AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 8, 1997 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- AASTROM BIOSCIENCES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MICHIGAN 2834 94-3096597 (PRIMARY STANDARD (IRS EMPLOYER (STATE OR OTHER INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.) JURISDICTION OF CODE NUMBER) INCORPORATION OR --------------- ORGANIZATION) 24 FRANK LLOYD WRIGHT DRIVE P.O. BOX 376 ANN ARBOR, MICHIGAN 48106 (313) 930-5555 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------- R. DOUGLAS ARMSTRONG, PH.D. PRESIDENT AND CHIEF EXECUTIVE OFFICER AASTROM BIOSCIENCES, INC. 24 FRANK LLOYD WRIGHT DRIVE P.O. BOX 376 ANN ARBOR, MICHIGAN 48106 (313) 930-5555 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) --------------- COPIES TO: T. KNOX BELL, ESQ. RICHARD R. PLUMRIDGE, ESQ. DOUGLAS J. REIN, ESQ. BROBECK PHLEGER & HARRISON LLP DAVID R. YOUNG, ESQ. 1633 BROADWAY GRAY CARY WARE & FREIDENRICH NEW YORK, NEW YORK 10019 A PROFESSIONAL CORPORATION (212) 581-1600 4365 EXECUTIVE DRIVE, SUITE 1600 SAN DIEGO, CALIFORNIA 92121 (619) 677-1400 --------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is to be filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Estimated solely for the purpose of computing the registration fee. (2) Computed pursuant to Rule 457(c) based upon the average high and low sale prices reported on the Nasdaq National Market on October 3, 1997. --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT PROPOSED MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE(2) - ------------------------------------------------------------------------------- Common Stock, No Par Val- ue...................... 1,500,000 $7.125 $10,687,500 $3,239 ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ PROSPECTUS (SUBJECT TO COMPLETION) DATED OCTOBER 8, 1997 1,500,000 SHARES [Logo] ASTROM BIOSCIENCES INC ==================== COMMON STOCK All of the shares of Common Stock, no par value per share (the "Common Stock"), offered hereby are being sold by Aastrom Biosciences, Inc. ("Aastrom" or the "Company"). The Common Stock is traded on the Nasdaq National Market under the symbol "ASTM." On October 3, 1997, the last reported sale price of the Common Stock on the Nasdaq National Market was $7.00 per share. See "Price Range of Common Stock." THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) The shares of Common Stock offered hereby are being offered, on an all or none basis, directly by the Company principally to selected institutional investors. Cowen & Company (the "Placement Agent") has been retained to act, on a best efforts basis, on behalf of the Company in connection with the arrangement of this transaction. The Company has agreed (i) to pay the Placement Agent a fee in connection with the arrangement of this financing, and (ii) to indemnify the Placement Agent against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Plan of Distribution." (2) The termination date of this offering is , 1997, subject to extension at the discretion of the Placement Agent to , 1997, and thereafter by the mutual agreement of the Company and the Placement Agent. Prior to the closing of this offering, all investor funds will be placed in escrow with , as escrow agent (the "Escrow Agent"), in an escrow account established for the benefit of the investors. Upon receipt of notice from the Escrow Agent that investors have deposited the requisite funds in the escrow account for the purchase of the shares of Common Stock offered hereby, the Company will deposit with The Depository Trust Company the shares of Common Stock to be credited to the accounts of the investors and will collect the investor funds from the Escrow Agent. In the event that investor funds are not received in the full amount necessary to satisfy the requirements of this offering, all funds deposited in the escrow account will be returned promptly to the investors. See "Plan of Distribution." (3)Before deducting expenses payable by the Company, estimated to be $350,000. COWEN & COMPANY , 1997
PROCEEDS TO PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)(3) - -------------------------------------------------------------------------------- Per Share.......................... $ $ $ - -------------------------------------------------------------------------------- Total.............................. $ $ $ [COLOR PHOTOGRAPH OF A PROTOTYPE OF THE AASTROM CPS WITH A CLINICIAN INNOCULATING CELLS] A prototype of the Aastrom CPS is currently being used in clinical trials and ongoing development activities are directed at completing production level components of the Aastrom CPS. The Company may not market the Aastrom CPS unless and until FDA and other necessary regulatory approvals are received. PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Prospective investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY Aastrom Biosciences, Inc. is developing proprietary process technologies and devices for a range of cell therapy applications, including stem cell therapies and selected emerging therapies such as immunotherapy, solid tissue repair and ex vivo gene therapy. The Company's lead product under development, the Aastrom Cell Production System (the "Aastrom CPS"), consists of a clinical cell culture system with single-use cassettes and reagents for use in the rapidly growing cell therapy market. The Company is currently conducting pre-pivotal trials at multiple sites in the United States and Europe of the Aastrom CPS for use in stem cell therapy in preparation for pivotal trials in the United States and potential marketing in Europe. The Company believes that the Aastrom CPS method will be a cost-effective, less invasive and less time consuming alternative to currently available stem cell collection methods and may enhance the clinical utility of umbilical cord blood ("UCB") transplants by expanding the number of cells available for transplant. For stem cell therapy, the Company has entered into a strategic collaboration for the marketing, distribution and customer service of the Aastrom CPS with Cobe BCT, Inc., a subsidiary of Gambro AB and a leading provider of blood cell processing products. The Aastrom CPS is designed as a platform product which implements the Company's pioneering stem cell replication technology. The Company also believes that the Aastrom CPS can be modified to produce a wide variety of other cell types for selected emerging therapies being developed by other companies and institutions. The Company intends to develop additional strategic collaborations for the development of the Aastrom CPS in certain of these other cell therapy market segments. In ex vivo gene therapy, the Company is also developing the Aastrom Gene Loader, which is being designed to address the production of gene-modified cells. Stem cell therapy is a rapidly growing form of cell therapy used to restore blood and immune system function to cancer patients following chemotherapy or radiation therapy. According to an industry source, approximately 32,000 stem cell therapy procedures were completed worldwide in 1995, and, according to another industry source, the number of such procedures utilizing donor-derived and patient-derived cells has been growing annually by approximately 15% and 20%, respectively. Other novel applications of stem cell therapy are under development by third parties, which include the treatment of autoimmune diseases and augmenting recipient acceptance of organ transplants. Current stem cell collection methods, including bone marrow harvest and peripheral blood progenitor cell mobilization, are costly, invasive and time-consuming for both medical personnel and patients. Technologies which facilitate a more readily available source of cells may contribute to additional growth in cell therapy procedures. UCB is emerging as a new source of cells for stem cell therapy, offering additional market opportunity, although the more widespread use of UCB transplants has been restricted by cell quantity limitations, which the Company believes may ultimately be addressed by the Aastrom CPS. The Company believes that the Aastrom CPS will offer significant advantages over traditional stem cell collection methods. The Aastrom CPS is intended to be used to produce cells used for therapy from a small starting volume of bone marrow cells. Compared with current methods of harvest and infusion, the Aastrom CPS is expected to involve two patient care episodes rather than approximately eight to 21 care episodes and less than three hours of patient procedure time rather than approximately 16 to 39 hours of patient procedure time. The Aastrom CPS may also permit higher and more frequent doses of chemotherapy to be administered to cancer patients by enabling the production of multiple doses of cells from patient samples taken at the initial collection. Further, in an evaluation of seven tumor-contaminated bone marrow samples that were expanded with the Aastrom CPS process, the presence of breast cancer cells in each sample was either substantially reduced or was no longer detectable. The Company believes that the combination of passive depletion during culture with the lower starting volume of tumor cells may result in a tumor-free or tumor-reduced cell product for transplant. 3 Aastrom is currently conducting a pre-pivotal stem cell therapy clinical trial in patients with Stage II, III and IV breast cancer at four U.S. sites. This clinical trial is designed to demonstrate that cells produced using the Aastrom CPS can provide hematopoietic recovery in accordance with trial endpoints in such patients who have received myeloablative chemotherapy. Pending a positive outcome of this and other related trials, the Company intends to seek FDA approval to begin a multi-center pivotal trial for use of the Aastrom CPS in stem cell therapy. It is anticipated that the results of this pivotal trial will be used to support the Company's Pre-Market Approval ("PMA") submission to the FDA. The Company has also initiated two clinical sites in Europe. The Company may not market the Aastrom CPS in the United States for stem cell therapy unless and until FDA and other necessary regulatory approvals are received and in Europe until CE Mark Registration is obtained. For UCB transplants, the Aastrom CPS is intended to be used to enable production of more effective therapeutic doses of cells, which would otherwise not be available with the small volume of UCB typically available. The Company has initiated, under an IDE received from the FDA, a multiple-site U.S. clinical trial for UCB expansion and transplantation in adult and pediatric patients. The Company's business strategy is to: (i) establish a consumable-based business model; (ii) focus initially on the currently-reimbursed stem cell therapy market; (iii) leverage Aastrom's cell production technology across multiple cell therapy market opportunities; and (iv) establish multiple strategic collaborations. For stem cell therapy, Aastrom has entered into a strategic collaboration with Cobe BCT to be the Company's exclusive worldwide marketing, distribution and service provider for the Aastrom CPS. In 1993, the Company entered into a series of agreements, pursuant to which Cobe BCT purchased an aggregate of $20,000,000 of the Company's equity securities and acquired the worldwide distribution rights to the Aastrom CPS for stem cell therapy. Under the terms of the collaboration, Aastrom retains manufacturing rights and 58% to 62% of all revenue generated by Cobe BCT's sale of the Aastrom CPS, subject to the Company's obligation to make certain royalty payments. Aastrom also retains all marketing and distribution rights to the Aastrom CPS for other cell types and ex vivo gene therapy applications, including stem cells. The Company has exclusive rights to twelve issued U.S. patents, including patents relating to production methods and composition of matter for stem and progenitor cells and the genetic modification of stem and other cell types, as well as patents for cell culture devices for human cells. 4 THE OFFERING Common Stock offered...................... 1,500,000 shares Common Stock to be outstanding after this 14,772,674 shares(1) offering................................. Use of proceeds........................... For the development and manufacture of the Aastrom CPS for use in clinical trials, expanded clinical trials, research and development of other product candidates, working capital and other general corporate purposes. Nasdaq National Market symbol............. ASTM SUMMARY FINANCIAL DATA
