return receipt requested; (iii) three (3) days
after being sent by U.S. certified mail, return receipt requested; or (iv) one
(1) day after deposit with a nationally recognized overnight delivery service,
in each case properly addressed to the party to receive the same. The addresses
and facsimile numbers for such communications shall be:
9
If to the Company: StemCells, Inc.
525 Del Rey Avenue
Suite C
Sunnyvale CA. 94086
Attention: George Dunbar, President & CEO
Telephone: (408) 731-8670
Facsimile: (408) 731-8674
With a copy to: Ropes & Gray
One International Place
Boston, MA 02110
Attention: Geoffrey B. Davis, Esq.
Telephone: (617) 951-7000
Facsimile: (617) 951-7050
If to a holder of this Warrant, to it at the address set forth below such
holder's signature on the signature page hereof. Each party shall provide five
(5) days' prior written notice to the other party of any change in address or
facsimile number.
Section 12. AMENDMENTS. This Warrant and any term hereof may be changed,
waived, discharged, or terminated only by an instrument in writing signed by the
party or holder hereof against which enforcement of such change, waiver,
discharge or termination is sought.
Section 13. DATE. The date of this Warrant is August 3, 2000. This Warrant,
in all events, shall be wholly void and of no effect after 5:00 P.M. Eastern
Standard Time on the Expiration Date, except that notwithstanding any other
provisions hereof, the provisions of Section 7 shall continue in full force and
effect after such date as to any Warrant Shares or other securities issued upon
the exercise of this Warrant.
Section 14. AMENDMENT AND WAIVER. Except as otherwise provided herein, the
provisions of the Warrants may be amended and the Company may take any action
herein prohibited, or omitted to perform any act herein required to be performed
by it, only if the Company has obtained the written consent of the holders of
Warrants representing a majority of the shares of Common Stock obtainable upon
exercise of the Warrants then outstanding, provided that no such action may
increase the Warrant Exercise Price of the Warrants or decrease the number of
shares or class of stock obtainable upon exercise of any warrants with out the
written consent of the holder of such warrant.
Section 15. DESCRIPTIVE HEADINGS; GOVERNING LAW. The descriptive headings
of the several sections of this Warrant are for convenience of reference only
and shall not limit or otherwise affect the meaning hereof. This Warrant shall
be governed by and interpreted under the laws of the State of New York, without
giving effect to any choice of law or conflict of law provision.
This Warrant has been duly executed by the Company as of the date first set
forth above.
10
STEMCELLS, INC.
By:
-------------------------------
Name:
Title:
Robert Farrell
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
Address:
--------------------------
- ----------------------------------
- ----------------------------------
11
EXHIBIT A
FORM OF SUBSCRIPTION
(Complete and sign only exercise of the Warrant in whole or in part.)
TO: StemCells, Inc.
The undersigned, the holder of the attached Warrant to which this Form of
Subscription applies, hereby irrevocably elects to exercise the purchase rights
represented by such warrant for and to purchase thereunder _______ shares of
Common Stock, par value $.01 per share (the "Shares"), from StemCells, Inc. (or
such other securities issuable pursuant to the terms of the Warrant) and either:
(i) herewith makes payment of $_______ therefor in cash or by certified or
official bank check or (ii) elects to make payment upon a cashless basis
pursuant to Section 2(b) of the Warrant and hereby exercises ______ Warrants and
the Per Share Value for purposes hereof is $_______. The undersigned hereby
requests that the certificate(s) representing such securities be issued in the
name(s) and delivered t the address(es) as follows:
Name:
---------------------------------------
Address:
---------------------------------------
Social Security Number:
---------------------------------------
Deliver to:
---------------------------------------
Address:
---------------------------------------
This the foregoing subscription evidences an exercise of the Warrant to
purchase fewer than all of the Shares (or other securities issuable pursuant to
the terms of the Warrant) to which the undersigned is entitled under such
warrant, please issue a new warrant, of like tenor, relating to the remaining
portion of the securities issuable upon exercise of such warrant (or other
securities issuable pursuant to the terms of such warrant) in the name(s), and
deliver the same to the address(es), as follow:
Name:
---------------------------------------
Address:
---------------------------------------
---------------------------------------
Dated:
---------------------------------------
- ------------------------- -------------------------------------------
(Name of Holder) (Social Security or Taxpayer Identification
Number of Holder, if applicable)
- -----------------------------
(Signature of Holder or Authorized
Signatory)
Signature Guaranteed:
-------------------------------------
12
EXHIBIT B
FORM OF WARRANT POWER
FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to
____________________________________________ Federal Identification No.______, a
warrant to purchase shares of the capital stock of StemCells, Inc. a Delaware
corporation, represented by warrant certificate No._________, standing in the
name of the undersigned on the books of said corporation. The undersigned does
hereby irrevocably constitute and appoint ____________________________, attorney
to transfer the warrants of said corporation, with full power of substitution in
the premises.
Dated:
---------------------------------
By:
---------------------------
Its:
--------------------------
13
EXHIBIT 4.5
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW
TOWARD RESALE OR DISTRIBUTION. THIS WARRANT MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE
REASONABLY ACCEPTABLE TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER SAID
ACT.
STEMCELLS, INC.
WARRANT TO PURCHASE COMMON STOCK
Warrant No.: MD-003 Number of Shares Issuable:
20,000
Date of Issuance: August 3, 2000
StemCells, Inc., a Delaware corporation (the "Company"), hereby certifies
that, for good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Joseph Donahue, the registered holder hereof or its
permitted assigns, is entitled, subject to the terms set forth below, to
purchase from the Company upon surrender of this Warrant, at any time or times
on or after the date hereof, but not after 5:00 P.M. Eastern Standard Time on
the Expiration Date (as defined herein) twenty thousand (20,000) fully paid,
nonassessable shares of Common Stock (as defined herein) of the Company (the
"Warrant Shares") at the Warrant Exercise Price per share provided in Section
l(b) below;
Section 1.
(a) LETTER AGREEMENT. This Warrant is one of the warrants (the "Warrants")
issued pursuant to Section 3.4 of the Placement Agency Agreement between the
Company and May Davis Group, Inc., dated as of July 31, 2000 (the "AGENCY
AGREEMENT").
(b) DEFINITIONS. The following words and terms as used in this Warrant
shall have the following meanings:
1
(i) "COMMON STOCK" means (i) the Company's common stock, par value .01
per share, and (ii) any capital stock into which such Common Stock shall have
been changed or any capital stock resulting from a reclassification of such
Common Stock.
(ii) "EXPIRATION DATE" means the date five (5) years from the date of
the issuance of the Warrant or, if such date falls on a Saturday, Sunday or
other day on which banks are required or authorized to be closed in the City of
New York or the State of New York (a "Holiday"), the next preceding date that is
not a Holiday.
(iii) "PERSON" means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
(iv) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(v) "WARRANT" shall mean this warrant and all warrants issued in
exchange, transfer or replacement of any thereof.
(vi) "WARRANT EXERCISE PRICE" shall be equal to $5.0375, subject to
adjustment as hereinafter provided.
(vii) "WARRANT SHARES" means the shares of Common Stock issuable upon
exercise of this Warrant.
(b) OTHER DEFINITIONAL PROVISIONS.
(i) Except as otherwise specified herein, all references herein (A) to
the Company shall be deemed to include the Company's successors and (B) to any
applicable law defined or referred to herein, shall be deemed references to such
applicable law as the same may have been or may be amended or supplemented from
time to time.
(ii) When used in this Warrant, the words "herein," "hereof," and
"hereunder," and words of similar import, shall refer to this Warrant as a whole
and not to any provision of this Warrant, and the words "Section," "Schedule,"
and "Exhibit" shall refer to Sections of, and Schedules and Exhibits to, this
Warrant unless otherwise specified.
(iii) Whenever the context so requires, the neuter gender includes the
masculine or feminine, and the singular number includes the plural, and vice
versa.
Section 2. EXERCISE OF WARRANT.
(a) Subject to the terms and conditions hereof, this Warrant may be
exercised by the holder hereof then registered on the books of the Company, in
whole or in part, at any time on any business day or after the opening of
business on the date hereof and prior to 5:00 P.M. Eastern Standard Time on
2
the Expiration Date by (i) delivery of a written notice, in the form of the
subscription notice attached as Exhibit A hereto, of such holder's election to
exercise this Warrant, which notice shall specify the number of Warrant Shares
to be purchased, (ii) (A) payment to the Company of an amount equal to the
Warrant Exercise Price multiplied by the number of Warrant Shares as to which
the Warrant is being exercised (plus any applicable issue or transfer taxes)
(the "Aggregate Exercise Price") in cash or by check or wire transfer, or (B) by
notifying the Company that it should subtract from the number of Warrant Shares
Issuable to the holder upon such exercise an amount of warrant shares having a
last reported sale price (as reported by Bloomberg), or, if the foregoing is not
appliclable, the fair market value (in either case, the "Per Share Value"), on
the trading day immediately preceding the date of the subscription notice equal
the Aggregate Exercise Price of the Warrant shares for which this warrant is
being exercised (a "Cashless Exercise"), and (iii) the surrender of this
Warrant, to a common carrier for delivery to the Company as soon as practicable
following such date (but in any case prior to 5:00 P.M. Eastern Standard Time on
the Expiration Date), this Warrant (or an indemnification undertaking with
respect to this Warrant in the case of its loss, theft, or destruction);
provided that if such Warrant Shares are to be issued in any name other than
that of the registered holder of this Warrant, such issuance shall be deemed a
transfer and the provisions of Section 7 shall be applicable. In the event of
any exercise of the rights represented by this Warrant in compliance with this
Section 2, a certificate or certificates for the Warrant Shares so purchased, in
such denominations as may be requested by the holder hereof and registered in
the name of, or as directed by, the holder, shall be delivered at the Company's
expense to, or as directed by, such holder as soon as practicable after such
rights shall have been so exercised, and in any event no later than five (5)
business days after the Company's receipt of the Exercise Notice, the Aggregate
Exercise Price and this Warrant (or indemnification undertaking with respect to
this Warrant in the case of its loss, theft or destruction) Upon delivery of the
Exercise Notice, this Warrant (or such indemnification undertaking) and
Aggregate Exercise Price referred to in clause (ii) (A) above or notification to
the Company of a Cashless Exercise referred to in clause (ii) (B) above, the
holder of this Warrant shall be deemed for all corporate purposes to have become
the holder of record of the Warrant Shares with respect to which this Warrant
has been exercised, irrespective of the date of delivery of the certificates
evidencing such Warrant Shares. In the case of a dispute as to the determination
of the Warrant Exercise Price or the Average Market Price of a security or the
arithmetic calculation of the Warrant Shares, the Company shall promptly issue
to the holder the number of shares of Common Stock that is not disputed and
shall submit the disputed determinations or arithmetic calculations to the
holder via facsimile within five (5) business days of receipt of the holder's
subscription notice. If the holder and the Company are unable to agree upon the
determination of the Warrant Exercise Price or Average Market Price or
arithmetic calculation of the Warrant Shares within five (5) business days of
such disputed determination or arithmetic calculation being submitted to the
holder, then the Company shall immediately submit via facsimile (i) the disputed
determination of the Warrant Exercise Price or the Average Market Price to an
independent, reputable investment banking firm or (ii) the disputed arithmetic
calculation of the Warrant Shares to its independent, outside accountant. The
Company shall cause the investment banking firm or the accountant, as the case
may be, to perform the determinations or calculations and notify the Company and
the holder of the results no later than five business days from the time it
receives the disputed determinations or calculations. Such investment bank's or
accountant's determination or calculation, as the case may be, shall be deemed
conclusive absent manifest error and the Company shall be liable for the costs
and expenses related to such determination or calculation.
3
(b) Unless the rights represented by this Warrant shall have expired or
shall have been fully exercised, the Company shall, as soon as practicable and
in any event no later than five (5) business days after any exercise and at its
own expense, issue a new Warrant identical in all respects to the Warrant
exercised except (i) it shall represent rights to purchase the number of Warrant
Shares purchasable immediately prior to such exercise under the Warrant
exercised, less the number of Warrant Shares with respect to which such Warrant
is exercised, and (ii) the holder thereof shall be deemed for all corporate
purposes to have become the holder of record of such Warrant Shares immediately
prior to the close of business on the date on which the Warrant is surrendered
and payment of the amount due in respect of such exercise and any applicable
taxes is made, irrespective of the date of delivery of certificates evidencing
such Warrant Shares, except that, if the date of such surrender and payment is a
date when the stock transfer books of the Company are properly closed, such
person shall be deemed to have become the holder of such Warrant Shares at the
opening of business on the next succeeding date on which the stock transfer
books are open. Upon presentation of a duly executed Subscription Form in the
Form of Exhibit A to this Warrant, the holder shall be entitled to exercise this
Warrant in whole or in part, if the holder shall have previously exercised and
surrendered this Warrant and the Company shall not have issued a new Warrant
representing the number of shares issuable following such prior exercise.
(c) No fractional shares of Common Stock are to be issued upon the exercise
of this Warrant, but rather the number of shares of Common Stock issued upon
exercise of this Warrant shall be rounded down to the nearest whole number and
the Company shall pay to the Holder in lieu of such fractional share cash in an
amount in proportion to the Per Share Value on the date of payment.
(d) If the Company shall fail for any reason or for no reason to issue to
holder on a timely basis as described under this Section 2 a certificate for the
number of shares of Common Stock to which the holder is entitled upon the
holder's exercise of this Warrant, the Company shall, upon notice from the
holder and in lieu of any other remedies under this Agreement or otherwise
available to such holder pay as liquidated damages in cash to such holder for
each day such issuance is not timely effected an amount equal to .25% of the
product of (A) the sum of the number of shares of Common Stock not issued to the
holder on a timely basis and to which the holder is entitled, and (B) the sum
derived by subtracting (1) the Warrant exercise price then in effect, from (2)
the Closing Bid Price of the Common Stock on the last possible date which the
Company could have issued Common Stock to the holder without violating this
Section 2.
(e) The Company shall not affect any exercise of any Warrant and no holder
of any Warrant shall have the right to exercise any Warrant pursuant to Section
2 to the extent that after giving effect to such exercise such person (together
with such Persons affiliates) (A) would beneficially owned in excess of 4.9% of
the outstanding shares of Common Stock following such conversion and (B) would
have acquired, through exercise of any Warrant or otherwise, in excess of 4.9%
of the outstanding shares of the Common Stock following such exercise during the
60-day period ending on and including such exercise date. For purposes of the
foregoing sentence, the number of shares of Common Stock beneficially owned by a
person and its affiliates or acquired by a person and its affiliates, as the
case may be, shall include the number of shares of Common Stock issuable upon
the exercise of the Warrants with respect to which the determination of such
sentence is being made, but shall exclude the number of shares of Common Stock
which would be issuable upon
4
(i) exercise of the remaining, non exercisable Warrants beneficially owned by
such person and its affiliates and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of the Company
subject to limitation on conversion or exercise analogous to the limitation
contained herein beneficially owned by such Person and its affiliates. Except as
set forth in the preceding sentence, for purposes of this section 2(e),
beneficial ownership shall be calculated in accordance with Section 13 (d) of
the Securities Exchange Act of 1934, as amended. Notwithstanding anything to the
contrary contained herein, each Exercise Notice shall constitute a
representation by the holder submitting such Exercise Notice that, after giving
effect to such Exercise Notice (A) the holder will not beneficially own (as
determined in accordance with this Section 2(e)) and (B) during the 60-day
period ending on and including such exercise date, the holder will not have
acquired, through exercise of any Warrant or otherwise, a number of shares of
Common Stock in excess of 4.9% of the outstanding shares of Common Stock as
reflected in the Company's most recent Form 10-Q or Form 10-K, as the case may
be, or more recent public release or other public notice by the Company setting
forth the number of Shares of Common Stock outstanding, but after giving effect
to exercise of any Warrant by such holder since the date as of which such
numbers of outstanding shares of the Common Stock was reported, and the Company
shall be entitled to rely solely on the foregoing representation in complying
with this Section 2(e).
Section 3. COVENANTS AS TO COMMON STOCK. The Company hereby covenants and
agrees as follows:
(a) A Warrant issued in substitution for or replacement of this Warrant
will upon issuance be duly authorized and validly issued.
(b) All Warrant Shares which may be issued upon the exercise as set forth
herein of the rights represented by this Warrant will, upon issuance, be validly
issued, fully paid and nonassessable and free from all taxes, liens and charges
with respect to the issue thereof.
(c) During the period within which the rights represented by this Warrant
may be exercised, the Company will at all times have authorized and reserved at
least the number of shares of Common Stock needed to provide for the exercise of
the rights then represented by this Warrant and the par value of said shares
will at all times be less than or equal to the applicable Warrant Exercise
Price.
(d) The Company shall promptly secure the listing of the shares of Common
Stock issuable upon exercise of this Warrant upon each national securities
exchange or automated quotation system, if any, or over-the-counter-bulletin
board upon which shares of Common Stock are then listed or quoted (subject to
official notice of the over-the-counter bulletin board of issuance upon exercise
of this Warrant) and shall maintain, so long as any other shares of Common Stock
shall be so listed or quoted, such listing or quotation of all shares of Common
Stock from time to time issuable upon the exercise of this Warrant; and the
Company shall so list or obtain quotation on each such national securities
exchange, automated quotation system or over-the-counter bulletin board, as the
case may be, and shall maintain such listing in quotation of, any other shares
of capital stock of the Company issuable upon the exercise of this Warrant if
and so long as any shares of the same class shall be listed on such national
securities exchange, automated quotation system or over-the-counter bulletin
board.
5
(e) The Company will not, by amendment of its Certificate of Incorporation
or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities, or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. Without limiting the generality of the foregoing, the Company (i)
will not increase the par value of any shares of Common Stock receivable upon
the exercise of this Warrant above the Exercise Price then in effect, and (ii)
will take all such actions as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant.
(f) This Warrant will be binding upon any entity succeeding to the Company
by merger, consolidation or acquisition of all or substantially all of the
Company's assets.
(g) If at any time when the registration statement referred to in the
Agency Agreement is not effective the Company proposes to file with the
Securities and Exchange Commission a registration statement relating to an
offering for its own account or the account of others under the Securities Act
of any of its Securities (other than on Form S-4 or Form S-8 (or their
equivalents at such time) relating to securities to be issued solely in
connection with any acquisition of, or strategic transaction with, any entity or
business or equity securities issuable in connection with stock option or other
employee benefit plans) the Company shall promptly send to the Holder's written
notice of the Company's intention to file a registration statement and of the
holder's rights under this section and, if within five (5) days after receipt of
such notice, the holder hereof shall so request in writing, the Company shall
include in such registration statement all or any part of the Common Stock
underlying this Warrant the holder requests to be registered; provided, however,
that the foregoing shall not apply to any registration statement if the holders
of the securities to be registered thereon have a right to exclude the Warrant
Shares from such registration statement. If a registration pursuant this section
is to be an underwritten public offering and the managing underwriters advise
the Company in writing, that in their reasonable good faith opinion, marketing
or other factors dictate that a limitation on the number of shares of Company
common stock which may be included in the registration statement is necessary to
facilitate and not adversely affect the proposed offering, then the Company
shall include in such registration: (1) first, all securities the Company
proposes to sell for its own account, (2) second, up to the full number of
securities proposed to be registered for the account of the holders of
securities entitled to inclusion of their securities requested to be registered
by the holder hereof and other holders of securities entitled to participate in
the registration, as of the date hereof, drawn from them pro rata based on the
number each has requested to be included in such registration. Any holder of a
Warrant or Warrant Shares who wishes to participate in such registration must
execute such agreements and take such actions as are customarily executed or
taken by selling stockholders in connection with a registration.
Section 4. TAXES. The Company shall not be required to pay any tax or taxes
attributable to the initial issuance of the Warrant Shares or any permitted
transfer involved in the issue or delivery
6
of any certificates for Warrant Shares in a name other than that of the
registered holder hereof or upon any permitted transfer of this Warrant.
Section 5. WARRANT HOLDER NOT DEEMED A STOCKHOLDER. Except as otherwise
specifically provided herein, no holder, as such, of this Warrant shall be
entitled to vote or receive dividends or be deemed the holder of shares of the
Company for any purpose, nor shall anything contained in this Warrant be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote, give or withhold consent to any
corporate action (whether any reorganization, issue of stock, reclassification
of stock, consolidation, merger, conveyance or otherwise), receive notice of
meetings, receive dividends or subscription rights, or otherwise, prior to the
issuance to the holder of this Warrant of the Warrant Shares which he or she is
then entitled to receive upon the due exercise of this Warrant.
In addition, nothing contained in this Warrant shall be construed as
imposing any liabilities on such holder to purchase any securities or as a
stockholder of the Company, whether such liabilities are asserted by the Company
or by creditors of the Company. Notwithstanding this Section 5, the Company will
provide the holder of this Warrant with copies of the same notices and other
information given to the stockholders of the Company generally,
contemporaneously with the giving thereof to the stockholders.
Section 6. REPRESENTATIONS OF HOLDER. The holder of this Warrant, by the
acceptance hereof, represents (and any assignor shall represent) that it is
acquiring this Warrant and the Warrant Shares for its own account for investment
purposes and not with a view to, or for sale in connection with, any
distribution hereof, and not with any present intention of distributing any of
the same. The holder of this Warrant further represents (and any assignor shall
represent), by acceptance hereof, that, as of this date, such holder is an
"accredited investor" as such term is defined in Rule 501(a)(1) of Regulation D
promulgated by the Securities and Exchange Commission under the Securities Act
(an "Accredited Investor"). Upon exercise of this Warrant, the holder shall, if
requested by the Company, confirm in writing, in a form satisfactory to the
Company, that the Warrant Shares so purchased are being acquired solely for the
holder's own account and not as a nominee for any other party, for investment,
and not with a view toward distribution or resale and that such holder is an
Accredited Investor. If such holder cannot make such representations because
they would be factually incorrect, it shall be a condition to such holder's
exercise of the Warrant that the Company receive such other representations as
the Company considers reasonably necessary to assure the Company that the
issuance of its securities upon exercise of the Warrant shall not violate any
United States Federal or state securities laws.
Section 7. OWNERSHIP AND TRANSFER.
(a) The Company shall maintain at its principal executive offices (or such
other office or agency of the Company as it may designate by notice to the
holder hereof), a register for this Warrant, in which the Company shall record
the name and address of the person in whose name this Warrant has been issued,
as well as the name and address of each permissible transferee. The Company may
treat the person in whose name any Warrant is registered on the register as the
owner and holder
7
thereof for all purposes, notwithstanding any notice to the contrary, but in all
events recognizing any transfers made in accordance with the terms of this
Warrant.
(b) This Warrant and the rights granted to the holder hereof are
transferable, in whole or in part, upon surrender of this Warrant, together with
a properly executed warrant power in the form of Exhibit B attached hereto;
provided, however, that any transfer or assignment shall subject to the
conditions set forth in Section 6 above and Section 7(c) below.
(c) The holder of this Warrant understands that this Warrant and the
Warrant Shares have not been and are not expected to be, registered under the
Securities Act or any state securities laws, and may not be offered for sale,
sold, assigned or transferred unless (a) subsequently registered thereunder, or
(b) such holder shall have delivered to the Company an opinion of counsel,
reasonably satisfactory in form, scope and substance to the Company, to the
effect that the securities to be sold, assigned or transferred may be sold,
assigned or transferred pursuant to an exemption from such registration. Any
sale of such securities made in reliance on Rule 144 promulgated under the
Securities Act may be made only in accordance with the terms of said Rule and
further, if said Rule is not applicable, any resale of such securities under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the Securities
Act) may require compliance with some other exemption under the Securities Act
or the rules and regulations of the Securities and Exchange Commission
thereunder; and neither the Company nor any other person is under any obligation
to register the Series A Preferred Share Warrants under the Securities Act or
any state securities laws or to comply with the terms and conditions of any
exemption thereunder except as set forth in Section 7(d) below. All Warrants and
Warrant Shares shall bear a legend in substantially the form set forth at the
beginning hereof until the Company receives a satisfactory opinion of counsel
that such legend is no longer required.
(d) The Company shall register the Warrant Shares for resale under the
Securities Act pursuant to the Registration Rights Agreement dated as of July
31, 2000, by and between the Company and the Buyers listed on the signature page
thereto (the "Registration Rights Agreement").
Section 8. ADJUSTMENT OF WARRANT EXERCISE PRICE. In order to prevent
dilution of the rights granted under this Warrant, the Warrant Exercise Price
shall be adjusted from time to time as follows:
(a) ADJUSTMENT OF WARRANT EXERCISE PRICE UPON SUBDIVISION OR COMBINATION OF
COMMON STOCK. If the Company at any time after the date of issuance of this
Warrant, subdivides (by any stock split, stock dividend, re-capitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Warrant Exercise Price in effect immediately prior
to such subdivision will be proportionately reduced and the number of shares of
Common Stock obtainable upon exercise of this Warrant will be proportionately
increased. If the Company at any time after the date of issuance of this Warrant
combines (by combination, reverse stock split or otherwise) one or more classes
of its outstanding shares of Common Stock into a smaller number of shares, the
Warrant Exercise Price in effect immediately prior to such combination will be
proportionately increased and the number of shares of Common Stock obtainable
upon exercise of this Warrant will be proportionately decreased.
8
(b) REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. Any
recapitalization, reorganization, reclassification, consolidation, merger, sale
of all or substantially all of the Company's assets to another Person or other
similar transaction which is effected in such a way that holders of Common Stock
are entitled to receive (either directly or upon subsequent liquidation) stock,
securities or assets with respect to or in exchange for Common Stock is referred
to herein as in "Organic Change." Prior to the consummation of any Organic
Change, the Company will make appropriate provision (in form and substance
reasonably satisfactory to the holders of a majority of the Warrants then
outstanding) to insure that, upon the consummation of such Organic Change, each
of the holders of the Warrants will thereafter have the right to acquire and
receive upon exercise hereof in lieu of the Common Stock, such shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for the number of shares of Common Stock immediately theretofore acquirable and
receivable upon exercise of the Warrants had such Organic Change not taken
place. In any such case, the Company will make appropriate provision (in form
and substance reasonably satisfactory to the holders of a majority of the
Warrants then outstanding) with respect to such holders' rights and interests to
insure that the provisions of this Section 8(b) will thereafter be applicable to
the Warrants.
(c) NOTICES.
(i) Immediately upon any adjustment of the Warrant Exercise Price
pursuant to this Section 8, the Company will give written notice thereof to the
holder of this Warrant, setting forth in reasonable detail and certifying the
calculation of such adjustment.
(ii) The Company will give written notice to the holder of this
Warrant at least ten (10) days prior to the date on which the Company closes its
books or takes a record (A) with respect to any dividend or distribution upon
the Common Stock, (B) with respect to any pro rata subscription offer to holders
of Common Stock or (C) for determining rights to vote with respect to any
Organic Change, dissolution or liquidation, except that in no event shall such
notice be provided to such holder prior to such information being made known to
the public.
(iii) The Company will also give written notice to the holder of this
Warrant at least ten (10) days prior to the date on which any Organic Change,
dissolution or liquidation will take place.
Section 10. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT. If this Warrant
is lost, stolen, mutilated or destroyed, the Company shall, on receipt of an
indemnification undertaking, issue a new Warrant of like denomination and tenor
as the Warrant so lost, stolen, mutilated or destroyed.
Section 11. NOTICE. Any notices, consents, waivers, or other communications
required or permitted to be given under the terms of this Warrant must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile, provided a copy
is mailed by U.S. certified mail, return receipt requested; (iii) three (3) days
after being sent by U.S. certified mail, return receipt requested; or (iv) one
(1) day after deposit with a nationally recognized overnight delivery service,
in each case properly addressed to the party to receive the same. The addresses
and facsimile numbers for such communications shall be:
9
If to the Company: StemCells, Inc.
525 Del Rey Avenue
Suite C
Sunnyvale CA. 94086
Attention: George Dunbar, President & CEO
Telephone: (408) 731-8670
Facsimile: (408) 731-8674
With a copy to: Ropes & Gray
One International Place
Boston, MA 02110
Attention: Geoffrey B. Davis, Esq.
Telephone: (617) 951-7000
Facsimile: (617) 951-7050
If to a holder of this Warrant, to it at the address set forth below such
holder's signature on the signature page hereof. Each party shall provide five
(5) days' prior written notice to the other party of any change in address or
facsimile number.
Section 12. AMENDMENTS. This Warrant and any term hereof may be changed,
waived, discharged, or terminated only by an instrument in writing signed by the
party or holder hereof against which enforcement of such change, waiver,
discharge or termination is sought.
Section 13. DATE. The date of this Warrant is August 3, 2000. This Warrant,
in all events, shall be wholly void and of no effect after 5:00 P.M. Eastern
Standard Time on the Expiration Date, except that notwithstanding any other
provisions hereof, the provisions of Section 7 shall continue in full force and
effect after such date as to any Warrant Shares or other securities issued upon
the exercise of this Warrant.
Section 14. AMENDMENT AND WAIVER. Except as otherwise provided herein, the
provisions of the Warrants may be amended and the Company may take any action
herein prohibited, or omitted to perform any act herein required to be performed
by it, only if the Company has obtained the written consent of the holders of
Warrants representing a majority of the shares of Common Stock obtainable upon
exercise of the Warrants then outstanding, provided that no such action may
increase the Warrant Exercise Price of the Warrants or decrease the number of
shares or class of stock obtainable upon exercise of any warrants with out the
written consent of the holder of such warrant.
Section 15. DESCRIPTIVE HEADINGS; GOVERNING LAW. The descriptive headings
of the several sections of this Warrant are for convenience of reference only
and shall not limit or otherwise affect the meaning hereof. This Warrant shall
be governed by and interpreted under the laws of the State of New York, without
giving effect to any choice of law or conflict of law provision.
This Warrant has been duly executed by the Company as of the date first set
forth above.
10
STEMCELLS, INC.
By:
-------------------------------
Name:
Title:
Joseph Donahue
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
Address:
--------------------------
--------------------------
--------------------------
11
EXHIBIT A
FORM OF SUBSCRIPTION
(Complete and sign only exercise of the Warrant in whole or in part.)
TO: StemCells, Inc.
The undersigned, the holder of the attached Warrant to which this Form of
Subscription applies, hereby irrevocably elects to exercise the purchase rights
represented by such warrant for and to purchase thereunder _______ shares of
Common Stock, par value $.01 per share (the "Shares"), from StemCells, Inc. (or
such other securities issuable pursuant to the terms of the Warrant) and either:
(i) herewith makes payment of $_______ therefor in cash or by certified or
official bank check or (ii) elects to make payment upon a cashless basis
pursuant to Section 2(b) of the Warrant and hereby exercises ______ Warrants and
the Per Share Value for purposes hereof is $_______. The undersigned hereby
requests that the certificate(s) representing such securities be issued in the
name(s) and delivered t the address(es) as follows:
Name:
---------------------------------------
Address:
---------------------------------------
Social Security Number:
---------------------------------------
Deliver to:
---------------------------------------
Address:
---------------------------------------
This the foregoing subscription evidences an exercise of the Warrant to
purchase fewer than all of the Shares (or other securities issuable pursuant to
the terms of the Warrant) to which the undersigned is entitled under such
warrant, please issue a new warrant, of like tenor, relating to the remaining
portion of the securities issuable upon exercise of such warrant (or other
securities issuable pursuant to the terms of such warrant) in the name(s), and
deliver the same to the address(es), as follow:
Name:
---------------------------------------
Address:
---------------------------------------
---------------------------------------
Dated:
---------------------------------------
- ------------------------- -------------------------------------------
(Name of Holder) (Social Security or Taxpayer Identification
Number of Holder, if applicable)
- -----------------------------
(Signature of Holder or Authorized
Signatory)
Signature Guaranteed:
-------------------------------------
12
EXHIBIT B
FORM OF WARRANT POWER
FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to
____________________________________________ Federal Identification No.______, a
warrant to purchase shares of the capital stock of StemCells, Inc. a Delaware
corporation, represented by warrant certificate No._________, standing in the
name of the undersigned on the books of said corporation. The undersigned does
hereby irrevocably constitute and appoint ____________________________, attorney
to transfer the warrants of said corporation, with full power of substitution in
the premises.
Dated:
---------------------------------
By:
---------------------------
Its:
--------------------------
13
EXHIBIT 4.6
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW
TOWARD RESALE OR DISTRIBUTION. THIS WARRANT MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE
REASONABLY ACCEPTABLE TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER SAID
ACT.
STEMCELLS, INC.
WARRANT TO PURCHASE COMMON STOCK
Warrant No.: MD-004 Number of Shares Issuable:
20,000
Date of Issuance: August 3, 2000
StemCells, Inc., a Delaware corporation (the "Company"), hereby certifies
that, for good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Hunter Singer, the registered holder hereof or its
permitted assigns, is entitled, subject to the terms set forth below, to
purchase from the Company upon surrender of this Warrant, at any time or times
on or after the date hereof, but not after 5:00 P.M. Eastern Standard Time on
the Expiration Date (as defined herein) twenty thousand (20,000) fully paid,
nonassessable shares of Common Stock (as defined herein) of the Company (the
"Warrant Shares") at the Warrant Exercise Price per share provided in Section
l(b) below;
Section 1.
(a) LETTER AGREEMENT. This Warrant is one of the warrants (the "Warrants")
issued pursuant to Section 3.4 of the Placement Agency Agreement between the
Company and May Davis Group, Inc., dated as of July 31, 2000 (the "AGENCY
AGREEMENT").
(b) DEFINITIONS. The following words and terms as used in this Warrant
shall have the following meanings:
1
(i) "COMMON STOCK" means (i) the Company's common stock, par value .01
per share, and (ii) any capital stock into which such Common Stock shall have
been changed or any capital stock resulting from a reclassification of such
Common Stock.