YEAR ENDED JUNE 30, ---------------------------------------------------------------- 1993 1994 1995 1996 1997 ----------- ----------- ----------- ----------- ------------ STATEMENT OF OPERATIONS DATA: Total revenues.......... $ 784,000 $ 872,000 $ 517,000 $ 1,609,000 $ 378,000 Costs and expenses: Research and develop- ment.................. 2,600,000 5,627,000 4,889,000 10,075,000 13,357,000 General and administra- tive.................. 1,153,000 1,565,000 1,558,000 2,067,000 1,953,000 ----------- ----------- ----------- ----------- ------------ Total costs and ex- penses............... 3,753,000 7,192,000 6,447,000 12,142,000 15,310,000 Other income, net....... 122,000 180,000 213,000 616,000 644,000 ----------- ----------- ----------- ----------- ------------ Net loss................ $(2,847,000) $(6,140,000) $(5,717,000) $(9,917,000) $(14,288,000) =========== =========== =========== =========== ============ Net loss per share(2)... $ (.52) $ (.82) $ (.66) $ (.98) $ (1.26) =========== =========== =========== =========== ============ Weighted average number of shares outstanding(2)......... 5,480,000 7,461,000 8,644,000 10,103,000 11,315,000 =========== =========== =========== =========== ============ - -------- (1) Excludes options and warrants outstanding as of June 30, 1997 to purchase 1,127,815 of Common Stock at a weighted average exercise price of $5.40 per share. Also excludes 15,711 shares which were canceled in September 1997 in connection with the repayment of a promissory note. See "Management--Stock Option and Employee Benefit Plans," "Certain Transactions" and Note 4 of Notes to Financial Statements. (2) See Note 1 of Notes to Financial Statements for information concerning the computation of net loss per share and shares used in computing net loss per share. (3) Adjusted to reflect the sale by the Company of 1,500,000 shares of Common Stock offered hereby at an assumed public offering price of $7.00 per share, after deduction of commissions and estimated offering expenses. See "Use of Proceeds" and "Capitalization." 5
JUNE 30, 1997 ---------------------------- ACTUAL AS ADJUSTED(3) ------------ -------------- BALANCE SHEET DATA: Cash, cash equivalents and short-term invest- ments........................................... $ 17,007,000 $26,527,000 Working capital.................................. 15,600,000 25,120,000 Total assets..................................... 18,410,000 27,930,000 Deficit accumulated during the development stage. (41,313,000) (41,313,000) Total shareholders' equity....................... 16,583,000 26,103,000 RISK FACTORS In addition to the other information in this Prospectus, prospective investors should consider the following risk factors in evaluating the Company and its business before purchasing any of the Common Stock offered hereby. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed below. UNCERTAINTIES RELATED TO PRODUCT DEVELOPMENT AND MARKETABILITY The Company has not completed the development or clinical trials of any of its cell culture technologies or product candidates and, accordingly, has not begun to market or generate revenue from their commercialization. Furthermore, the Company's technologies and product candidates are based on cell culture processes and methodologies which are not widely employed. Commercialization of the Company's lead product candidate, the Aastrom CPS, will require substantial additional research and development by the Company as well as substantial clinical trials. There can be no assurance that the Company will successfully complete development of the Aastrom CPS or its other product candidates, or successfully market its technologies or product candidates, which lack of success would have a material adverse effect on the Company's business, financial condition and results of operations. The Company or its collaborators may encounter problems and delays relating to research and development, regulatory approval and intellectual property rights of the Company's technologies and product candidates. There can be no assurance that the Company's research and development programs will be successful, that its cell culture technologies and product candidates will facilitate the ex vivo production of cells with the expected biological activities in humans, that its technologies and product candidates, if successfully developed, will prove to be safe and efficacious in clinical trials, that the necessary regulatory approvals for any of the Company's technologies or product candidates and the cells produced in such products will be obtained or, if obtained, will be as broad as sought, that patents will issue on the Company's patent applications or that the Company's intellectual property protections will be adequate. The Company's product development efforts are primarily directed toward obtaining regulatory approval to market the Aastrom CPS as an alternative to the bone marrow harvest and peripheral blood progenitor cell ("PBPC") stem cell collection methods. These stem cell collection methods have been widely practiced for a number of years, and there can be no assurance that any of the Company's technologies or product candidates will be accepted by the marketplace as readily as these or other competing processes and methodologies, or at all. The failure by the Company to achieve any of the foregoing would have a material adverse effect on the Company's business, financial condition and results of operations. UNCERTAINTIES RELATED TO CLINICAL TRIALS The approval of the U.S. Food and Drug Administration (the "FDA") will be required before any commercial sales of the Company's product candidates may commence in the United States, and approvals from foreign regulatory authorities will be required before international sales may commence. Prior to obtaining necessary regulatory approvals, the Company will be required to demonstrate the safety and efficacy of its processes and product candidates and the cells produced by such processes and in such products for application in the treatment of humans through extensive preclinical studies and clinical trials. The Company is currently conducting pre-pivotal clinical trials to demonstrate the safety and biological activity of patient-derived or UCB cells produced in the Company's prototype of the Aastrom CPS in a limited number of patients with breast cancer. If the results from these pre-pivotal trials are successful, the Company intends to seek clearance from the FDA to commence pivotal clinical trials. The results of preclinical studies and clinical trials of the Company's product candidates, however, may not necessarily be predictive of results that will be obtained from subsequent or more extensive clinical trials. Further, there can be no assurance that pre-pivotal or pivotal clinical trials of any of the Company's product candidates will demonstrate the safety, reliability and efficacy of such products, or of the cells produced in such products, to the extent necessary to obtain required regulatory approvals or market acceptance. 6 The ability of the Company to complete its clinical trials in a timely manner is dependent upon many factors, including the rate of patient enrollment. Patient enrollment is a function of many factors, including the size of the patient population, the proximity of suitable patients to clinical sites and the eligibility criteria for the study. The Company has experienced delays in patient accrual in its current pre-pivotal clinical trials. Further delays in patient accrual, in the Company's current pre-pivotal clinical trials or in future clinical trials, could result in increased costs associated with clinical trials or delays in receiving regulatory approvals and commercialization, if any. Furthermore, the progress of clinical investigations with the Aastrom CPS and the Company's other product candidates will be monitored by the FDA, which has the authority to cease clinical investigations, at any time, due to patient safety or other considerations. Any of the foregoing would have a material adverse effect on the Company's business, financial condition and results of operations. See "--Uncertainty of Regulatory Approval; Extensive Government Regulation." The Company's current pre-pivotal trials are designed to demonstrate specific biological safety and activity of cells produced in the Aastrom CPS, but is not designed to demonstrate long-term sustained engraftment of such cells. The patients enrolled in this pre-pivotal trial will have undergone extensive chemotherapy treatment prior to the infusion of cells produced in the Aastrom CPS. Such treatments will have substantially weakened these patients and may have irreparably damaged their hematopoietic systems. Due to these and other factors, it is possible that one or more of these patients may die or suffer severe complications during the course of the pre-pivotal trial. Further, there can be no assurance that patients receiving cells produced with the Company's technologies and product candidates will demonstrate long-term engraftment in a manner comparable to cells obtained from current stem cell therapy procedures, or at all. The failure to adequately demonstrate the safety or efficacy of the Company's technologies and product candidates, including long-term sustained engraftment, or the death of, or occurrence of severe complications in, one or more patients could substantially delay, or prevent, regulatory approval of such product candidates and have a material adverse effect on the Company's business, financial condition and results of operations. MANUFACTURING AND SUPPLY UNCERTAINTIES; DEPENDENCE ON THIRD PARTIES The Company does not operate and has no current intention to operate manufacturing facilities for the production of its product candidates. The Company currently arranges for the manufacture of its product candidates and their components, including certain cytokines, serum and media, with third parties, and expects to continue to do so in the foreseeable future. The Company has entered into collaborative product development and supply agreements with SeaMED Corporation ("SeaMED"), Ethox Corporation ("Ethox") and Anchor Advanced Products Inc., Mid-State Plastics Division ("MSP"), for the collaborative development and manufacture of certain components of the Aastrom CPS and is dependent upon those suppliers to manufacture its products. The Company is also dependent upon Immunex Corporation ("Immunex"), Life Technologies, Inc. and Biowhittaker for the supply of certain cytokines, serum and media to be used in conjunction with the Aastrom CPS. With regard to cytokines that are not commercially available from other sources, Immunex is currently the Company's sole supplier and few alternative supply sources exist. Apart from SeaMED, Ethox, MSP and Immunex, the Company currently does not have contractual commitments from any of these manufacturers or suppliers. There can be no assurance that the Company's supply of such key cytokines, components and other materials will not become limited, be interrupted or become restricted to certain geographic regions. Additionally, there can be no assurance that the Company will not require additional cytokines, components and other materials to manufacture, use or market its product candidates, or that necessary key components will be available for use on a sustained basis, if at all, by the Company in the markets in which it intends to sell its products. There can also be no assurance that the Company will be able to obtain alternative components and materials from other manufacturers of acceptable quality, or on terms or in quantities acceptable to the Company or that the Company will not require additional cytokines, components and other materials to manufacture or use its product candidates. In the event that any of the Company's key manufacturers or suppliers fail to perform their respective obligations or the Company's supply of such cytokines, components or other materials become limited or interrupted, the Company would not be able to market its product candidates on a timely and cost-competitive basis, if at all, which would have a material adverse effect on the Company's business, financial condition and results of operations. 