(ii) "EXPIRATION DATE" means the date five (5) years from the date of
the issuance of the Warrant or, if such date falls on a Saturday, Sunday or
other day on which banks are required or authorized to be closed in the City of
New York or the State of New York (a "Holiday"), the next preceding date that is
not a Holiday.
(iii) "PERSON" means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
(iv) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(v) "WARRANT" shall mean this warrant and all warrants issued in
exchange, transfer or replacement of any thereof.
(vi) "WARRANT EXERCISE PRICE" shall be equal to $5.0375, subject to
adjustment as hereinafter provided.
(vii) "WARRANT SHARES" means the shares of Common Stock issuable upon
exercise of this Warrant.
(b) OTHER DEFINITIONAL PROVISIONS.
(i) Except as otherwise specified herein, all references herein (A)
to the Company shall be deemed to include the Company's successors and
(B) to any applicable law defined or referred to herein, shall be deemed
references to such applicable law as the same may have been or may be
amended or supplemented from time to time.
(ii) When used in this Warrant, the words "herein," "hereof," and
"hereunder," and words of similar import, shall refer to this Warrant as
a whole and not to any provision of this Warrant, and the words
"Section," "Schedule," and "Exhibit" shall refer to Sections of, and
Schedules and Exhibits to, this Warrant unless otherwise specified.
(iii) Whenever the context so requires, the neuter gender includes
the masculine or feminine, and the singular number includes the plural,
and vice versa.
Section 2. EXERCISE OF WARRANT.
(a) Subject to the terms and conditions hereof, this Warrant may be
exercised by the holder hereof then registered on the books of the Company, in
whole or in part, at any time on any business day or after the opening of
business on the date hereof and prior to 5:00 P.M. Eastern Standard Time on
2
the Expiration Date by (i) delivery of a written notice, in the form of the
subscription notice attached as Exhibit A hereto, of such holder's election to
exercise this Warrant, which notice shall specify the number of Warrant Shares
to be purchased, (ii) (A) payment to the Company of an amount equal to the
Warrant Exercise Price multiplied by the number of Warrant Shares as to which
the Warrant is being exercised (plus any applicable issue or transfer taxes)
(the "Aggregate Exercise Price") in cash or by check or wire transfer, or (B) by
notifying the Company that it should subtract from the number of Warrant Shares
Issuable to the holder upon such exercise an amount of warrant shares having a
last reported sale price (as reported by Bloomberg), or, if the foregoing is not
appliclable, the fair market value (in either case, the "Per Share Value"), on
the trading day immediately preceding the date of the subscription notice equal
the Aggregate Exercise Price of the Warrant shares for which this warrant is
being exercised (a "Cashless Exercise"), and (iii) the surrender of this
Warrant, to a common carrier for delivery to the Company as soon as practicable
following such date (but in any case prior to 5:00 P.M. Eastern Standard Time on
the Expiration Date), this Warrant (or an indemnification undertaking with
respect to this Warrant in the case of its loss, theft, or destruction);
provided that if such Warrant Shares are to be issued in any name other than
that of the registered holder of this Warrant, such issuance shall be deemed a
transfer and the provisions of Section 7 shall be applicable. In the event of
any exercise of the rights represented by this Warrant in compliance with this
Section 2, a certificate or certificates for the Warrant Shares so purchased, in
such denominations as may be requested by the holder hereof and registered in
the name of, or as directed by, the holder, shall be delivered at the Company's
expense to, or as directed by, such holder as soon as practicable after such
rights shall have been so exercised, and in any event no later than five (5)
business days after the Company's receipt of the Exercise Notice, the Aggregate
Exercise Price and this Warrant (or indemnification undertaking with respect to
this Warrant in the case of its loss, theft or destruction) Upon delivery of the
Exercise Notice, this Warrant (or such indemnification undertaking) and
Aggregate Exercise Price referred to in clause (ii) (A) above or notification to
the Company of a Cashless Exercise referred to in clause (ii) (B) above, the
holder of this Warrant shall be deemed for all corporate purposes to have become
the holder of record of the Warrant Shares with respect to which this Warrant
has been exercised, irrespective of the date of delivery of the certificates
evidencing such Warrant Shares. In the case of a dispute as to the determination
of the Warrant Exercise Price or the Average Market Price of a security or the
arithmetic calculation of the Warrant Shares, the Company shall promptly issue
to the holder the number of shares of Common Stock that is not disputed and
shall submit the disputed determinations or arithmetic calculations to the
holder via facsimile within five (5) business days of receipt of the holder's
subscription notice. If the holder and the Company are unable to agree upon the
determination of the Warrant Exercise Price or Average Market Price or
arithmetic calculation of the Warrant Shares within five (5) business days of
such disputed determination or arithmetic calculation being submitted to the
holder, then the Company shall immediately submit via facsimile (i) the disputed
determination of the Warrant Exercise Price or the Average Market Price to an
independent, reputable investment banking firm or (ii) the disputed arithmetic
calculation of the Warrant Shares to its independent, outside accountant. The
Company shall cause the investment banking firm or the accountant, as the case
may be, to perform the determinations or calculations and notify the Company and
the holder of the results no later than five business days from the time it
receives the disputed determinations or calculations. Such investment bank's or
accountant's determination or calculation, as the case may be, shall be deemed
conclusive absent manifest error and the Company shall be liable for the costs
and expenses related to such determination or calculation.
3
(b) Unless the rights represented by this Warrant shall have expired or
shall have been fully exercised, the Company shall, as soon as practicable and
in any event no later than five (5) business days after any exercise and at its
own expense, issue a new Warrant identical in all respects to the Warrant
exercised except (i) it shall represent rights to purchase the number of Warrant
Shares purchasable immediately prior to such exercise under the Warrant
exercised, less the number of Warrant Shares with respect to which such Warrant
is exercised, and (ii) the holder thereof shall be deemed for all corporate
purposes to have become the holder of record of such Warrant Shares immediately
prior to the close of business on the date on which the Warrant is surrendered
and payment of the amount due in respect of such exercise and any applicable
taxes is made, irrespective of the date of delivery of certificates evidencing
such Warrant Shares, except that, if the date of such surrender and payment is a
date when the stock transfer books of the Company are properly closed, such
person shall be deemed to have become the holder of such Warrant Shares at the
opening of business on the next succeeding date on which the stock transfer
books are open. Upon presentation of a duly executed Subscription Form in the
Form of Exhibit A to this Warrant, the holder shall be entitled to exercise this
Warrant in whole or in part, if the holder shall have previously exercised and
surrendered this Warrant and the Company shall not have issued a new Warrant
representing the number of shares issuable following such prior exercise.
(c) No fractional shares of Common Stock are to be issued upon the exercise
of this Warrant, but rather the number of shares of Common Stock issued upon
exercise of this Warrant shall be rounded down to the nearest whole number and
the Company shall pay to the Holder in lieu of such fractional share cash in an
amount in proportion to the Per Share Value on the date of payment.
(d) If the Company shall fail for any reason or for no reason to issue to
holder on a timely basis as described under this Section 2 a certificate for the
number of shares of Common Stock to which the holder is entitled upon the
holder's exercise of this Warrant, the Company shall, upon notice from the
holder and in lieu of any other remedies under this Agreement or otherwise
available to such holder pay as liquidated damages in cash to such holder for
each day such issuance is not timely effected an amount equal to .25% of the
product of (A) the sum of the number of shares of Common Stock not issued to the
holder on a timely basis and to which the holder is entitled, and (B) the sum
derived by subtracting (1) the Warrant exercise price then in effect, from (2)
the Closing Bid Price of the Common Stock on the last possible date which the
Company could have issued Common Stock to the holder without violating this
Section 2.
(e) The Company shall not affect any exercise of any Warrant and no holder
of any Warrant shall have the right to exercise any Warrant pursuant to Section
2 to the extent that after giving effect to such exercise such person (together
with such Persons affiliates) (A) would beneficially owned in excess of 4.9% of
the outstanding shares of Common Stock following such conversion and (B) would
have acquired, through exercise of any Warrant or otherwise, in excess of 4.9%
of the outstanding shares of the Common Stock following such exercise during the
60-day period ending on and including such exercise date. For purposes of the
foregoing sentence, the number of shares of Common Stock beneficially owned by a
person and its affiliates or acquired by a person and its affiliates, as the
case may be, shall include the number of shares of Common Stock issuable upon
the exercise of the Warrants with respect to which the determination of such
sentence is being made, but shall exclude the number of shares of Common Stock
which would be issuable upon
4
(i) exercise of the remaining, non exercisable Warrants beneficially owned by
such person and its affiliates and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of the Company
subject to limitation on conversion or exercise analogous to the limitation
contained herein beneficially owned by such Person and its affiliates. Except as
set forth in the preceding sentence, for purposes of this section 2(e),
beneficial ownership shall be calculated in accordance with Section 13 (d) of
the Securities Exchange Act of 1934, as amended. Notwithstanding anything to the
contrary contained herein, each Exercise Notice shall constitute a
representation by the holder submitting such Exercise Notice that, after giving
effect to such Exercise Notice (A) the holder will not beneficially own (as
determined in accordance with this Section 2(e)) and (B) during the 60-day
period ending on and including such exercise date, the holder will not have
acquired, through exercise of any Warrant or otherwise, a number of shares of
Common Stock in excess of 4.9% of the outstanding shares of Common Stock as
reflected in the Company's most recent Form 10-Q or Form 10-K, as the case may
be, or more recent public release or other public notice by the Company setting
forth the number of Shares of Common Stock outstanding, but after giving effect
to exercise of any Warrant by such holder since the date as of which such
numbers of outstanding shares of the Common Stock was reported, and the Company
shall be entitled to rely solely on the foregoing representation in complying
with this Section 2(e).
Section 3. COVENANTS AS TO COMMON STOCK. The Company hereby covenants and
agrees as follows:
(a) A Warrant issued in substitution for or replacement of this Warrant
will upon issuance be duly authorized and validly issued.
(b) All Warrant Shares which may be issued upon the exercise as set forth
herein of the rights represented by this Warrant will, upon issuance, be validly
issued, fully paid and nonassessable and free from all taxes, liens and charges
with respect to the issue thereof.
(c) During the period within which the rights represented by this Warrant
may be exercised, the Company will at all times have authorized and reserved at
least the number of shares of Common Stock needed to provide for the exercise of
the rights then represented by this Warrant and the par value of said shares
will at all times be less than or equal to the applicable Warrant Exercise
Price.
(d) The Company shall promptly secure the listing of the shares of Common
Stock issuable upon exercise of this Warrant upon each national securities
exchange or automated quotation system, if any, or over-the-counter-bulletin
board upon which shares of Common Stock are then listed or quoted (subject to
official notice of the over-the-counter bulletin board of issuance upon exercise
of this Warrant) and shall maintain, so long as any other shares of Common Stock
shall be so listed or quoted, such listing or quotation of all shares of Common
Stock from time to time issuable upon the exercise of this Warrant; and the
Company shall so list or obtain quotation on each such national securities
exchange, automated quotation system or over-the-counter bulletin board, as the
case may be, and shall maintain such listing in quotation of, any other shares
of capital stock of the Company issuable upon the exercise of this Warrant if
and so long as any shares of the same class shall be listed on such national
securities exchange, automated quotation system or over-the-counter bulletin
board.
5
(e) The Company will not, by amendment of its Certificate of Incorporation
or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities, or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. Without limiting the generality of the foregoing, the Company (i)
will not increase the par value of any shares of Common Stock receivable upon
the exercise of this Warrant above the Exercise Price then in effect, and (ii)
will take all such actions as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant.
(f) This Warrant will be binding upon any entity succeeding to the Company
by merger, consolidation or acquisition of all or substantially all of the
Company's assets.
(g) If at any time when the registration statement referred to in the
Agency Agreement is not effective the Company proposes to file with the
Securities and Exchange Commission a registration statement relating to an
offering for its own account or the account of others under the Securities Act
of any of its Securities (other than on Form S-4 or Form S-8 (or their
equivalents at such time) relating to securities to be issued solely in
connection with any acquisition of, or strategic transaction with, any entity or
business or equity securities issuable in connection with stock option or other
employee benefit plans) the Company shall promptly send to the Holder's written
notice of the Company's intention to file a registration statement and of the
holder's rights under this section and, if within five (5) days after receipt of
such notice, the holder hereof shall so request in writing, the Company shall
include in such registration statement all or any part of the Common Stock
underlying this Warrant the holder requests to be registered; provided, however,
that the foregoing shall not apply to any registration statement if the holders
of the securities to be registered thereon have a right to exclude the Warrant
Shares from such registration statement. If a registration pursuant this section
is to be an underwritten public offering and the managing underwriters advise
the Company in writing, that in their reasonable good faith opinion, marketing
or other factors dictate that a limitation on the number of shares of Company
common stock which may be included in the registration statement is necessary to
facilitate and not adversely affect the proposed offering, then the Company
shall include in such registration: (1) first, all securities the Company
proposes to sell for its own account, (2) second, up to the full number of
securities proposed to be registered for the account of the holders of
securities entitled to inclusion of their securities requested to be registered
by the holder hereof and other holders of securities entitled to participate in
the registration, as of the date hereof, drawn from them pro rata based on the
number each has requested to be included in such registration. Any holder of a
Warrant or Warrant Shares who wishes to participate in such registration must
execute such agreements and take such actions as are customarily executed or
taken by selling stockholders in connection with a registration.
Section 4. TAXES. The Company shall not be required to pay any tax or taxes
attributable to the initial issuance of the Warrant Shares or any permitted
transfer involved in the issue or delivery
6
of any certificates for Warrant Shares in a name other than that of the
registered holder hereof or upon any permitted transfer of this Warrant.
Section 5. WARRANT HOLDER NOT DEEMED A STOCKHOLDER. Except as otherwise
specifically provided herein, no holder, as such, of this Warrant shall be
entitled to vote or receive dividends or be deemed the holder of shares of the
Company for any purpose, nor shall anything contained in this Warrant be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote, give or withhold consent to any
corporate action (whether any reorganization, issue of stock, reclassification
of stock, consolidation, merger, conveyance or otherwise), receive notice of
meetings, receive dividends or subscription rights, or otherwise, prior to the
issuance to the holder of this Warrant of the Warrant Shares which he or she is
then entitled to receive upon the due exercise of this Warrant.
In addition, nothing contained in this Warrant shall be construed as
imposing any liabilities on such holder to purchase any securities or as a
stockholder of the Company, whether such liabilities are asserted by the Company
or by creditors of the Company. Notwithstanding this Section 5, the Company will
provide the holder of this Warrant with copies of the same notices and other
information given to the stockholders of the Company generally,
contemporaneously with the giving thereof to the stockholders.
Section 6. REPRESENTATIONS OF HOLDER. The holder of this Warrant, by the
acceptance hereof, represents (and any assignor shall represent) that it is
acquiring this Warrant and the Warrant Shares for its own account for investment
purposes and not with a view to, or for sale in connection with, any
distribution hereof, and not with any present intention of distributing any of
the same. The holder of this Warrant further represents (and any assignor shall
represent), by acceptance hereof, that, as of this date, such holder is an
"accredited investor" as such term is defined in Rule 501(a)(1) of Regulation D
promulgated by the Securities and Exchange Commission under the Securities Act
(an "Accredited Investor"). Upon exercise of this Warrant, the holder shall, if
requested by the Company, confirm in writing, in a form satisfactory to the
Company, that the Warrant Shares so purchased are being acquired solely for the
holder's own account and not as a nominee for any other party, for investment,
and not with a view toward distribution or resale and that such holder is an
Accredited Investor. If such holder cannot make such representations because
they would be factually incorrect, it shall be a condition to such holder's
exercise of the Warrant that the Company receive such other representations as
the Company considers reasonably necessary to assure the Company that the
issuance of its securities upon exercise of the Warrant shall not violate any
United States Federal or state securities laws.
Section 7. OWNERSHIP AND TRANSFER.
(a) The Company shall maintain at its principal executive offices (or such
other office or agency of the Company as it may designate by notice to the
holder hereof), a register for this Warrant, in which the Company shall record
the name and address of the person in whose name this Warrant has been issued,
as well as the name and address of each permissible transferee. The Company may
treat the person in whose name any Warrant is registered on the register as the
owner and holder
7
thereof for all purposes, notwithstanding any notice to the contrary, but in all
events recognizing any transfers made in accordance with the terms of this
Warrant.
(b) This Warrant and the rights granted to the holder hereof are
transferable, in whole or in part, upon surrender of this Warrant, together with
a properly executed warrant power in the form of Exhibit B attached hereto;
provided, however, that any transfer or assignment shall subject to the
conditions set forth in Section 6 above and Section 7(c) below.
(c) The holder of this Warrant understands that this Warrant and the
Warrant Shares have not been and are not expected to be, registered under the
Securities Act or any state securities laws, and may not be offered for sale,
sold, assigned or transferred unless (a) subsequently registered thereunder, or
(b) such holder shall have delivered to the Company an opinion of counsel,
reasonably satisfactory in form, scope and substance to the Company, to the
effect that the securities to be sold, assigned or transferred may be sold,
assigned or transferred pursuant to an exemption from such registration. Any
sale of such securities made in reliance on Rule 144 promulgated under the
Securities Act may be made only in accordance with the terms of said Rule and
further, if said Rule is not applicable, any resale of such securities under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the Securities
Act) may require compliance with some other exemption under the Securities Act
or the rules and regulations of the Securities and Exchange Commission
thereunder; and neither the Company nor any other person is under any obligation
to register the Series A Preferred Share Warrants under the Securities Act or
any state securities laws or to comply with the terms and conditions of any
exemption thereunder except as set forth in Section 7(d) below. All Warrants and
Warrant Shares shall bear a legend in substantially the form set forth at the
beginning hereof until the Company receives a satisfactory opinion of counsel
that such legend is no longer required.
(d) The Company shall register the Warrant Shares for resale under the
Securities Act pursuant to the Registration Rights Agreement dated as of July
31, 2000, by and between the Company and the Buyers listed on the signature page
thereto (the "Registration Rights Agreement").
Section 8. ADJUSTMENT OF WARRANT EXERCISE PRICE. In order to prevent
dilution of the rights granted under this Warrant, the Warrant Exercise Price
shall be adjusted from time to time as follows:
(a) ADJUSTMENT OF WARRANT EXERCISE PRICE UPON SUBDIVISION OR COMBINATION OF
COMMON STOCK. If the Company at any time after the date of issuance of this
Warrant, subdivides (by any stock split, stock dividend, re-capitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Warrant Exercise Price in effect immediately prior
to such subdivision will be proportionately reduced and the number of shares of
Common Stock obtainable upon exercise of this Warrant will be proportionately
increased. If the Company at any time after the date of issuance of this Warrant
combines (by combination, reverse stock split or otherwise) one or more classes
of its outstanding shares of Common Stock into a smaller number of shares, the
Warrant Exercise Price in effect immediately prior to such combination will be
proportionately increased and the number of shares of Common Stock obtainable
upon exercise of this Warrant will be proportionately decreased.
8
(b) REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. Any
recapitalization, reorganization, reclassification, consolidation, merger, sale
of all or substantially all of the Company's assets to another Person or other
similar transaction which is effected in such a way that holders of Common Stock
are entitled to receive (either directly or upon subsequent liquidation) stock,
securities or assets with respect to or in exchange for Common Stock is referred
to herein as in "Organic Change." Prior to the consummation of any Organic
Change, the Company will make appropriate provision (in form and substance
reasonably satisfactory to the holders of a majority of the Warrants then
outstanding) to insure that, upon the consummation of such Organic Change, each
of the holders of the Warrants will thereafter have the right to acquire and
receive upon exercise hereof in lieu of the Common Stock, such shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for the number of shares of Common Stock immediately theretofore acquirable and
receivable upon exercise of the Warrants had such Organic Change not taken
place. In any such case, the Company will make appropriate provision (in form
and substance reasonably satisfactory to the holders of a majority of the
Warrants then outstanding) with respect to such holders' rights and interests to
insure that the provisions of this Section 8(b) will thereafter be applicable to
the Warrants.
(c) NOTICES.
(i) Immediately upon any adjustment of the Warrant Exercise Price
pursuant to this Section 8, the Company will give written notice thereof to the
holder of this Warrant, setting forth in reasonable detail and certifying the
calculation of such adjustment.
(ii) The Company will give written notice to the holder of this
Warrant at least ten (10) days prior to the date on which the Company closes its
books or takes a record (A) with respect to any dividend or distribution upon
the Common Stock, (B) with respect to any pro rata subscription offer to holders
of Common Stock or (C) for determining rights to vote with respect to any
Organic Change, dissolution or liquidation, except that in no event shall such
notice be provided to such holder prior to such information being made known to
the public.
(iii) The Company will also give written notice to the holder of this
Warrant at least ten (10) days prior to the date on which any Organic Change,
dissolution or liquidation will take place.
Section 10. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT. If this Warrant
is lost, stolen, mutilated or destroyed, the Company shall, on receipt of an
indemnification undertaking, issue a new Warrant of like denomination and tenor
as the Warrant so lost, stolen, mutilated or destroyed.
Section 11. NOTICE. Any notices, consents, waivers, or other communications
required or permitted to be given under the terms of this Warrant must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile, provided a copy
is mailed by U.S. certified mail, return receipt requested; (iii) three (3) days
after being sent by U.S. certified mail, return receipt requested; or (iv) one
(1) day after deposit with a nationally recognized overnight delivery service,
in each case properly addressed to the party to receive the same. The addresses
and facsimile numbers for such communications shall be:
9
If to the Company: StemCells, Inc.
525 Del Rey Avenue
Suite C
Sunnyvale CA. 94086
Attention: George Dunbar, President & CEO
Telephone: (408) 731-8670
Facsimile: (408) 731-8674
With a copy to: Ropes & Gray
One International Place
Boston, MA 02110
Attention: Geoffrey B. Davis, Esq.
Telephone: (617) 951-7000
Facsimile: (617) 951-7050
If to a holder of this Warrant, to it at the address set forth below such
holder's signature on the signature page hereof. Each party shall provide five
(5) days' prior written notice to the other party of any change in address or
facsimile number.
Section 12. AMENDMENTS. This Warrant and any term hereof may be changed,
waived, discharged, or terminated only by an instrument in writing signed by the
party or holder hereof against which enforcement of such change, waiver,
discharge or termination is sought.
Section 13. DATE. The date of this Warrant is August 3, 2000. This Warrant,
in all events, shall be wholly void and of no effect after 5:00 P.M. Eastern
Standard Time on the Expiration Date, except that notwithstanding any other
provisions hereof, the provisions of Section 7 shall continue in full force and
effect after such date as to any Warrant Shares or other securities issued upon
the exercise of this Warrant.
Section 14. AMENDMENT AND WAIVER. Except as otherwise provided herein, the
provisions of the Warrants may be amended and the Company may take any action
herein prohibited, or omitted to perform any act herein required to be performed
by it, only if the Company has obtained the written consent of the holders of
Warrants representing a majority of the shares of Common Stock obtainable upon
exercise of the Warrants then outstanding, provided that no such action may
increase the Warrant Exercise Price of the Warrants or decrease the number of
shares or class of stock obtainable upon exercise of any warrants with out the
written consent of the holder of such warrant.
Section 15. DESCRIPTIVE HEADINGS; GOVERNING LAW. The descriptive headings
of the several sections of this Warrant are for convenience of reference only
and shall not limit or otherwise affect the meaning hereof. This Warrant shall
be governed by and interpreted under the laws of the State of New York, without
giving effect to any choice of law or conflict of law provision.
This Warrant has been duly executed by the Company as of the date first set
forth above.
10
STEMCELLS, INC.
By:
-------------------------------
Name:
Title:
Hunter Singer
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
Address:
--------------------------
- ----------------------------------
- ----------------------------------
11
EXHIBIT A
FORM OF SUBSCRIPTION
(Complete and sign only exercise of the Warrant in whole or in part.)
TO: StemCells, Inc.
The undersigned, the holder of the attached Warrant to which this Form of
Subscription applies, hereby irrevocably elects to exercise the purchase rights
represented by such warrant for and to purchase thereunder _______ shares of
Common Stock, par value $.01 per share (the "Shares"), from StemCells, Inc. (or
such other securities issuable pursuant to the terms of the Warrant) and either:
(i) herewith makes payment of $_______ therefor in cash or by certified or
official bank check or (ii) elects to make payment upon a cashless basis
pursuant to Section 2(b) of the Warrant and hereby exercises ______ Warrants and
the Per Share Value for purposes hereof is $_______. The undersigned hereby
requests that the certificate(s) representing such securities be issued in the
name(s) and delivered t the address(es) as follows:
Name:
---------------------------------------
Address:
---------------------------------------
Social Security Number:
---------------------------------------
Deliver to:
---------------------------------------
Address:
---------------------------------------
This the foregoing subscription evidences an exercise of the Warrant to
purchase fewer than all of the Shares (or other securities issuable pursuant to
the terms of the Warrant) to which the undersigned is entitled under such
warrant, please issue a new warrant, of like tenor, relating to the remaining
portion of the securities issuable upon exercise of such warrant (or other
securities issuable pursuant to the terms of such warrant) in the name(s), and
deliver the same to the address(es), as follow:
Name:
---------------------------------------
Address:
---------------------------------------
---------------------------------------
Dated:
---------------------------------------
- ------------------------- -------------------------------------------
(Name of Holder) (Social Security or Taxpayer Identification
Number of Holder, if applicable)
- -----------------------------
(Signature of Holder or Authorized
Signatory)
Signature Guaranteed:
-------------------------------------
12
EXHIBIT B
FORM OF WARRANT POWER
FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to
____________________________________________ Federal Identification No.______, a
warrant to purchase shares of the capital stock of StemCells, Inc. a Delaware
corporation, represented by warrant certificate No._________, standing in the
name of the undersigned on the books of said corporation. The undersigned does
hereby irrevocably constitute and appoint ____________________________, attorney
to transfer the warrants of said corporation, with full power of substitution in
the premises.
Dated:
---------------------------------
By:
---------------------------
Its:
--------------------------
13
EXHIBIT 4.7
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW
TOWARD RESALE OR DISTRIBUTION. THIS WARRANT MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE
REASONABLY ACCEPTABLE TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER SAID
ACT.
STEMCELLS, INC.
WARRANT TO PURCHASE COMMON STOCK
Warrant No.: MD-005 Number of Shares Issuable:
20,000
Date of Issuance: August 3, 2000
StemCells, Inc., a Delaware corporation (the "Company"), hereby certifies
that, for good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, May Davis Group, Inc., the registered holder hereof or
its permitted assigns, is entitled, subject to the terms set forth below, to
purchase from the Company upon surrender of this Warrant, at any time or times
on or after the date hereof, but not after 5:00 P.M. Eastern Standard Time on
the Expiration Date (as defined herein) twenty thousand (20,000) fully paid,
nonassessable shares of Common Stock (as defined herein) of the Company (the
"Warrant Shares") at the Warrant Exercise Price per share provided in Section
l(b) below;
Section 1.
(a) LETTER AGREEMENT. This Warrant is one of the warrants (the "Warrants")
issued pursuant to Section 3.4 of the Placement Agency Agreement between the
Company and May Davis Group, Inc., dated as of July 31, 2000 (the "AGENCY
AGREEMENT").
(b) DEFINITIONS. The following words and terms as used in this Warrant
shall have the following meanings:
1
(i) "COMMON STOCK" means (i) the Company's common stock, par value .01
per share, and (ii) any capital stock into which such Common Stock shall have
been changed or any capital stock resulting from a reclassification of such
Common Stock.
(ii) "EXPIRATION DATE" means the date five (5) years from the date of
the issuance of the Warrant or, if such date falls on a Saturday, Sunday or
other day on which banks are required or authorized to be closed in the City of
New York or the State of New York (a "Holiday"), the next preceding date that is
not a Holiday.
(iii) "PERSON" means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
(iv) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(v) "WARRANT" shall mean this warrant and all warrants issued in
exchange, transfer or replacement of any thereof.
(vi) "WARRANT EXERCISE PRICE" shall be equal to $5.0375, subject to
adjustment as hereinafter provided.
(vii) "WARRANT SHARES" means the shares of Common Stock issuable upon
exercise of this Warrant.
(b) OTHER DEFINITIONAL PROVISIONS.
(i) Except as otherwise specified herein, all references herein (A)
to the Company shall be deemed to include the Company's successors and
(B) to any applicable law defined or referred to herein, shall be deemed
references to such applicable law as the same may have been or may be
amended or supplemented from time to time.
(ii) When used in this Warrant, the words "herein," "hereof," and
"hereunder," and words of similar import, shall refer to this Warrant as
a whole and not to any provision of this Warrant, and the words
"Section," "Schedule," and "Exhibit" shall refer to Sections of, and
Schedules and Exhibits to, this Warrant unless otherwise specified.
(iii) Whenever the context so requires, the neuter gender includes
the masculine or feminine, and the singular number includes the plural,
and vice versa.
Section 2. EXERCISE OF WARRANT.
(a) Subject to the terms and conditions hereof, this Warrant may be
exercised by the holder hereof then registered on the books of the Company, in
whole or in part, at any time on any business day or after the opening of
business on the date hereof and prior to 5:00 P.M. Eastern Standard Time on
2
the Expiration Date by (i) delivery of a written notice, in the form of the
subscription notice attached as Exhibit A hereto, of such holder's election to
exercise this Warrant, which notice shall specify the number of Warrant Shares
to be purchased, (ii) (A) payment to the Company of an amount equal to the
Warrant Exercise Price multiplied by the number of Warrant Shares as to which
the Warrant is being exercised (plus any applicable issue or transfer taxes)
(the "Aggregate Exercise Price") in cash or by check or wire transfer, or (B) by
notifying the Company that it should subtract from the number of Warrant Shares
Issuable to the holder upon such exercise an amount of warrant shares having a
last reported sale price (as reported by Bloomberg), or, if the foregoing is not
appliclable, the fair market value (in either case, the "Per Share Value"), on
the trading day immediately preceding the date of the subscription notice equal
the Aggregate Exercise Price of the Warrant shares for which this warrant is
being exercised (a "Cashless Exercise"), and (iii) the surrender of this
Warrant, to a common carrier for delivery to the Company as soon as practicable
following such date (but in any case prior to 5:00 P.M. Eastern Standard Time on
the Expiration Date), this Warrant (or an indemnification undertaking with
respect to this Warrant in the case of its loss, theft, or destruction);
provided that if such Warrant Shares are to be issued in any name other than
that of the registered holder of this Warrant, such issuance shall be deemed a
transfer and the provisions of Section 7 shall be applicable. In the event of
any exercise of the rights represented by this Warrant in compliance with this
Section 2, a certificate or certificates for the Warrant Shares so purchased, in
such denominations as may be requested by the holder hereof and registered in
the name of, or as directed by, the holder, shall be delivered at the Company's
expense to, or as directed by, such holder as soon as practicable after such
rights shall have been so exercised, and in any event no later than five (5)
business days after the Company's receipt of the Exercise Notice, the Aggregate
Exercise Price and this Warrant (or indemnification undertaking with respect to
this Warrant in the case of its loss, theft or destruction) Upon delivery of the
Exercise Notice, this Warrant (or such indemnification undertaking) and
Aggregate Exercise Price referred to in clause (ii) (A) above or notification to
the Company of a Cashless Exercise referred to in clause (ii) (B) above, the
holder of this Warrant shall be deemed for all corporate purposes to have become
the holder of record of the Warrant Shares with respect to which this Warrant
has been exercised, irrespective of the date of delivery of the certificates
evidencing such Warrant Shares. In the case of a dispute as to the determination
of the Warrant Exercise Price or the Average Market Price of a security or the
arithmetic calculation of the Warrant Shares, the Company shall promptly issue
to the holder the number of shares of Common Stock that is not disputed and
shall submit the disputed determinations or arithmetic calculations to the
holder via facsimile within five (5) business days of receipt of the holder's
subscription notice. If the holder and the Company are unable to agree upon the
determination of the Warrant Exercise Price or Average Market Price or
arithmetic calculation of the Warrant Shares within five (5) business days of
such disputed determination or arithmetic calculation being submitted to the
holder, then the Company shall immediately submit via facsimile (i) the disputed
determination of the Warrant Exercise Price or the Average Market Price to an
independent, reputable investment banking firm or (ii) the disputed arithmetic
calculation of the Warrant Shares to its independent, outside accountant. The
Company shall cause the investment banking firm or the accountant, as the case
may be, to perform the determinations or calculations and notify the Company and
the holder of the results no later than five business days from the time it
receives the disputed determinations or calculations. Such investment bank's or
accountant's determination or calculation, as the case may be, shall be deemed
conclusive absent manifest error and the Company shall be liable for the costs
and expenses related to such determination or calculation.
3
(b) Unless the rights represented by this Warrant shall have expired or
shall have been fully exercised, the Company shall, as soon as practicable and
in any event no later than five (5) business days after any exercise and at its
own expense, issue a new Warrant identical in all respects to the Warrant
exercised except (i) it shall represent rights to purchase the number of Warrant
Shares purchasable immediately prior to such exercise under the Warrant
exercised, less the number of Warrant Shares with respect to which such Warrant
is exercised, and (ii) the holder thereof shall be deemed for all corporate
purposes to have become the holder of record of such Warrant Shares immediately
prior to the close of business on the date on which the Warrant is surrendered
and payment of the amount due in respect of such exercise and any applicable
taxes is made, irrespective of the date of delivery of certificates evidencing
such Warrant Shares, except that, if the date of such surrender and payment is a
date when the stock transfer books of the Company are properly closed, such
person shall be deemed to have become the holder of such Warrant Shares at the
opening of business on the next succeeding date on which the stock transfer
books are open. Upon presentation of a duly executed Subscription Form in the
Form of Exhibit A to this Warrant, the holder shall be entitled to exercise this
Warrant in whole or in part, if the holder shall have previously exercised and
surrendered this Warrant and the Company shall not have issued a new Warrant
representing the number of shares issuable following such prior exercise.