7 Certain of the compounds used by the Company in its current stem cell expansion process involve the use of animal-derived products. The availability of these compounds for clinical and commercial use may become limited by suppliers or restricted by regulatory authorities, which may impose a potential competitive disadvantage for the Company's products compared to competing products and procedures. There can be no assurance that the Company will not experience delays or disadvantages related to the future availability of such materials. Any restriction on the use of such materials could have a material adverse effect on the Company's business, financial condition and results of operations, and there can be no assurance that the Company will be able to develop or obtain alternative compounds. Like SeaMED, Ethox and MSP, other suppliers would need to meet FDA manufacturing requirements and undergo rigorous facility and process validation tests required by federal and state regulatory authorities. Any significant delays in the completion and validation of such facilities could have a material adverse effect on the ability of the Company to complete clinical trials and to market its products on a timely and profitable basis, which in turn would have a material adverse effect on the Company's business, financial condition and results of operations. There can also be no assurance that the Company will be able to continue its present arrangements with its suppliers, supplement existing relationships or establish new relationships or that the Company will be able to identify and obtain the ancillary materials that are necessary to develop its product candidates in the future. The Company's dependence upon third parties for the supply and manufacture of such items could adversely affect the Company's ability to develop and deliver commercially feasible products on a timely and competitive basis. HISTORY OF OPERATING LOSSES; ANTICIPATION OF FUTURE LOSSES The Company is a development stage company and there can be no assurance that its product applications for cell therapy will be successful. The Company has not yet completed the development and clinical trials of any of its product candidates and, accordingly, has not yet begun to generate revenues from the commercialization of any of its product candidates. Aastrom was incorporated in 1989 and has experienced substantial operating losses since inception. As of June 30, 1997, the Company has incurred net operating losses totaling approximately $41.3 million. Such losses have resulted principally from costs incurred in the research and development of the Company's cell culture technologies and the Aastrom CPS, general and administrative expenses, and the prosecution of patent applications. The Company expects to incur significant and increasing operating losses for at least the next several years, primarily owing to the expansion of its research and development programs, including preclinical studies and clinical trials. The amount of future losses and when, if ever, the Company will achieve profitability, are uncertain. The Company's ability to achieve profitability will depend, among other things, on successfully completing the development of its product candidates, obtaining regulatory approvals, establishing manufacturing, sales and marketing arrangements with third parties, and raising sufficient funds to finance its activities. No assurance can be given that the Company's product development efforts will be successful, that required regulatory approvals will be obtained, that any of the Company's product candidates will be manufactured at a competitive cost and will be of acceptable quality, or that the Company will be able to achieve profitability or that profitability, if achieved, can be sustained. LIMITED SALES AND MARKETING CAPABILITIES; DEPENDENCE ON COLLABORATIVE RELATIONSHIPS The Company has limited internal sales, marketing and distribution capabilities. If any of the Company's product candidates are successfully developed and the necessary regulatory approvals are obtained, the Company intends to market such products through collaborative relationships with companies that have established sales, marketing and distribution capabilities. The Company has established a strategic alliance with Cobe Laboratories, Inc. and Cobe BCT, Inc. (collectively, "Cobe") for the worldwide distribution of the Aastrom CPS for stem cell therapy and related uses. Cobe has the right to terminate its Distribution Agreement with the Company upon twelve months notice upon a change of control of the Company, other than to Cobe, or at any time after December 31, 1997, if Cobe determines that commercialization of the Aastrom CPS for stem cell therapy on or prior to December 31, 1998 is unlikely. See "--Consequences of Cobe Relationship." 8 The amount and timing of resources that Cobe commits to its strategic alliance activities with the Company are, to a significant extent, outside of the control of the Company. There can be no assurance that Cobe will pursue the marketing and distribution of the Company's products, continue to perform its obligations under its agreements with the Company or that the Company's strategic alliance with Cobe will result in the successful commercialization and distribution of the Company's technologies and product candidates. There can also be no assurance that Cobe will be successful in its efforts to market and distribute the Company's products for stem cell therapy. The suspension or termination of the Company's strategic alliance with Cobe or the failure of the strategic alliance to be successful would have a material adverse effect on the Company's business, financial condition and results of operations. Subject to the contractual requirements of the Cobe relationship, the Company will seek to enter into other agreements relating to the development and marketing of product candidates and in connection with such agreements may rely upon corporate partners to conduct clinical trials, seek regulatory approvals for, manufacture and market its potential products. There can be no assurance that the Company will be able to establish collaborative relationships for the development or marketing of the Company's product candidates on acceptable terms, if at all, or, if such relationships are established, that they will be successful or sustained on a long-term basis. The inability of the Company to establish such collaborative relationships may require the Company to curtail its development or marketing activities with regard to its potential products which would have a material adverse effect on the Company's business, financial condition and results of operations. FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING To date, Aastrom has funded its operations primarily through the sale of equity securities and corporate collaborations. The Company anticipates that the net proceeds of this offering, together with the Company's available cash and expected interest income thereon, will be sufficient to finance the development and manufacture of the Aastrom CPS for use in clinical trials, expanded clinical trials, other research and development and working capital and other corporate requirements until late 1998. This estimate is based on certain assumptions which could be negatively impacted by the matters discussed under this heading and elsewhere under the caption "Risk Factors." In order to grow and expand its business, and to introduce its product candidates into the marketplace, the Company will need, among other things, to raise additional funds. The development of the Company's products for the expansion of additional cell types will require the Company to raise additional funds or to seek collaborative partners, or both, to finance related research and development activities. The Company's future capital requirements will depend upon many factors, including, but not limited to, continued scientific progress in its research and development programs, costs and timing of conducting clinical trials and seeking regulatory approvals and patent prosecutions, competing technological and market developments, possible changes in existing collaborative relationships, the ability of the Company to establish additional collaborative relationships, and effective commercialization activities and facilities expansions if and as required. Because of the Company's potential long-term funding requirements, it may attempt to access the public or private equity markets if and whenever conditions are favorable, even if it does not have an immediate need for additional capital at that time. There can be no assurance that any such additional funding will be available to the Company on reasonable terms, or at all. If adequate funds are not available, the Company may be required to delay or terminate research and development programs, curtail capital expenditures, and reduce business development and other operating activities. If the Company is not successful in finding, entering into and maintaining arrangements with collaborative partners, its development efforts could be delayed. Furthermore, there can be no assurance that the Company will be able to implement collaborative development agreements under acceptable terms, if at all. Any of the foregoing capital constraints would have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." UNCERTAINTY OF REGULATORY APPROVAL; EXTENSIVE GOVERNMENT REGULATION The Company's research and development activities, preclinical studies, clinical trials, and the anticipated manufacturing and marketing of its product candidates are subject to extensive regulation by the FDA and other regulatory authorities in the United States. These activities are also regulated in other countries where the 9 Company intends to test and market its product candidates. The approval of the FDA will be required before any commercial sales of the Company's product candidates may commence in the United States. Additionally, the Company will be required to obtain approvals from foreign regulatory authorities before international sales may commence. The Company's products are potentially subject to regulation as medical devices under the Federal Food, Drug, and Cosmetic Act, or as biological products under the Public Health Service Act, or both. Different regulatory requirements may apply to the Company's products depending on how they are categorized by the FDA under these laws. To date, the FDA has indicated that it intends to regulate the Aastrom CPS for stem cell therapy as a Class III medical device through the Center for Biologics Evaluation and Research. However, there can be no assurance that the FDA will ultimately regulate the Aastrom CPS for stem cell therapy as a medical device or that regulatory approval for such product will be obtained in a timely fashion or at all. Further, it is unclear whether the FDA will separately regulate the cell therapies derived from the Aastrom CPS. The FDA is in the process of developing its requirements with respect to somatic cell therapy and gene cell therapy products, and recently proposed a new type of license for autologous cells manipulated ex vivo and intended for