(c) No fractional shares of Common Stock are to be issued upon the exercise
of this Warrant, but rather the number of shares of Common Stock issued upon
exercise of this Warrant shall be rounded down to the nearest whole number and
the Company shall pay to the Holder in lieu of such fractional share cash in an
amount in proportion to the Per Share Value on the date of payment.
(d) If the Company shall fail for any reason or for no reason to issue to
holder on a timely basis as described under this Section 2 a certificate for the
number of shares of Common Stock to which the holder is entitled upon the
holder's exercise of this Warrant, the Company shall, upon notice from the
holder and in lieu of any other remedies under this Agreement or otherwise
available to such holder pay as liquidated damages in cash to such holder for
each day such issuance is not timely effected an amount equal to .25% of the
product of (A) the sum of the number of shares of Common Stock not issued to the
holder on a timely basis and to which the holder is entitled, and (B) the sum
derived by subtracting (1) the Warrant exercise price then in effect, from (2)
the Closing Bid Price of the Common Stock on the last possible date which the
Company could have issued Common Stock to the holder without violating this
Section 2.
(e) The Company shall not affect any exercise of any Warrant and no holder
of any Warrant shall have the right to exercise any Warrant pursuant to Section
2 to the extent that after giving effect to such exercise such person (together
with such Persons affiliates) (A) would beneficially owned in excess of 4.9% of
the outstanding shares of Common Stock following such conversion and (B) would
have acquired, through exercise of any Warrant or otherwise, in excess of 4.9%
of the outstanding shares of the Common Stock following such exercise during the
60-day period ending on and including such exercise date. For purposes of the
foregoing sentence, the number of shares of Common Stock beneficially owned by a
person and its affiliates or acquired by a person and its affiliates, as the
case may be, shall include the number of shares of Common Stock issuable upon
the exercise of the Warrants with respect to which the determination of such
sentence is being made, but shall exclude the number of shares of Common Stock
which would be issuable upon
4
(i) exercise of the remaining, non exercisable Warrants beneficially owned by
such person and its affiliates and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of the Company
subject to limitation on conversion or exercise analogous to the limitation
contained herein beneficially owned by such Person and its affiliates. Except as
set forth in the preceding sentence, for purposes of this section 2(e),
beneficial ownership shall be calculated in accordance with Section 13 (d) of
the Securities Exchange Act of 1934, as amended. Notwithstanding anything to the
contrary contained herein, each Exercise Notice shall constitute a
representation by the holder submitting such Exercise Notice that, after giving
effect to such Exercise Notice (A) the holder will not beneficially own (as
determined in accordance with this Section 2(e)) and (B) during the 60-day
period ending on and including such exercise date, the holder will not have
acquired, through exercise of any Warrant or otherwise, a number of shares of
Common Stock in excess of 4.9% of the outstanding shares of Common Stock as
reflected in the Company's most recent Form 10-Q or Form 10-K, as the case may
be, or more recent public release or other public notice by the Company setting
forth the number of Shares of Common Stock outstanding, but after giving effect
to exercise of any Warrant by such holder since the date as of which such
numbers of outstanding shares of the Common Stock was reported, and the Company
shall be entitled to rely solely on the foregoing representation in complying
with this Section 2(e).
Section 3. COVENANTS AS TO COMMON STOCK. The Company hereby covenants and
agrees as follows:
(a) A Warrant issued in substitution for or replacement of this Warrant
will upon issuance be duly authorized and validly issued.
(b) All Warrant Shares which may be issued upon the exercise as set forth
herein of the rights represented by this Warrant will, upon issuance, be validly
issued, fully paid and nonassessable and free from all taxes, liens and charges
with respect to the issue thereof.
(c) During the period within which the rights represented by this Warrant
may be exercised, the Company will at all times have authorized and reserved at
least the number of shares of Common Stock needed to provide for the exercise of
the rights then represented by this Warrant and the par value of said shares
will at all times be less than or equal to the applicable Warrant Exercise
Price.
(d) The Company shall promptly secure the listing of the shares of Common
Stock issuable upon exercise of this Warrant upon each national securities
exchange or automated quotation system, if any, or over-the-counter-bulletin
board upon which shares of Common Stock are then listed or quoted (subject to
official notice of the over-the-counter bulletin board of issuance upon exercise
of this Warrant) and shall maintain, so long as any other shares of Common Stock
shall be so listed or quoted, such listing or quotation of all shares of Common
Stock from time to time issuable upon the exercise of this Warrant; and the
Company shall so list or obtain quotation on each such national securities
exchange, automated quotation system or over-the-counter bulletin board, as the
case may be, and shall maintain such listing in quotation of, any other shares
of capital stock of the Company issuable upon the exercise of this Warrant if
and so long as any shares of the same class shall be listed on such national
securities exchange, automated quotation system or over-the-counter bulletin
board.
5
(e) The Company will not, by amendment of its Certificate of Incorporation
or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities, or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. Without limiting the generality of the foregoing, the Company (i)
will not increase the par value of any shares of Common Stock receivable upon
the exercise of this Warrant above the Exercise Price then in effect, and (ii)
will take all such actions as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant.
(f) This Warrant will be binding upon any entity succeeding to the Company
by merger, consolidation or acquisition of all or substantially all of the
Company's assets.
(g) If at any time when the registration statement referred to in the
Agency Agreement is not effective the Company proposes to file with the
Securities and Exchange Commission a registration statement relating to an
offering for its own account or the account of others under the Securities Act
of any of its Securities (other than on Form S-4 or Form S-8 (or their
equivalents at such time) relating to securities to be issued solely in
connection with any acquisition of, or strategic transaction with, any entity or
business or equity securities issuable in connection with stock option or other
employee benefit plans) the Company shall promptly send to the Holder's written
notice of the Company's intention to file a registration statement and of the
holder's rights under this section and, if within five (5) days after receipt of
such notice, the holder hereof shall so request in writing, the Company shall
include in such registration statement all or any part of the Common Stock
underlying this Warrant the holder requests to be registered; provided, however,
that the foregoing shall not apply to any registration statement if the holders
of the securities to be registered thereon have a right to exclude the Warrant
Shares from such registration statement. If a registration pursuant this section
is to be an underwritten public offering and the managing underwriters advise
the Company in writing, that in their reasonable good faith opinion, marketing
or other factors dictate that a limitation on the number of shares of Company
common stock which may be included in the registration statement is necessary to
facilitate and not adversely affect the proposed offering, then the Company
shall include in such registration: (1) first, all securities the Company
proposes to sell for its own account, (2) second, up to the full number of
securities proposed to be registered for the account of the holders of
securities entitled to inclusion of their securities requested to be registered
by the holder hereof and other holders of securities entitled to participate in
the registration, as of the date hereof, drawn from them pro rata based on the
number each has requested to be included in such registration. Any holder of a
Warrant or Warrant Shares who wishes to participate in such registration must
execute such agreements and take such actions as are customarily executed or
taken by selling stockholders in connection with a registration.
Section 4. TAXES. The Company shall not be required to pay any tax or taxes
attributable to the initial issuance of the Warrant Shares or any permitted
transfer involved in the issue or delivery
6
of any certificates for Warrant Shares in a name other than that of the
registered holder hereof or upon any permitted transfer of this Warrant.
Section 5. WARRANT HOLDER NOT DEEMED A STOCKHOLDER. Except as otherwise
specifically provided herein, no holder, as such, of this Warrant shall be
entitled to vote or receive dividends or be deemed the holder of shares of the
Company for any purpose, nor shall anything contained in this Warrant be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote, give or withhold consent to any
corporate action (whether any reorganization, issue of stock, reclassification
of stock, consolidation, merger, conveyance or otherwise), receive notice of
meetings, receive dividends or subscription rights, or otherwise, prior to the
issuance to the holder of this Warrant of the Warrant Shares which he or she is
then entitled to receive upon the due exercise of this Warrant.
In addition, nothing contained in this Warrant shall be construed as
imposing any liabilities on such holder to purchase any securities or as a
stockholder of the Company, whether such liabilities are asserted by the Company
or by creditors of the Company. Notwithstanding this Section 5, the Company will
provide the holder of this Warrant with copies of the same notices and other
information given to the stockholders of the Company generally,
contemporaneously with the giving thereof to the stockholders.
Section 6. REPRESENTATIONS OF HOLDER. The holder of this Warrant, by the
acceptance hereof, represents (and any assignor shall represent) that it is
acquiring this Warrant and the Warrant Shares for its own account for investment
purposes and not with a view to, or for sale in connection with, any
distribution hereof, and not with any present intention of distributing any of
the same. The holder of this Warrant further represents (and any assignor shall
represent), by acceptance hereof, that, as of this date, such holder is an
"accredited investor" as such term is defined in Rule 501(a)(1) of Regulation D
promulgated by the Securities and Exchange Commission under the Securities Act
(an "Accredited Investor"). Upon exercise of this Warrant, the holder shall, if
requested by the Company, confirm in writing, in a form satisfactory to the
Company, that the Warrant Shares so purchased are being acquired solely for the
holder's own account and not as a nominee for any other party, for investment,
and not with a view toward distribution or resale and that such holder is an
Accredited Investor. If such holder cannot make such representations because
they would be factually incorrect, it shall be a condition to such holder's
exercise of the Warrant that the Company receive such other representations as
the Company considers reasonably necessary to assure the Company that the
issuance of its securities upon exercise of the Warrant shall not violate any
United States Federal or state securities laws.
Section 7. OWNERSHIP AND TRANSFER.
(a) The Company shall maintain at its principal executive offices (or such
other office or agency of the Company as it may designate by notice to the
holder hereof), a register for this Warrant, in which the Company shall record
the name and address of the person in whose name this Warrant has been issued,
as well as the name and address of each permissible transferee. The Company may
treat the person in whose name any Warrant is registered on the register as the
owner and holder
7
thereof for all purposes, notwithstanding any notice to the contrary, but in all
events recognizing any transfers made in accordance with the terms of this
Warrant.
(b) This Warrant and the rights granted to the holder hereof are
transferable, in whole or in part, upon surrender of this Warrant, together with
a properly executed warrant power in the form of Exhibit B attached hereto;
provided, however, that any transfer or assignment shall subject to the
conditions set forth in Section 6 above and Section 7(c) below.
(c) The holder of this Warrant understands that this Warrant and the
Warrant Shares have not been and are not expected to be, registered under the
Securities Act or any state securities laws, and may not be offered for sale,
sold, assigned or transferred unless (a) subsequently registered thereunder, or
(b) such holder shall have delivered to the Company an opinion of counsel,
reasonably satisfactory in form, scope and substance to the Company, to the
effect that the securities to be sold, assigned or transferred may be sold,
assigned or transferred pursuant to an exemption from such registration. Any
sale of such securities made in reliance on Rule 144 promulgated under the
Securities Act may be made only in accordance with the terms of said Rule and
further, if said Rule is not applicable, any resale of such securities under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the Securities
Act) may require compliance with some other exemption under the Securities Act
or the rules and regulations of the Securities and Exchange Commission
thereunder; and neither the Company nor any other person is under any obligation
to register the Series A Preferred Share Warrants under the Securities Act or
any state securities laws or to comply with the terms and conditions of any
exemption thereunder except as set forth in Section 7(d) below. All Warrants and
Warrant Shares shall bear a legend in substantially the form set forth at the
beginning hereof until the Company receives a satisfactory opinion of counsel
that such legend is no longer required.
(d) The Company shall register the Warrant Shares for resale under the
Securities Act pursuant to the Registration Rights Agreement dated as of July
31, 2000, by and between the Company and the Buyers listed on the signature page
thereto (the "Registration Rights Agreement").
Section 8. ADJUSTMENT OF WARRANT EXERCISE PRICE. In order to prevent
dilution of the rights granted under this Warrant, the Warrant Exercise Price
shall be adjusted from time to time as follows:
(a) ADJUSTMENT OF WARRANT EXERCISE PRICE UPON SUBDIVISION OR COMBINATION OF
COMMON STOCK. If the Company at any time after the date of issuance of this
Warrant, subdivides (by any stock split, stock dividend, re-capitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Warrant Exercise Price in effect immediately prior
to such subdivision will be proportionately reduced and the number of shares of
Common Stock obtainable upon exercise of this Warrant will be proportionately
increased. If the Company at any time after the date of issuance of this Warrant
combines (by combination, reverse stock split or otherwise) one or more classes
of its outstanding shares of Common Stock into a smaller number of shares, the
Warrant Exercise Price in effect immediately prior to such combination will be
proportionately increased and the number of shares of Common Stock obtainable
upon exercise of this Warrant will be proportionately decreased.
8
(b) REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. Any
recapitalization, reorganization, reclassification, consolidation, merger, sale
of all or substantially all of the Company's assets to another Person or other
similar transaction which is effected in such a way that holders of Common Stock
are entitled to receive (either directly or upon subsequent liquidation) stock,
securities or assets with respect to or in exchange for Common Stock is referred
to herein as in "Organic Change." Prior to the consummation of any Organic
Change, the Company will make appropriate provision (in form and substance
reasonably satisfactory to the holders of a majority of the Warrants then
outstanding) to insure that, upon the consummation of such Organic Change, each
of the holders of the Warrants will thereafter have the right to acquire and
receive upon exercise hereof in lieu of the Common Stock, such shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for the number of shares of Common Stock immediately theretofore acquirable and
receivable upon exercise of the Warrants had such Organic Change not taken
place. In any such case, the Company will make appropriate provision (in form
and substance reasonably satisfactory to the holders of a majority of the
Warrants then outstanding) with respect to such holders' rights and interests to
insure that the provisions of this Section 8(b) will thereafter be applicable to
the Warrants.
(c) NOTICES.
(i) Immediately upon any adjustment of the Warrant Exercise Price
pursuant to this Section 8, the Company will give written notice thereof to the
holder of this Warrant, setting forth in reasonable detail and certifying the
calculation of such adjustment.
(ii) The Company will give written notice to the holder of this
Warrant at least ten (10) days prior to the date on which the Company closes its
books or takes a record (A) with respect to any dividend or distribution upon
the Common Stock, (B) with respect to any pro rata subscription offer to holders
of Common Stock or (C) for determining rights to vote with respect to any
Organic Change, dissolution or liquidation, except that in no event shall such
notice be provided to such holder prior to such information being made known to
the public.
(iii) The Company will also give written notice to the holder of this
Warrant at least ten (10) days prior to the date on which any Organic Change,
dissolution or liquidation will take place.
Section 10. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT. If this Warrant
is lost, stolen, mutilated or destroyed, the Company shall, on receipt of an
indemnification undertaking, issue a new Warrant of like denomination and tenor
as the Warrant so lost, stolen, mutilated or destroyed.
Section 11. NOTICE. Any notices, consents, waivers, or other communications
required or permitted to be given under the terms of this Warrant must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile, provided a copy
is mailed by U.S. certified mail, return receipt requested; (iii) three (3) days
after being sent by U.S. certified mail, return receipt requested; or (iv) one
(1) day after deposit with a nationally recognized overnight delivery service,
in each case properly addressed to the party to receive the same. The addresses
and facsimile numbers for such communications shall be:
9
If to the Company: StemCells, Inc.
525 Del Rey Avenue
Suite C
Sunnyvale CA. 94086
Attention: George Dunbar, President & CEO
Telephone: (408) 731-8670
Facsimile: (408) 731-8674
With a copy to: Ropes & Gray
One International Place
Boston, MA 02110
Attention: Geoffrey B. Davis, Esq.
Telephone: (617) 951-7000
Facsimile: (617) 951-7050
If to a holder of this Warrant, to it at the address set forth below such
holder's signature on the signature page hereof. Each party shall provide five
(5) days' prior written notice to the other party of any change in address or
facsimile number.
Section 12. AMENDMENTS. This Warrant and any term hereof may be changed,
waived, discharged, or terminated only by an instrument in writing signed by the
party or holder hereof against which enforcement of such change, waiver,
discharge or termination is sought.
Section 13. DATE. The date of this Warrant is August 3, 2000. This Warrant,
in all events, shall be wholly void and of no effect after 5:00 P.M. Eastern
Standard Time on the Expiration Date, except that notwithstanding any other
provisions hereof, the provisions of Section 7 shall continue in full force and
effect after such date as to any Warrant Shares or other securities issued upon
the exercise of this Warrant.
Section 14. AMENDMENT AND WAIVER. Except as otherwise provided herein, the
provisions of the Warrants may be amended and the Company may take any action
herein prohibited, or omitted to perform any act herein required to be performed
by it, only if the Company has obtained the written consent of the holders of
Warrants representing a majority of the shares of Common Stock obtainable upon
exercise of the Warrants then outstanding, provided that no such action may
increase the Warrant Exercise Price of the Warrants or decrease the number of
shares or class of stock obtainable upon exercise of any warrants with out the
written consent of the holder of such warrant.
Section 15. DESCRIPTIVE HEADINGS; GOVERNING LAW. The descriptive headings
of the several sections of this Warrant are for convenience of reference only
and shall not limit or otherwise affect the meaning hereof. This Warrant shall
be governed by and interpreted under the laws of the State of New York, without
giving effect to any choice of law or conflict of law provision.
This Warrant has been duly executed by the Company as of the date first set
forth above.
10
STEMCELLS, INC.
By:
-------------------------------
Name:
Title:
May Davis Group, Inc.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
Address:
--------------------------
- ----------------------------------
- ----------------------------------
11
EXHIBIT A
FORM OF SUBSCRIPTION
(Complete and sign only exercise of the Warrant in whole or in part.)
TO: StemCells, Inc.
The undersigned, the holder of the attached Warrant to which this Form of
Subscription applies, hereby irrevocably elects to exercise the purchase rights
represented by such warrant for and to purchase thereunder _______ shares of
Common Stock, par value $.01 per share (the "Shares"), from StemCells, Inc. (or
such other securities issuable pursuant to the terms of the Warrant) and either:
(i) herewith makes payment of $_______ therefor in cash or by certified or
official bank check or (ii) elects to make payment upon a cashless basis
pursuant to Section 2(b) of the Warrant and hereby exercises ______ Warrants and
the Per Share Value for purposes hereof is $_______. The undersigned hereby
requests that the certificate(s) representing such securities be issued in the
name(s) and delivered t the address(es) as follows:
Name:
---------------------------------------
Address:
---------------------------------------
Social Security Number:
---------------------------------------
Deliver to:
---------------------------------------
Address:
---------------------------------------
This the foregoing subscription evidences an exercise of the Warrant to
purchase fewer than all of the Shares (or other securities issuable pursuant to
the terms of the Warrant) to which the undersigned is entitled under such
warrant, please issue a new warrant, of like tenor, relating to the remaining
portion of the securities issuable upon exercise of such warrant (or other
securities issuable pursuant to the terms of such warrant) in the name(s), and
deliver the same to the address(es), as follow:
Name:
---------------------------------------
Address:
---------------------------------------
---------------------------------------
Dated:
---------------------------------------
- ------------------------- -------------------------------------------
(Name of Holder) (Social Security or Taxpayer Identification
Number of Holder, if applicable)
- -----------------------------
(Signature of Holder or Authorized
Signatory)
Signature Guaranteed:
-------------------------------------
12
EXHIBIT B
FORM OF WARRANT POWER
FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to
____________________________________________ Federal Identification No.______, a
warrant to purchase shares of the capital stock of StemCells, Inc. a Delaware
corporation, represented by warrant certificate No._________, standing in the
name of the undersigned on the books of said corporation. The undersigned does
hereby irrevocably constitute and appoint ____________________________, attorney
to transfer the warrants of said corporation, with full power of substitution in
the premises.
Dated:
---------------------------------
By:
---------------------------
Its:
--------------------------
13
EXHIBIT 4.8
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN
COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
Right to Purchase the Specified Number of
Shares of Common Stock of StemCells, Inc
STEMCELLS, INC.
COMMON STOCK PURCHASE WARRANT, CLASS A
NO. A-1
STEMCELLS, INC., a Delaware corporation (the "Company"),
hereby certifies that, for value received, Millennium Partners, L.P. or its
registered assigns (the "Holder"), is entitled, subject to the terms set forth
below, to purchase from the Company at any time or from time to time during the
Exercise Period (such capitalized term and all other capitalized terms used
herein having the respective meanings provided herein), the Specified Number of
fully paid and nonassessable shares of Common Stock at a purchase price per
share equal to the Purchase Price. The number of such shares of Common Stock is
subject to adjustment as provided in this Warrant.
As used herein the following terms, unless the context
otherwise requires, have the following respective meanings:
"Adjustment Date" means any of the First Adjustment Date and
each date which occurs every 90 days after the First Adjustment Date through and
including the date which is 810 days after the Issuance Date.
"Adjustment Factor" means 1.015.
"Adjustment Shares" means the number of shares of Common
Stock, determined on each Adjustment Date in accordance with Section 1.3(a), to
be added to the Specified Number on each Adjustment Date in accordance with
Section 1.3(b).
"Auditors" means Ernst & Young LLP or such other firm of
independent public accountants of recognized national standing as shall have
been engaged by the Company to audit its financial statements.
"Average Market Price" means the arithmetic average of the ten
(10) lowest Market Prices during the applicable Measurement Period.
"Cash and Cash Equivalent Balances" of any person on any date
shall be determined from such person's books maintained in accordance with
Generally Accepted Accounting Principles, and means, without duplication, the
sum of (1) the cash accrued by such person and its subsidiaries on a
consolidated basis on such date and available for use by such person and its
subsidiaries on such date and (2) all assets which would, on a consolidated
balance sheet of such person and its subsidiaries prepared as of such date in
accordance with Generally Accepted Accounting Principles, be classified as cash
or cash equivalents, less the amount thereof which secures any outstanding
indebtedness of such person or its subsidiaries.
"Callable Warrant" means the Callable Warrant, issued by the
Company pursuant to the Subscription Agreement.
"Class A Warrant Shares" means those shares of Common Stock
issued upon exercise of this Warrant (subject to equitable adjustment from time
to time on terms reasonably acceptable to the Holder for stock splits, stock
dividends, combinations, recapitalizations, reclassifications, distributions,
Tender Offers and similar events occurring after the Issuance Date).
"Commission" means the Securities and Exchange Commission.
"Common Shares Held" as of any date means the sum of (1) the
number of Initial Shares which are then held by the Holder plus (2) the number
of Class A Warrant Shares which are then held by the Holder plus (3) the number
of shares of Common Stock which are issuable upon exercise of this Warrant
immediately prior to the determination of the number of Adjustment Shares
pursuant to Section 1.3(a).
"Common Stock" means the Company's Common Stock, $.01 par
value per share, as authorized on the date hereof, and any other securities into
which or for which the Common Stock may be converted or exchanged pursuant to a
plan of recapitalization, reorganization, merger, sale of assets or otherwise.
"Company" shall include StemCells, Inc., a Delaware
corporation, and any corporation that shall succeed to or assume the obligations
of StemCells, Inc. hereunder in accordance with the terms hereof.
"Control Notice" means a notice given by the Company to the
Holder, in accordance with Section 1.5(b), (i) stating that a Share Limitation
Event has occurred by reason of events which are not solely within the control
of the Company and (ii) enclosing an executed copy of an Auditors'
Determination.
"Exercise Period" means the period commencing on the First
Adjustment Date and ending thirty (30) days following the Last Adjustment Date.
"First Adjustment Date" means the date which is 180 days after
the Issuance Date.
2
"Generally Accepted Accounting Principles" for any person
means the generally accepted accounting principles and practices applied by such
person from time to time in the preparation of its audited financial statements.
"Holder Repurchase Price" means, for each share of Common
Stock which may not be issued upon exercise of this Warrant by reason of the
Shareholder Approval Rule in accordance with Section 1.4 (c), 120% of the
greater of: (x) the arithmetic average of the Market Price on each of the five
consecutive Trading Days immediately prior to and including the expiration of
the 75-day period referred to in Section 1.4(c) or the Repurchase Date referred
to in Section 1.4(b), as the case may be, (y) the arithmetic average of the
Market Price on each of the five consecutive Trading Days immediately prior to
the repurchase date pursuant to Section 1.4(c) or Section 1.4(b) and (z) if
determined prior to the First Adjustment Date, the price per share paid by the
Holder for the shares of Common Stock purchased on the Issuance Date pursuant to
the Subscription Agreement or, if determined on or after the First Adjustment
Date, the most recent Adjustment Price (subject to equitable adjustment from
time to time on terms reasonably acceptable to the Holder for stock splits,
stock dividends, combinations, recapitalizations, reclassifications,
distributions, Tender Offers and similar events occurring after the Issuance
Date).
"Initial Shares" means those shares of Common Stock purchased
by the Holder on the Issuance Date pursuant to the Subscription Agreement
(subject to equitable adjustment from time to time on terms reasonably
acceptable to the Holder for stock splits, stock dividends, combinations,
recapitalizations, reclassifications, distributions, Tender Offers and similar
events occurring after the Issuance Date), excluding shares issuable pursuant to
the Callable Warrant.
"Issuance Date" means the first date of original issuance of
this Warrant.
"Market Price" of the Common Stock on any date means the
closing bid price for one share of Common Stock on such date on the first
applicable among the following: (a) the national securities exchange on which
the shares of Common Stock are listed which constitutes the principal securities
market for the Common Stock, (b) the Nasdaq, if the Nasdaq constitutes the
principal market for the Common Stock on such date, or (c) the Nasdaq SmallCap,
if the Nasdaq SmallCap constitutes the principal securities market for the
Common Stock on such date, in any such case as reported by Bloomberg, LP.;
provided, however, that if during any Measurement Period or other period during
which the Market Price is being determined:
(i) The Company shall declare or pay a
dividend or make a distribution to all holders of the
outstanding Common Stock in shares of Common Stock or fix any
record date for any such action, then the Market Price for
each day in such Measurement Period or such other period
which day is prior to the earlier of (1) the date fixed for
the determination of stockholders entitled to receive such
dividend or other distribution and (2) the date on which
ex-dividend trading in the Common Stock with respect to such
dividend or distribution begins shall be reduced by
multiplying the Market Price (determined without regard to
this proviso) for each such day in such Measurement Period or
such other period by a fraction, the numerator of which shall
be the number of shares of Common Stock outstanding at the
close of business on the earlier of (1) the record date
3
fixed for such determination and (2) the date on which
ex-dividend trading in the Common Stock with respect to such
dividend or distribution begins and the denominator of which
shall be the sum of such number of shares and the total
number of shares constituting such dividend or other
distribution;
(ii) The Company shall issue rights or
warrants to all holders of its outstanding shares of Common
Stock, or fix a record date for such issuance, which rights
or warrants entitle such holders (for a period expiring
within forty-five (45) days after the date fixed for the
determination of stockholders entitled to receive such rights
or warrants) to subscribe for or purchase shares of Common
Stock at a price per share less than the Market Price
(determined without regard to this proviso) for any day in
such Measurement Period or such other period which day is
prior to the end of such 45-day period, then the Market Price
for each such day shall be reduced so that the same shall
equal the price determined by multiplying the Market Price
(determined without regard to this proviso) by a fraction,
the numerator of which shall be the number of shares of
Common Stock outstanding at the close of business on the
record date fixed for the determination of stockholders
entitled to receive such rights or warrants plus the number
of shares which the aggregate offering price of the total
number of shares so offered would purchase at such Market
Price, and the denominator of which shall be the number of
shares of Common Stock outstanding on the close of business
on such record date plus the total number of additional
shares of Common Stock so offered for subscription or
purchase. In determining whether any rights or warrants
entitle the holders to subscribe for or purchase shares of
Common Stock at less than the Market Price (determined
without regard to this proviso), and in determining the
aggregate offering price of such shares of Common Stock,
there shall be taken into account any consideration received
for such rights or warrants, the value of such consideration,
if other than cash, to be determined in good faith by a
resolution of the Board of Directors of the Company;
(iii) The outstanding shares of Common
Stock shall be subdivided into a greater number of shares of
Common Stock or a record date for any such subdivision shall
be fixed, then the Market Price of the Common Stock for each
day in such Measurement Period or such other period which day
is prior to the earlier of (1) the day upon which such
subdivision becomes effective and (2) the date on which
ex-dividend trading in the Common Stock with respect to such
subdivision begins shall be proportionately reduced, and
conversely, in case the outstanding shares of Common Stock
shall be combined into a smaller number of shares of Common
Stock, the Market Price for each day in such Measurement
Period or such other period which day is prior to the earlier
of (1) the date on which such combination becomes effective
and (2) the date on which trading in the Common Stock on a
basis which gives effect to such combination begins, shall be
proportionately increased;
(iv) The Company shall, by dividend or
otherwise, distribute to all holders of its Common Stock
shares of any class of capital stock of the Company
4
(other than any dividends or distributions to which clause
(i) of this proviso applies) or evidences of its
indebtedness, cash or other assets (including securities, but
excluding any rights or warrants referred to in clause (ii)
of this proviso and dividends and distributions paid
exclusively in cash and excluding any capital stock,
evidences of indebtedness, cash or assets distributed upon a
merger or consolidation) (the foregoing hereinafter in this
clause (iv) of this proviso called the "Securities"), or fix
a record date for any such distribution, then, in each such
case, the Market Price for each day in such Measurement
Period or such other period which day is prior to the earlier
of (1) the record date for such distribution and (2) the date
on which ex-dividend trading in the Common Stock with respect
to such distribution begins shall be reduced so that the same
shall be equal to the price determined by multiplying the
Market Price (determined without regard to this proviso) by a
fraction, the numerator of which shall be the Market Price
(determined without regard to this proviso) for such date
less the fair market value (as determined in good faith by
resolution of the Board of Directors of the Company) on such
date of the portion of the Securities so distributed or to be
distributed applicable to one share of Common Stock and the
denominator of which shall be the Market Price (determined
without regard to this proviso) for such date. If the Board
of Directors of the Company determines the fair market value
of any distribution for purposes of this clause (iv) by
reference to the actual or when issued trading market for any
Securities comprising all or part of such distribution, it
must in doing so consider the prices in such market on the
same day for which an adjustment in the Market Price is being
determined.
For purposes of this clause (iv) and
clauses (i) and (ii) of this proviso, any dividend or
distribution to which this clause (iv) is applicable that
also includes shares of Common Stock, or rights or warrants
to subscribe for or purchase shares of Common Stock to which
clause (i) or (ii) of this proviso applies (or both), shall
be deemed instead to be (1) a dividend or distribution of the
evidences of indebtedness, assets, shares of capital stock,
rights or warrants other than such shares of Common Stock or
rights or warrants to which clause (i) or (ii) of this
proviso applies (and any Market Price reduction required by
this clause (iv) with respect to such dividend or
distribution shall then be made) immediately followed by (2)
a dividend or distribution of such shares of Common Stock or
such rights or warrants (and any further Market Price
reduction required by clauses (i) and (ii) of this proviso
with respect to such dividend or distribution shall then be
made), except that any shares of Common Stock included in
such dividend or distribution shall not be deemed
"outstanding at the close of business on the date fixed for
such determination" within the meaning of clause (i) of this
proviso;
(v) The Company or any subsidiary of the
Company shall (x) by dividend or otherwise, distribute to all
holders of its Common Stock cash in (or fix any record date
for any such distribution), or (y) repurchase or reacquire
shares of its Common Stock for, in either case, an aggregate
amount that, combined with (1) the aggregate amount of any
other such distributions to all holders of its Common Stock
made exclusively in cash after the Issuance Date
5
and within the 12 months preceding the date of payment of
such distribution, and in respect of which no adjustment
pursuant to this clause (v) has been made, (2) the aggregate
amount of any cash plus the fair market value (as determined
in good faith by a resolution of the Board of Directors of
the Company) of consideration paid in respect of any
repurchase or other reacquisition by the Company or any
subsidiary of the Company of any shares of Common Stock made
after the Issuance Date and within the 12 months preceding
the date of payment of such distribution or making of such
repurchase or reacquisition, as the case may be, and in
respect of which no adjustment pursuant to this clause (v)
has been made, and (3) the aggregate of any cash plus the
fair market value (as determined in good faith by a
resolution of the Board of Directors of the Company) of
consideration payable in respect of any Tender Offer by the
Company or any of its subsidiaries for all or any portion of
the Common Stock concluded within the 12 months preceding the
date of payment of such distribution or completion of such
repurchase or reacquisition, as the case may be, and in
respect of which no adjustment pursuant to clause (vi) of
this proviso has been made (such aggregate amount combined
with the amounts in clauses (1), (2) and (3) above being the
"Combined Amount"), exceeds 10% of the product of the Market
Price (determined without regard to this proviso) for any day
in such Measurement Period or such other period which day is
prior to the earlier of (A) the record date with respect to
such distribution and (B) the date on which ex-dividend
trading in the Common Stock with respect to such distribution
begins or the date of such repurchase or reacquisition, as
the case may be, times the number of shares of Common Stock
outstanding on such date, then, and in each such case, the
Market Price for each such day shall be reduced so that the
same shall equal the price determined by multiplying the
Market Price (determined without regard to this proviso) for
such day by a fraction (i) the numerator of which shall be
equal to the Market Price (determined without regard to this
proviso) for such day less an amount equal to the quotient of
(x) the excess of such Combined Amount over such 10% and (y)
the number of shares of Common Stock outstanding on such day
and (ii) the denominator of which shall be equal to the
Market Price (determined without regard to this proviso) for
such day; or
(vi) A Tender Offer made by the Company or
any of its subsidiaries for all or any portion of the Common
Stock shall expire and such Tender Offer (as amended upon the
expiration thereof) shall require the payment to stockholders
(based on the acceptance (up to any maximum specified in the
terms of the Tender Offer) of Purchased Shares (as defined
below)) of an aggregate consideration having a fair market
value (as determined in good faith by resolution of the Board
of Directors of the Company) that combined together with (1)
the aggregate of the cash plus the fair market value (as
determined in good faith by a resolution of the Board of
Directors of the Company), as of the expiration of such
Tender Offer, of consideration payable in respect of any
other Tender Offers, by the Company or any of its
subsidiaries for all or any portion of the Common Stock
expiring within the 12 months preceding the expiration of
such Tender Offer and in respect of which no adjustment
pursuant to this clause
6
(vi) has been made, (2) the aggregate amount of any cash plus
the fair market value (as determined in good faith by a
resolution of the Board of Directors of the Company) of
consideration paid in respect of any repurchase or other
reacquisition by the Company or any subsidiary of the Company
of any shares of Common Stock made after the Issuance Date
and within the 12 months preceding the expiration of such
Tender Offer and in respect of which no adjustment pursuant
to clause (v) of this proviso has been made, and (3) the
aggregate amount of any distributions to all holders of
Common Stock made exclusively in cash within 12 months
preceding the expiration of such Tender Offer and in respect
of which no adjustment pursuant to clause (v) of this proviso
has been made, exceeds 10% of the product of the Market Price
(determined without regard to this proviso) for any day in
such period times the number of shares of Common Stock
outstanding on such day, then, and in each such case, the
Market Price for such day shall be reduced so that the same
shall equal the price determined by multiplying the Market
Price (determined without regard to this proviso) for such
day by a fraction, the numerator of which shall be the number
of shares of Common Stock outstanding on such day multiplied
by the Market Price (determined without regard to this
proviso) for such day and the denominator of which shall be
the sum of (x) the fair market value (determined as
aforesaid) of the aggregate consideration payable to
stockholders based on the acceptance (up to any maximum
specified in the terms of the Tender Offer) of all shares
validly tendered and not withdrawn as of the last time
tenders could have been made pursuant to such Tender Offer
(the "Expiration Time") (the shares deemed so accepted, up to
any such maximum, being referred to as the "Purchased
Shares") and (y) the product of the number of shares of
Common Stock outstanding (less any Purchased Shares) on such
day times the Market Price (determined without regard to this
proviso) of the Common Stock on the Trading Day next
succeeding the Expiration Time. If the application of this
clause (vi) to any Tender Offer would result in an increase
in the Market Price (determined without regard to this
proviso) for any trade, no adjustment shall be made for such
Tender Offer under this clause (vi) for such day.
"Measurement Period" means, with respect to any Adjustment
Date, the period of 30 consecutive Trading Days ending on the Trading Day prior
to such Adjustment Date.
"Nasdaq" means the Nasdaq National Market.
"Nasdaq SmallCap" means the Nasdaq SmallCap Market.
"1934 Act" means the Securities Exchange Act of 1934, as
amended.
"1933 Act" means the Securities Act of 1933, as amended.
"Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the Holder at any time shall be entitled to receive, or shall
have received, on the exercise of this Warrant, in lieu of
7
or in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 4.
"Purchase Price" means the greater of (x) $.01 per share or
(y) the par value per share of the Common Stock.
"Purchased Securities" as of any date means (1) the Initial
Shares which are then held by the Holder, (2) the Class A Warrant Shares which
are then held by the Holder and (3) this Warrant.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the date hereof, by and between the Company and the
original Holder of this Warrant, as amended from time to time in accordance with
its terms.
"Registration Statement" shall have the meaning provided in
the Registration Rights Agreement.
"Repurchase Date" means the date of repurchase by the Company
of the Securities pursuant to Section 1.4.
"Repurchase Notice" means a notice given by the Company to the
Holder pursuant to Section 1.4(b) exercising the Company's right to repurchase
all of the Securities pursuant to Section 1.4(b) which states (1) the number of
shares of Common Stock (including shares issuable upon exercise of this Warrant)
which are to be repurchased, (2) the Repurchase Price and the formula for
determining the same, determined in accordance herewith and (3) the Repurchase
Date.
"Repurchase Price" means, for each share of Common Stock
repurchased pursuant to Section 1.4, the product of (x) the arithmetic average
of the Market Price on each of the five consecutive Trading Days ending on and
including the Adjustment Date following which the Repurchase Notice is given
times (y) the Adjustment Factor.
"Share Limit" means 3,902,081 shares of Common Stock (subject
to equitable adjustment from time to time on terms reasonably acceptable to the
Holder for stock splits, stock dividends, combinations, recapitalizations,
reclassifications, distributions, Tender Offers and similar events occurring
after the Issuance Date).
"Share Limitation Event" means a time at which the Company is
unable to issue all shares of Common Stock otherwise required to be issued upon
exercise of this Warrant by reason of the restrictions set forth in the
Shareholder Approval Rule and the Company has not obtained a waiver thereof.
"Shareholder Approval" shall mean the approval by a majority
of the votes cast by the holders of shares of Common Stock (in person or by
proxy) at a meeting of the stockholders of the Company (duly convened at which a
quorum was present), or a unanimous written consent of holders of shares of
Common Stock given without a meeting, of the issuance by the Company of 20% or
more of the Common Stock of the Company outstanding on the
8
Issuance Date for less than the greater of the book or market value of such
Common Stock, as and to the extent required under the Shareholder Approval Rule.
"Shareholder Approval Rule" means Rule 4460(i)(1)(D) of Nasdaq
as in effect from time to time or any successor, replacement or similar rule or
regulation of Nasdaq or any other principal securities market on which the
Common Stock is listed for trading.
"Specified Number" means the number of shares of Common Stock
for which this Warrant is exercisable from time to time as determined in
accordance with Section 1.3.
"Subscription Agreement" means the Subscription Agreement,
dated as of July [ ], 2000, by and between the Company and the original Holder
of this Warrant, as amended from time to time in accordance with its terms.
"Tender Offer" means a tender offer or exchange offer.
"Total Common Shares" as of any date means the sum of (1) the
number of Initial Shares plus (2) the number of Class A Warrant Shares plus (3)
the number of shares of Common Stock issued pursuant to the Callable Warrant.
"Trading Day" means a day on which the principal securities
market for the Common Stock is open for general trading of securities.
1. EXERCISE OF WARRANT.
1.1 EXERCISE. Subject to the limitations on exercises in
Sections 1.2 and 1.4(a), this Warrant may be exercised by the Holder hereof at
any time or from time to time during the Exercise Period by delivery of the
subscription form annexed hereto (duly executed by the Holder) to the Company
and by making payment, in cash or by certified or official bank check payable to
the order of the Company, in the amount obtained by multiplying (i) the number
of shares of Common Stock designated by the Holder in the subscription form by
(ii) the Purchase Price. If at the request of the Company the subscription form
is delivered to the Company's transfer agent for the Common Stock, the Holder
shall provide a copy of the subscription form to the Company at the time of
exercise and the Company will confirm the exercise instructions given therein by
notice to the Company's transfer agent within one Trading Day after receiving
such subscription form. Upon each exercise of this Warrant, whether by cash or
cashless exercise, the Holder shall not be required to surrender this Warrant to
the Company unless the Holder has no further rights to purchase shares of Common
Stock hereunder. The Holder and the Company shall maintain records showing the
number of shares purchased in connection with each exercise of this Warrant and
the dates of such exercises or shall use such other method, satisfactory to the
Holder and the Company, so as to not require physical surrender of this Warrant
upon each such exercise.
(a) CASHLESS EXERCISE. Subject to the limitations on
exercises in Sections 1.2 and 1.4(a), during the Exercise Period and at any time
after the earlier to occur of the SEC Effective Date (as defined in the
Registration Rights Agreement) and the date the initial registration statement
filed pursuant to the Registration Rights Agreement is declared effective by the
Commission, when a registration statement covering the resale of the Common
Stock issuable
9
hereunder and naming the Holder as a selling stockholder thereunder is not then
effective, the Holder may surrender this Warrant to the Company together with a
notice of cashless exercise, in which event the Company shall issue to the
Holder the number of shares of Common Stock determined as follows:
X = Y [(A-B)/A]
where:
X = the number of shares of Common Stock to be issued
to the Holder.
Y = the number of shares of Common Stock with respect
to which this Warrant is being exercised.
A = the average of the closing sale prices of the
Common Stock for the five (5) trading days
immediately prior to (but not including) the date of
exercise.
B = the Purchase Price.
For purposes of Rule 144 promulgated under the Securities Act, it is intended,
understood and acknowledged that the shares of Common Stock issued in a cashless
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for such shares shall be deemed to have been commenced, on
the issue date of this Warrant.
(b) In lieu of delivering physical certificates representing
the shares of Common Stock issuable upon exercise of this Warrant, provided the
Company's transfer agent is participating in the Depository Trust Company
("DTC") Fast Automated Securities Transfer ("FAST") program, upon request of the
Holder, the Company shall use its best efforts to cause its transfer agent to
electronically transmit the shares of Common Stock issuable upon exercise to the
Holder, by crediting the account of the Holder's prime broker with DTC through
its Deposit Withdrawal Agent Commission ("DWAC") system. The time periods for
delivery described above shall apply to the electronic transmittals through the
DWAC system. The Company agrees to coordinate with DTC to accomplish this
objective.
1.2 CERTAIN EXERCISE RESTRICTIONS.
(b) Notwithstanding anything to the contrary contained
herein, the number of shares of Common Stock that may be acquired by the Holder
upon exercise pursuant to the terms hereof shall not exceed a number that, when
added to the total number of shares of Common Stock deemed beneficially owned by
such Holder (other than by virtue of the ownership of securities or rights to
acquire securities that have limitations on the Holder's right to convert,
exercise or purchase similar to the limitation set forth herein), together with
all shares of Common Stock deemed beneficially owned (other than by virtue of
the ownership of securities or rights to acquire securities that have
limitations on the Holder's right to convert, exercise or purchase similar to
the limitation set forth herein) by the Holder's "Affiliates" (as defined in
Rule 144 of the Securities Act) ("Aggregation Parties") that would be aggregated
for purposes of
10
determining whether a group under Section 13(d) of the Securities Exchange Act
of 1934, as amended, exists, would exceed 9.99% of the total issued and
outstanding shares of Common Stock (the "Restricted Ownership Percentage"). Each
Holder shall have the right (w) at any time and from time to time to reduce its
Restricted Ownership Percentage immediately upon notice to the Company and (x)
(subject to waiver) at any time and from time to time, to increase its
Restricted Ownership percentage immediately in the event of the announcement as
pending or planned, of a merger or consolidation of the Company, a sale of all
or substantially all of the assets of the Company, or the acquisition by any
third party (and/or such party's Aggregation Parties) of at least 50% of the
Company's outstanding Common Stock.
(c) The Holder covenants at all times on each day (each such
day being referred to as a "Covenant Day") as follows: during the balance of
such Covenant Day and the succeeding sixty-one (61) days (the balance of such
Covenant Day and the succeeding 61 days being referred to as the "Covenant
Period") such Holder will not acquire shares of Common Stock pursuant to any
right (including exercise of this Warrant) existing at the commencement of the
Covenant Period to the extent the number of shares so acquired by such Holder
and its Aggregation Parties (ignoring all dispositions) would exceed:
(x) the Restricted Ownership Percentage of the total number
of shares of Common Stock outstanding at the
commencement of the Covenant Period,
MINUS
(y) the number of shares of Common Stock owned by such
Holder and its Aggregation Parties at the
commencement of the Covenant Period.
A new and independent covenant will be deemed to be given by
the Holder as of each moment of each Covenant Day. No covenant will terminate,
diminish or modify any other covenant. The Holder agrees to comply with each
such covenant.
The Company's obligation to issue shares of Common Stock which
would exceed such limits shall be suspended to the extent necessary until such
time, if any, as shares of Common Stock may be issued in compliance with such
restrictions.
11
1.3 DETERMINATION OF SPECIFIED NUMBER. (a) On each Adjustment
Date, the number of Adjustment Shares shall be computed as follows:
IF CP less than or equal to ICP, and
IF CP less than $2.25 and
IF CP greater than or equal to MPP, then
CS = PPSH x 1.015, and
BSH = CS - FSH, and
if the Company elects to pay Holder
B$ = BSH x CP,
AS = CS - BSH - PPSH
or else AS = CS - PPSH
but IF CP less than MPP, then
CS = (MPP x PPSH x (1.015)/CP
BSH = CS - FSH, and
if the Company elects to pay Holder
B$ = BSH x CP,
AS = CS - BSH - PPSH
or else AS = CS -PPSH.
IF CP less than ICP and IF CP greater than or equal to $2.25 and
IF CP greater than or equal to MPP, then
AS = PPSH x .015
or else AS = [(MPP x PPSH x 1.015)/CP] - PPSH
IF CP greater than ICP, then AS=0
12
where:
AS = Adjustment Shares
CS = Initially calculated Adjustment Shares
I$ = $4,000,000
ICP = $4.33125
BSH = Buyout Shares: The number of shares for
which the Company may, in lieu of having the
Specified Number increase by the applicable
number of Adjustment Shares, elect to pay
cash to the Holder in the amount of the
Buyout.
FSH = Floor Shares (the number of shares that
are not subject to the Company's election to
buyout). The initial value of FSH shall be
set to FSH = 1,777,778. FSH shall be
recalculated at each Adjustment Date by
multiplying the value of FSH as of the
immediately preceding Adjustment Date by
(1 - (SHX/PPSH))
B$ = Buyout Amount.
SHX = the number of Warrant shares exercised
during the current Adjustment Period.
CP = the Average Market Price as of the
then-current Adjustment Date.
PPSH = the number of Common Shares Held as of the
immediately preceding Adjustment Date.
MPP = the lesser of ICP or the lowest Average
Market Price as of any prior Adjustment Date
(or ICP on the first Adjustment Date).
As indicated above, if as of any Adjustment Date the Average
Market Price is below $2.25 (as such number shall be appropriately adjusted for
any stock splits, recapitalizations or similar events), the Company may, in lieu
of having the increase in the Specified Number include the number of Buyout
Shares, elect to pay cash to the Holder in an amount equal to the Buyout Amount
(B$). Such election must be made by written notice to the holders within five
(5) business days after the applicable Adjustment Date and the Company must make
payment therefor in cash (i) within sixty (60) days after the first Adjustment
Date, if applicable and (ii) within five (5) business days after any subsequent
applicable Adjustment Date.
13
(b) Prior to the First Adjustment Date, the Specified Number
shall equal zero. For each Adjustment Date on which the number of Adjustment
Shares determined in accordance with Section 1.3(a) is a positive number,
(1) on the First Adjustment Date, the Specified Number shall
equal the number of Adjustment Shares; and
(2) on each subsequent Adjustment Date, the Specified Number
shall equal (x) the Specified Number determined on the immediately preceding
Adjustment Date plus (y) the number of Adjustment Shares determined on the
current Adjustment Date less (z) the number of shares of Common Stock for which
this Warrant was exercised during the most recently completed Quarterly Period.
(c) The number of Adjustment Shares may not be a negative
number. For each Adjustment Date on which the number of Adjustment Shares
determined in accordance with Section 1.2(a) is zero or would otherwise be a
negative number, the Holder shall not be obligated to transfer any shares of
Common Stock to the Company.
(d) On each Adjustment Date or within three Trading Days
thereafter, the Holder shall give an Adjustment Notice in the form attached
hereto to the Company accompanied by the spreadsheet referred to Section 1.3(e)
used to calculate the Adjustment Shares. If the Holder fails to give an
Adjustment Notice within three Trading Days after any Adjustment Date, the
Company may notify the Holder of such failure and, if the Holder does not
deliver such Adjustment Notice within three Trading Days after such notice of
failure is given to the Holder, the Company shall give such Adjustment Notice to
the Holder. Absent manifest error, the Adjustment Notice and such spreadsheet
shall be binding on the Company and the Holder for purposes of making the
determinations required by this Section 1.3. The Company and the Holder shall
use their best efforts to promptly correct any error in any Adjustment Notice.
(e) A spreadsheet illustrating the application of the
forgoing is annexed hereto and made a part hereof; such spreadsheet shall be
used in calculating Adjustment Shares pursuant to this Section 1.3.
1.4 MAXIMUM SHARE LIMITATION; REPURCHASE RIGHTS. Provided
that the Common Stock is listed for trading on Nasdaq or another market having
the Shareholder Approval Rule or an equivalent rule, and provided that
Shareholder Approval or the equivalent has not been obtained, this Warrant may
not be exercised to purchase shares of Common Stock to the extent, and only to
the extent, such exercise would cause the Total Common Shares of the Holder to
exceed the Share Limit. If such conditions obtain and if an exercise in full of
this Warrant and/or the Callable Warrant would, but for the preceding sentence
and the other limitations contained in Sections 1.1 and 1.2 above, cause the
Total Common Shares to exceed the Share Limit:
(a) If (i) (at the time of the Company's exercise of its
right in this sentence) the Company shall be in compliance in all material
respects with its obligations to the Holder (including, without limitation, its
obligations under this Warrant, the Callable Warrant, the
14
Subscription Agreement and the Registration Rights Agreement), (ii) on the date
the Repurchase Notice is given and at all times until the Repurchase Date, the
Registration Statement is effective and available for use by the Holder for the
resale of all of its Shares of Common Stock previously issued or issuable and
(iii) on the date the Repurchase Notice is given and on the Repurchase Date, the
Company has available unrestricted Cash and Cash Equivalent Balances not less
than the aggregate amount to be paid to repurchase shares of Common Stock
pursuant to Section 1.4 of this Warrant and the Other Class A Warrants, then the
Company shall have the right to repurchase the shares of Common Stock issuable
pursuant to the Warrant and/or the Callable Warrant held by the Holder in
accordance with Section 1.4(b).
(b) To exercise its repurchase right, the Company shall give
a Repurchase Notice, not more frequently than once in any period of 180
consecutive days, on the Trading Day immediately following an Adjustment Date.
If the Repurchase Notice is timely given, the Company shall be obligated to
repurchase such portion of the shares issuable pursuant to this Warrant and/or
the Callable Warrant (in proportions designated by the Holder) which exceed the
Share Limit on a Repurchase Date which is not less than 20 Trading Days or more
than 30 Trading Days after the date of the Repurchase Notice, if this Warrant
and/or the Callable Warrant is to be repurchased pursuant to this Section 1.4,
the Company shall repurchase such Warrants as if such Warrants had been
exercised, to the extent of the portion of the Warrants being repurchased, on
the Repurchase Date and the shares of Common Stock issuable upon such exercise
were held directly by the Holder and were being repurchased. On the Repurchase
Date, the Company shall make payment to the Holder of the applicable Repurchase
Price multiplied by the number of shares of Common Stock to be repurchased in
immediately available funds to such account as specified by the Holder in
writing to the Company at least one Trading Day prior to the Repurchase Date,
provided that if such payment is not so made on the Repurchase Date, the Company
shall be obligated to repurchase such number of shares at a purchase price equal
to the Holder Repurchase Price per share. Notwithstanding anything to the
contrary in the foregoing provisions of this Section 1.4, prior to the
Repurchase Date, or such later date on which the Repurchase Price is paid, the
Holder shall be free to exercise this Warrant as long as such exercise does not
violate the first sentence of this Section 1.4.
(c) If the Company does not timely give a Repurchase Notice
pursuant to subsection (b) above, the Company shall have the option by written
notice to the Holder, and the Holder shall have the right to require the Company
by written notice, to seek the Shareholder Approval applicable to an issuance of
shares in excess of the Share Limit ("Excess Shares") as soon as possible, but
in any event, not later than the 75th day after such election or the Holder's
demand, and if the Company shall have failed to receive Shareholder Approval
within five (5) Business Days of such 75th day, the Company shall, on such fifth
Business Day, pay cash to such Holder in an amount equal to the Holder
Repurchase Price multiplied by the number of Excess Shares. If the Company fails
to pay the Holder Repurchase Price in full pursuant to this Section 1.4 within
seven days after the date payable, the Company will pay interest thereon at a
rate of 18% per annum or such lesser maximum amount that is permitted to be paid
by applicable law, to the Holder, accruing daily from such fifth Business Day
until such amount, plus all such interest thereon, is paid in full.
2. DELIVERY OF STOCK CERTIFICATES, ETC., ON EXERCISE. (a) As
soon as practicable after the exercise of this Warrant, and in any event within
three Trading Days
15
thereafter, the Company at its expense (including the payment by it of any
applicable issue or stamp taxes) will cause to be issued in the name of and
delivered to the Holder hereof, or as the Holder (upon payment by the Holder of
any applicable transfer taxes) may direct, a certificate or certificates for the
number of fully paid and nonassessable shares of Common Stock (or Other
Securities) to which the Holder shall be entitled on such exercise, in such
denominations as may be requested by the Holder, plus, in lieu of any fractional
share to which the Holder would otherwise be entitled, cash equal to such
fraction multiplied by the then current fair market value (as reasonably
determined by the Company) of one full share, together with any other stock or
other securities and property (including cash, where applicable) to which the
Holder is entitled upon such exercise pursuant to Section 1 or otherwise. Upon
exercise of this Warrant as provided herein, the Company's obligation to issue
and deliver the certificates for Common Stock shall be absolute and
unconditional, irrespective of the absence of any action by the Holder to
enforce the same, any waiver or consent with respect to any provision thereof,
the recovery of any judgment against any person or any action to enforce the
same, any failure or delay in the enforcement of any other obligation of the
Company to the Holder, or any setoff, counterclaim, recoupment, limitation or
termination, or any breach or alleged breach by the Holder or any other person
of any obligation to the Company, and irrespective of any other circumstance
which might otherwise limit such obligation of the Company to the Holder in
connection with such exercise. If the Company fails to issue and deliver the
certificates for the Common Stock to the Holder pursuant to the first sentence
of this paragraph as and when required to do so, in addition to any other
liabilities the Company may have hereunder and under applicable law, the Company
shall pay or reimburse the Holder on demand for all out-of-pocket expenses
including, without limitation, reasonable fees and expenses of legal counsel
incurred by the Holder as a result of such failure.
(b) If the Company fails to deliver to the Holder a
certificate or certificates representing the shares of Common Stock pursuant to
Section 2(a) by the third Trading Day after each date of exercise of this
Warrant, the Company shall pay to the Holder, in cash, as liquidated damages and
not as a penalty, $5,000 for each day after such third Trading Day until such
certificates are delivered. The payment and acceptance of any cash penalty shall
not preclude the Holder from proceeding under the next paragraph 2(c); provided
that any amounts actually paid to the Holder under this paragraph 2(b) herein
shall be deducted (but not below zero) from the amount otherwise recoverable
under paragraph 2(c) below.
(c) In addition to any other rights available to the Holder,
but subject to paragraph 2(b) above, if the Company fails to deliver to the
Holder a certificate or certificates representing shares of Common Stock
pursuant to Section 2(a) by the third Trading Day after the date of exercise of
this Warrant, and if after such third Trading Day the Holder purchases (in an
open market transaction or otherwise) shares of Common Stock to deliver in
satisfaction of a sale by the Holder of the shares of Common Stock which the
Holder anticipated receiving upon such exercise (a "Buy-In"), then the Company
shall pay (1) in cash to the Holder the amount by which (x) the Holder's total
purchase price (including brokerage commissions, if any) for the shares of
Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the
number of shares of Common Stock that the Company was required to deliver
pursuant to Section 2(a) to deliver to the Holder in connection with the
exercise at issue by (B) the Market Price at the time of the sale giving rise to
such purchase obligation and (2) deliver to the Holder the number of shares of
Common Stock that would have been issued had the Company timely complied with
its
16
exercise and delivery obligations under Section 2(a). For example, if the Holder
purchases Common Stock having a total purchase price of $11,000 to cover a
Buy-In with respect to an attempted exercise of shares of Common Stock with a
Market Price on the date of exercise totaled $10,000, under clause (A) of the
immediately preceding sentence the Company shall be required to pay the Holder
$1,000. The Holder shall provide the Company written notice and appropriate
documentation indicating the amounts payable to the Holder in respect of the
Buy-In.
3. ADJUSTMENT FOR DIVIDENDS IN OTHER STOCK, PROPERTY, ETC.;
RECLASSIFICATION, ETC. In case at any time or from time to time after the
Issuance Date, all the holders of Common Stock (or Other Securities) shall have
received, or (on or after the record date fixed for the determination of
stockholders eligible to receive) shall have become entitled to receive, without
payment therefor,
(b) other or additional stock or other securities or property
(other than cash) by way of dividend, or
(c) any cash (excluding cash dividends payable solely out of
earnings or earned surplus of the Company), or
(d) other or additional stock or other securities or property
(including cash) by way of spin-off, split-up, reclassification,
recapitalization, combination of shares or similar corporate rearrangement,
other than additional shares of Common Stock (or Other Securities) issued as a
stock dividend or in a stock-split (adjustments in respect of which are provided
for in Section 5), then and in each such case the Holder shall be entitled to
receive, at the same time as holders of Common Stock, the amount of stock and
other securities and property (including cash in the cases referred to in
subdivisions (b) and (c) of this Section 3) which the Holder would have received
if on the date thereof the Holder had been the holder of record of the Specified
Number, after giving effect to all adjustments called for during such period by
Section 4. Notwithstanding anything in this Section 3 to the contrary, no
adjustments pursuant to this Section 3 shall actually be made until the
cumulative effect of the adjustments called for by this Section 3 since the date
of the last adjustment actually made would change the amount of stock or other
securities and property which the Holder would hold by more than 1%.
4. EXERCISE UPON REORGANIZATION, CONSOLIDATION, MERGER, ETC.
In case of any (1) merger or consolidation of the Company with or into another
person, or (2) sale by the Company of more than one-half of the assets of the
Company (on a book value basis) in one or a series of related transactions, or
(3) tender or other offer or exchange (whether by the Company or another person)
pursuant to which holders of Common Stock are permitted to tender or exchange
their shares for other securities, stock, cash or property of the Company or
another Person; then the Holder shall have the right thereafter to (A) exercise
this Warrant for the shares of stock and other securities, cash and property
receivable upon or deemed to be held by holders of Common Stock following such
merger, consolidation or sale, and the Holder shall be entitled upon such event
or series of related events to receive such amount of securities, cash and
property as the Common Stock for which this Warrant could have been exercised
immediately prior to such merger, consolidation or sale would have been
entitled, (B) in the case of a merger
17
or consolidation, (x) require the surviving entity to issue to the Holder a
warrant entitling the Holder to acquire shares of such entity's common stock,
which warrant shall have terms identical (including with respect to exercise) to
the terms of this Warrant and shall be entitled to all of the rights and
privileges set forth herein and the agreements pursuant to which this Warrant
was issued (including, without limitation, as such rights relate to the
acquisition, transferability, registration and listing of such shares of stock
other securities issuable upon exercise thereof), or (C) in the event of an
exchange or tender offer or other transaction contemplated by clause (3) of this
Section, tender or exchange this Warrant for such securities, stock, cash and
other property receivable upon or deemed to be held by holders of Common Stock
that have tendered or exchanged their shares of Common Stock following such
tender or exchange, and the Holder shall be entitled upon such exchange or
tender to receive such amount of securities, cash and property as the shares of
Common Stock for which this Warrant could have been exercised immediately prior
to such tender or exchange would have been entitled as would have been issued.
In the case of clause (B), the exercise price applicable for the newly issued
warrant shall be based upon the amount of securities, cash and property that
each share of Common Stock would receive in such transaction and the Purchase
Price immediately prior to the effectiveness or closing date for such
transaction. The terms of any such merger, sale, consolidation, tender or
exchange shall include such terms so as continue to give the Holder the right to
receive the securities, cash and property set forth in this Section upon any
conversion or redemption following such event. This provision shall similarly
apply to successive such events.
5. ADJUSTMENT FOR EXTRAORDINARY EVENTS. In the event that
after the Issuance Date the Company shall (i) issue additional shares of Common
Stock as a dividend or other distribution on outstanding Common Stock, (ii)
subdivide or reclassify its outstanding share of Common Stock, or (iii) combine
its outstanding share of Common Stock into a smaller number of shares of Common
Stock, then, in each event, the Specified Number shall, simultaneously with the
happening of such event, be adjusted by multiplying the Specified Number in
effect immediately prior to such event by a fraction, the numerator of which
shall be the number of shares of Common Stock outstanding immediately after such
event and the denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to such event, and the product so obtained shall
thereafter be the Specified Number then in effect. The Specified Number, as so
adjusted, shall be readjusted in the same manner upon the happening of any
successive event or events described in this Section 5.
6. FURTHER ASSURANCES. Subject to the terms hereof, the
Company will take all action that may be necessary or appropriate in order that
the Company may validly and legally issue fully paid and nonassessable shares of
stock, free from all taxes, liens and charges with respect to the issue thereof,
on the exercise of all or any portion of this Warrant from time to time
outstanding.
7. NOTICES OF RECORD DATE, ETC. In the event of
(a) any taking by the Company of a record of the holders of
any class of securities for the purpose of determining the holders thereof who
are entitled to receive any dividend on, or any right to subscribe for, purchase
or otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, or
18
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
transfer of all or substantially all of the assets of the Company to or
consolidation or merger of the Company with or into any other person (other than
a wholly-owned subsidiary of the Company), or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
then and in each such event the Company will mail or cause to be mailed to the
Holder, at least ten days prior to such record date, a notice specifying (i) the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and character of such dividend,
distribution or right, (ii) the date on which any such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up is to take place, and the time, if any is
to be fixed, as of which the holders of record of Common Stock (or Other
Securities) shall be entitled to exchange their shares of Common Stock (or Other
Securities) for securities or other property deliverable on such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up, and (iii) the amount and character of
any stock or other securities, or rights or options with respect thereto,
proposed to be issued or granted, the date of such proposed issue or grant and
the persons or class of persons to whom such proposed issue or grant is to be
offered or made. Such notice shall also state that the action in question or the
record date is subject to the effectiveness of a registration statement under
the 1933 Act, or a favorable vote of stockholders, if either is required. Such
notice shall be mailed at least ten days prior to the date specified in such
notice on which any such action is to be taken or the record date, whichever is
earlier.
8. RESERVATION OF STOCK, ETC., ISSUABLE ON EXERCISE OF
WARRANTS. The Company will at all times reserve and keep available out of its
authorized but unissued shares of capital stock, solely for issuance and
delivery on the exercise of this Warrant, a sufficient number of shares of
Common Stock (or Other Securities) to effect the full exercise of this Warrant
and the exercise, conversion or exchange of any other warrant or security of the
Company exercisable for, convertible into, exchangeable for or otherwise
entitling the holder to acquire shares of Common Stock (or Other Securities),
and if at any time the number of authorized but unissued shares of Common Stock
(or Other Securities) shall not be sufficient to effect such exercise,
conversion or exchange, the Company shall take such action as may be necessary
to increase its authorized but unissued shares of Common Stock (or Other
Securities) to such number as shall be sufficient for such purposes.
9. TRANSFER OF WARRANT. This Warrant shall inure to the
benefit of the successors to and assigns of the Holder. This Warrant and all
rights hereunder, in whole or in part, are registrable at the office or agency
of the Company referred to below by the Holder hereof in person or by his duly
authorized attorney, upon surrender of this Warrant properly endorsed.
10. REGISTER OF WARRANTS. The Company shall maintain, at the
principal office of the Company (or such other office as it may designate by
notice to the Holder hereof), a register in which the Company shall record the
name and address of the person in whose name this Warrant has been issued, as
well as the name and address of each successor and prior owner
19
of such Warrant. The Company shall be entitled to treat the person in whose name
this Warrant is so registered as the sole and absolute owner of this Warrant for
all purposes.
11. EXCHANGE OF WARRANT. This Warrant is exchangeable, upon
the surrender hereof by the Holder hereof at the office or agency of the Company
referred to in Section 10, for one or more new Warrants of like tenor
representing in the aggregate the right to subscribe for and purchase the number
of shares of Common Stock which may be subscribed for and purchased hereunder,
each of such new Warrants to represent the right to subscribe for and purchase
such number of shares as shall be designated by said Holder hereof at the time
of such surrender.
12. REPLACEMENT OF WARRANT. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of this Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
13. WARRANT AGENT. The Company may, by written notice to the
Holder, appoint the transfer agent and registrar for the Common Stock as the
Company's agent for the purpose of issuing shares of Common Stock (or Other
Securities) on the exercise of this Warrant pursuant to Section 1, and the
Company may, by notice to the Holder, appoint an agent having an office in the
United States of America for the purpose of exchanging this Warrant pursuant to
Section 11 and replacing this Warrant pursuant to Section 12, or either of the
foregoing, and thereafter any such exchange or replacement, as the case may be,
shall be made at such office by such agent.
14. REMEDIES. The Company stipulates that the remedies at law
of the Holder in the event of any default or threatened default by the Company
in the performance of or compliance with any of the terms of this Warrant are
not and will not be adequate, and that such terms may be specifically enforced
by a decree for the specific performance of any agreement contained herein or by
an injunction against a violation of any of the terms hereof or otherwise.
15. NO RIGHTS OR LIABILITIES AS A STOCKHOLDER. This Warrant
shall not entitle the Holder hereof to any voting rights or other rights as a
stockholder of the Company. No provision of this Warrant, in the absence of
affirmative action by the Holder hereof to purchase Common Stock, and no mere
enumeration herein of the rights or privileges of the Holder hereof, shall give
rise to any liability of the Holder for the Purchase Price or as a stockholder
of the Company, whether such liability is asserted by the Company or by
creditors of the Company.