structural repair or reconstruction; autologous cells are cells obtained from, and administered to, the same patient. This proposal may indicate that the FDA will impose a similar approval requirement on other types of autologous cellular therapies, such as autologous cells for stem cell therapy. Any such additional regulatory or approval requirement could significantly delay the introduction of the Company's product candidates to the market, and have a material adverse effect on the Company's business, financial condition and results of operations. Until the FDA issues definitive regulations covering the Company's product candidates, the regulatory guidelines or requirements for approval of such product candidates will continue to be subject to significant uncertainty. Before marketing, the Aastrom CPS or other product candidates developed by the Company must undergo an extensive regulatory approval process. The regulatory process, which includes preclinical studies and clinical trials to establish safety and efficacy, takes many years and requires the expenditure of substantial resources. Data obtained from preclinical and clinical activities are susceptible to varying interpretations which could delay, limit or prevent FDA approval. In addition, delays or rejections may be encountered based upon changes in FDA policy for medical product approvals during the period of product development and FDA regulatory review of applications submitted by the Company for product approval. Similar delays may also be encountered in foreign countries. There can be no assurance that, even after the expenditures of substantial time and financial resources, regulatory approval will be obtained for any products developed by the Company. Moreover, if regulatory approval of a product is obtained, such approval may be subject to limitations on the indicated uses for which it may be marketed. Further, even if such regulatory approval is obtained, a marketed product, its manufacturer and its manufacturing facilities are subject to continual review and periodic inspections by the FDA, and later discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions on such product or manufacturer, including a withdrawal of the product from the market. Failure to comply with the applicable regulatory requirements can, among other things, result in fines, suspensions of regulatory approvals, product recalls, operating restrictions and criminal prosecution. Further, additional government regulation may be established which could prevent or delay regulatory approval of the Company's products. The Company believes that the Aastrom CPS will be regulated in Europe as a Class IIb medical device, under the authority of the new Medical Device Directives ("MDD") being implemented by European Union ("EU") member countries. In order for the Company to market its products in Europe, it must obtain a CE Mark from a Notified Body to certify that the Company and its operations comply with certain minimum quality standards and compliance procedures, or, alternatively, that its manufactured products meet a more limited set of requirements. There can be no assurance that the Company and its suppliers will be able to meet these minimum requirements, or, if met, that the Company and its suppliers will be able to maintain such compliance. The result of such non- compliance would have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance, however, that the Aastrom CPS will be regulated in Europe as a Class IIb medical device, and, if the Aastrom CPS is not so regulated, the Company could be forced to obtain additional regulatory approvals and could be subjected to additional regulatory requirements and uncertainty, which would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Government Regulation." 10 CONSEQUENCES OF COBE RELATIONSHIP Cobe is the largest single shareholder of the Company, beneficially owning approximately 22% of the outstanding Common Stock following the completion of this offering. In addition, Cobe has certain preemptive rights to maintain its relative percentage ownership and voting interest in the Company, pursuant to which Cobe has the option of purchasing shares in this offering to maintain its beneficial ownership at approximately 24% of the outstanding shares of Common Stock. Cobe also has an option, until February 2000, to purchase from the Company an amount of Common Stock equal to 30% of the Company's fully diluted shares after the exercise of such option, at a purchase price equal to 120% of the public market trading price of the Company's Common Stock. If such option is exercised, Cobe would significantly increase its ownership interest in the Company and, as a consequence of such share ownership, obtain effective control of the Company. Such effective control would include the ability to influence the outcome of shareholder votes, including votes concerning the election of directors, the amendment of provisions of the Company's Restated Articles of Incorporation or Bylaws, and the approval of mergers and other significant transactions. Cobe also has been granted a "right of first negotiation" in the event that the Company determines to sell all, or any material portion, of its assets to another company or to merge with another company. Furthermore, the Company has agreed to use reasonable and good faith efforts to cause a nominee designated by Cobe to be elected to the Board of Directors for as long as Cobe owns at least 15% of the outstanding Common Stock. In addition, Edward C. Wood, Jr., the President of Cobe BCT, is a director of the Company. The agreements establishing the Company's relationship with Cobe provide the Company with an option (the "Put Option") to require Cobe to purchase the lesser of 20%, or $5,000,000, in an initial public offering ("IPO") or a private offering meeting certain minimum requirements. In the event that the Company exercises the Put Option, Cobe then has the option to purchase up to 40% of that offering. While the Put Option was not exercised by the Company in connection with the IPO, Cobe voluntarily elected to purchase an additional 714,200 shares of Common Stock in the IPO, for an aggregate purchase price of approximately $5,000,000. The Put Option does not apply to any public offerings, including this offering. The Company and Cobe are evaluating whether or not the Put Option remains in effect as to any future private offerings of the Company's equity securities. The existence of the foregoing rights or the exercise of such control by Cobe could have the effect of delaying, deterring or preventing certain takeovers or changes in control of the management of the Company, including transactions in which shareholders might otherwise receive a premium for their shares over then current market prices. See "Description of Capital Stock--Rights of Cobe." COMPETITION AND TECHNOLOGICAL CHANGE The Company is engaged in the development of medical products and processes which will face competition in a marketplace characterized by rapid technological change. Many of the Company's competitors have significantly greater resources than the Company, and have developed and may develop product candidates and processes that directly compete with the Company's products. Moreover, competitors that are able to achieve patent protection, obtain regulatory approvals and commence commercial sales of their products before the Company, and competitors that have already done so, may enjoy a significant competitive advantage. The Company's product development efforts are primarily directed toward obtaining regulatory approval to market the Aastrom CPS for stem cell therapy. That market is currently dominated by the bone marrow harvest and PBPC collection methods. The Company's clinical data, although early, suggests that cells expanded in the Aastrom CPS using its current process will enable hematopoietic recovery within the time frames currently achieved by bone marrow harvest, however, neutrophil and platelet recovery times may be slower than with PBPC collection methods. The Company is evaluating techniques and methods to optimize the cells produced in the Aastrom CPS to reduce the recovery time of neutrophils and platelets in patients. There can be no assurance that if such procedure optimization does not lead to recovery times equal to or faster than those of PBPC collection methods, such outcome would not have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the bone marrow harvest and PBPC collection methods have been widely practiced for a number of years and, recently, the patient costs associated with these procedures have begun to decline. There can be no assurance that the Aastrom CPS method, if approved for marketing, will prove to be competitive with these established collection methods on the basis of hematopoietic recovery time, cost or otherwise. The Company also is aware of certain other products manufactured or under development by competitors that are used for the prevention or treatment of certain diseases and health conditions which the 11 Company has targeted for product development. In particular, the Company is aware that competitors such as Amgen, Inc., CellPro, Incorporated, Novartis, A.G., Baxter Healthcare Corp. and Rhone-Poulenc Rorer Inc. ("RPR") are in advanced stages of development of technologies and products for use in stem cell therapy and other market applications currently being pursued by the Company. In addition, Cobe, a significant shareholder of the Company, is a market leader in the blood cell processing products industry and, accordingly, a potential competitor of the Company. There can be no assurance that developments by others will not render the Company's product candidates or technologies obsolete or noncompetitive, that the Company will be able to keep pace with new technological developments or that the Company's product candidates will be able to supplant established products and methodologies in the therapeutic areas that are targeted by the Company. The foregoing factors could have a material adverse effect on the Company's business, financial condition and results of operations. UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS Aastrom's success depends in part on its ability, and the ability of its licensors, to obtain patent protection for its products and processes, preserve its trade secrets, defend and enforce its rights against infringement and operate without infringing the proprietary rights of third parties, both in the United States and in other countries. The validity and breadth of claims in medical technology patents involve complex legal and factual questions and, therefore, may be highly uncertain. No assurance can be given that any patents based on pending patent applications or any future patent applications of the Company or its licensors will be issued, that the scope of any patent protection will exclude competitors or provide competitive advantages to the Company, that any of the patents that have been or may be issued to the Company or its licensors will be held valid if subsequently challenged or that others will not claim rights in or ownership of the patents and other proprietary rights held or licensed by the Company. Furthermore, there can be no assurance that others have not developed or will not develop similar products, duplicate any of the Company's products or design around any patents that have been or may be issued to the Company or its licensors. Since patent applications in the United States are maintained in secrecy until patents issue, the Company also cannot be certain that others did not first file applications for inventions covered by the Company's and its licensors' pending patent applications, nor can the Company be certain that it will not infringe any patents that may issue to others on such applications. The Company relies on certain licenses granted by the University of Michigan and Dr. Cremonese for the majority of its patent rights. If the Company breaches such