16. NOTICES, ETC. All notices and other communications from
the Company to the registered Holder or from the registered Holder to the
Company shall be delivered personally (which shall include telephone line
facsimile transmission with answer back confirmation) or by courier and shall be
effective upon receipt, addressed to each party at the address or telephone line
facsimile transmission number for each party set forth in the Subscription
Agreement or at such other address or telephone line facsimile transmission
number as a party shall have provided to the other party in accordance with this
provision.
20
17. TRANSFER RESTRICTIONS. By acceptance of this Warrant, the
Holder represents to the Company that this Warrant is being acquired for the
Holder's own account and for the purpose of investment and not with a view to,
or for sale in connection with, the distribution thereof, nor with any present
intention of distributing or selling this Warrant or the Common Stock issuable
upon exercise of this Warrant. The Holder acknowledges and agrees that this
Warrant and, except as otherwise provided in the Registration Rights Agreement,
the shares of Common Stock issuable upon exercise of this Warrant (if any) have
not been (and at the time of acquisition by the Holder, will not have been or
will not be), registered under the 1933 Act or under the securities laws of any
state, in reliance upon certain exemptive provisions of such statutes. The
Holder further recognizes and acknowledges that (a) because this Warrant and,
except as provided in the Registration Rights Agreement, the Common Stock
issuable upon exercise of this Warrant (if any) are unregistered, they may not
be eligible for resale, and may only be resold in the future pursuant to an
effective registration statement under the 1933 Act and any applicable state
securities laws, or pursuant to a valid exemption from such registration
requirements and (b) this Warrant and the Common Stock issuable upon the
exercise hereof are subject to the transfer restrictions and other terms,
conditions and obligations set forth in the Registration Rights Agreement and in
the Subscription Agreement. Unless the shares of Common Stock issuable upon
exercise of this Warrant have theretofore been registered for resale under the
1933 Act, the Company may require, as a condition to the issuance of Common
Stock upon the exercise of this Warrant a confirmation as of the date of
exercise of the Holder's representations pursuant to this Section 17.
18. LEGEND. Except to the extent required by the Subscription
Agreement, each certificate for shares issued upon exercise of this Warrant
shall be free of any restrictive legend.
19. ATTORNEYS' FEES. In any litigation, arbitration or court
proceeding between the Company and Holder relating hereto, the prevailing party
shall be entitled to attorneys' fees and expenses and all costs of proceedings
incurred in enforcing this Warrant; provided that the prevailing party may only
recover attorney's fees and expenses aggregating up to 35% of the amount sought
in good faith to be recovered.
20. AMENDMENT; WAIVER. This Warrant and any terms hereof may
be changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought.
21. MISCELLANEOUS. The corporate laws of the State of
Delaware shall govern all issues concerning the relative rights of the Company
and its stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Warrant shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. The Company
and the Holder hereby irrevocably submit to the exclusive jurisdiction of the
state and federal courts sitting in the City of New York, borough of Manhattan,
for the adjudication of any dispute hereunder or in connection herewith or with
any transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, or that
such suit, action or proceeding is improper. Each of the Company and the Holder
hereby irrevocably waives
21
personal service of process and consents to process being served in any such
suit, action or proceeding by certified mail, return receipt requested, and
agrees that such service shall constitute good and sufficient service of process
and notice thereof. Nothing contained herein shall be deemed to limit in any way
any right to serve process in any manner permitted by law.
22
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed on its behalf by one of its officers thereunto duly authorized.
Dated: July 31, 2000 STEMCELLS, INC.
By:
-------------------------
Title:
----------------------
23
FORM OF SUBSCRIPTION
STEMCELLS, INC.
(To be signed only on exercise of Warrant)
TO: STEMCELLS, INC.
525 Del Rey Avenue
Suite C
Sunnyvale, California 94086
Attention: Chief Financial Officer
1. The undersigned Holder of the attached original, executed
Warrant hereby elects to exercise its purchase right under such Warrant with
respect to ______________ shares of Common Stock, as defined in the Warrant, of
StemCells, Inc., a Delaware corporation (the "Company").
2. The undersigned Holder elects to pay the aggregate purchase
price for such shares of Common Stock (the "Exercise Shares") (i) by lawful
money of the United States or the enclosed certified or official bank check
payable in United States dollars to the order of the Company in the amount of
$___________, or (ii) by wire transfer of United States funds to the account of
the Company in the amount of $____________, which transfer has been made before
or simultaneously with the delivery of this Form of Subscription pursuant to the
instructions of the Company.
3. The undersigned Holder represents and warrants that it is
an accredited investor as defined under Rule 501(a) promulgated under the
Securities Act of 1933, as amended.
4. Please issue a stock certificate or certificates
representing the appropriate number of shares of Common Stock in the name of the
undersigned or in such other name as is specified below:
Name:
-----------------------------
Address:
-----------------------------
-----------------------------
24
5. The undersigned Holder hereby represents to the Company
that the exercise of the Warrant elected hereby does not violate Section 1.2 of
the Warrant.
Dated: ___________ ___, ____ HOLDER:
---------------------------------------------
By:
-----------------------------------------
(Signature must conform to name of Holder
as specified on the face of the Warrant)
Name:
Title:
Address:
------------------------------------
---------------------------------------------
25
ADJUSTMENT NOTICE
TO: STEMCELLS, INC.
525 Del Ray Avenue
Suite C
Sunnyvale, California 94086
Attention: Chief Financial Officer
Facsimile No: 408-731-8674
This Adjustment Notice is given pursuant to the terms of the
Common Stock Purchase Warrant, Class A, dated July 31, 2000, issued by
STEMCELLS, INC., a Delaware corporation (the "Warrant"). Capitalized terms used
herein and not otherwise defined herein have the respective meanings provided in
the Warrant. Attached hereto is a copy of the spreadsheet used pursuant to
Section 1.3(e) of the Warrant to prepare this notice. The undersigned Holder
hereby notifies the Company as follows:
(1) Adjustment Date:
(2) Computation of number of Adjustment Shares ("AS")
pursuant to Section 1.3(a):
(a) Common Shares Held as of prior Adjustment Date:
(b) To determine the Average Market Price, the ten lowest
Market Prices during the 30 Trading Days during the
Measurement Period were as follows:
DATE PRICE ($) DATE PRICE ($)
---- --------- ---- ---------
(c) Lowest Average Market Price as of any previous
Adjustment Date: $________.
(d) Adjustment Shares: ______________
(3) Specified Number on preceding Adjustment Date:
__________
(4) Shares issued upon exercises during last Quarterly
Period: _____
(5) Specified Number on Adjustment Date: _______________
26
NAME OF HOLDER:
Date:
------------------------ -----------------------------------
By:
-------------------------------
Name:
Title:
27
EXHIBIT 4.9
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN
COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
STEMCELLS, INC.
CALLABLE WARRANT
Warrant No. CW-1 Dated: July 31, 2000
STEMCELLS, INC., a Delaware corporation (the "Company"), hereby certifies
that, for value received, MILLENNIUM PARTNERS, L.P., or its registered assigns
("Holder"), is entitled, subject to the terms set forth below, to purchase from
the Company a total of 101,587 shares of common stock, $.01 par value per share
(the "Common Stock"), of the Company (each such share, a "Warrant Share" and all
such shares, the "Warrant Shares") at an exercise price equal to $4.7250 per
share (as adjusted from time to time as provided in Section 9, the "Exercise
Price"), at any time and from time to time from and after the date hereof and
through and including July 31, 2005 (the "Expiration Date"), and subject to the
following terms and conditions:
1. REGISTRATION OF WARRANT. The Company shall register this Warrant, upon
records to be maintained by the Company for that purpose (the "Warrant
Register"), in the name of the record Holder hereof from time to time. The
Company may deem and treat the registered Holder of this Warrant as the absolute
owner hereof for the purpose of any exercise hereof or any distribution to the
Holder, and for all other purposes, and the Company shall not be affected by
notice to the contrary.
2. REGISTRATION OF TRANSFERS AND EXCHANGES.
(a) The Company shall register the transfer of any portion of this
Warrant in the Warrant Register, upon surrender of this Warrant, with the Form
of Assignment attached hereto duly completed and signed, to the Transfer Agent
or to the Company at the office specified in or pursuant to Section 3(b). Upon
any such registration or transfer, a new warrant to purchase Common Stock, in
substantially the form of this Warrant (any such new warrant, a "New Warrant"),
evidencing the portion of this Warrant so transferred shall be issued to the
transferee and a New Warrant evidencing the remaining portion of this Warrant
not so
transferred, if any, shall be issued to the transferring Holder. The
acceptance of the New Warrant by the transferee thereof shall be deemed the
acceptance of such transferee of all of the rights and obligations of a holder
of a Warrant.
(b) This Warrant is exchangeable, upon the surrender hereof by the
Holder to the office of the Company specified in or pursuant to Section 3(b) for
one or more New Warrants, evidencing in the aggregate the right to purchase the
number of Warrant Shares which may then be purchased hereunder. Any such New
Warrant will be dated the date of such exchange.
3. DURATION, EXERCISE AND REDEMPTION OF WARRANTS.
(a) This Warrant shall be exercisable by the registered Holder on any
business day before 5:00 P.M., New York City time, at any time and from time to
time on or after the date hereof to and including the Expiration Date. At 5:00
P.M., New York City time on the Expiration Date, the portion of this Warrant not
exercised prior thereto shall be and become void and of no value.
(b) Subject to Sections 2(b), 5 and 10, upon surrender of this
Warrant, with the Form of Election to Purchase attached hereto duly completed
and signed, to the Company at its address for notice set forth in Section 13 and
upon payment of the Exercise Price multiplied by the number of Warrant Shares
that the Holder intends to purchase hereunder, in the manner provided hereunder,
all as specified by the Holder in the Form of Election to Purchase, the Company
shall promptly (but in no event later than 3 business days after the Date of
Exercise (as defined herein)) issue or cause to be issued and cause to be
delivered to or upon the written order of the Holder and in such name or names
as the Holder may designate, a certificate for the Warrant Shares issuable upon
such exercise, free of restrictive legends except (i) either in the event that a
registration statement covering the resale of the Warrant Shares and naming the
Holder as a selling stockholder thereunder is not then effective or the Warrant
Shares are not freely transferable without volume restrictions pursuant to Rule
144(k) promulgated under the Securities Act of 1933, as amended (the "Securities
Act"), or (ii) if this Warrant shall have been issued pursuant to a written
agreement between the original Holder and the Company, as required by such
agreement. Any person so designated by the Holder to receive Warrant Shares
shall be deemed to have become holder of record of such Warrant Shares as of the
Date of Exercise of this Warrant.
A "Date of Exercise" means the date on which the Company shall have
received (i) this Warrant (or any New Warrant, as applicable), with the Form of
Election to Purchase attached hereto (or attached to such New Warrant)
appropriately completed and duly signed, and (ii) payment of the Exercise Price
for the number of Warrant Shares so indicated by the holder hereof to be
purchased.
(c) This Warrant shall be exercisable, either in its entirety or, from
time to time, for a portion of the number of Warrant Shares. If less than all of
the Warrant Shares which may be purchased under this Warrant are exercised at
any time, the Company shall issue or cause to be issued, at its expense, a New
Warrant evidencing the right to purchase the remaining number of Warrant Shares
for which no exercise has been evidenced by this Warrant.
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(d) In lieu of delivering physical certificates representing the
Warrant Shares issuable upon conversion of this Warrant, provided the Company's
transfer agent is participating in the Depository Trust Company ("DTC") Fast
Automated Securities Transfer ("FAST") program, upon request of the Holder, the
Company shall use its best efforts to cause its transfer agent to electronically
transmit the Warrant Shares issuable upon exercise to the Holder, by crediting
the account of the Holder's prime broker with DTC through its Deposit Withdrawal
Agent Commission ("DWAC") system. The time periods for delivery described above
shall apply to the electronic transmittals through the DWAC system. The Company
agrees to coordinate with DTC to accomplish this objective.
(e) Commencing at any time after the date of the issuance of this
Warrant, the Company shall have the right, upon fifteen (15) days notice to the
Holder, to cancel this Warrant in full effective on such 15th day (the
"Cancellation Date"). The Holder may exercise this Warrant at any time prior to
the Cancellation Date. On the Cancellation Date, the Company shall pay in full
and complete satisfaction of its obligations under the remaining portion of this
Warrant to the Holder an amount in cash equal to (i) the number of shares of
Common Stock then issuable hereunder multiplied by (ii) $8.64, as such number
shall be appropriately adjusted for stock splits, recapitalizations and similar
events minus the applicable Exercise Price as of the Cancellation Date, and the
Holder shall surrender this Warrant to the Company for cancellation.
4. REGISTRATION RIGHTS. This Warrant and the Holder hereof are entitled to
the benefits of, and subject to the terms and condition of and obligations
under, that certain Registration Rights Agreement dated the date hereof between
the Company and the original Holder (the "Registration Rights Agreement").
5. Intentionally left blank.
6. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes
attributable to the issuance of Warrant Shares upon the exercise of this
Warrant; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the registration
of any certificates for Warrant Shares or Warrants in a name other than that of
the Holder. The Holder shall be responsible for all other tax liability that may
arise as a result of holding or transferring this Warrant or receiving Warrant
Shares upon exercise hereof.
7. REPLACEMENT OF WARRANT. If this Warrant is mutilated, lost, stolen or
destroyed, the Company shall issue or cause to be issued in exchange and
substitution for and upon cancellation hereof, or in lieu of and substitution
for this Warrant, a New Warrant, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction and indemnity, if
requested, satisfactory to it. Applicants for a New Warrant under such
circumstances shall also comply with such other reasonable regulations and
procedures and pay such other reasonable charges as the Company may prescribe.
8. RESERVATION OF WARRANT SHARES. The Company covenants that it will at all
times reserve and keep available out of the aggregate of its authorized but
unissued Common Stock, solely for the purpose of enabling it to issue Warrant
Shares upon exercise of this Warrant
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as herein provided, the number of Warrant Shares which are then issuable and
deliverable upon the exercise of this entire Warrant, free from preemptive
rights or any other actual contingent purchase rights of persons other than the
Holder (taking into account the adjustments and restrictions of Section 9). The
Company covenants that all Warrant Shares that shall be so issuable and
deliverable shall, upon issuance and the payment of the applicable Exercise
Price in accordance with the terms hereof, be duly and validly authorized,
issued and fully paid and nonassessable.
9. CERTAIN ADJUSTMENTS. The Exercise Price and number of Warrant Shares
issuable upon exercise of this Warrant are subject to adjustment from time to
time as set forth in this Section. Upon each such adjustment of the Exercise
Price pursuant to this Section, the Holder shall thereafter prior to the
Expiration Date be entitled to purchase, at the Exercise Price resulting from
such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.
(a) If the Company, at any time while this Warrant is outstanding, (i)
shall pay a stock dividend or otherwise make a distribution or distributions on
shares of its Common Stock or on any other class of capital stock payable in
shares of Common Stock (except dividends or distributions paid on preferred or
other senior stock), (ii) subdivide outstanding shares of Common Stock into a
larger number of shares, or (iii) combine outstanding shares of Common Stock
into a smaller number of shares, the Exercise Price shall be multiplied by a
fraction of which the numerator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding before such event and of which
the denominator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding after such event. Any adjustment made
pursuant to this Section shall become effective immediately after the record
date for the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision or combination, and shall apply to successive
subdivisions and combinations.
(b) In case of any reclassification of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, then the Holder shall have the right
thereafter to exercise this Warrant only into the shares of stock and other
securities and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification or share exchange, and the Holder
shall be entitled upon such event to receive such amount of securities or
property as such Holder would have been entitled to receive if such Holder had
exercised this Warrant immediately prior to such reclassification or share
exchange (net of the applicable Exercise Price). The terms of any such
reclassification or share exchange shall include such terms so as to continue to
give to the Holder the right to receive the securities or property set forth in
this Section 9(b) upon any exercise following any such reclassification or share
exchange.
(c) If the Company, at any time while this Warrant is outstanding,
shall distribute to all holders of Common Stock (and not to holders of this
Warrant) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security
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(excluding those referred to in Sections 9(a), (b) and (d)), then in each such
case the Exercise Price shall be determined by multiplying the Exercise Price in
effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which the
denominator shall be the Exercise Price determined as of the record date
mentioned above, and of which the numerator shall be such Exercise Price on such
record date less the then fair market value at such record date of the portion
of such assets or evidence of indebtedness so distributed applicable to one
outstanding share of Common Stock as determined by the Company's independent
certified public accountants that regularly examine the financial statements of
the Company (an "Appraiser").
(d) If at any time the Company or any subsidiary thereof, as
applicable with respect to Common Stock Equivalents (as defined below), shall
issue shares of Common Stock or rights, warrants, options or other securities or
debt that is convertible into or exchangeable for shares of Common Stock
("COMMON STOCK EQUIVALENTS"), entitling any person or entity to acquire shares
of Common Stock at a price per share less than the market price of the Common
Stock at the time of issuance, except with respect to a Board Approved
Transaction (as defined herein), forthwith upon such issue or sale, the Exercise
Price shall be reduced to the price (calculated to the nearest cent) determined
by multiplying the Exercise Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the sum of (i) the number of shares of
Common Stock outstanding immediately prior to such issuance, and (ii) the number
of shares of Common Stock which the aggregate consideration received (or to be
received, assuming exercise or conversion in full of such Common Stock
Equivalents) for the issuance of such additional shares of Common Stock would
purchase at the Exercise Price, and the denominator of which shall be the sum of
the number of shares of Common Stock outstanding immediately after the issuance
of such additional shares. For purposes hereof, all shares of Common Stock that
are issuable upon conversion, exercise or exchange of Common Stock Equivalents
shall be deemed outstanding immediately after the issuance of such Common Stock
Equivalents. Such adjustment shall be made whenever such Common Stock or Common
Stock Equivalents are issued. However, upon the expiration of any Common Stock
Equivalents the issuance of which resulted in an adjustment in the Exercise
Price pursuant to this Section, the Exercise Price shall immediately upon such
expiration be recomputed and effective immediately upon such expiration be
increased to the price which it would have been (but reflecting any other
adjustments in the Exercise Price made pursuant to the provisions of this
Section after the issuance of such Common Stock Equivalents) had the adjustment
of the Exercise Price made upon the issuance of such Common Stock Equivalents
been made on the basis of offering for subscription or purchase only that number
of shares of the Common Stock actually purchased upon the exercise of such
Common Stock Equivalents actually exercised. Notwithstanding anything herein to
the contrary, issuances of any stock or stock options under any bona fide
employee benefit plan or compensation arrangement of the Company, shall not be
subject to the provisions of this Section.
A "Board Approved Transaction" is a transaction involving a strategic
alliance, acquisition of stock or assets, merger, collaboration, joint venture,
partnership or similar arrangement of the Company with another corporation,
partnership or other business entity (A) which is engaged in a business similar
complementary or related to the business of the Company or (B) pursuant to which
the Company issues securities with the primary purpose to directly or indirectly
acquire, license or otherwise become entitled to use technology relevant to or
useful in
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the Company's business, so long as the Company's Board of Directors by
resolution duly adopted approves such transaction in accordance with its duties
under applicable law.
(e) In case of any (1) merger or consolidation of the Company with or
into another Person, or (2) sale by the Company of more than one-half of the
assets of the Company (on a market value basis) in one or a series of related
transactions, or (3) tender or other offer or exchange (whether by the Company
or another Person) pursuant to which holders of Common Stock are permitted to
tender or exchange their shares for other securities, stock, cash or property of
the Company or another Person; then the Holder shall have the right thereafter
to (A) exercise this Warrant for the shares of stock and other securities, cash
and property receivable upon or deemed to be held by holders of Common Stock
following such merger, consolidation or sale, and the Holder shall be entitled
upon such event or series of related events to receive such amount of
securities, cash and property as the Common Stock for which this Warrant could
have been exercised immediately prior to such merger, consolidation or sales
would have been entitled, (B) in the case of a merger or consolidation, require
the surviving entity to issue to the Holder a warrant entitling the Holder to
acquire shares of such entity's common stock, which warrant shall have terms
identical MUTATIS MUTANDIS (including with respect to exercise) to the terms of
this Warrant and shall be entitled to all of the rights and privileges set forth
herein and the agreements pursuant to which this Warrant was issued (including,
without limitation, as such rights relate to the acquisition, transferability,
registration and listing of such shares of stock or other securities issuable
upon exercise thereof), or (C) in the event of an exchange or tender offer or
other transaction contemplated by clause (3) of this Section 9(e), tender or
exchange this Warrant for such securities, stock, cash and other property
receivable upon or deemed to be held by holders of Common Stock that have
tendered or exchanged their shares of Common Stock following such tender or
exchange, and the Holder shall be entitled upon such exchange or tender to
receive such amount of securities, cash and property as the shares of Common
Stock for which this Warrant could have been exercised immediately prior to such
tender or exchange would have been entitled as would have been issued (net of
the applicable Exercise Price). In the case of clause (B), the exercise price
applicable for the newly issued warrant shall be based upon the amount of
securities, cash and property that each share of Common Stock would receive in
such transaction and the Exercise Price immediately prior to the effectiveness
or closing date for such transaction. The terms of any such merger, sale,
consolidation, tender or exchange shall include such terms so as continue to
give the Holder the right to receive the securities, cash and property set forth
in this Section upon any conversion or exercise following such event. This
provision shall similarly apply to successive such events.
(f) For the purposes of this Section 9, the following clauses shall
also be applicable:
(i) RECORD DATE. In case the Company shall take a record of the
holders of its Common Stock for the purpose of entitling them (A) to receive a
dividend or other distribution payable in Common Stock or in securities
convertible or exchangeable into shares of Common Stock, or (B) to subscribe for
or purchase Common Stock or securities convertible or exchangeable into shares
of Common Stock, then such record date shall be deemed to be the date of the
issue or sale of the shares of Common Stock deemed to have been issued or sold
upon the declaration of such dividend or the making of such other distribution
or
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the date of the granting of such right of subscription or purchase, as the
case may be.
(ii) TREASURY SHARES. The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by or for
the account of the Company, and the disposition of any such shares shall be
considered an issue or sale of Common Stock.
(g) All calculations under this Section 9 shall be made to the nearest
cent or the nearest 1/100th of a share, as the case may be.
(h) If (i) the Company shall declare a dividend (or any other
distribution) on its Common Stock; or (ii) the Company shall declare a special
nonrecurring cash dividend on or a redemption of its Common Stock; or (iii) the
Company shall authorize the granting to all holders of the Common Stock rights
or warrants to subscribe for or purchase any shares of capital stock of any
class or of any rights; or (iv) the approval of any stockholders of the Company
shall be required in connection with any reclassification of the Common Stock,
any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, or any
compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property; or (v) the Company shall authorize the voluntary
dissolution, liquidation or winding up of the affairs of the Company, then the
Company shall cause to be mailed to each Holder at their last addresses as they
shall appear upon the Warrant Register, at least 30 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, grant of rights or warrants, or if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding up; provided, however, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
10. PAYMENT OF EXERCISE PRICE. The Holder shall pay the Exercise Price in
one of the following manners:
(a) CASH EXERCISE. The Holder may deliver immediately available funds;
or
(b) CASHLESS EXERCISE. At any time after the earlier to occur of the
SEC Effective Date (as defined in the Registration Rights Agreement) and the
date the initial registration statement filed pursuant to the Registration
Rights Agreement is declared effective by the Commission, when a registration
statement covering the resale of the Warrant Shares and naming the Holder as a
selling stockholder thereunder is not then effective, the Holder may surrender
this Warrant to the Company together with a notice of cashless exercise, in
which
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event the Company shall issue to the Holder the number of Warrant Shares
determined as follows:
X = Y [(A-B)/A]
where:
X = the number of Warrant Shares to be issued
to the Holder.
Y = the number of Warrant Shares with respect to
which this Warrant is being exercised.
A = the average of the closing sale prices of the
Common Stock for the five (5) trading days immediately prior
to (but not including) the Date of Exercise.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is intended,
understood and acknowledged that the Warrant Shares issued in a cashless
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for the Warrant Shares shall be deemed to have been
commenced, on the issue date of this Warrant.
11. CERTAIN EXERCISE RESTRICTIONS.
(a) Notwithstanding anything to the contrary contained herein, the
number of shares of Common Stock that may be acquired by the Holder upon
exercise pursuant to the terms hereof shall not exceed a number that, when added
to the total number of shares of Common Stock deemed beneficially owned by such
Holder (other than by virtue of the ownership of securities or rights to acquire
securities that have limitations on the Holder's right to convert, exercise or
purchase similar to the limitation set forth herein), together with all shares
of Common Stock deemed beneficially owned (other than by virtue of the ownership
of securities or rights to acquire securities that have limitation set forth
herein) by the Holder's "affiliates" (as defined in Rule 144 of the Securities
Act) ("Aggregation Parties"), that would be aggregated for purposes of
determining whether a group under Section 13(d) of the Securities Exchange Act
of 1934, as amended, exists would exceed 9.99% of the total issued and
outstanding shares of the Common Stock (the "Restricted Ownership Percentage").
Each Holder shall have the right (w) at any time and from time to time to reduce
its Restricted Ownership Percentage immediately upon notice to the Company and
(x) (subject to waiver) at any time and from time to time, to increase its
Restricted Ownership Percentage immediately in the event of the announcement as
pending or planned, of a merger or consolidation of the Company, a sale of all
or substantially all of the assets of the Company or the acquisition by any
third party (and/or such party's Aggregation Parties) of at least 51% of the
Company's outstanding Common Stock.
(b) The Holder covenants at all times on each day (each such day being
referred to as a "Covenant Day") as follows: during the balance of such Covenant
Day and the succeeding sixty-one (61) days (the balance of such Covenant Day
and the succeeding 61
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days being referred to as the "Covenant Period") such Holder will not acquire
shares of Common Stock pursuant to any right (including exercise of this
Warrant) existing at the commencement of the Covenant Period to the extent
the number of shares so acquired by such Holder and its Aggregation Parties
(ignoring all dispositions) would exceed:
(x) the Restricted Ownership Percentage of the total
number of shares of Common Stock outstanding at
the commencement of the Covenant Period;
MINUS
(y) the number of share of Common Stock owned by
such Holder and its Aggregation Parties at
the commencement of the Covenant Period.
A new and independent covenant will be deemed to be given by the Holder as
of each moment of each Covenant Day. No covenant will terminate, diminish or
modify any other covenant. The Holder agrees to comply with each such covenant.
The Company's obligation to issue shares of Common Stock which would exceed
such limited shall be suspended to the extent necessary until such time, if any,
as shares of Common Stock may be issued in compliance with such restrictions.
12. FRACTIONAL SHARES. The Company shall not be required to issue or cause
to be issued fractional Warrant Shares on the exercise of this Warrant. The
number of full Warrant Shares which shall be issuable upon the exercise of this
Warrant shall be computed on the basis of the aggregate number of Warrant Shares
purchasable on exercise of this Warrant so presented. If any fraction of a
Warrant Share would, except for the provisions of this Section, be issuable on
the exercise of this Warrant, the Company shall pay an amount in cash equal to
the Exercise Price multiplied by such fraction.
13. NOTICES. Any and all notices or other communications or deliveries
hereunder shall be in writing and shall be deemed given and effective on the
earliest of (i) the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section prior to 6:30 p.m. (New York City time) on a business day, (ii) the
business day after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section later than 6:30 p.m. (New York City time) on any date and earlier than
11:59 p.m. (New York City time) on such date, (iii) the business day following
the date of mailing, if sent by nationally recognized overnight courier service,
or (iv) upon actual receipt by the party to whom such notice is required to be
given. The addresses for such communications shall be: (i) if to the Company, to
525 Del Rey Avenue, Suite C, Sunnyvale, California 94086, with a copy to Ropes &
Gray, One International Place, Boston, Massachusetts, 02110, Attention: Geoffrey
B. Davis, Esq., (facsimile number (617) 951-7050), or (ii) if to the Holder, to
the Holder at the address or facsimile number appearing on the Warrant Register
or such other address or facsimile number as the Holder may provide to the
Company in accordance with this Section.
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14. WARRANT AGENT. The Company shall serve as warrant agent under this
Warrant. Upon thirty (30) days' notice to the Holder, the Company may appoint a
new warrant agent. Any corporation into which the Company or any new warrant
agent may be merged or any corporation resulting from any consolidation to which
the Company or any new warrant agent shall be a party or any corporation to
which the Company or any new warrant agent transfers substantially all of its
corporate trust or shareholders services business shall be a successor warrant
agent under this Warrant without any further act. Any such successor warrant
agent shall promptly cause notice of its succession as warrant agent to be
mailed (by first class mail, postage prepaid) to the Holder at the Holder's last
address as shown on the Warrant Register.
15. MISCELLANEOUS.
(a) This Warrant shall be binding on and inure to the benefit of the
parties hereto and their respective successors and assigns. Subject to the
Subscription Agreement and applicable securities laws, this Warrant shall be
freely transferable subject to applicable Securities Laws. This Warrant may be
amended only in writing signed by the Company and the Holder and their
successors and assigns.
(b) Subject to Section 15(a), above, nothing in this Warrant shall be
construed to give to any person or corporation other than the Company and the
Holder any legal or equitable right, remedy or cause under this Warrant. This
Warrant shall inure to the sole and exclusive benefit of the Company and the
Holder.
(c) The corporate laws of the State of Delaware shall govern all
issues concerning the relative rights of the Company and its stockholders. All
other questions concerning the construction, validity, enforcement and
interpretation of this Warrant shall be governed by and construed and enforced
in accordance with the internal laws of the State of New York, without regard to
the principles of conflicts of law thereof. The Company and the Holder hereby
irrevocably submit to the exclusive jurisdiction of the state and federal courts
sitting in the City of New York, borough of Manhattan, for the adjudication of
any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of any such court, or that such suit,
action or proceeding is improper. Each of the Company and the Holder hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by certified mail, return receipt
requested, and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
(d) The headings herein are for convenience only, do not constitute a
part of this Warrant and shall not be deemed to limit or affect any of the
provisions hereof.
(e) In case any one or more of the provisions of this Warrant shall be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Warrant shall not in any way be affected
or impaired thereby and the parties will attempt in good faith to agree upon a
valid and enforceable provision which shall be
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a commercially reasonable substitute therefor, and upon so agreeing, shall
incorporate such substitute provision in this Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer as of the date first indicated above.
STEMCELLS, INC.
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
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FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)
To StemCells, Inc:
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase _____________
shares of common stock, $.01 par value per share, of STEMCELLS, INC. (the
"Common Stock") and , if such Holder is not utilizing the cashless exercise
provisions set forth in this Warrant, encloses herewith $________ in cash,
certified or official bank check or checks, which sum represents the aggregate
Exercise Price (as defined in the Warrant) for the number of shares of Common
Stock to which this Form of Election to Purchase relates, together with any
applicable taxes payable by the undersigned pursuant to the Warrant.
The undersigned requests that certificates for the shares of Common Stock
issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
--------------------------------
- -------------------------------------------------------------------------------
(Please print name and address)
If the number of shares of Common Stock issuable upon this exercise shall
not be all of the shares of Common Stock which the undersigned is entitled to
purchase in accordance with the enclosed Warrant, the undersigned requests that
a New Warrant (as defined in the Warrant) evidencing the right to purchase the
shares of Common Stock not issuable pursuant to the exercise evidenced hereby be
issued in the name of and delivered to:
- -------------------------------------------------------------------------------
(Please print name and address)
12
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Dated: , Name of Holder:
------------ ----
(Print)
(By:)
(Name:)
(Title:)
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant)
13
FORM OF ASSIGNMENT
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase ____________ shares of Common Stock of StemCells, Inc. to
which the within Warrant relates and appoints ________________ attorney to
transfer said right on the books of StemCells, Inc. with full power of
substitution in the premises.
Dated:
- ---------------, ----
---------------------------------------
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant)
---------------------------------------
Address of Transferee
---------------------------------------
---------------------------------------
In the presence of:
- --------------------------
EXHIBIT 10.48
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of July 31, 2000 (this
"Agreement"), is made by and between STEMCELLS, INC., a Delaware corporation
(the "Company"), and the entity named on the signature page hereto (the "Initial
Investor" or "Holder").
W I T N E S S E T H:
WHEREAS, in connection with the Subscription Agreement, dated as of July
31, 2000, between the Initial Investor and the Company (the "Subscription
Agreement"), the Company has agreed, upon the terms and subject to the
conditions of the Subscription Agreement, to issue and sell to the Initial
Investor shares (the "Common Shares") of Common Stock, $.01 par value (the
"Common Stock"), of the Company, and to issue a Callable Warrant (the "Callable
Warrant") and a Common Stock Purchase Warrant, Class A (the "Class A Warrant")
(collectively, the "Warrants") to purchase shares (the "Warrant Shares") of
Common Stock; and
WHEREAS, to induce the Initial Investor to execute and deliver the
Subscription Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"1933 Act"), and applicable state securities laws with respect to the Common
Shares and the Warrant Shares;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Initial
Investor hereby agree as follows:
1. DEFINITIONS.
(a) As used in this Agreement, the following terms shall have the
following meanings:
"Investor" or "Investors" means the Initial Investor and any
transferee or assignee who agrees to become bound by the provisions of this
Agreement, or a similar agreement relating to Common Shares, Callable Warrants,
Class A Warrants or Warrant Shares, in accordance with Section 9 hereof.
"Majority Holders" means those Investors who hold a majority in
interest of the Registrable Securities.
"1934 Act" means the Securities Exchange Act of 1934, as amended.
"Permitted Transferee" means any person (1) who is an "accredited
investor" as defined in Regulation D under the 1933 Act, and (2) who,
immediately following the assignment of rights under this Agreement holds (x) at
least 50,000 shares of Common Stock or (y) Warrants which at the time of such
transfer are exercisable for at least 50,000 shares of Common Stock, or any
combination thereof (the 50,000 share amounts referred to in this definition
being subject to equitable adjustment from time to time on terms reasonably
acceptable to the Majority Holders
for (i) stock splits, (ii) stock dividends, (iii) combinations, (iv) capital
reorganizations, (v) issuance to all holders of Common Stock of rights or
warrants to purchase shares of Common Stock and (vi) similar events relating to
the Common Stock, in each such case which occur on or after the Closing Date).
"register," "registered," and "registration" refer to a registration
effected by preparing and filing a Registration Statement or Statements in
compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any
successor rule providing for offering securities on a continuous basis ("Rule
415"), and the declaration or ordering of effectiveness of such Registration
Statement by the SEC.
"Registrable Securities" means the Common Shares and the Warrant
Shares, whether held by the Initial Investor or any other Investor. As to any
particular securities, such securities shall cease to be Registrable Securities
when they have been sold pursuant to an effective registration statement or in
compliance with Rule 144 or are eligible to be sold pursuant to subsection (k)
of Rule 144.
"Registration Period" means the period from the Closing Date to the
earlier of (i) the date which is five years after the SEC Effective Date, (ii)
the date on which each Investor may sell all of its Registrable Securities
without registration under the 1933 Act pursuant to subsection (k) of Rule 144,
without restriction on the manner of sale or the volume of securities which may
be sold in any period and without the requirement for the giving of any notice
to, or the making of any filing with, the SEC and (iii) the date on which the
Investors no longer beneficially own any Registrable Securities.
"Registration Statement" means a registration statement of the Company
under the 1933 Act, including any amendment thereto, required to be filed by the
Company pursuant to this Agreement.
"Rule 144" means Rule 144 promulgated under the 1933 Act or any other
similar rule or regulation of the SEC that may at any time permit a holder of
any securities to sell securities of the Company to the public without
registration under the 1933 Act.
"SEC" means the United States Securities and Exchange Commission.
"SEC Effective Date" means the date the Registration Statement is
declared effective by the SEC.
"SEC Filing Date" means the date the Registration Statement is first
filed with the SEC pursuant to Section 2(a).
(b) Capitalized terms defined in the introductory paragraph or the
recitals to this Agreement shall have the respective meanings therein provided.
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Subscription Agreement.
2
2. REGISTRATION.
(a) Mandatory Registration. (1) The Company shall prepare and, on
or prior to the date which is 45 days after the Closing Date, file with the
SEC a Registration Statement on Form S-1 (or Form S-3, if the Company is
eligible to use such form), which, on the date of filing with the SEC, covers
the resale by the Initial Investor of a number of shares of Common Stock at
least equal to the greater of (A) 1,800,000 shares of Common Stock or (B) the
sum of (x) the number of Common Shares PLUS (y) the number of Warrant Shares
issuable upon the exercise in full of the Callable Warrant PLUS (z) the
number of Warrant Shares equal to 175% of the number of shares of Common
Stock issuable upon the exercise of the Class A Warrant, determined as if the
First Adjustment Date (as defined in the Class A Warrant) occurred on the
Closing Date and the Class A Warrant was otherwise exercised in full for cash
in accordance with the terms thereof on the Trading Day prior to the SEC
Filing Date (in each case determined without regard to the limitations on
beneficial ownership contained in the Warrants). If at any time the number of
shares of Common Stock included in the Registration Statement required to be
filed as provided in the first sentence of this Section 2(a) shall be
insufficient to cover all of the number of Warrant Shares issuable upon
exercise of the unexercised portion of the Warrants, then promptly, but in no
event later than 30 days after such insufficiency shall occur (or, if later,
30 days after the date upon which the Company first becomes eligible to file
a Registration Statement therefor if such ineligibility resulted from the
indeterminate number of shares of Common Stock), the Company shall file with
the SEC an additional Registration Statement on Form S-1 (or Form S-3, if the
Company is eligible to use such form) (which shall not constitute a
post-effective amendment to the Registration Statement filed pursuant to the
first sentence of this Section 2(a)), covering such number of shares of
Common Stock as shall be sufficient to permit such exercise. The Company
shall use its best efforts to have such additional Registration Statement
declared effective as soon as possible thereafter, and in any event by the
90th day following notice that such Registration Statement is required. For
all purposes of this Agreement such additional Registration Statement shall
be deemed to be the Registration Statement required to be filed by the
Company pursuant to Section 2(a) of this Agreement, and the Company and the
Investors shall have the same rights and obligations with respect to such
additional Registration Statement as they shall have with respect to the
initial Registration Statement required to be filed by the Company pursuant
to this Section 2(a). Without the written consent of the Majority Holders,
the Registration Statement shall not include securities to be sold for the
account of any selling security holder other than the Investors and the
holders of the registration rights described in Schedule 11(a).
(2) Prior to the SEC Effective Date or during any time subsequent
to the SEC Effective Date when the Registration Statement for any reason is not
available for use by any Investor for the resale of any Registrable Securities
hereunder, the Company shall not file any other registration statement or any
amendment thereto with the SEC under the 1933 Act or request the acceleration of
the effectiveness of any other registration statement previously filed with the
SEC, other than any registration statement registering securities issued (v) to
holders of registration rights described in Schedule 11(a), (w) pursuant to
compensation plans for employees, directors, officers, advisers or consultants
of the Company and in accordance with the terms of such plans, (x) upon exercise
of conversion, exchange, purchase or similar rights issued, granted or given by
the Company and outstanding as of the date of this Agreement and disclosed in
the SEC Reports or the Subscription Agreement, (y) pursuant to a public offering
3
underwritten on a firm commitment basis registered under the 1933 Act or (z) as
part of a transaction involving a strategic alliance, acquisition of stock or
assets, merger, collaboration, joint venture, partnership or other similar
arrangement of the Company with another corporation, partnership or other
business entity (A) which is engaged in a business similar, complementary or
related to the business of the Company or (B) pursuant to which the Company
issues securities with the primary purpose to directly or indirectly acquire,
license or otherwise become entitled to use technology relevant to or useful in
the Company's business, so long as in each case of this clause (z) the Board of
Directors of the Company by resolution duly adopted (and a copy of which shall
be furnished to the Investor promptly after adoption) duly approves such
transaction in accordance with its duties under applicable law (each of the
forgoing transactions a "Board Approved Transaction").
(b) Certain Offerings. If any offering pursuant to a Registration
Statement pursuant to Section 2(d) hereof involves an underwritten offering,
Investors who hold a majority in interest of the Registrable Securities subject
to such underwritten offering shall have the right to select one legal counsel.
The Investors who hold the Registrable Securities to be included in such
underwriting shall pay all underwriting discounts and commissions and other fees
and expenses of any investment banker or bankers and manager or managers (other
than fees and expenses relating to registration of Registrable Securities under
federal or state securities laws, which are payable by the Company pursuant to
Section 5 hereof) with respect to their Registrable Securities and the fees and
expenses of such legal counsel so selected by the Investors.
(c) Certain Payments. If: (1) the initial Registration Statement is
not filed on or prior to the 45th day following the Closing Date (if the Company
files such Registration Statement without affording the Holder the opportunity
to review and comment on the same as required by Section 3(h) hereof, the
Company shall not be deemed to have satisfied this clause (1)), or (2) the
initial Registration Statement filed hereunder is not declared effective by the
Commission on or prior to the 90th day following the Closing Date (the
"Effectiveness Required Date"), or (3) after a Registration Statement is filed
with and declared effective by the SEC, such Registration Statement ceases to be
effective as to a material portion of the Registrable Securities at any time
prior to the expiration of the Registration Period without being succeeded
within ten business days by an amendment to such Registration Statement or by a
subsequent Registration Statement filed with and declared effective by the SEC,
or (4) the Common Stock shall be delisted or suspended from trading on the
Nasdaq National Market or on any exchange or other principal market for the
Common Stock for more than three (3) business days (which need not be
consecutive days), or (5) the exercise rights of the Holders pursuant to the
Warrants are suspended for any reason, or (6) an amendment to a Registration
Statement is not filed by the Company with the SEC within ten business days of
the SEC's notifying the Company that such amendment is required in order for
such Registration Statement to be declared effective (any such failure or breach
being referred to as an "Event," and for purposes of clauses (1), (2) and (5)
the date on which such Event occurs, for purposes of clauses (3) and (6) the
date upon which such 10 day period is exceeded, or for purposes of clause (4)
the date on which such three business day period is exceeded, being referred to
as "Event Date"), then, on the Event Date and each monthly anniversary thereof
until the applicable Event is cured, the Company shall pay to each Holder 1.5%
of the purchase price paid by such Holder pursuant to the Purchase Agreement, in
cash, ("Delay Payments"). If the Company fails to pay any Delay Payments
4
pursuant to this Section in full within seven (7) days after the date payable,
the Company will pay interest thereon at a rate of 18% per annum (or such lesser
maximum amount that is permitted to be paid by applicable law) to the Holder,
accruing daily from the date such Delay Payments are due until such amounts,
plus all such interest thereon, are paid in full. The Delay Payments pursuant to
the terms hereof shall apply on a pro-rata basis for any portion of a month
prior to the cure of an Event. The Delay Payments shall not preclude the Holder
from seeking appropriate additional damages and remedies for any such Events.
(d) Piggy-Back Registrations. If at any time the Company shall
determine to prepare and file with the SEC a registration statement relating to
an offering for its own account or the account of others under the 1933 Act of
any of its equity securities, other than a registration statement registering
securities issued (1) pursuant to compensation plans for employees, directors,
officers, advisers or consultants of the Company and in accordance with the
terms of such plans or (2) as part of a Board Approved Transaction, the Company
shall send to each Investor who is entitled to registration rights under this
Agreement written notice of such determination and, if within five (5) business
days after receipt of such notice, an Investor shall so request in writing, the
Company shall include in such Registration Statement all or any part of the
Registrable Securities the Investor requests to be registered, except that if,
in connection with any underwritten public offering for the account of the
Company, the managing underwriter(s) thereof shall impose a limitation on the
number of shares of Common Stock which may be included in the Registration
Statement because, in such underwriter(s)' judgment, such limitation is
necessary to effect an orderly public distribution, then the Company shall be
obligated to include in such Registration Statement only such limited portion of
the Registrable Securities with respect to which the Investor has requested
inclusion hereunder. Any exclusion of Registrable Securities shall be made pro
rata among the Investors seeking to include Registrable Securities, in
proportion to the number of Registrable Securities sought to be included by such
Investors; provided, however, that the Company shall not exclude any Registrable
Securities unless the Company has first excluded all outstanding securities the
holders of which are not entitled by right to inclusion of securities in such
Registration Statement; and provided further, however, that, after giving effect
to the immediately preceding proviso, any exclusion of Registrable Securities
shall be made pro rata with holders of other securities having the right to
include such securities in the Registration Statement, based on the number of
securities for which registration is requested except to the extent such pro
rata exclusion of such other securities is prohibited under any written
agreement entered into by the Company with the holder of such other securities
prior to the date of this Agreement, in which case such other securities shall
be excluded, if at all, in accordance with the terms of such agreement. No right
to registration of Registrable Securities under this Section 2(d) shall be
construed to limit any registration required under Section 2(a) hereof. The
obligations of the Company under this Section 2(d) may be waived as to all
Investors by the Majority Holders and as to a particular Investor by such
Investor and shall expire after the Company has afforded the opportunity for the
Investor(s) to exercise registration rights under this Section 2(d) for two
registrations; provided, however, that any Investor who shall have had any
Registrable Securities excluded from any Registration Statement in accordance
with this Section 2(d) shall be entitled to include in an additional
Registration Statement filed by the Company the Registrable Securities so
excluded. Notwithstanding any other provision of this Agreement, if the
Registration Statement required to be filed pursuant to Section 2(a) of this
Agreement shall have been ordered effective by the SEC and the Company shall
have maintained the effectiveness of such Registration Statement as
5
required by this Agreement and if the Company shall otherwise have complied in
all material respects with its obligations under this Agreement, then the
Company shall not be obligated to register any Registrable Securities on such
Registration Statement referred to in this Section 2(d).
(e) Eligibility for Form S-3. The Company shall file all reports
required to be filed by the Company with the SEC in a timely manner so as to
obtain eligibility for the use of Form S-3.
3. OBLIGATIONS OF THE COMPANY. In connection with the registration of the
Registrable Securities, the Company shall:
(a) prepare promptly, and file with the SEC not later than 45 days
after the Closing Date, a Registration Statement with respect to the number of
Registrable Securities provided in Section 2(a), and thereafter to use its best
efforts to cause each Registration Statement relating to Registrable Securities
to become effective as soon as possible after such filing but in any event on or
prior to the Effectiveness Required Date, and keep the Registration Statement
effective pursuant to Rule 415 at all times during the Registration Period;
submit to the SEC, within three Business Days after the Company learns that no
review of the Registration Statement will be made by the staff of the SEC or
that the staff of the SEC has no further comments on the Registration Statement,
as the case may be, a request for acceleration of effectiveness of the
Registration Statement to a time and date not later than 48 hours after the
submission of such request; notify the Investors of the effectiveness of the
Registration Statement on the date the Registration Statement is declared
effective; and the Company represents and warrants to, and covenants and agrees
with, the Investors that the Registration Statement (including any amendments or
supplements thereto and prospectuses contained therein), at the time it is first
filed with the SEC, at the time it is ordered effective by the SEC and at all
times during which it is required to be effective hereunder other than any
period after which the Company notifies the Investors pursuant to Section 3(f)
until the time when the Investors may again sell Registrable Securities pursuant
to the Registration Statement (and each such amendment and supplement at the
time it is filed with the SEC and at all times during which it is available for
use in connection with the offer and sale of the Registrable Securities) shall
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein, or necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading;
(b) prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration Statement effective at all times during the
Registration Period, and, during the Registration Period, comply with the
provisions of the 1933 Act with respect to the disposition of all Registrable
Securities of the Company covered by the Registration Statement until such time
as all of such Registrable Securities have been disposed of in accordance with
the intended methods of disposition by the seller or sellers thereof as set
forth in the Registration Statement;
(c) furnish to each Investor whose Registrable Securities are included
in the Registration Statement and its legal counsel, (1) promptly after the same
is prepared and publicly distributed, filed with the SEC or received by the
Company, one copy of the Registration
6
Statement and any amendment thereto, each preliminary prospectus and prospectus
and each amendment or supplement thereto, each letter written by or on behalf of
the Company to the SEC or the staff of the SEC and each item of correspondence
from the SEC or the staff of the SEC relating to such Registration Statement,
and (2) such number of copies of a prospectus, including a preliminary
prospectus, and all amendments and supplements thereto and such other documents,
as such Investor may reasonably request in order to facilitate the disposition
of the Registrable Securities owned by such Investor; notwithstanding the
foregoing, prior to such disclosure and review, the Company shall notify the
Holders if any portion of such documents contains material non-public
information, in which case the Holders may decline to review such documents or
portions thereof (the "Right to Decline Review");
(d) use commercially reasonable efforts to (i) register and qualify
the Registrable Securities covered by the Registration Statement under such
securities or blue sky laws of such jurisdictions as the Investors who hold a
majority in interest of the Registrable Securities being offered reasonably
request, (ii) prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements to such registrations and
qualifications as may be necessary to maintain the effectiveness thereof at all
times until the end of the Registration Period, (iii) take such other actions as
may be necessary to maintain such registrations and qualifications in effect at
all times during the Registration Period and (iv) take all other actions
reasonably necessary or advisable to qualify the Registrable Securities for sale
in such jurisdictions; provided, however, that the Company shall not be required
in connection therewith or as a condition thereto (I) to qualify to do business
in any jurisdiction where it would not otherwise be required to qualify but for
this Section 3(d), (II) to subject itself to general taxation in any such
jurisdiction, (III) to file a general consent to service of process in any such
jurisdiction, (IV) to provide any undertakings that cause more than nominal
expense or burden to the Company or (V) to make any change in its Certificate of
Incorporation or by-laws, which in each case the Board of Directors of the
Company determines in good faith to be contrary to the best interests of the
Company and its stockholders;
(e) in the event that the Registrable Securities are being offered in
an underwritten offering pursuant to Section 2(d), enter into and perform its
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the underwriters of such offering;
(f) as promptly as practicable after becoming aware of such event or
circumstance, notify each Investor of any event or circumstance of which the
Company has knowledge, as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and use its commercially reasonable
efforts promptly to prepare a supplement or amendment to the Registration
Statement to correct such untrue statement or omission, file such supplement or
amendment with the SEC at such time as shall permit the Investors to sell
Registrable Securities pursuant to the Registration Statement as promptly as
practicable, and deliver a number of copies of such supplement or amendment to
each Investor as such Investor may reasonably request;
7
(g) as promptly as practicable after becoming aware of such event,
notify each Investor who holds Registrable Securities being sold (or, in the
event of an underwritten offering, the managing underwriters) of the issuance by
the SEC of any stop order or other suspension of effectiveness of the
Registration Statement at the earliest possible time;
(h) not less than five Business Days prior to the filing of the
Registration Statement or any related prospectus or any amendment or supplement
thereto (including any document that would be incorporated or deemed to be
incorporated therein by reference), the Company shall, (i) furnish to the
Holders and their counsel copies of all such documents proposed to be filed,
which documents (other than those incorporated or deemed to be incorporated by
reference) will be subject to the review of such Holders and their counsel
(subject to the Right to Decline Review), and (ii) cause its officers and
directors, counsel and independent certified public accountants to respond to
such inquiries as shall be necessary, in the reasonable opinion of respective
counsel to such to conduct a reasonable investigation within the meaning of the
1933 Act. The Company shall not file the Registration Statement or any such
prospectus or any amendments or supplements thereto to which the Holders of a
majority of the Registrable Securities and their counsel shall reasonably object
in good faith.
(i) make generally available to its security holders as soon as
practical, but not later than ninety (90) days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 under the 1933 Act) covering a twelve-month period beginning not later
than the first day of the Company's fiscal quarter next following the effective
date of the Registration Statement;
(j) [Omitted];
(k) make available for inspection by any Investor, and any attorney,
accountant or other agent retained by any such Investor (collectively, the
"Inspectors"), all pertinent financial and other records, pertinent corporate
documents and properties of the Company (collectively, the "Records"), as shall
be reasonably necessary to enable each Investor to exercise its due diligence
responsibility, and cause the Company's officers, directors and employees to
supply all information which any Inspector may reasonably request for purposes
of such due diligence; provided, however, that each Inspector shall hold in
confidence and shall not make any disclosure (except to an Investor) of any
Record or other information which the Company determines in good faith to be
confidential, and of which determination the Inspectors are so notified, unless
(i) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (ii) the release of such
Records is ordered pursuant to a subpoena or other order from a court or
government body of competent jurisdiction or (iii) the information in such
Records has been made generally available to the public other than by disclosure
in violation of this or any other agreement. The Company shall not be required
to disclose any confidential information in such Records to any Inspector until
and unless such Inspector shall have entered into confidentiality agreements (in
form and substance satisfactory to the Company) with the Company with respect
thereto, substantially in the form of this Section 3(k). Each Investor agrees
that it shall, upon learning that disclosure of such Records is sought in or by
a court or governmental body of competent jurisdiction or through other means,
give prompt notice to the Company and allow the Company, at the Company's own
expense, to undertake appropriate action to prevent disclosure of, or to obtain
a protective order for, the
8
Records deemed confidential. The Company shall hold in confidence and shall not
make any disclosure of information concerning an Investor provided to the
Company pursuant to Section 4(e) hereof unless (i) disclosure of such
information is necessary to comply with federal or state securities laws or
applicable rules and regulations of Nasdaq or other market or exchange, (ii) the
disclosure of such information is necessary to avoid or correct a misstatement
or omission in any Registration Statement, (iii) the release of such information
is ordered pursuant to a subpoena or other order from a court or governmental
body of competent jurisdiction or (iv) such information has been made generally
available to the public other than by disclosure in violation of this or, to the
knowledge of the Company, any other agreement. Each party agrees that it shall,
upon learning that disclosure of such information concerning another party is
sought in or by a court or governmental body of competent jurisdiction or
through other means, give prompt notice to such other party and allow such other
party, at such other party's own expense, to undertake appropriate action to
prevent disclosure of, or to obtain a protective order for, such information;
(l) use its commercially reasonable efforts (i) to cause all the
Registrable Securities covered by the Registration Statement to be listed on the
Nasdaq National Market or such other principal securities market on which
securities of the same class or series issued by the Company are then listed or
traded or (ii) if securities of the same class or series as the Registrable
Securities are not then listed on the Nasdaq National Market or any such other
securities market, to cause all of the Registrable Securities covered by the
Registration Statement to be listed on the New York Stock Exchange, the American
Stock Exchange or the Nasdaq SmallCap Market;
(m) provide a transfer agent and registrar, which may be a single
entity, for the Registrable Securities not later than the effective date of the
Registration Statement;
(n) cooperate with the Investors who hold Registrable Securities being
offered to facilitate the timely preparation and delivery of certificates (not
bearing any restrictive legends) representing Registrable Securities to be
offered pursuant to the Registration Statement and enable such certificates to
be in such denominations or amounts, as the case may be, as the Investors may
reasonably request and registered in such names as the Investors may request;
and, within three Business Days after a Registration Statement which includes
Registrable Securities is ordered effective by the SEC, the Company shall
deliver to the transfer agent for the Registrable Securities (with copies to the
Investors whose Registrable Securities are included in such Registration
Statement) an instruction substantially in the form attached hereto as EXHIBIT 1
and shall cause legal counsel selected by the Company to deliver to the
Investors an opinion of such counsel in the form attached hereto as EXHIBIT 2
(with a copy to the Company's transfer agent);
(o) during the period the Company is required to maintain
effectiveness of the Registration Statement pursuant to Section 3(a), the
Company shall not bid for or purchase any Common Stock or any right to purchase
Common Stock or attempt to induce any person to purchase any such security or
right if such bid, purchase or attempt would in any way limit the right of the
Investors to sell Registrable Securities by reason of the limitations set forth
in Regulation M under the 1934 Act; and
9
(p) take all other reasonable actions requested by the Majority
Holders necessary to expedite and facilitate disposition by the Investors of the
Registrable Securities pursuant to the Registration Statement.
4. OBLIGATIONS OF THE INVESTORS. In connection with the registration of the
Registrable Securities, the Investors shall have the following obligations:
(a) It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities.
(b) Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement;
(c) In the event Investors holding a majority in interest of the
Registrable Securities being registered determine to engage the services of an
underwriter, each Investor agrees to enter into and perform such Investor's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of the Registrable Securities, unless such Investor has notified the
Company in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement;
(d) Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(f) or
3(g), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession of the prospectus covering such
Registrable Securities current at the time of receipt of such notice;
(e) No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements approved by
the Investors entitled hereunder to approve such arrangements, (ii) completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements and (iii) agrees to pay its pro rata share of all
underwriting discounts and commissions and other fees and expenses of investment
bankers and any manager or
10
managers of such underwriting and legal expenses of the underwriters applicable
with respect to its Registrable Securities, in each case to the extent not
payable by the Company pursuant to the terms of this Agreement; and
(f) Each Investor agrees to take all reasonable actions necessary to
comply with the prospectus delivery requirements of the 1933 Act applicable to
its sales of Registrable Securities and to assist the Company in carrying out
its obligations hereunder.
5. EXPENSES OF REGISTRATION. All reasonable expenses (other than
underwriting discounts and commissions and other fees and expenses of investment
bankers engaged by Investors and other than brokerage commissions), incurred in
connection with registrations, filings or qualifications pursuant to Sections 2
and 3, including, without limitation, all registration, listing and
qualifications fees, printers and accounting fees and the fees and disbursements
of counsel for the Company and one legal counsel for the Investors (in addition
to the payment of the Initial Investor's expenses to the extent provided in the
Subscription Agreement), shall be borne by the Company.
6. INDEMNIFICATION. In the event any Registrable Securities are included in
a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Investor who holds such Registrable Securities, the
directors, if any, of such Investor, the officers, if any, of such Investor,
each person, if any, who controls any Investor within the meaning of the 1933
Act or the 1934 Act, any underwriter (as defined in the 1933 Act) for the
Investors, the directors, if any, of such underwriter and the officers, if any,
of such underwriter, and each person, if any, who controls any such underwriter
within the meaning of the 1933 Act or the 1934 Act (each, an "Indemnified
Person"), against any losses, claims, damages, liabilities or expenses (joint or
several) incurred (collectively, "Claims") to which any of them may become
subject under the 1933 Act, the 1934 Act or otherwise, insofar as such Claims
(or actions or proceedings, whether commenced or threatened, in respect thereof)
arise out of or are based upon any of the following statements or omissions in
or violations with respect to the Registration Statement, or any post-effective
amendment thereof, or any prospectus included therein: (i) any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement or any post-effective amendment thereof or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus if used prior to the effective date of such Registration
Statement, or contained in the final prospectus (as amended or supplemented, if
the Company files any amendment thereof or supplement thereto with the SEC) or
the omission or alleged omission to state therein any material fact necessary to
make the statements made therein, in light of the circumstances under which the
statements therein were made, not misleading or (iii) any violation or alleged
violation by the Company of the 1933 Act, the 1934 Act, any state securities law
or any rule or regulation under the 1933 Act, the 1934 Act or any state
securities law (the matters in the foregoing clauses (i) through (iii) being,
collectively, "Violations"). Subject to the restrictions set forth in Section
6(d) with respect to the number of legal counsel, the Company shall reimburse
the Investors and the other Indemnified Persons, promptly as such expenses are
incurred and are due and payable, for any legal fees or
11
other reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(a): (I) shall
not apply to a Claim arising out of or based upon a Violation which occurs in
reliance upon and in conformity with information furnished in writing to the
Company by any Indemnified Person or underwriter for such Indemnified Person
expressly for use in connection with the preparation of the Registration
Statement, the prospectus or any such amendment thereof or supplement thereto,
if such prospectus was timely made available by the Company pursuant to Section
3(c) hereof; (II) with respect to any preliminary prospectus shall not inure to
the benefit of any Indemnified Person if the untrue statement or omission of
material fact contained in the preliminary prospectus was corrected in the
prospectus, as then amended or supplemented, if such prospectus was timely made
available by the Company pursuant to Section 3(c) hereof; and (III) shall not
apply to amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of the Company, which consent shall not be
unreasonably withheld. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of the Indemnified Person
and shall survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9.
(b) In connection with any Registration Statement in which an Investor
is participating, each such Investor agrees to indemnify and hold harmless, to
the same extent and in the same manner set forth in Section 6(a), the Company,
each of its directors, each of its officers who signs the Registration
Statement, each person, if any, who controls the Company within the meaning of
the 1933 Act or the 1934 Act, any underwriter and any other stockholder selling
securities pursuant to the Registration Statement or any of its directors or
officers or any person who controls such stockholder or underwriter within the
meaning of the 1933 Act or the 1934 Act (collectively and together with an
Indemnified Person, an "Indemnified Party"), against any Claim to which any of
them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar
as such Claim arises out of or is based upon any Violation, in each case to the
extent (and only to the extent) that such Violation occurs in reliance upon and
in conformity with written information furnished to the Company by such Investor
expressly for use in connection with such Registration Statement or any
post-effective amendment thereof, or any prospectus included therein; and such
Investor will reimburse any legal or other expenses reasonably incurred by any
Indemnified Party, promptly as such expenses are incurred and are due and
payable, in connection with investigating or defending any such Claim; provided,
however, that the indemnity agreement contained in this Section 6(b) shall not
apply to amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of such Investor, which consent shall not be
unreasonably withheld; provided, further, however, that the Investor shall be
liable under this Section 6(b) for only that amount of a Claim as does not
exceed the amount of the proceeds to such Investor from the sale of Registrable
Securities pursuant to such Registration Statement. Such indemnity shall remain
in full force and effect regardless of any investigation made by or on behalf of
such Indemnified Party and shall survive the transfer of the Registrable
Securities by the Investors pursuant to Section 9. Notwithstanding anything to
the contrary contained herein, the indemnification agreement contained in this
Section 6(b) with respect to any preliminary prospectus shall not inure to the
benefit of any Indemnified Party if the untrue statement or omission of material
fact contained in the preliminary prospectus was corrected on a timely basis in
the prospectus, as then amended or supplemented.
12
(c) The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as provided
above, with respect to information so furnished in writing by such persons
expressly for inclusion in the Registration Statement.
(d) Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action
(including any governmental action), such Indemnified Person or Indemnified
Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel selected by the indemnifying party
but reasonably acceptable to the Indemnified Person or the Indemnified Party, as
the case may be; provided, however, that an Indemnified Person or Indemnified
Party shall have the right to retain its own counsel with the fees and expenses
to be paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential differing interests between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding. In such event, the Company shall pay for only one
separate legal counsel for the Investors; such legal counsel shall be selected
by the Investors holding a majority in interest of the Registrable Securities
included in the Registration Statement to which the Claim relates. The failure
to deliver written notice to the indemnifying party within a reasonable time of
the commencement of any such action shall not relieve such indemnifying party of
any liability to the Indemnified Person or Indemnified Party under this Section
6, except to the extent that the indemnifying party is prejudiced in its ability
to defend such action. The indemnification required by this Section 6 shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
7. CONTRIBUTION. To the extent any indemnification by an indemnifying party
is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under Section 6 to the fullest extent permitted by law; provided,
however, that (a) no contribution shall be made under circumstances where the
maker would not have been liable for indemnification under the fault standards
set forth in Section 6, (b) no seller of Registrable Securities guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any seller of Registrable Securities
who was not guilty of such fraudulent misrepresentation and (c) contribution by
any seller of Registrable Securities shall be limited in amount to the amount by
which the net amount of proceeds received by such seller from the sale of such
Registrable Securities exceeds the purchase price paid by such seller for such
Registrable Securities.
8. REPORTS UNDER 1934 ACT. With a view to making available to the Investors
the benefits of Rule 144, the Company agrees to:
13
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act; and
(c) furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144 and the 1934 Act or
describing any failure to so comply, (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company and (iii) such other information as may be reasonably requested to
permit the Investors to sell such securities pursuant to Rule 144 without
registration.
9. ASSIGNMENT OF THE REGISTRATION RIGHTS. The rights to have the Company
register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the Investors to any Permitted Transferee only if: (a)
the Investor agrees in writing with such Permitted Transferee to assign such
rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment, (b) except as otherwise provided in the
Subscription Agreement, the Company is, within a reasonable time after such
transfer or assignment, furnished with written notice of (i) the name and
address of such Permitted Transferee and (ii) the securities with respect to
which such registration rights are being transferred or assigned, (c)
immediately following such transfer or assignment the further disposition of
such securities by such Permitted Transferee is restricted under the 1933 Act
and applicable state securities laws, and (d) at or before the time the Company
receives the written notice contemplated by clause (b) of this sentence (or such
later time within ten Business Days after the Company approves a Proposed
Transferee pursuant to the Subscription Agreement) such Permitted Transferee
agrees in writing with the Company to be bound by all of the provisions
contained herein and in the Subscription Agreement. In connection with any such
transfer the Company shall, at the cost and expense of the Permitted Transferee,
promptly after such assignment take such actions as shall be reasonably
acceptable to the Initial Investor and such Permitted Transferee to assure that
the Registration Statement and related prospectus are available for use by such
Permitted Transferee for sales of the Registrable Securities in respect of which
the rights to registration have been so assigned; provided, however, that the
Company shall not be required to breach any other obligation hereunder in taking
such actions. In connection with any such assignment, each Investor shall have
the right to assign to such Permitted Transferee such Investor's rights under
the Subscription Agreement by notice of such assignment to the Company.
Following such notice of assignment of rights under the Subscription Agreement,
the Company shall be obligated to such Permitted Transferee to perform all of
its covenants under the Subscription Agreement as if such Permitted Transferee
were the Buyer under the Subscription Agreement.
10. AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Agreement may
be amended only with the written consent of the Majority Holders and the Company
and, subject to the penultimate sentence of Section 2(d), the observance by the
Company of any provision of this Agreement may be waived (either generally or in
a particular instance and either retroactively or prospectively) only with the
written consent of the Majority Holders. Any
14
amendment or waiver effected in accordance with this Section 10 shall be binding
upon each Investor and the Company.
11. MISCELLANEOUS.
(a) Neither the Company nor any of its subsidiaries has entered, as of
the date hereof, nor shall the Company or any of its subsidiaries, on or after
the date of this Agreement, enter into any agreement with respect to its
securities that is inconsistent with the rights granted to the Holders in this
Agreement or otherwise conflicts with the provisions hereof. Except as and to
the extent specified in Schedule 11(a) hereto, neither the Company nor any of
its subsidiaries has previously entered into any agreement granting any
registration rights with respect to any of its securities to any Person.
(b) Except as and to the extent specified in Schedule 11(a) hereto and
except with the written consent of the Majority Holders, neither the Company nor
any of its security holders (other than the Holders in such capacity pursuant
hereto) may include securities of the Company in the Registration Statement
other than the Registrable Securities, and the Company shall not after the date
hereof enter into any agreement providing any such right to be so included to
any of its security holders.
(c) A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(d) Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
(by hand, by courier, by telephone line facsimile transmission (with answer back
confirmation) or other means) (i) if to the Company, at 525 Del Rey Avenue,
Suite C, Sunnyvale, California 94086, Attention: Chief Executive Officer,
facsimile number (408) 731-8674 with a copy to Ropes & Gray, One International
Place, Boston, Massachusetts, 02110, Attention: Geoffrey B. Davis, Esq.,
(facsimile number (617) 951-7050), (ii) if to the Initial Investor, at 666 Fifth
Avenue, New York, New York 10103, facsimile number (212) 841-6302, and (iii) if
to any other Investor, at such address as such Investor shall have provided in
writing to the Company, or at such other address as each such party furnishes by
notice given in accordance with this Section 11(b), and shall be effective upon
receipt.