agreements or otherwise fails to comply with such agreements, or if such agreements expire or are otherwise terminated, the Company may lose its rights under the patents held by the University of Michigan and Dr. Cremonese, which would have a material adverse effect on the Company's business, financial condition and results of operation. See "Business--Patents and Proprietary Rights--Research and License Agreements." The Company also relies on trade secrets and unpatentable know-how which it seeks to protect, in part, by confidentiality agreements with its employees, consultants, suppliers and licensees. There can be no assurance that these agreements will not be breached, that the Company would have adequate remedies for any breach, or that the Company's trade secrets or unpatentable know-how will not otherwise become known or be independently developed by competitors. The Company's success will also depend in part on its ability to develop commercially viable products without infringing the proprietary rights of others. The Company has not conducted freedom of use patent searches and no assurance can be given that patents do not exist or could not be filed which would have an adverse effect on the Company's ability to market its products or maintain its competitive position with respect to its products. If the Company's technology components, devices, designs, products, processes or other subject matter are claimed under other existing United States or foreign patents or are otherwise protected by third party proprietary rights, the Company may be subject to infringement actions. In such event, the Company may challenge the validity of such patents or other proprietary rights or be required to obtain licenses from such companies in order to develop, manufacture or market its products. There can be no assurance that the Company would be able to obtain such licenses or that such licenses, if available, could be obtained on commercially reasonable terms. Furthermore, the failure to either develop a commercially viable alternative or obtain such licenses could result in delays in marketing the Company's proposed products or the inability to proceed with the development, manufacture or sale of products requiring such licenses, which could have a material adverse 12 effect on the Company's business, financial condition and results of operations. If the Company is required to defend itself against charges of patent infringement or to protect its own proprietary rights against third parties, substantial costs will be incurred regardless of whether the Company is successful. Such proceedings are typically protracted with no certainty of success. An adverse outcome could subject the Company to significant liabilities to third parties, and force the Company to curtail or cease its development and sale of its products and processes. See "Business--Patents and Proprietary Rights." NO ASSURANCE OF THIRD PARTY REIMBURSEMENT The Company's ability to successfully commercialize its product candidates will depend in part on the extent to which payment for the Company's products and related treatments will be available from government healthcare programs, such as Medicare and Medicaid, as well as private health insurers, health maintenance organizations and other third party payors. Government and other third-party payors are increasingly attempting to contain health care costs, in part by challenging the price of medical products and services. Reimbursement by third-party payors depends on a number of factors, including the payor's determination that use of the product is safe and effective, not experimental or investigational, medically necessary, appropriate for the specific patient and cost-effective. Since reimbursement approval is required from each payor individually, seeking such approvals is a time-consuming and costly process which will require the Company to provide scientific and clinical support for the use of each of the Company's products to each payor separately. Significant uncertainty exists as to the payment status of newly approved medical products, and there can be no assurance that adequate third- party payments will be available to enable the Company to establish or maintain price levels sufficient to realize an appropriate return on its investment in product development. If adequate payment levels are not provided by government and third-party payors for use of the Company's products, the market acceptance of those products will be adversely affected. There can be no assurance that reimbursement in the United States or foreign countries will be available for any of the Company's product candidates, that any reimbursement granted will be maintained, or that limits on reimbursement available from third-party payors will not reduce the demand for, or negatively affect the price of, the Company's products. The unavailability or inadequacy of third-party reimbursement for the Company's product candidates would have a material adverse effect on the Company. Finally, the Company is unable to forecast what additional legislation or regulation relating to the healthcare industry or third-party coverage and reimbursement may be enacted in the future, or what effect such legislation or regulation would have on the Company's business. HAZARDOUS MATERIALS The Company's research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive compounds. The Company is subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. In the event of any contamination or injury from these materials, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. Furthermore, the failure to comply with current or future regulations could result in the imposition of substantial fines against the Company, suspension of production, alteration of its manufacturing processes or cessation of operations. There can be no assurance that the Company will not be required to incur significant costs to comply with any such laws and regulations in the future, or that such laws or regulations will not have a material adverse effect on the Company's business, financial condition and results of operations. Any failure by the Company to control the use, disposal, removal or storage of, or to adequately restrict the discharge of, or assist in the cleanup of, hazardous chemicals or hazardous, infectious or toxic substances could subject the Company to significant liabilities, including joint and several liability under certain statutes. The imposition of such liabilities would have a material adverse effect on the Company's business, financial condition and results of operations. POTENTIAL PRODUCT LIABILITY; AVAILABILITY OF INSURANCE The Company is, and will continue to be, subject to the risk of product liability claims alleging that the use of its products has adverse effects on patients. This risk exists for product candidates tested in human clinical 13 trials as well as products that are sold commercially, if any. Further, given the medical conditions for which the Aastrom CPS is expected to be utilized, any product liability claim could entail substantial compensatory and punitive damages. The assertion of product liability claims against the Company could result in a substantial cost to, and diversion of efforts by, the Company. There can be no assurance that the Company would prevail in any such litigation or that product liability claims, if made, would not result in a recall of the Company's products or a change in the indications for which they may be used. The Company maintains product liability insurance coverage up to an aggregate of $5,000,000 for claims arising from the use of its product candidates in clinical trials. There can be no assurance that the Company will be able to maintain such insurance or obtain product liability insurance in the future to cover any of its product candidates which are commercialized or that such existing or any future insurance and the resources of the Company would be sufficient to satisfy any liability resulting from product liability claims. Consequently, a product liability claim or other claim with respect to uninsured or underinsured liabilities could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON KEY PERSONNEL The success of the Company depends in large part upon the Company's ability to attract and retain highly qualified scientific and management personnel. The Company faces competition for such personnel from other companies, research and academic institutions and other entities. There can be no assurance that the Company will be successful in hiring or retaining key personnel. See "Business--Employees" and "Management." SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market following this offering could adversely affect the prevailing market price of the Common Stock and the Company's ability to raise capital in the future. Upon completion of this offering, the Company will have a total of 14,772,674 shares of Common Stock outstanding, based upon the number of shares outstanding as of September 30, 1997, all of which are eligible for sale in the public market, subject in some cases to certain volume restrictions and other conditions imposed by Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"). However, 5,707,252 outstanding shares of Common Stock are subject to lock-up agreements expiring 90 days following the date of this Prospectus. Such agreements provide that Cowen & Company may, in its sole discretion and at any time without notice, release all or a portion of the shares subject to these lock-up agreements. Certain existing shareholders have rights to include shares of Common Stock owned by them in future registrations by the Company for the sale of Common Stock or to request that the Company register their shares under the Securities Act. See "Description of Capital Stock--Registration Rights," "Shares Eligible for Future Sale" and "Plan of Distribution." CONTROL BY EXISTING MANAGEMENT AND SHAREHOLDERS Upon completion of this offering, the Company's directors, executive officers, and certain principal shareholders, including Cobe, affiliated with members of the Board of Directors and their affiliates will beneficially own approximately 32.5% of the outstanding shares of Common Stock. Accordingly, such shareholders, acting together, may have the ability to exert significant influence over the election of the Company's Board of Directors and other matters submitted to the Company's shareholders for approval. The voting power of these holders may discourage or prevent certain takeovers or changes in control of the management of the Company unless the terms are approved by such holders. See "Principal Shareholders." POSSIBLE STOCK PRICE VOLATILITY The price of the Company's Common Stock has experienced significant volatility. The trading price of the Common Stock and the price at which the Company may sell securities in the future could be subject to wide fluctuations in response to announcements of clinical results, research activities, technological innovations or new 14 products by the Company or competitors, changes in government regulation, developments concerning proprietary rights, variations in the Company's operating results, announcements by the Company of regulatory developments, litigation, disputes concerning patents or proprietary rights or public concern regarding the safety, efficacy or other implications of the products or methodologies to be developed by the Company or its collaborators or enabled by the Company's technology, general market conditions, the liquidity of the Company or its ability to raise additional funds, and other factors or events. In addition, the stock market has experienced extreme fluctuations in price and volume. This volatility has significantly affected the market prices for securities of emerging biotechnology companies for reasons frequently unrelated to or disproportionate to the operating performance of the specific companies. These market fluctuations, as well as shortfalls in revenue or earnings as compared with public market analysts' expectations, changes in such analysts' recommendations or projections and fluctuations in the stock markets generally may adversely affect the market price of the Common Stock. In addition, since the Company's initial public offering in February 1997, the average daily trading volume of the Common Stock on the Nasdaq National Market has generally been relatively low. There can be no assurance that a more active trading market will develop in the future. ANTI-TAKEOVER EFFECT OF CHARTER AND BYLAW PROVISIONS AND MICHIGAN LAW The Company's Restated Articles of Incorporation authorize the Board of Directors to issue, without shareholder approval, 5,000,000 shares of Preferred Stock with voting, conversion, and other rights and preferences that could materially and adversely affect the voting power or other rights of the holders of Common Stock. The issuance of Preferred Stock or of rights to purchase Preferred Stock could be used to discourage an unsolicited acquisition proposal. The Company's Bylaws contain procedural restrictions on director nominations by shareholders and the submission of other proposals for consideration at shareholder meetings. The possible issuance of Preferred Stock and the procedures required for director nominations and shareholder proposals could discourage a proxy contest, make more difficult the acquisition of a substantial block of Common Stock, or limit the price that investors might be willing to pay in the future for shares of Common Stock. The Company's Restated Articles of Incorporation eliminate the right of shareholders to act without a meeting, do not provide for cumulative voting in the election of directors and provide that the holders of at least two-thirds of the outstanding shares of Common Stock must approve certain transactions resulting in a change of control of the Company. In addition, certain provisions of Michigan law applicable to the Company could also delay or make more difficult a merger, tender offer or proxy contest involving the Company. See "Description of Capital Stock." IMMEDIATE AND SUBSTANTIAL DILUTION; ABSENCE OF DIVIDENDS Purchasers of the Common Stock in this offering will experience immediate and substantial dilution in the net tangible book value of the Common Stock. Additional dilution is likely to occur upon the exercise of outstanding options or warrants granted by the Company. The Company has never paid cash dividends and does not anticipate paying any cash dividends in the foreseeable future. See "Dilution" and "Dividend Policy." FORWARD-LOOKING STATEMENTS This Prospectus contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, including, but not limited to, statements regarding: uncertainties related to product development and marketability; uncertainties related to clinical trials; manufacturing and supply uncertainties and dependence on third parties; history of operating losses and anticipation of future losses; limited sales and marketing capabilities and dependence on collaborative relationships; future capital needs and uncertainty of additional funding; uncertainty of regulatory approval and extensive government regulation; consequences of Cobe relationship; competition and technological change; uncertainty regarding patents and proprietary rights; no assurance of third party reimbursement; hazardous materials; and potential product liability and availability of insurance. These statements are subject to risks and uncertainties, including those set forth under this caption, and actual results could differ materially from those expressed or implied in these statements. All forward-looking statements included in this Prospectus are made as of the date hereof, and the Company assumes no obligation to update any such forward-looking statement or reason why actual results might differ. 15 THE COMPANY Aastrom was incorporated in Michigan in March 1989 under the name Ann Arbor Stromal, Inc. In 1991, the Company changed its name to Aastrom Biosciences, Inc. The Company's principal executive offices are located at 24 Frank Lloyd Wright Drive, P.O. Box 376, Ann Arbor, Michigan 48106, and its telephone number is (313) 930-5555. Aastrom(TM) and the Company's stylized logo are trademarks of the Company. Leukine and Neupogen are registered trademarks of Immunex Corporation and Amgen, Inc., respectively. USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,500,000 shares of Common Stock offered hereby are estimated to be $9,520,000 at an assumed public offering price of $7.00 per share and after deducting commissions and estimated offering expenses payable by the Company. The Company currently intends to use approximately $5,000,000 of the net proceeds from the offering to fund product and clinical development activities for the Aastrom CPS, including pre-pivotal and pivotal clinical trials, and approximately $3,000,000 for other research activities, with the remaining amount being used for working capital and other general corporate purposes, including scheduled repayments of obligations under equipment leases. The Company has $189,000 of outstanding equipment lease commitments as of June 30, 1997, with final payments due between December 1997 and May 1999 that bear interest ranging from 9.7% to 12.1%. Based on its current operating plan, the Company anticipates that the net proceeds of this offering, together with the Company's available cash and expected interest income thereon, should be sufficient to finance the development and manufacture of the Aastrom CPS for use in clinical trials, expanded clinical trials, other research and development and working capital and other corporate requirements until late 1998. This estimate is based on certain assumptions which could be negatively impacted by the matters discussed in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Pending such uses, the net proceeds will be invested in short- term, interest bearing investment grade securities. PRICE RANGE OF COMMON STOCK The Company effected an initial public offering of its Common Stock during February 1997 at a price of $7.00 per share. Commencing on February 4, 1997, the Company's Common Stock has been quoted on the Nasdaq National Market under the symbol "ASTM." The following table sets forth, for the periods indicated, the high and low sale prices per share of the Common Stock as reported on the Nasdaq National Market. On October 3, 1997, the last reported sale price of the Common Stock on the Nasdaq National Market was $7.00 per share. As of August 31, 1997, there were approximately 140 shareholders of record of the Common Stock. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its Common Stock and does not anticipate paying such cash dividends in the foreseeable future. The Company currently anticipates that it will retain all future earnings, if any, for use in the development of its business. 16
HIGH LOW ---- ---- YEAR ENDED JUNE 30, 1997 3rd Quarter (from February 4, 1997).................. $ 7 5/8 $ 5 3/4 4th Quarter.......................................... 8 1/2 3 1/2 YEAR ENDING JUNE 30, 1998 1st Quarter.......................................... 9 15/16 3 1/4 2nd Quarter (through October 3, 1997)................ 8 6 7/8 DILUTION The Company's net tangible book value at June 30, 1997 was approximately $16,583,000, or $1.25 per share. Net tangible book value per share represents the amount of the Company's shareholders' equity, less intangible assets, divided by 13,275,208, the number of shares of Common Stock outstanding as of June 30, 1997. After giving effect to the sale of 1,500,000 shares of Common Stock in this offering at an assumed public offering price of $7.00 per share and after deducting commissions and estimated offering expenses payable by the Company, the net tangible book value of the Company as of June 30, 1997 would have been $26,103,000, or $1.77 per share. This represents an immediate increase in net tangible book value of $.52 per share to existing shareholders and an immediate dilution in net tangible book value of $5.23 per share to purchasers of Common Stock in this offering, as illustrated in the following table: The foregoing excludes (i) options and warrants outstanding as of June 30, 1997 to purchase 1,127,815 shares of Common Stock at a weighted average exercise price of $5.40 per share, (ii) 6,216 shares that were issued subsequent to June 30, 1997 upon the exercise of stock options, and (iii) 6,961 shares that were issued subsequent to June 30, 1997 under the Company's 1996 Employee Stock Purchase Plan. The foregoing includes 15,711 shares that were canceled in September 1997 in connection with the repayment of a promissory note. In the event such options and warrants are exercised, investors may experience further dilution. See "Management--Stock Option and Employee Benefit Plans," "Certain Transactions" and Note 4 of Notes to Financial Statements. 17
Assumed public offering price per share........................ $7.00 Net tangible book value per share as of June 30, 1997........ $1.25 Increase per share attributable to new investors............. .52 ----- Net tangible book value per share after this offering.......... 1.77 ----- Dilution per share to new investors............................ $5.23 ===== CAPITALIZATION The following table sets forth the capitalization of the Company (i) as of June 30, 1997, and (ii) as adjusted to reflect the receipt of the estimated net proceeds from the Company's sale of 1,500,000 shares of Common Stock pursuant to this offering, at an assumed public offering price of $7.00 per share. See "Use of Proceeds." - -------- (1)See Note 7 of Notes to Financial Statements. (2) Excludes options and warrants outstanding as of June 30, 1997 to purchase 1,127,815 shares of Common Stock at a weighted average exercise price of $5.40 per share, (ii) 6,216 shares that were issued subsequent to June 30, 1997 upon the exercise of stock options, and (iii) 6,961 shares that were issued subsequent to June 30, 1997 under the Company's 1996 Employee Stock Purchase Plan. Includes 15,711 shares that were canceled in September 1997 in connection with the repayment of a promissory note. See "Management-- Stock Option and Employee Benefit Plans," "Certain Transactions" and Note 4 of Notes to Financial Statements. 18
JUNE 30, 1997 -------------------------- ACTUAL AS ADJUSTED ------------ ------------ Long-term portion of capital lease obligations(1).. $ 65,000 $ 65,000 Shareholders' equity(2): Preferred stock, no par value: 5,000,000 shares authorized, no shares issued and outstanding, actual and as adjusted.......................... -- -- Common stock, no par value: 40,000,000 shares authorized; 13,275,208 issued and outstanding, actual, and 14,775,208 issued and outstanding, as adjusted; in each case net of shareholder notes and other................................. 57,896,000 67,416,000 Deficit accumulated during the development stage... (41,313,000) (41,313,000) ------------ ------------ Total shareholders' equity......................... 16,583,000 26,103,000 ------------ ------------ Total capitalization............................. $ 16,648,000 $ 26,168,000 ============ ============ SELECTED FINANCIAL DATA The statement of operations data for the fiscal years ended June 30, 1995, 1996 and 1997 and for the period from Inception to June 30, 1997 and the balance sheet data at June 30, 1996 and 1997, are derived from, and are qualified by reference to, the audited financial statements included elsewhere in the Prospectus and should be read in conjunction with those financial statements and notes thereto. The statement of operations data for the fiscal years ended June 30, 1993 and 1994, and the balance sheet data at June 30, 1993, 1994 and 1995, are derived from audited financial statements not included herein. The data set forth below are qualified by reference to, and should be read in conjunction with, the financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations." -------- (1) See Note 1 of Notes to Financial Statements for information concerning the computation of net loss per share and shares used in computing net loss per share. 19