(e) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(f) This Agreement shall be enforced, governed by and construed in
accordance with the laws of the State of New York applicable to agreements made
and to be performed entirely within such State. In the event that any provision
of this Agreement is invalid or unenforceable under any applicable statute or
rule of law, then such provision shall be deemed inoperative to the extent that
it may conflict therewith and shall be deemed modified to conform
15
with such statute or rule of law. Any provision hereof which may prove invalid
or unenforceable under any law shall not affect the validity or enforceability
of any other provision hereof. Each party hereby consents to the exclusive
jurisdiction and venue of the federal and state courts located in New York, New
York in any action or proceeding arising hereunder and to service of process by
certified mail, return receipt requested (which shall constitute "personal
service").
(g) This Agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein. This Agreement supersedes all prior agreements and understandings among
the parties hereto with respect to the subject matter hereof.
(h) Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
(i) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(j) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
(k) [Omitted]
(l) Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
(m) The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent, and no rules of
strict construction will be applied against any party.
(n) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same agreement. This Agreement, once executed by a party, may be delivered
to the other party hereto by telephone line facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
16
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed by their respective officers thereunto duly
authorized as of day and year first above written.
STEMCELLS, INC.
By:
----------------------------------
Name:
Title:
THE INITIAL INVESTOR: MILLENNIUM PARTNERS, L.P.
By:
----------------------------------
Name:
Title:
17
EXHIBIT 1
TO
REGISTRATION
RIGHTS AGREEMENT
[Company Letterhead]
[Date]
[TRANSFER AGENT'S NAME AND ADDRESS]
Ladies and Gentlemen:
This letter shall serve as our irrevocable authorization and direction to
you (1) to transfer or re-register the certificates for the shares of Common
Stock, $.01 par value (the "Common Stock"), of STEMCELLS, INC., a Delaware
corporation (the "Company"), represented by certificate numbers _______ and
_______ for an aggregate of _______ shares (the "Outstanding Shares") of Common
Stock presently registered in the name of [Name of Investors] upon surrender of
such certificate(s) to you, notwithstanding the legend appearing on such
certificates, and (2) to issue shares (the "Warrant Shares") of Common Stock to
or upon the order of the holder from time to time on exercise of the Callable
Warrant, Common Stock Purchase Warrants, Class A (collectively, the "Warrants")
exercisable for Common Stock issued by the Company upon receipt by you of a
subscription form from such holder in the form enclosed herewith. The transfer
or re-registration of the certificates for the Outstanding Shares by you should
be made at such time as you are requested to do so by the record holder of the
Outstanding Shares. The certificate issued upon such transfer or re-registration
should be registered in such name as requested by the holder of record of the
certificate surrendered to you and should not bear any legend which would
restrict the transfer of the shares represented thereby. In addition, you are
hereby directed to remove any stop-transfer instruction relating to the
Outstanding Shares. Certificates for the Warrant Shares should not bear any
restrictive legend and should not be subject to any stop-transfer restriction.
Contemporaneously with the delivery of this letter, the Company is
delivering to you the following:
(a) a list showing the name and address of each holder of record of
the Warrants and the date of issuance, Warrant number, and, in the case of the
Callable Warrant, the initial fixed number of shares issuable upon exercise
thereof;
(b) the form of subscription relating to the exercise of the Warrants;
and
(c) an opinion of Iris Brest, Vice President and General Counsel of
the Company, as to registration of the Outstanding Shares and the Warrant Shares
for resale under the Securities Act of 1933, as amended.
Should you have any questions concerning this matter, please contact me.
Very truly yours,
STEMCELLS, INC.
By:
--------------------------
Name:
Title:
Enclosures
cc: [Names of Investors]
EXHIBIT 2
TO
REGISTRATION
RIGHTS AGREEMENT
[SEC Effective Date]
[Names and Addresses of Investors]
STEMCELLS, INC.
SHARES OF COMMON STOCK
Ladies and Gentlemen:
I am Vice President and General Counsel of STEMCELLS, INC., a Delaware
corporation (the "Company"), and I understand that the Company has sold to
[Names of Investors] (the "Holders") an aggregate of ________ shares (the
"Common Shares") of the Company's Common Stock, $.01 par value (the "Common
Stock"), and issued to the Holders a Callable Warrant, a Common Stock Purchase
Warrant, Class A (collectively, the "Warrants"). The Common Shares were sold,
and the Warrants were issued, to the Holders pursuant to a Subscription
Agreement, dated as of July 31, 2000, by and between Millennium Partners, L.P.
(the "Initial Investor") and the Company (the "Subscription Agreement").
Pursuant to the Registration Rights Agreement, dated as of July 31, 2000, by and
between the Company and the Initial Investor (the "Registration Rights
Agreement") entered into in connection with the purchase by the Initial Investor
of the Common Shares, the Company agreed with each Holder, among other things,
to register for resale (1) the Common Shares and (2) the shares (the "Warrant
Shares") of Common Stock issuable upon exercise of the Warrants under the
Securities Act of 1933, as amended (the "1933 Act"), upon the terms provided in
the Registration Rights Agreement. The Common Shares and the Warrant Shares are
referred to herein collectively as the "Shares." Pursuant to the Registration
Rights Agreement, on _______, _____ the Company filed a Registration Statement
on Form S-1 (File No. __________) (the "Registration Statement") with the
Securities and Exchange Commission (the "SEC") relating to the Shares, which
names the Holders as selling stockholders thereunder.
[Other introductory and scope of examination language to be inserted]
Based on the foregoing, I am of the opinion that:
(1) Since the Closing Date, the Company has timely filed with the SEC all
forms, reports and other documents required to be filed with the SEC under the
Securities 1934 Act of 1934, as amended (the "1934 Act"). All of such forms,
reports and other documents complied,
when filed, in all material respects, with all applicable requirements of the
1933 Act and the 1934 Act;
(2) The Registration Statement and the Prospectus contained therein (other
than the financial statements and financial schedules and other financial and
statistical information contained or incorporated by reference therein, as to
which I have not been requested to and do not express any opinion) comply as to
form in all material respects with the applicable requirements of the 1933 Act
and the rules and regulations promulgated thereunder; and
(3) The Registration Statement has become effective under the 1933 Act, to
the best of my knowledge after due inquiry, no stop order proceedings with
respect thereto have been instituted or threatened by the SEC. The Shares have
been registered under the 1933 Act and may be resold by the respective Holders
pursuant to the Registration Statement.
I have participated in the preparation of the Registration Statement and
the Prospectus, including review and discussions with officers and other
representatives of the Company, representatives of the independent public
accountants for the Company, and your representatives at which the contents of
the Registration Statement and the Prospectus contained therein and related
matters were discussed, and, although I am not passing upon and do not assume
any responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus contained therein, on
the basis of the foregoing, nothing has come to my attention that leads me to
believe either that the Registration Statement at the time the Registration
Statement became effective contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the Prospectus contained in
the Registration Statement, as of its date, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading (it being understood that I have not
been requested to and do not express any view with respect to the financial
statements and schedules and other financial and statistical data included or
incorporated by reference in the Registration Statement or the Prospectus
contained therein).
Paragraph (3) of this opinion may be relied upon by ____________, Transfer
Agent and Registrar (the "Transfer Agent"), as if addressed to the Transfer
Agent.
Very truly yours,
cc: [TRANSFER AGENT]
EXHIBIT 10.49
================================================================================
SUBSCRIPTION AGREEMENT
DATED AS OF JULY 31, 2000
BY AND BETWEEN
STEMCELLS, INC.
AND
MILLENNIUM PARTNERS, L.P.
------------------
COMMON STOCK, CALLABLE WARRANTS
AND
COMMON STOCK PURCHASE WARRANTS
================================================================================
THIS SUBSCRIPTION AGREEMENT, dated as of July 31, 2000, by and
between STEMCELLS, INC., a Delaware corporation (the "Company"), with
headquarters located at 525 Del Rey Avenue, Suite C, Sunnyvale, CA 94086, and
Millennium Partners, L.P., a Cayman Islands limited partnership (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Buyer wishes to purchase, upon the terms and subject to
the conditions of this Agreement, shares of Common Stock, $.01 par value (the
"Common Stock"), of the Company and in connection therewith the Company is to
issue to the Buyer warrants to purchase shares of Common Stock as provided in
this Agreement; and
WHEREAS, the Company and the Buyer are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Rule 506 of Regulation D as promulgated by the Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933
Act");
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE.
(a) SUBSCRIPTION. The Buyer hereby agrees to purchase from the Company, and the
Company hereby agrees to sell to the Buyer, the number of shares (the "Common
Shares") of Common Stock set forth on the signature page of this Agreement at
the price per share and for the aggregate purchase price set forth on the
signature page of this Agreement (the "Purchase Price"). The Purchase Price
shall be payable in United States dollars. In connection with the purchase of
the Common Shares by the Buyer, the Company shall issue to the Buyer, at the
closing on the Closing Date (as defined herein), (1) Callable Warrants in the
form attached hereto as ANNEX I (the "Callable Warrants") to purchase the number
of shares of Common Stock set forth therein (subject to adjustment as provided
in the Callable Warrants) and (2) Common Stock Purchase Warrants, Class A, in
the form attached hereto as ANNEX II (the "Class A Warrants") to purchase the
number of shares of Common Stock set forth therein (subject to adjustment as
provided in the Class A Warrants). The Callable Warrants and the Class A
Warrants are referred to herein collectively as the "Warrants." The shares of
Common Stock issuable upon exercise of the Warrants are referred to herein as
the "Warrant Shares." The Common Shares and the Warrant Shares are referred to
herein collectively as the "Shares." The Shares and the Warrants are referred to
herein collectively as the "Securities."
(b) THE CLOSING.
(1) TIMING. Subject to the fulfillment or waiver of the conditions set
forth in Section 6 hereof, the purchase and sale of the Common Shares and
Warrants shall take place at a closing
(the "CLOSING") on the date hereof or such other date as the Buyer and the
Company may agree upon at the offices of Kleinberg, Kaplan, Wolff & Cohen, P.C.
(2) FORM AND Timing OF PAYMENT. The Buyer shall pay the Purchase Price
for the Common Shares by delivering (A) 75% of the Purchase Price to the Company
on the Closing Date and (B) 25% of the Purchase Price to the Company on the date
on which the Registration Statement (as defined in the Registration Rights
Agreement) becomes effective (or such later date which is two (2) business days
after Buyer receives written notice of the date of such effectiveness). Upon
Closing, the Company shall deliver (A) instructions to its registrar and
transfer agent regarding the issuance of the certificates for all the Common
Shares and shall cause its registrar and transfer agent to deliver such
certificates to Buyer as soon as possible after Closing and (B) the Warrants,
registered in the corporate securities records of the Company and on the
certificates in the name of the Buyer or its nominee, to the Buyer (or
Kleinberg, Kaplan, Wolff & Cohen, P.C. on behalf of the Buyer).
(c) METHOD OF PAYMENT. Payment of the Purchase Price for the Common Shares shall
be made in U.S. Dollars by wire transfer of funds to an account designated by
the Company.
As used in this Agreement, the term "Business Day" means any day other
than a
Saturday, Sunday or other day on which commercial banks in the City of New York
are authorized or required by law to remain closed.
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.
The Buyer represents and warrants to, and covenants and agrees with,
the Company as follows:
(a) ACCREDITED BUYER STATUS; SOPHISTICATED BUYER. The Buyer is
an "accredited investor" as that term is defined in Rule 501(a) of
Regulation D under the 1933 Act. The Buyer has such knowledge and
experience in financial and business matters that it is capable of
evaluating the merits and risks of investment in the Common Shares, the
Warrants and Warrant Shares.
(b) INFORMATION. The Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and
operations of the Company which have been requested and materials
relating to the offer and sale of the Common Shares, the Warrants and
Warrant Shares which have been requested by the Buyer. The Buyer and
its advisors, if any, have been afforded the opportunity to ask
questions of the Company. Neither such inquiries nor any other due
diligence investigations conducted by the Buyer or its advisors, if
any, or its representatives shall modify, amend or affect the Buyer's
right to rely on the Company's representations and warranties contained
in Section 3 below. The Buyer understands that its investment in the
Common Shares, the Warrants and Warrant Shares involves a high degree
of risk. The Buyer has sought such accounting, legal and tax advice as
it has considered necessary to make an informed investment decision
with respect to its acquisition of the Common Shares, the Warrants and
Warrant Shares.
2
(c) LEGENDS. The Company shall issue certificates for the
Common Shares, the Warrants and Warrant Shares to the Buyer without any
legend except as described herein. The Buyer covenants that, in
connection with any transfer of Shares by the Buyer pursuant to the
registration statement contemplated by the Registration Rights
Agreement, it will comply with the applicable prospectus delivery
requirements of the 1933 Act, provided that copies of a current
prospectus relating to such effective registration statement are or
have been supplied to the Buyer.
(d) AUTHORIZATION; ENFORCEMENT. Each of this Agreement and the
Registration Rights Agreement has been duly and validly authorized,
executed and delivered on behalf of the Buyer and is a valid and
binding agreement of the Buyer enforceable against the Buyer in
accordance with its terms, subject as to enforceability to general
principles of equity and to applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation and other similar laws relating
to, or affecting generally, the enforcement of applicable creditors'
rights and remedies. The Buyer has the requisite corporate power and
authority to enter into and perform its obligations under this
Agreement and the Registration Rights Agreement and each other
agreement entered into by the parties hereto in connection with the
transactions contemplated by this Agreement.
(e) NO CONFLICTS. The execution, delivery and performance of
this Agreement and the Registration Rights Agreement by the Buyer and
the consummation by the Buyer of the transactions contemplated hereby
and thereby will not result in a violation of the certificate of
incorporation, by-laws or other documents of organization of the Buyer.
(f) INVESTMENT REPRESENTATION. The Buyer is purchasing the
Common Shares and the Warrants for its own account and not with a view
to distribution in violation of any securities laws. The Buyer has been
advised and understands that neither the Common Shares, the Warrants
nor the Warrant Shares issuable upon exercise thereof have been
registered under the 1933 Act or under the "blue sky" laws of any
jurisdiction and may be resold only if registered pursuant to the
provisions of the 1933 Act or if an exemption from registration is
available, except under circumstances where neither such registration
nor such an exemption is required by law. The Buyer has been advised
and understands that the Company, in issuing the Common Shares and the
Warrant, is relying upon, among other things, the representations and
warranties of the Buyer contained in this Section 3 in concluding that
such issuance is a "private offering" and is exempt from the
registration provisions of the 1933 Act.
(g) RULE 144. The Buyer understands that there is no public
trading market for the Warrants and that none is expected to develop.
The Buyer understands that the Common Shares, the Warrants and the
Warrant Shares received upon conversion or exercise thereof must be
held indefinitely unless and until registered under the 1933 Act or an
exemption from registration is available. The Buyer is aware of the
provisions of Rule 144 promulgated under the 1933 Act.
3
(h) RELIANCE BY THE COMPANY. The Buyer understands that the
Common Shares and the Warrants are being offered and sold in reliance
on a transactional exemption from the registration requirements of
Federal and state securities laws and that the Company is relying upon
the truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of the Buyer set forth herein in
order to determine the applicability of such exemptions and the
suitability of the Buyer to acquire the Common Shares and the Warrants.
3. COMPANY REPRESENTATIONS, WARRANTIES, ETC.
The Company represents and warrants to, and covenants and agrees with,
the Buyer that, except as set forth in the schedules attached hereto:
(a) ORGANIZATION AND QUALIFICATION; MATERIAL ADVERSE EFFECT.
The Company is a corporation duly incorporated and existing in good
standing under the laws of the State of Delaware and has the requisite
corporate power to own its properties and to carry on its business as
now being conducted. The Company does not have any Subsidiary other
than StemCells California, Inc. (the "SUBSIDIARY"). The Subsidiary is
duly organized, and validly existing and in good standing under the
laws of its jurisdiction of formation. Except where specifically
indicated to the contrary, all references in this Agreement to
Subsidiary shall be deemed to refer to the Subsidiary of the Company.
The Company is duly qualified as a foreign corporation to do business
and is in good standing in every jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary other than those in which the failure so to qualify would not
have a Material Adverse Effect. "MATERIAL ADVERSE EFFECT" means any
adverse effect on the business, operations, properties, prospects or
financial condition of the Company and its Subsidiary, which is (either
alone or together with all other adverse effects) material to the
Company and its Subsidiary, taken as a whole, and any material adverse
effect on the transactions contemplated under this Agreement, the
Certificate and the Registration Rights Agreement, or any other
agreement or document contemplated hereby or thereby.
(b) AUTHORIZATION; ENFORCEMENT. (i) The Company has all
requisite corporate power and authority to enter into and perform this
Agreement, the Registration Rights Agreement and the Warrants
("TRANSACTION DOCUMENTS") and to issue the Common Shares and the
Warrants in accordance with the terms hereof, (ii) the execution and
delivery of this Agreement, the Registration Rights Agreement and the
Warrants by the Company and the consummation by it of the transactions
contemplated hereby and thereby, including the issuance of the Common
Shares and the Warrants, have been duly authorized by all necessary
corporate action, and no further consent or authorization of the
Company or its
4
Board of Directors (or any committee or subcommittee thereof) or
stockholders is required, (iii) this Agreement, the Registration Rights
Agreement and the Warrants have been duly executed and delivered by the
Company, (iv) this Agreement, the Registration Rights Agreement and the
Warrants constitute valid and binding obligations of the Company
enforceable against the Company in accordance with their terms, except
(A) as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally the enforcement of creditors'
rights and remedies or by other equitable principles of general
application, and (B) to the extent the indemnification provisions
contained in this Agreement and the Registration Rights Agreement may
be limited by applicable federal or state securities laws and (v) the
Common Shares, the Warrants, and the Warrant Shares issuable upon the
exercise thereof have been duly authorized and, upon issuance thereof
and payment therefor in accordance with the terms of this Agreement,
the Common Shares, the Warrants, and the Warrant Shares issuable upon
the exercise thereof will be validly issued, fully paid and
non-assessable, free and clear of any and all liens, claims and
encumbrances.
(c) CAPITALIZATION. As of the date hereof, the authorized
capital stock of the Company consists of (i) 45,000,000 shares of
Common Stock, of which as of April 18, 2000, 19,510,409 shares were
issued and outstanding, as of the date hereof, 4,057,313 shares are
issuable and reserved for issuance pursuant to the Company's stock
option and purchase plans and committed pursuant to pending
acquisitions, and as of the date hereof, assuming a conversion price of
$4.00 for the Company's 6% Cumulative Convertible Preferred Stock,
approximately 456,563 shares are issuable pursuant to securities (other
than options and purchase plans referred to above), exercisable or
exchangeable for, or convertible into, shares of Common Stock, and
approximately 838,126 shares are reserved for issuance pursuant to such
securities and (ii) 1,000,000 shares of preferred stock, of which as of
the date hereof, (A) 2,626 shares are currently designated as 6%
Cumulative Convertible Preferred Stock, 1,500 shares of which are
issued and outstanding and (B) 450,000 shares are designated as Junior
Preferred Shares, none of which are issued or outstanding. All of such
outstanding shares have been, or upon issuance will be, validly issued,
fully paid and nonassessable. As of the date hereof, except as
disclosed in SCHEDULE 3(c), (i) no shares of the Company's capital
stock are subject to preemptive rights or any other similar rights or
any liens or encumbrances suffered or permitted by the Company, (ii)
there are no outstanding debt securities, (iii) there are no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or
rights convertible into, any shares of capital stock of the Company or
its Subsidiary, or contracts, commitments, understandings or
arrangements by which the Company or its Subsidiary is or may become
bound to issue additional shares of capital stock of the Company or its
Subsidiary or options, warrants, scrip, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities
or rights convertible into, any shares of capital stock of the Company
or its Subsidiary, (iv) there are no agreements or arrangements under
which the Company or its
5
Subsidiary is obligated to register the sale of any of their securities
under the Securities Act of 1933, as amended ("SECURITIES ACT" or "1933
Act") (except the Registration Rights Agreement and except as set forth
on SCHEDULE 3(c)), (v) there are no outstanding securities of the
Company or its Subsidiary which contain any redemption or similar
provisions, and there are no contracts, commitments, understandings or
arrangements by which the Company or its Subsidiary is or may become
bound to redeem a security of the Company or its Subsidiary, (vi) there
are no securities or instruments containing anti-dilution or similar
provisions that will be triggered by the issuance of the Common Shares
or the Warrants as described in this Agreement or the Warrants and
(vii) the Company does not have any stock appreciation rights or
"phantom stock" plans or agreements or any similar plan or agreement.
The Company has furnished to the Buyer true and correct copies of the
Company's Certificate of Incorporation, as amended and as in effect on
the date hereof (the "CERTIFICATE OF INCORPORATION"), and the Company's
By-laws, as in effect on the date hereof (the "BY-LAWS").
(d) NO CONFLICTS. The execution, delivery and performance of
the Transaction Documents by the Company and the consummation by the
Company of the transactions contemplated hereby and thereby and the
issuance of Common Shares, the Warrants, and the Warrant Shares
underlying the Warrants will not (i) result in a violation of the
Certificate of Incorporation, any certificate of designations,
preferences and rights of any outstanding series of preferred stock of
the Company or the By-laws; (ii) conflict with, or constitute a default
(or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument
to which the Company or its Subsidiary is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree
(including United States federal and state securities laws and
regulations and the rules and regulations of the Nasdaq National Market
(the "PRINCIPAL MARKET") or other principal securities exchange or
trading market on which the Common Stock is traded or listed)
applicable to the Company or its Subsidiary or by which any property or
asset of the Company or its Subsidiary is bound or affected. Neither
the Company nor its Subsidiary is in violation of any term of, or in
default under, (x) its certificate of incorporation, any certificate of
designations, preferences and rights of any outstanding series of
preferred stock or By-laws or their organizational charter or by-laws,
respectively, (y) any material contract, agreement, mortgage,
indebtedness, indenture, instrument, or (z) any judgment, decree or
order or any statute, rule or regulation applicable to the Company or
its Subsidiary, the non-compliance with which (in the cases of (y) and
(z)) would cause a Material Adverse Effect. Except as specifically
contemplated by this Agreement and as required under the 1933 Act or
state "blue sky" laws, the Company is not required to obtain any
consent, authorization or order of, or make any filing or registration
with, any court, governmental agency or any regulatory or
self-regulatory agency in order for it to execute, deliver or perform
any of its obligations under, or contemplated by, the Transaction
Documents or the issuance of the Common Shares and the Warrants in
accordance with the terms hereof or thereof. All consents,
authorizations, orders, filings and registrations which the
6
Company is required to obtain pursuant to the preceding sentence have
been obtained or effected on or prior to the date hereof, or in the
case of post-sale filings, will be made promptly after the date hereof.
The Company complies with and is not in violation of the listing
requirements of the Principal Market as in effect on the date hereof in
all material respects and on each of the Closing Dates and is not aware
of any existing facts which provide a basis for delisting or suspension
of the Common Stock by the Principal Market.
(e) SEC DOCUMENTS; FINANCIAL STATEMENTS. Since December 31,
1998, the Company has filed all reports, schedules, forms, statements
and other documents required to be filed by it with the SEC pursuant to
the reporting requirements of the Securities Exchange Act of 1934, as
amended (the "1934 Act") (all of the foregoing filed prior to the date
hereof and all exhibits included therein and financial statements and
schedules thereto and documents incorporated by reference therein being
hereinafter referred to as the "SEC DOCUMENTS"). As of their respective
dates, the SEC Documents complied in all material respects with the
requirements of the 1934 Act and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of the
SEC Documents, at the time they were filed with the SEC, contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading. As of their respective dates, the financial
statements of the Company included in the SEC Documents complied as to
form in all material respects with applicable accounting requirements
and the published rules and regulations of the SEC with respect
thereto. Such financial statements have been prepared in accordance
with generally accepted accounting principles, consistently applied,
during the periods involved (except (i) as may be otherwise indicated
in such financial statements or the notes thereto, or (ii) in the case
of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present
in all material respects the financial position of the Company as of
the dates thereof and the results of its operations and cash flows for
the periods then ended (subject, in the case of unaudited statements,
to normal year-end audit adjustments). Neither the Company nor its
Subsidiary or any of their officers, directors, employees or agents
have provided the Buyer with any material, nonpublic information which
was not publicly disclosed prior to the date hereof.
(f) ABSENCE OF CERTAIN CHANGES. Except as set forth in the SEC
Documents identified on Schedule 3(f) hereto, since December 31, 1998
there has been no adverse change or adverse development in the
business, properties, assets, operations, financial condition,
prospects, liabilities or results of operations of the Company or its
Subsidiary which has had or, to the knowledge of the Company or its
Subsidiary, is reasonably likely to have a Material Adverse Effect. The
Company has not taken any steps, and does not currently expect to take
any steps, to seek protection pursuant to any bankruptcy law nor does
the Company or its Subsidiary have any knowledge or reason to believe
that its creditors intend to initiate involuntary bankruptcy
proceedings.
7
(g) ABSENCE OF LITIGATION. There is no action, suit,
proceeding, inquiry or investigation before or by any court, public
board, government agency, self-regulatory organization or body pending
or, to the knowledge of the Company or its Subsidiary, threatened
against or affecting the Company, the Common Stock or any of the
Company's Subsidiary or any of the Company's or the Company's
Subsidiary's officers or directors in their capacities as such, which
individually and in the aggregate, respectively, would be reasonably
likely to result in liability to the Company in excess of $50,000 and
$100,000, respectively.
(h) ACKNOWLEDGMENT REGARDING BUYER'S PURCHASE OF SHARES. The
Company acknowledges and agrees that the Buyer is acting solely in the
capacity of arm's length purchaser with respect to the Transaction
Documents and the transactions contemplated hereby and thereby. The
Company further acknowledges that the Buyer is not acting as financial
advisor or fiduciary of the Company (or in any similar capacity) with
respect to the Transaction Documents and the transactions contemplated
hereby and thereby, and any advice given by the Buyer or any of its
respective representatives or agents in connection with the Transaction
Documents and the transactions contemplated hereby and thereby is
merely incidental to the Buyer's purchase of the Common Shares. The
Company further represents to the Buyer that the Company's decision to
enter into the Transaction Documents has been based solely on the
independent evaluation by the Company and its representatives.
(i) NO UNDISCLOSED EVENTS, LIABILITIES, DEVELOPMENTS OR
CIRCUMSTANCES. No event, liability, development or circumstance has
occurred or exists with respect to the Company or its Subsidiary or
their respective business, properties, prospects, operations or
financial condition, that would be required to be disclosed by the
Company under applicable securities laws in a registration statement
filed with the SEC relating to an issuance and sale by the Company of
its Common Stock and which has not been publicly disclosed.
(j) NO INSIDE INFORMATION. The Company has not provided and,
the Company shall not provide, the Buyer with any non-public
information, except to the extent that the Buyer exercises its right to
review a registration statement containing material non-public
information (after receiving written notice of the existence of such
content) and except in the case of the Buyer's exercising rights
pursuant to Section 4(i) below.
(k) NO SECURITIES ACT REGISTRATION. The sale and issuance of
the Common Shares and Warrants in accordance with terms of this
Agreement and the issuance of Warrant Shares upon exercise of the
Warrants are exempt from registration under the 1933 Act.
(l) EMPLOYEE RELATIONS. Neither the Company nor its Subsidiary
is involved in any labor dispute nor, to the knowledge of the Company
or its Subsidiary, is any such dispute threatened, the effect of which
would be reasonably likely to result in a Material Adverse Effect.
Neither the Company nor
8
its Subsidiary is a party to a collective bargaining agreement. The
Company and its Subsidiary believe that relations between the Company
and its Subsidiary and their respective employees are good. No
executive officer (as defined in Rule 501(f) of the 1933 Act) whose
departure would be adverse to the Company has notified the Company that
such officer intends to leave the Company or otherwise terminate such
officer's employment with the Company.
(m) INTELLECTUAL PROPERTY RIGHTS. The Company and its
Subsidiary own or possess adequate rights or licenses to use all
trademarks, trade names, service marks, service mark registrations,
service names, patents, patent rights, copyrights, inventions,
licenses, approvals, governmental authorizations, trade secrets and
rights necessary to conduct their respective businesses as now
conducted. None of the Company's trademarks, trade names, service
marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, government
authorizations, trade secrets or other intellectual property rights
have expired or terminated, or are expected to expire or terminate
within two (2) years from the date of this Agreement except as would
not have a Material Adverse Effect. The Company and its Subsidiary do
not have any knowledge of any infringement by the Company or its
Subsidiary of trademark, trade name rights, patents, patent rights,
copyrights, inventions, licenses, service names, service marks, service
mark registrations, trade secret or other similar rights of others, or
of any such development of similar or identical trade secrets or
technical information by others, and no claim, action or proceeding has
been made or brought against, or to the Company's knowledge, is
threatened against, the Company or its Subsidiary regarding trademarks,
trade name rights, patents, patent rights, inventions, copyrights,
licenses, service names, service marks, service mark registrations,
trade secrets or other infringement. The Company and its Subsidiary
have taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their intellectual properties.
(n) SHAREHOLDER APPROVAL RULE. The Company has not issued any
shares of Common Stock or shares of any series of preferred stock or
other securities convertible into, exchangeable for or otherwise
entitling the holder to acquire shares of Common Stock which are
subject to Rule 4460(i)(1)(D) of Nasdaq as in effect from time to time
or any successor, replacement or similar provision thereof or of any
other market on which the Common Stock is listed for trading (the
"Shareholder Approval Rule") and which would be integrated with the
sale of the Common Shares to the Buyer or the issuance of Warrant
Shares upon exercise of the Warrants for purposes of the Shareholder
Approval Rule.
(o) ENVIRONMENTAL LAWS. The Company and its Subsidiary (i) are
in compliance with any and all applicable foreign, federal, state and
local laws and regulations relating to the protection of human health
and safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) have received
all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses
and (iii) are in compliance with all terms and conditions of
9
any such permit, license or approval where such noncompliance or
failure to receive permits, licenses or approvals referred to in
clauses (i), (ii) or (iii) above could have, individually or in the
aggregate, a Material Adverse Effect.
(p) TITLE. The Company and its Subsidiary have good and
marketable title in fee simple to all real property and good and
marketable title to all personal property owned by them which is
material to the business of the Company and its Subsidiary, in each
case free and clear of all liens, encumbrances and defects except such
as are described in SCHEDULE 3(p) or in the SEC Documents listed in
SCHEDULE 3(p) or such as do not materially and adversely affect the
value of such property and do not interfere with the use made and
proposed to be made of such property by the Company or its Subsidiary.
Any real property and facilities held under lease by the Company or its
Subsidiary are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and
buildings by the Company and its Subsidiary.
(q) INSURANCE. The Company and its Subsidiary are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses in which the Company and its
Subsidiary are engaged. Neither the Company nor any such Subsidiary has
been refused any insurance coverage sought or applied for and neither
the Company nor any such Subsidiary has any reason to believe that it
will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that
would not materially and adversely affect the condition, financial or
otherwise, or the earnings, business or operations of the Company and
its Subsidiary taken as a whole.
(r) REGULATORY PERMITS. The Company and its Subsidiary possess
all material certificates, authorizations and permits issued by the
appropriate federal, state or foreign regulatory authorities, necessary
to conduct their respective businesses, and neither the Company nor any
such Subsidiary has received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization or
permit.
(s) INTERNAL ACCOUNTING CONTROLS. The Company and its
Subsidiary maintain a system of internal accounting controls sufficient
to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability, (iii) access to assets
is permitted only in accordance with management's general or specific
authorization and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
10
(t) FOREIGN CORRUPT PRACTICES ACT. Neither the Company, nor
any director, officer, agent, employee or other person acting on behalf
of the Company or any Subsidiary has, in the course of acting for, or
on behalf of, the Company, directly or indirectly used any corporate
funds for any unlawful contribution, gift, entertainment or other
unlawful expenses relating to political activity; directly or
indirectly made any direct or indirect unlawful payment to any foreign
or domestic government official or employee from corporate funds;
violated or is in violation of any provision of the U.S. Foreign
Corrupt Practices Act of 1977, as amended, or any similar treaties of
the United States; or directly or indirectly made any bribe, rebate,
payoff, influence payment, kickback or other unlawful payment to any
foreign or domestic government or party official or employee.
(u) TAX STATUS. The Company and its Subsidiary has made or
filed all United States federal and state income and all other tax
returns, reports and declarations required by any jurisdiction to which
it is subject and (i) has paid all taxes and other governmental
assessments and charges, shown or determined to be due on such returns,
reports and declarations, except those being contested in good faith
and (ii) has set aside on its books provisions reasonably adequate for
the payment of all taxes for periods subsequent to the periods to which
such returns, reports or declarations apply. There are no unpaid taxes
claimed to be due by the taxing authority of any jurisdiction, and the
Company is not aware of any basis for any such claim.
(v) CERTAIN TRANSACTIONS. Except as set forth in the SEC
Documents filed on EDGAR at least thirty (30) Trading Days prior to the
date hereof and except for arm's length transactions pursuant to which
the Company makes payments in the ordinary course of business upon
terms no less favorable than the Company could obtain from third
parties and other than the grant of stock options disclosed on SCHEDULE
3(c), none of the officers, directors or employees of the Company is
presently a party to any transaction with the Company or its Subsidiary
(other than for services as employees, consultants, officers and
directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental
of real or personal property to or from, or otherwise requiring
payments to or from any officer, director or such employee or, to the
knowledge of the Company, any corporation, partnership, trust or other
entity in which any officer, director or any such employee has a
substantial interest or is an officer, director, trustee or partner.
(w) DILUTIVE EFFECT. The Company understands and acknowledges
that the number of Common Shares issuable upon exercise of the Warrants
purchased pursuant to this Agreement will increase in certain
circumstances. The Company further acknowledges that, subject to such
limitations as are expressly set forth in the Transaction Documents,
its obligation to issue Common Shares upon exercise of the Warrants
purchased pursuant to this Agreement, is absolute and unconditional
regardless of the dilutive effect that such issuance may have on the
ownership interests of other shareholders of the Company.
11
(x) APPLICATION OF TAKEOVER PROTECTIONS. There are no
anti-takeover provisions contained in the Company's Certificate of
Incorporation or otherwise which will be triggered as a result of the
transactions contemplated by this Agreement, including, without
limitation, the Company's issuance of the Common Shares and the Buyer's
ownership of the Common Shares.
(y) RIGHTS PLAN. The Company confirms that no provision of the
Company's rights plan will, under any present or future circumstances,
delay, prevent or interfere with the performance of any of the
Company's obligations under the Transaction Documents and such plan
will not be "triggered" by such performance.
(z) OBLIGATIONS ABSOLUTE. Each of the Company and the Buyer
agrees that, subject only to the conditions, qualifications and
exceptions (if any) specifically set forth in the Transaction
Documents, its obligations under the Transaction Documents are
unconditional and absolute. Except to the extent (if any) specifically
set forth in the Transaction Documents, each party's obligations
thereunder are not subject to any right of set off, counterclaim, delay
or reduction.
(aa) ISSUANCE OF COMMON SHARES. The Common Shares are duly
authorized and reserved for issuance and, upon exercise of the Warrants
in accordance with the terms thereof, such Common Shares will be
validly issued, fully paid and non-assessable, free and clear of any
and all liens, claims and encumbrances, and entitled to be traded on
the Principal Market or the New York Stock Exchange or the American
Stock Exchange, or the Nasdaq small cap market (collectively with the
Principal Market, the "APPROVED MARKETS"), and the holders of such
Common Shares shall be entitled to all rights and preferences accorded
to a holder of Common Stock. As of the date of this Agreement, the
outstanding shares of Common Stock are currently listed on the
Principal Market.
(bb) MODEX. The Company owns approximately 126,193 shares of
the common stock of Modex Therapeutics, Ltd.
(cc) BROKERS. The Company has taken no action which would give
rise to any claim by any person for brokerage commissions, finder's
fees or similar payments by the Buyer relating to this Agreement or the
transactions contemplated hereby.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
(a) TRANSFER RESTRICTIONS. The Company and the Buyer acknowledge and
agree that (A) the Shares and the Warrants have not been and are not being
registered under the provisions of the 1933 Act and, except as provided in the
Registration Rights Agreement with respect to the resale of the Shares, the
Shares have not been and are not being registered for resale under the 1933 Act,
and the Securities may not be transferred unless (i) subsequently registered for
resale thereunder or (ii) the Buyer shall have delivered to the Company an
opinion of counsel, reasonably satisfactory in form, scope and substance to the
Company, to the effect
12
that the Securities to be sold or transferred may be sold or transferred
pursuant to an exemption from such registration (unless waived) and (B) any
resale of the Securities made in reliance on Rule 144 promulgated under the 1933
Act ("Rule 144") may be made only in accordance with the terms of Rule 144 and
further, if Rule 144 is not applicable, any such resale of Securities under
circumstances in which the seller, or the person through whom the sale is made,
may be deemed to be an underwriter, as that term is used in the 1933 Act, may
require compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC thereunder.
(b) RESTRICTIVE LEGEND. (1) The Buyer acknowledges and agrees that the
Warrants shall bear a restrictive legend in substantially the following form:
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended. The securities have been
acquired for investment and may not be resold, transferred or assigned
in the absence of an effective registration statement for the
securities under the Securities Act of 1933, as amended, or an opinion
of counsel that registration is not required under said Act.
(2) The Buyer further acknowledges and agrees that until such time
as the Shares have been registered for resale under the 1933 Act as contemplated
by the Registration Rights Agreement, the certificates for the Shares may bear a
restrictive legend in substantially the following form:
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended. The securities have been
acquired for investment and may not be resold, transferred or assigned
in the absence of an effective registration statement for the
securities under the Securities Act of 1933, as amended, or an opinion
of counsel that registration is not required under said Act.
(3) Once the Registration Statement required to be filed by the
Company pursuant to Section 2 of the Registration Rights Agreement has been
declared effective, thereafter (1) upon request of the Buyer the Company will
substitute certificates without restrictive legend for certificates for all
Shares issued prior to the date such Registration Statement is declared
effective by the SEC which bear such restrictive legend and remove any
stop-transfer restriction relating thereto promptly, but in no event later than
three Trading Days (as defined herein) after surrender of such certificates by
the Buyer and (2) the Company shall not place any restrictive legend on
certificates for Warrant Shares or impose any stop-transfer restriction thereon.
As used in this Agreement, "Trading Day" means a day on whichever of (x) the
national securities exchange, (y) Nasdaq or (z) the Nasdaq SmallCap Market (if
at the time such market constitutes the principal securities market for the
Common Stock) is open for general trading.
(c) REGISTRATION RIGHTS AGREEMENT. The parties hereto agree to enter
into the Registration Rights Agreement in the form attached hereto as ANNEX III
on or before the Closing Date.
(d) FORM D. The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to the
Buyer promptly
13
after such filing. The Buyer agrees to cooperate with the Company in connection
with such filing and, upon request of the Company, to provide all information
relating to the Buyer reasonably required for such filing.
(e) AUTHORIZATION FOR TRADING; REPORTING STATUS. On or before the
Closing Date, the Company shall, if required, file a notification for listing of
additional shares with the Nasdaq relating to the Shares and shall provide
evidence of such filing to the Buyer. So long as the Buyer beneficially owns any
of the Shares or the Warrants, the Company covenants to timely file (or obtain
extensions in respect thereof and file within the applicable grace period) all
reports required to be filed by the Company after the date hereof pursuant to
Section 13(a) or 15(d) of the Exchange Act; provided, however, that if the
Company is not required to file reports pursuant to such sections, it will
prepare and furnish to the Purchasers and make publicly available in accordance
with Rule 144(c) promulgated under the Securities Act such information as is
required for the Purchasers to sell the Securities under Rule 144 promulgated
under the Securities Act.
(f) USE OF PROCEEDS. Neither the Company nor any Subsidiary owns or has
any present intention of acquiring any "margin stock" as defined in Regulation G
(12 CFR Part 207) of the Board of Governors of the Federal Reserve System
("margin stock"). The proceeds of sale of the Shares will be used for general
working capital purposes and in the operation of the Company's business. None of
such proceeds will be used, directly or indirectly (1) to make any loan to or
investment in any other person (other than financing the Company's subsidiaries
in the ordinary course of business or in connection with an acquisition of
another corporation or business or assets of another corporation or business) or
(2) for the purpose, whether immediate, incidental or ultimate, of purchasing or
carrying any margin stock or for the purpose of maintaining, reducing or
retiring any indebtedness which was originally incurred to purchase or carry any
stock that is currently a margin stock or for any other purpose which might
constitute the transactions contemplated by this Agreement a "purpose credit"
within the meaning of such Regulation G. Neither the Company nor any agent
acting on its behalf has taken or will take any action which might cause this
Agreement or the transactions contemplated hereby to violate Regulation G,
Regulation T or any other regulation of the Board of Governors of the Federal
Reserve System or to violate the 1934 Act, in each case as in effect now or as
the same may hereafter be in effect.
(g) BLUE SKY LAWS. The Company shall take such action as shall be
necessary to qualify, or to obtain an exemption for, the Common Shares for sale
to the Buyer and the Warrants for issuance to the Buyer pursuant to this
Agreement and the Warrant Shares for issuance to the Buyer upon exercise of the
Warrants under such of the securities or "blue sky" laws of jurisdictions as
shall be applicable to the sale of the Common Shares and the issuance of the
Warrants pursuant to this Agreement and the issuance to the Buyer of Warrant
Shares upon exercise of the Warrants. The Company shall furnish copies of all
filings, applications, orders and grants or confirmations of exemptions relating
to such securities or "blue sky" laws.
(h) EXPENSES. The parties shall each bear their own expenses in
connection with this Agreement, the other Transaction Documents and the
transactions contemplated hereby and thereby; provided, however, that the
Company shall pay or reimburse the Buyer for all reasonable expenses (including,
without limitation, legal fees and expenses of counsel to the
14
Buyer and the Buyer's due diligence expenses) not in excess of $25,000 incurred
by the Buyer in connection with this Agreement and the transactions contemplated
hereby. In addition, the Company or the Buyer, as the case may be, shall pay on
demand all expenses incurred by the other party, including reasonable attorneys'
fees and expenses, as a consequence of, or in connection with any default or
breach of any of the defaulting or breaching party's obligations set forth in
any of such agreements or instruments and the enforcement of any right of,
including the collection of any payments due, the other party under any of such
agreements or instruments, including any action or proceeding relating to such
enforcement, or any order, injunction or other process seeking to restrain a
party from paying any amount due the other party, in which the other party
prevails, provided that such reimbursable legal fees and expenses do not exceed,
in each instance, 35% of the amount sought in good faith to be recovered.
(i) CERTAIN ISSUANCES OF SECURITIES. Unless the Company obtains the
approval of its stockholders as required by the Shareholder Approval Rule or a
waiver thereof from Nasdaq, the Company will not issue any shares of Common
Stock or shares of any series of preferred stock or other securities convertible
into, exchangeable for, or otherwise entitling the holder to acquire, shares of
Common Stock which would be subject to the requirements of the Shareholder
Approval Rule and which would be integrated with the sale of the Common Shares
and issuance of the Warrants to the Buyer or the issuance of Warrant Shares upon
exercise of the Warrants for purposes of the Shareholder Approval Rule.
During the period from the date of this Agreement through December 31,
2000, the Company shall not, without the prior written consent of the Buyer
(which may be withheld in its sole discretion) file any registration statement
for any securities of the Company (or securities underlying convertible,
exchangeable or exercisable securities) other than (A) pursuant to the
Registration Rights Agreement, (B) with respect to a bona fide secondary public
offering of newly issued shares of Common Stock, (C) with respect to Approved
Transactions or (D) in connection with any financing transaction in which shares
of Common Stock are issued or are issuable upon exercise or conversion of
securities issued in such transaction and the effective purchase price per share
of such Common Stock at the time of consummation of such transaction is greater
than the price per share set forth on the signature page hereto (as
appropriately adjusted to for any stock splits, recapitalizations or similar
events to allow for a meaningful comparison). As used herein, "Approved
Transaction" means (i) a bona fide issuance pursuant to a compensation or
similar arrangement with employees, officers, directors, or consultants, (ii) a
bank financing or (iii) as part of a transaction involving a strategic alliance,
acquisition of stock or assets, merger, collaboration, joint venture,
partnership or other similar arrangement of the Company with another
corporation, partnership or other business entity (A) which is engaged in a
business similar, complementary or related to the business of the Company or (B)
pursuant to which the Company issues securities with the primary purpose to
directly or indirectly acquire, license or otherwise become entitled to use
technology relevant to or useful in the Company's business, so long as in each
case of this clause (iii) the Board of Directors of the Company by resolution
duly adopted duly approves such transaction in accordance with its duties under
applicable law.
During the period from the date of execution and delivery of this
Agreement until the earlier of (a) the date (after Closing) on which the Buyer
no longer holds any Common Shares acquired hereunder or (b) the last Adjustment
Date (as defined in the Class A Warrants).
15
Date (the "Co-Investment Period"), Millennium Partners, L.P. ("Millennium")
shall have a right to participate in all capital raising transactions as set
forth in this Section 4(i). Millennium shall have the right to co-invest, on the
same terms as the other investors in such transactions, in any future offerings
of the Company's securities issued in capital raising transactions (other than
securities issued in connection with strategic investments, bank financings and
compensation or similar arrangements with employees, officers, directors and
consultants), for up to 100% of the principal amount of such offerings.
During the Co-Investment Period, the Company shall give written notice
to Millennium (subject to the "Right to Decline Review" as defined in the
Registration Rights Agreement) upon the closing of a private sale of securities
either (A) issued at a discount to market value, (B) having variable conversion
or exercise price features or (C) similar to the Class A Warrants (a "PRIVATE
FINANCING TRANSACTION"), in each case excluding any Approved Transactions,
Millennium shall have ten (10) business days from receipt of such notice to
deliver a written notice to the Company that it elects to exercise its right to
co-invest in such Financing Transaction, which notice shall indicate the
percentage (up to 100%) of the Financing Transaction with respect to which
Millennium is co-investing. In the event that any of the consideration to be
issued to the Company in a Financing Transaction consists of consideration other
than cash, Millennium shall have the right to provide the cash equivalent as
determined in good faith by the Board of Directors of the Company. This right of
co-invest shall continue even if the Buyer elects not to co-invest in one or
more Financing Transactions.
In addition, and without limiting the foregoing, the Buyer shall also
have the right during the Co-Investment Period, with respect to one Private
Financing Transaction (excluding an Approved Transaction) to prohibit one
potential investor in such Private Financing Transaction from participating
therein so long as the Buyer (or another investor designated or arranged by the
Buyer and reasonably acceptable to the Company), replaces the investment in the
Company that would have been made by such prohibited investor. Until such right
is exercised, the Company shall give the Buyer at least five (5) business days'
notice prior to the closing of any Private Financing Transaction.
(j) CERTAIN TRADING RESTRICTIONS. The Buyer agrees that on the Closing
Date, the Buyer will have no short position in the Common Stock. The Buyer
agrees that on and after the Closing Date until the Buyer no longer holds any
Securities, the Buyer will not engage in any short sales or other hedging
transactions (including swaps, options or derivative securities) relating to the
Shares; unless at the time of any such transaction the Company is then in breach
of its obligations to have the Buyer's Securities duly registered under the
Registration Rights Agreement; and PROVIDED, HOWEVER, the Buyer may engage in
such short sales and/or hedging activity provided that (i) the Buyer's short
position does not exceed the number of Warrant Shares then issuable upon
exercise of the Callable Warrants, (ii) no such short sales shall be at a per
share price below $3.9375 (as such figure shall be appropriately adjusted for
any stock splits, recapitalizations or similar events), and (iii) the aggregate
amount of such short sales made on any one day shall not exceed 5% of the total
trading volume on such day.
(k) COMMERCIALLY REASONABLE EFFORTS. Each of the parties shall use
commercially reasonable efforts timely to satisfy each of the conditions to the
other party's
16
obligations to sell and purchase the Common Shares set forth in Section 7 or 8,
as the case may be, of this Agreement on or before the Closing Date.
5. OPTION TO PURCHASE ADDITIONAL SECURITIES.
(a) At the option of Millennium, Millennium may purchase additional
shares of Common Stock (the "OPTION SHARES") for a purchase price per share
equal to 110% of the average of the closing bid prices for the Company's Common
Stock (as reported on Nasdaq or other market on which the Common Stock is
principally traded) over the five (5) Trading Days immediately preceding the
date of the Option Notice (defined below) (which purchase price per share shall
not in any case be less than the price per share set forth on the signature page
hereto (subject to appropriate adjustment for stock splits, recapitalizations
and similar events) for an aggregate purchase price of up to Three Million U.S.
Dollars ($3,000,000).
(b) This option may be exercised in whole or in part, at any time and
from time to time commencing on the Closing Date until the first anniversary of
the Closing Date. Upon delivery of a notice by Millennium exercising its option
hereunder ("Option Notice"), the Company shall be obligated to sell, issue and
deliver to Millennium, and Millennium shall be obligated to purchase, the Option
Shares specified in the option exercise notice, subject to the terms of this
Section 5(b). Closing of any such purchase and sale (each an "Option Closing")
shall take place in the same manner as the Closing. At the Option Closing, the
Company shall deliver certificates evidencing the Option Shares being purchased
against the payment of the purchase price therefor, which Option Closing shall
occur within three (3) Trading Days of delivery of the Option Notice by Buyer.
The Option Shares and the holders thereof shall be subject to the terms,
conditions and obligations applicable to the Common Shares under this Agreement
and the Registration Rights Agreement.
(c) In addition to issuing to Millennium the Option Shares, at each
Option Closing the Company shall also issue to Millennium a number of Callable
Warrants and Class A Warrants such that the number of each of such Warrants
bears the same proportion to the number of Option Shares issued at the Option
Closing as the Callable Warrants and Class A Warrants issued hereunder on the
Closing Date bear to the number of Common Shares issued hereunder on the Closing
Date; provided that the Callable Warrants shall have an initial exercise price
(subject to adjustment as provided therein) equal to 120% of the average of the
closing bid prices of the Common Stock (as reported on Nasdaq or other market on
which the Common Stock is principally traded) for the five (5) Trading Days
immediately preceding the date of the Option Notice for such Option Closing
(which initial exercise price shall not in any case be less than the initial
exercise price of the Callable Warrant issued on the Closing Date (subject to
appropriate adjustment for any stock splits, recapitalizations or similar
events). All Option Shares and shares of Common Stock underlying any Callable
Warrants and Class A Warrants issued at an Option Closing shall have the same
registration rights, and shall be subject to the same terms, conditions and
obligations, as provided in the Registration Rights Agreement, and upon each
Option Closing the Company shall enter into a new or supplemental registration
rights agreement covering all such securities in the same form as the
Registration Rights Agreement. All Option Shares and shares of Common Stock
underlying any Callable Warrants and Class A Warrants
17
issued at an Option Closing, and the holders thereof, shall have the same
rights, and shall be subject to the same terms, conditions and obligations, as
provided in this Agreement and each such holder shall be deemed to be a Buyer
for all purposes hereunder. At each Option Closing, the Company shall execute
and deliver all documents reasonably requested by Millennium, including without
limitation, to the extent so requested, a new subscription agreement in the same
form as this Agreement and the documents referred to in Sections 8(c), 8(d) and
8(e) below with reference to such Option Closing instead of the Closing
hereunder. The Company shall at all times during the period that this option is
exercisable have duly reserved a sufficient number of shares of Common Stock to
satisfy in full the option hereunder at such time.
(d) (i) Notwithstanding anything to the contrary contained herein, the
number of Option Shares that may be acquired by the Buyer shall not exceed a
number that, when added to the total number of shares of Common Stock deemed
beneficially owned by the Buyer (other than by virtue of the ownership of
securities or rights to acquire securities that have limitations on the Buyer's
right to convert, exercise or purchase similar to the limitation set forth
herein), together with all shares of Common Stock deemed beneficially owned
(other than by virtue of the ownership of securities or rights to acquire
securities that have limitation set forth herein) by the Buyer's "affiliates"
(as defined in Rule 144 of the Securities Act) ("Aggregation Parties"), that
would be aggregated for purposes of determining whether a group under Section
13(d) of the Securities Exchange Act of 1934, as amended, exists would exceed
9.99% of the total issued and outstanding shares of the Common Stock (the
"Restricted Ownership Percentage"). The Buyer shall have the right (w) at any
time and from time to time to reduce its Restricted Ownership Percentage
immediately upon notice to the Company and (x) (subject to waiver) at any time
and from time to time, to increase its Restricted Ownership Percentage
immediately in the event of the announcement as pending or planned, of a merger
or consolidation of the Company, a sale of all or substantially all of the
assets of the Company or the acquisition by any third party (and/or such party's
Aggregation Parties) of at least 51% of the Company's outstanding Common Stock.
(ii) The Buyer covenants at all times on each day (each such day being
referred to as a "Covenant Day") as follows: during the balance of such Covenant
Day and the succeeding sixty-one (61) days (the balance of such Covenant Day and
the succeeding 61 days being referred to as the "Covenant Period") the Buyer
will not acquire shares of Common Stock pursuant to any right (including
exercise of this option) existing at the commencement of the Covenant Period to
the extent the number of shares so acquired by the Buyer and its Aggregation
Parties (ignoring all dispositions) would exceed:
(x) the Restricted Ownership Percentage of the
total number of shares of Common Stock
outstanding at the commencement of the
Covenant Period; MINUS
(y) the number of share of Common Stock owned
by the Buyer and its Aggregation Parties
at the commencement of the Covenant
Period.
A new and independent covenant will be deemed to be given by the Buyer
as of each moment of each Covenant Day. No covenant will terminate, diminish or
modify any other covenant. The Buyer agrees to comply with each such covenant.
18
The Company's obligation to issue shares of Common Stock which would
exceed such limits shall be suspended to the extent necessary until such time,
if any, as shares of Common Stock may be issued in compliance with such
restrictions.
(iii) Notwithstanding anything contained herein, unless shareholder
approval is obtained in accordance with the Shareholder Approval Rule, or the
Common Stock is no longer listed or quoted on a market subject to the
Shareholder Approval Rule or an equivalent rule, the Company shall not issue
shares of Common Stock hereunder to the extent that the total number of shares
of Common Stock issued to the Buyer under this Agreement (including the
Warrants) would exceed 3,902,081 (as such number shall be appropriately adjusted
for any stock splits, recapitalizations or similar events).
6. CLOSING DATE.
Subject to the satisfaction or waiver of the conditions set forth in
Sections 7 and 8, the date and time of the issuance and sale of the Common
Shares and the issuance of the Warrants shall be 12:00 noon, New York City time,
on the Closing Date.
7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL - AND ISSUE.
The Buyer understands that the Company's obligation to sell the Common
Shares and issue the Warrants to the Buyer pursuant to this Agreement is
conditioned upon the satisfaction of the following conditions precedent on or
before the Closing Date (any or all of which may be waived by the Company in its
sole discretion):
(a) The receipt and acceptance by the Company of this Agreement as
evidenced by execution of this Agreement by the Company and delivery of an
executed counterpart of this Agreement to the Buyer or its legal counsel;
(b) Delivery by the Buyer to the Company of good funds for payment of
75% of the Purchase Price for the Common Shares in accordance with Section 1(b)
hereof; and
(c) The accuracy in all material respects on the Closing Date of the
representations and warranties of the Buyer contained in this Agreement as if
made on the Closing Date and the performance by the Buyer on or before the
Closing Date of all covenants and agreements of the Buyer required to be
performed on or before the Closing Date, and receipt by the Company of a
certificate, dated the Closing Date, of a duly authorized signatory of the Buyer
confirming such matters and such other matters as the Company may reasonably
request.
8. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the
Common Shares and acquire the Warrants on the Closing Date is conditioned upon
the satisfaction of the following conditions precedent on or before the Closing
Date (any or all of which may be waived by the Buyer in its sole discretion):
19
(a) The receipt and acceptance by the Buyer of this Agreement as
evidenced by execution of this Agreement by the Buyer and delivery of an
executed counterpart of this Agreement to the Company or its legal counsel;
(b) Delivery by the Company to the Buyer (or its counsel) of the
certificates for the Common Shares, the Callable Warrants and the Class A
Warrants in accordance with this Agreement;
(c) The accuracy in all material respects on the Closing Date of the
representations and warranties of the Company contained in this Agreement as if
made on the Closing Date and the performance by the Company on or before the
Closing Date of all covenants and agreements of the Company required to be
performed on or before the Closing Date, and receipt by the Buyer of a
certificate, dated the Closing Date, of the Chief Executive Officer of the
Company confirming such matters and such other matters as the Buyer may
reasonably request;
(d) The receipt by the Buyer of a certificate, dated the Closing Date,
of the Secretary of the Company certifying (1) the Certificate of Incorporation,
as amended, and By-Laws of the Company as in effect on the Closing Date and (2)
all resolutions of the Board of Directors (and committees thereof) of the
Company relating to this Agreement and the transactions contemplated hereby;
(e) Receipt by the Buyer on the Closing Date of an opinion of Ropes &
Gray, dated the Closing Date, in such form, scope and substance reasonably
satisfactory to the Buyer, to the effect set forth in ANNEX IV attached hereto.
(f) From the date hereof to the Closing Date, trading in the Company's
Common Stock shall not have been suspended by the SEC and trading in securities
generally as reported by Nasdaq shall not have been suspended or limited, and
the Common Stock shall be listed on Nasdaq.
(g) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction which prohibits the
consummation of any of the transactions contemplated by this Agreement, the
Warrants or the Registration Rights Agreement. The NASD shall not have objected
or indicated that it may object to the consummation of any of the transactions
contemplated by this Agreement.
(h) The Company and the Buyer shall have executed and delivered the
Registration Rights Agreement.
(i) The Company shall have delivered to the Buyer such other documents
relating to the transactions contemplated by this Agreement as the Buyer or its
counsel may reasonably request.
20
9. MISCELLANEOUS.
(a) GOVERNING LAW. The corporate laws of the State of Delaware shall
govern all issues concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. Each party
hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the City of New York, borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such party
at the address in effect for notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.
(b) COUNTERPARTS. This Agreement may be executed in counterparts and by
the parties hereto on separate counterparts, all of which together shall
constitute one and the same instrument. A facsimile transmission of this
Agreement bearing a signature on behalf of a party hereto shall be legal and
binding on such party. Although this Agreement is dated as of the date first set
forth above, the actual date of execution and delivery of this Agreement by each
party is the date set forth below such party's signature on the signature page
hereof. Any reference in this Agreement or in any of the documents executed and
delivered by the parties hereto in connection herewith to (1) the date of
execution and delivery of this Agreement by the Buyer shall be deemed a
reference to the date set forth below the Buyer's signature on the signature
page hereof, (2) the date of execution and delivery of this Agreement by the
Company shall be deemed a reference to the date set forth below the Company's
signature on the signature page hereof and (3) the date of execution and
delivery of this Agreement or the date of execution and delivery of this
Agreement by the Buyer and the Company shall be deemed a reference to the later
of the dates set forth below the signatures of the parties on the signature page
hereof.
(c) HEADINGS, ETC. The headings, captions and footers of this Agreement
are for convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
(d) SEVERABILITY. If any provision of this Agreement shall be invalid
or unenforceable in any jurisdiction, such invalidity or unenforceability shall
not affect the validity or enforceability of the remainder of this Agreement or
the validity or enforceability of this Agreement in any other jurisdiction.
(e) AMENDMENTS. No amendment, modification, waiver, discharge or
termination of any provision of this Agreement nor consent to any departure by
the Buyer or the Company therefrom shall in any event be effective unless the
same shall be in writing and signed by the party to be charged with enforcement,
and then shall be effective only in the specific instance and for the purpose
for which given. No course of dealing between the parties hereto shall operate
as an amendment of this Agreement.
21
(f) WAIVERS. Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, or any course of dealings between the parties, shall not operate as a
waiver thereof or an amendment hereof, nor shall any single or partial exercise
of any such right or power, or any abandonment or discontinuance of steps to
enforce such a right or power, preclude any other or further exercise thereof or
exercise of any other right or power.
(g) NOTICES. Any notices required or permitted to be given under the
terms of this Agreement shall be delivered personally (which shall include
telephone line facsimile transmission with answer back confirmation) or by
courier and shall be effective upon receipt, in the case of the Company
addressed to the Company at its address shown in the introductory paragraph of
this Agreement, Attention: Chief Executive Officer (telephone line facsimile
transmission number (408) 731-8674, with a copy to Ropes & Gray, One
International Place, Boston, Massachusetts, 02110, Attention: Geoffrey B. Davis,
Esq., (facsimile number (617) 951-7050), or, in the case of the Buyer, at its
address or telephone line facsimile transmission number shown on the signature
page of this Agreement, with a copy to Kleinberg, Kaplan, Wolff & Cohen, P.C.,
551 Fifth Avenue, New York, New York 10176, Attn: Martin D. Sklar, Esq.
(facsimile number (212) 986-8866) or such other address or telephone line
facsimile transmission number as a party shall have provided by notice to the
other party in accordance with this provision.
(h) ASSIGNMENT. Prior to the Closing Date, the Buyer may not assign its
rights and obligations under this Agreement. Any transfer of the Shares or the
Warrants by the Buyer after the Closing Date shall be made in accordance with
Section 4. After the Closing Date, the Buyer shall have the right to assign its
rights and obligations under this Agreement in connection with any transfer of
the Securities upon execution by any transferee of an instrument reasonably
satisfactory to the Company pursuant to which the transferee agrees with the
Company to be bound as a Buyer by the terms and conditions of this Agreement.
(i) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The respective
representations, warranties, covenants and agreements of the Buyer and the
Company contained in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement shall survive the delivery of and
payment for the Common Shares and shall remain in full force and effect
regardless of any investigation made by or on behalf of them or any person
controlling or advising any of them.
(j) ENTIRE AGREEMENT. This Agreement and its Schedules and Annexes set
forth the entire agreement between the parties hereto with respect to the
subject matter hereof and supersede all prior agreements and understandings,
whether written or oral, with respect thereto.
(k) TERMINATION. Either party shall have the right to terminate this
Agreement by giving notice to the other party at any time at or prior to the
Closing Date if:
(i) the other party shall have failed, refused, or been unable
at or prior to the date of such termination of this Agreement to
perform any of its obligations hereunder the performance of which was
due at the time of termination;
22
(ii) any other condition of the terminating party's
obligations hereunder is not fulfilled at the time such condition was
to be fulfilled; or
(iii) the closing shall not have occurred on a Closing Date on
or before August 3, 2000, other than solely by reason of a breach of
this Agreement by the terminating party.
Any such termination shall be effective upon the giving of notice thereof by the
terminating party. Upon such termination, neither party shall have any further
obligation to the other party hereunder; provided, however, that nothing herein
shall relieve a breaching party of any liability it may have to the other party
as a result of such breach.
(l) FURTHER ASSURANCES. Each party to this Agreement will perform any
and all acts and execute any and all documents as may be necessary and proper
under the circumstances in order to accomplish the intents and purposes of this
Agreement and to carry out its provisions.
(m) PUBLIC STATEMENTS, PRESS RELEASES, ETC. The Company and the Buyer
shall have the right to approve before issuance any press releases or any other
public statements with respect to the transactions contemplated hereby;
PROVIDED, HOWEVER, that the Company shall be entitled, without the prior
approval of the Buyer, to make any press release or other public disclosure with
respect to such transactions as is required by applicable law or Nasdaq
regulation (although the Buyer shall be consulted by the Company in connection
with any such press release or other public disclosure prior to its release and
shall be provided with a copy thereof).
(n) CONSTRUCTION. The language used in this Agreement will be deemed to
be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.
(o) INDEMNIFICATION. In consideration of the Buyer's execution and
delivery of the this Agreement and the Registration Rights Agreement and
acquiring the Common Shares hereunder and in addition to all of the Company's
other obligations under this Agreement or the transaction documents contemplated
hereby, the Company shall defend, protect, indemnify and hold harmless the Buyer
and all of its partners, officers, directors, employees, members and direct or
indirect investors and any of the foregoing person's agents or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement) (collectively, the
"INDEMNITEES") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Indemnitee is a party to
the action for which indemnification hereunder is sought), and including
reasonable attorneys' fees and disbursements (the "INDEMNIFIED LIABILITIES"),
incurred by any Indemnitee as a result of, or arising out of, or relating to (a)
any misrepresentation or breach of any representation or warranty made by the
Company in this Agreement or the other transaction documents contemplated hereby
or any other certificate or document contemplated hereby or thereby, (b) any
breach of any covenant, agreement or obligation of the Company contained in this
Agreement or the other transaction documents contemplated herein or any other
certificate or document contemplated hereby or thereby, (c) any cause of action,
suit or claim brought or made against such Indemnitee
23
by a third party and arising out of or resulting from (i) the execution,
delivery, performance, breach by the Company or enforcement of this Agreement or
the other transaction documents contemplated hereby or any other certificate,
instrument or document contemplated hereby or thereby, (ii) any transaction
financed or to be financed in whole or in part, directly or indirectly, with the
proceeds of the issuance of the Shares or (iii) the status of the Buyer or
holder of the Shares or Warrants as an investor in the Company and (d) the
enforcement of this Section. Notwithstanding the foregoing, Indemnified
Liabilities shall not include any liability of any Indemnitee arising solely out
of such Indemnitee's gross negligence, willful misconduct or fraudulent
action(s). To the extent that the foregoing undertaking by the Company may be
unenforceable for any reason, the Company shall make the maximum contribution to
the payment and satisfaction of each of the Indemnified Liabilities which is
permissible under applicable law. Except as otherwise set forth herein, the
mechanics and procedures with respect to the rights and obligations under this
section shall be the same as those set forth in the Registration Rights
Agreement, including, without limitation, those procedures with respect to the
settlement of claims and Company's right to assume the defense of claims.
[SIGNATURE PAGE FOLLOWS]
24
IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer
and the Company by their respective officers or other representatives thereunto
duly authorized on the respective dates set forth below.
NUMBER OF SHARES: 923,521
PRICE PER SHARE: $4.33125
AGGREGATE PURCHASE PRICE: $4,000,000.00
MILLENNIUM PARTNERS, LP
By:
------------------------------
Name:
Title:
Date: As of July 31, 2000
Address: 666 Fifth Avenue
New York, New York 10103
Facsimile: (212) 841-6302
STEMCELLS, INC.
By:
------------------------------
Name:
Title:
Date: As of July 31, 2000
25
SCHEDULES
Disclosure Schedule
ANNEXES
Annex I Form of Callable Warrant
Annex II Form of Common Stock Purchase Warrant, Class A
Annex III Form of Registration Rights Agreement
Annex IV Form of Opinion of Counsel to Be Delivered on Closing Date
26
Exhibit 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 14, 2000 in the Registration Statement
(Form S-1 No. 333- ) and related Prospectus of StemCells, Inc.
(formerly CytoTherapeutics, Inc.) for the registration of 3,205,486 shares of
its common stock.
Providence, Rhode Island
September 7, 2000