YEAR ENDED JUNE 30, INCEPTION TO ------------------------------------------------------------------ JUNE 30, 1993 1994 1995 1996 1997 1997 ----------- ----------- ------------ ------------ ------------ ------------ STATEMENT OF OPERATIONS DATA: Revenues: Research and develop- ment agreements....... $ -- $ 49,000 $ 396,000 $ 1,342,000 $ 230,000 $ 2,017,000 Grants................. 784,000 823,000 121,000 267,000 148,000 2,143,000 ----------- ----------- ------------ ------------ ------------ ------------ Total revenues........ 784,000 872,000 517,000 1,609,000 378,000 4,160,000 Costs and expenses: Research and develop- ment.................. 2,600,000 5,627,000 4,889,000 10,075,000 13,357,000 38,432,000 General and administra- tive.................. 1,153,000 1,565,000 1,558,000 2,067,000 1,953,000 9,042,000 ----------- ----------- ------------ ------------ ------------ ------------ Total costs and ex- penses............... 3,753,000 7,192,000 6,447,000 12,142,000 15,310,000 47,474,000 ----------- ----------- ------------ ------------ ------------ ------------ Loss from operations.... (2,969,000) (6,320,000) (5,930,000) (10,533,000) (14,932,000) (43,314,000) ----------- ----------- ------------ ------------ ------------ ------------ Other income (expense): Interest income........ 148,000 245,000 279,000 678,000 676,000 2,252,000 Interest expense....... (26,000) (65,000) (66,000) (62,000) (32,000) (251,000) ----------- ----------- ------------ ------------ ------------ ------------ Net loss................ $(2,847,000) $(6,140,000) $ (5,717,000) $ (9,917,000) $(14,288,000) $(41,313,000) =========== =========== ============ ============ ============ ============ Net loss per share(1)... $ (.52) $ (.82) $ (.66) $ (.98) $ (1.26) =========== =========== ============ ============ ============ Weighted average number of shares outstanding(1)......... 5,480,000 7,461,000 8,644,000 10,103,000 11,315,000 =========== =========== ============ ============ ============ JUNE 30, ------------------------------------------------------------------ 1993 1994 1995 1996 1997 ----------- ----------- ------------ ------------ ------------ BALANCE SHEET DATA: Cash, cash equivalents and short-term invest- ments................. $ 3,085,000 $ 6,730,000 $ 11,068,000 $ 10,967,000 $ 17,007,000 Working capital........ 2,744,000 6,187,000 10,319,000 9,851,000 15,600,000 Total assets........... 4,156,000 8,227,000 12,551,000 12,673,000 18,410,000 Long-term capital lease obligations........... 311,000 425,000 412,000 189,000 65,000 Deficit accumulated during the development stage................. (5,251,000) (11,391,000) (17,108,000) (27,025,000) (41,313,000) Total shareholders' eq- uity.................. 3,268,000 6,985,000 11,186,000 10,850,000 16,583,000 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since its inception, the Company has been in the development stage and engaged in research and product development, conducted both on its own behalf and in connection with various collaborative research and development agreements with other entities. The Company does not expect to generate positive cash flows from operations for at least the next several years and, until product sales commence, the Company expects that its revenue sources will continue to be limited to grant revenue, research funding and milestone payments and licensing fees from potential future corporate collaborators. The timing and amount of such future cash payments and revenues, if any, will be subject to significant fluctuations, based in part on the success of the Company's research activities, the receipt of necessary regulatory approvals, the timing of the achievement of certain other milestones and the extent to which associated costs are reimbursed under grant or other arrangements. Substantially all of the Company's revenues from product sales, if any, will be subject to the Company's obligation to make aggregate royalty payments of up to 5% to certain licensors of its technology. Further, under the Company's Distribution Agreement with Cobe, Cobe will perform marketing and distribution activities and in exchange will receive approximately 38% to 42% of the Company's product sales in the area of stem cell therapy, subject to negotiated discounts and volume-based adjustments. Research and development expenses may fluctuate due to the timing of expenditures for the varying stages of the Company's research and clinical development programs. Research and development expenses will increase as product development programs and applications of the Company's products progress through research and development stages. Under the Company's License Agreement with Immunex, annual renewal fees of $1,000,000 are payable in each of the next three fiscal years. Under the Company's Distribution Agreement with Cobe, regulatory approval activities for the Company's products for stem cell therapies outside of the United States will be conducted, and paid for, by Cobe. As a result of these and other factors, the Company's results of operations have fluctuated and are expected to continue to fluctuate significantly from year to year and from quarter to quarter and therefore may not be comparable to or indicative of the result of operations for any future periods. Over the past several years, the Company's net loss has primarily increased, consistent with the growth in the Company's scope and size of operations. In the near term, the Company plans additional moderate growth in employee headcount necessary to address increasing requirements in the areas of product development, research, clinical and regulatory affairs, quality systems and administration. Assuming capital is available to finance such growth, the Company's operating expenses will continue to increase as a result. At least until such time as the Company enters into arrangements providing research and development funding or initiates product sales, the net loss will continue to increase as well. The Company has never been profitable and does not anticipate having net income for at least the next several years. Through June 30, 1997, the Company had an accumulated deficit of $41,313,000. There can be no assurance that the Company will be able to achieve profitability on a sustained basis, if at all. This Prospectus contains, in addition to historical information, forward- looking statements that involve risks and uncertainties. The Company's actual results could differ materially from the results discussed in the forward- looking statements. Factors that could cause or contribute to such differences include those discussed under this caption, as well as those discussed under the caption "Risk Factors" and elsewhere in this Prospectus. RESULTS OF OPERATIONS YEARS ENDED JUNE 30, 1997, 1996 AND 1995 Total revenues were $378,000 in 1997, $1,609,000 in 1996 and $517,000 in 1995. Grant revenues decreased to $148,000 in 1997 from $267,000 in 1996 and were $121,000 in 1995, reflecting the timing of grant awards and related research activities, to the extent that such associated costs are reimbursed under the grants. Grant revenues accounted for 39%, 17% and 23% of total revenues for the years ended June 30, 1997, 1996 and 1995, respectively, and are recorded on a cost-reimbursement basis. Revenues from research and development agreements totaled $230,000 in 1997, $1,342,000 in 1996 and $396,000 in 1995, reflecting research funding received by the Company under its collaboration with RPR which commenced in September 1995 and ended in 20 September 1996. Revenues from RPR accounted for 52%, 83% and 48% of such revenue in 1997, 1996 and 1995, respectively. Total costs and expenses were $15,310,000 in 1997, $12,142,000 in 1996 and $6,447,000 in 1995. The increases in costs and expenses in 1997 and 1996 are primarily the result of increases in research and development expense to $13,357,000 in 1997 from $10,075,000 in 1996 and $4,889,000 in 1995. Research and development expense includes charges of $1,000,000 and $1,500,000 for the years ended June 30, 1997 and 1996, respectively, representing license fee payments pursuant to the Company's supply agreement with Immunex. The increase in research and development expense reflects an increase in research, clinical development and product development activities. General and administrative expenses were $1,953,000 in 1997, $2,067,000 in 1996 and $1,558,000 in 1995. General and administrative expenses, which decreased slightly in 1997 compared to 1996, are expected to increase as a result of increasing finance, legal and other administrative and marketing expenses in support of the Company's increasing product development and research activities. Interest income was $676,000 in 1997, $678,000 in 1996 and $279,000 in 1995. The fluctuations in interest income are due primarily to corresponding changes in the levels of cash, cash equivalents and short-term investments for such periods. Interest expense was $32,000 in 1997, $62,000 in 1996 and $66,000 in 1995, reflecting decreasing amounts outstanding under capital leases during these periods. The Company's net loss was $14,288,000 in 1997, $9,917,000 in 1996 and $5,717,000 in 1995. The Company expects to report substantial net losses for at least the next several years. The Company has not generated any profits to date and therefore has not paid any federal income taxes since inception. At June 30, 1997, the Company's federal tax net operating loss and tax credit carryforwards were $40,420,000 and $971,000, respectively, which will expire from 2004 through 2012, if not utilized. The Company underwent an ownership change in October 1993, which has resulted in a limitation under which the Company can utilize a portion of its federal net operating loss carryforward amounting to $1,153,000 per year. As of June 1997, the portion of the Company's net operating loss that remains subject to this limitation is $2,490,000 and therefore is not expected to ultimately effect the Company's ability to utilize this benefit. If certain changes in ownership should occur again in the future, the Company's ability to utilize its net operating loss and tax credit carryforwards may become subject to further annual limitation. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations since inception primarily through public and private sales of its equity securities, which, from inception through June 30, 1997, have totaled approximately $57,906,000, and, to a lesser degree, through grant funding, payments received under research agreements and collaborations, interest earned on cash, cash equivalents, and short-term investments, and funding under equipment leasing agreements. These financing sources have historically allowed the Company to maintain adequate levels of cash and other liquid investments. Under the Company's primary equipment leasing agreement, the lessor is granted a security interest in all of the Company's property and assets. The Company's combined cash, cash equivalents and short-term investments totaled $17,007,000 at June 30, 1997, an increase of $6,040,000 from June 30, 1996. The primary uses of cash, cash equivalents and short-term investments during the year ended June 30, 1997 included $13,214,000 to finance the Company's operations and working capital requirements, $424,000 in capital equipment additions and $223,000 in scheduled debt payments. On February 7, 1997, the Company completed an underwritten initial public offering of 3,000,000 shares of its Common Stock at an offering price of $7.00 per share. On March 5, 1997, the underwriters elected to purchase an additional 250,000 shares of Common Stock pursuant to the underwriters' over-allotment option at a price of $7.00 per share. Proceeds from the offering, net of underwriters' commissions and expenses, were $19,885,000. The Company plans to continue its policy of investing excess funds in short-term, investment-grade, interest- bearing instruments. 21 The Company's future cash requirements will depend on many factors, including continued scientific progress in its research and development programs, the scope and results of clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting and enforcing patents, competing technological and market developments and the cost of product commercialization. The Company does not expect to generate a positive cash flow from operations for at least the next several years due to the expected increase in spending for research and development programs and the expected cost of commercializing its product candidates. The Company intends to seek additional funding through research and development agreements with suitable corporate collaborators, grants and through public or private financing transactions. The Company anticipates that the net proceeds of this offering, together with the Company's available cash and expected interest income thereon, will be sufficient to finance the development and manufacture of the Aastrom CPS for use in clinical trials, expanded clinical trials, other research and development and working capital and other corporate requirements until late 1998. This estimate is based on certain assumptions which could be negatively impacted by the matters discussed under this heading and elsewhere under the caption "Risk Factors." The Company expects that its primary sources of capital for the foreseeable future will be through collaborative arrangements and through the public or private sale of its debt or equity securities. There can be no assurance that such collaborative arrangements, or any public or private financing, will be available on acceptable terms, if at all, or can be sustained. Several factors will affect the Company's ability to raise additional funding, including, but not limited to, market volatility of the Company's Common Stock and economic conditions affecting the public markets generally or some portion or all of the technology sector. If adequate funds are not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its research and development programs, which may have a material adverse effect on the Company's business. See "Risks Factors--Future Capital Needs; Uncertainty of Additional Funding" and Notes to Financial Statements. RECENT ACCOUNTING PRONOUNCEMENT During March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which amends the standards for computing earnings per share previously set forth in Accounting Principles Board Opinion No. 15, "Earnings per Share" ("APB 15"). SFAS 128, which will be adopted by the Company for the period ending December 31, 1997, will not have a material effect on the computation of the Company's historical net loss per share amounts. 22 BUSINESS OVERVIEW Aastrom is developing proprietary process technologies and devices for a range of cell therapy applications, including stem cell therapies and selected emerging therapies such as immunotherapy, solid tissue repair and ex vivo gene therapy. The Company's lead product under development, the Aastrom Cell Production System (the "Aastrom CPS"), consists of a clinical cell culture system with single-use cassettes and reagents for use in the rapidly growing cell therapy market. The Company is currently conducting "pre-pivotal" trials at multiple sites in the United States and Europe of the Aastrom CPS for use in stem cell therapy in preparation for pivotal trials in the United States and potential marketing in Europe. The Company believes that the Aastrom CPS procedure will be a cost-effective, less invasive and less time consuming alternative to currently available stem cell collection methods and may enhance the clinical utility of umbilical cord blood ("UCB") transplants by expanding the number of cells available for transplant. For stem cell therapy, the Company has entered into a strategic collaboration for the marketing, distribution and customer service of the Aastrom CPS with Cobe BCT, Inc., a subsidiary of Gambro AB and a leading provider of blood cell processing products. The Aastrom CPS is designed as a platform product which implements the Company's pioneering stem cell replication technology. The Company believes that the Aastrom CPS can be modified to produce a wide variety of other cell types for selected emerging therapies being developed by other companies and institutions. The Company intends to develop additional strategic collaborations for the development of the Aastrom CPS in certain of these other cell therapy market segments. In ex vivo gene therapy, the Company is also developing the Aastrom Gene Loader, which is being designed to address the production of gene-modified cells. CELL THERAPY Cell therapy or ex vivo gene therapy involves the use of human cells to treat a medical disorder. The most common types of cell therapy, blood and platelet transfusions, have been widely used for many decades. More recently, bone marrow-derived and UCB cells have been used to restore the bone marrow and the blood and immune system cells which are damaged by chemotherapy and radiation therapy during the treatment of many types of cancer. Transplantation of these cells is known as stem cell therapy. Other cell therapies have recently been used for generating skin and cartilage tissue, and additional cell therapies are being developed by various companies and researchers to restore immune system cells as well as bone, kidney, liver, vascular and neuronal tissues. Cell therapies require the collection of cells, either from the patient or a suitably matched donor. These cells are typically processed and stored for administration to the patient. Although cell therapy is being developed for use in an increasing number of diseases, widespread application of new cell therapies remains limited by the difficulties and expense associated with current cell collection and processing procedures. The problems of current cell collection techniques are exemplified in the area of stem cell therapy where the patient or donor undergoes invasive, time-consuming and costly procedures to collect the large volume of cells currently required for effective treatment. The Company believes an alternative to collecting the required therapeutic dose of cells is to grow these cells ex vivo from a small starting volume. However, ex vivo cell expansion, when biologically possible, has typically required costly techniques, facilities and operations to comply with FDA current good manufacturing practices ("cGMP"), which are not generally available in hospitals. As a result, cells needed for such therapies often require specialized cell production facilities which use labor- intensive, manual cell culture techniques. In ex vivo gene therapy, genes are introduced into target cells in order to selectively correct or modulate disease conditions, or to modify cells for production of a therapeutic protein. The Company believes that the successful practice of ex vivo gene therapy will require the development of processes and products for the reliable, high-efficiency transfer of genes into cells and a means to produce the necessary dose of the genetically modified cells under cGMP conditions. STEM CELL THERAPY Stem cell therapy is used to treat cancer patients who undergo chemotherapy or radiation therapy at dose levels that are toxic to the hematopoietic system, which is comprised of the bone marrow and the cells of the 23 blood and immune systems. The objective of stem cell therapy is to restore the hematopoietic system via the infusion and subsequent engraftment of healthy cells to replace bone marrow and result in the rapid recovery of neutrophils and platelets that have been destroyed by chemotherapy and radiation therapy. Stem cell therapy reduces the risk of life-threatening infections and bleeding episodes following cancer treatments. In order to treat many cancers, high intensity chemotherapy or radiation is often required, which may severely destroy ("myeloablation") or partially destroy ("myelosuppression") the patient's hematopoietic system. Cells required for effective stem cell therapy include stem cells, to replenish depleted bone marrow and provide a long-term ongoing source of the multilineage progenitor cells of the blood and immune systems, and early and late stage hematopoietic progenitor cells, to provide for rapid neutrophil and platelet recoveries. Stromal accessory cells are believed to further augment the growth of bone marrow. In the adult, all of these cell types originate in the bone marrow. These cells are currently collected from the donor or patient directly through multiple syringe aspirations under anesthesia, known as bone marrow collection, or through blood apheresis following treatment with drugs which cause cells to be released or mobilized from the bone marrow into the blood. This latter technique is known as a peripheral blood progenitor cell ("PBPC") collection. See "--Current Stem Cell Collection Methods." Recently, it has been demonstrated that the blood cells found in the umbilical cord of newborn infants include cells effective for stem cell therapy. This source of cells is being explored by physicians as a significant new development in stem cell therapy, but is currently limited by difficulties in obtaining sufficient quantities of these cells and by prolonged engraftment times for the cells once transplanted into the patient. Once collected, the stem cell mixture is infused intravenously and the stem and stromal accessory cells migrate into the bone cavity where they engraft to form a new marrow. The hematopoietic progenitor cell components of the cell mixture provide early restoration of circulating white blood cells and platelets. The replenished bone marrow will normally provide long-term hematopoietic function, but complete restoration of bone marrow may take years following myeloablative cancer therapy. When the patient's hematopoietic system is malignant, such as in the case of leukemia, cells from a suitable donor are generally required in order to avoid reintroducing the disease during cell infusion. Such donor derived transplants are termed "allogeneic" transplants. Procedures using cells derived from the patient are termed "autologous" transplants. STEM CELL THERAPY MARKET OPPORTUNITY The benefits of stem cell therapy in the treatment of cancer patients have been well established over the past two decades. Stem cell therapy, in the form of bone marrow transplantation, was originally used in patients who had received treatment for blood and bone marrow cancers such as leukemia, and genetic diseases of the blood. However, because stem cell therapy has been shown to promote the rapid recovery of hematopoietic function, it is now being increasingly used to enable patients with other forms of cancer to receive high dose or multicycle chemotherapy and radiation treatments. These high- intensity therapies have a greater probability of eradicating dose-sensitive cancers but, because of their hematopoietic toxicity, cannot generally be given without stem cell therapy. As a result, some patients are treated with lower and less effective doses, and fewer cycles of therapy than might otherwise be used. According to an industry source, approximately 32,000 stem cell therapy procedures were completed worldwide in 1995, and, according to another industry source, the number of such procedures utilizing donor-derived and patient-derived cells has been growing annually by approximately 15% and 20%, respectively. This growth has been driven by encouraging clinical results in the treatment of dose-sensitive solid tumors, such as breast and ovarian cancers. The Company expects that the number of stem cell therapy procedures will continue to grow due to increased incidence and prevalence of cancer, continued clinical demand for myelotoxic cancer treatment, and the increased cost effectiveness of stem cell therapy treatments. Stem cell therapy may also enhance the effectiveness of blood cell growth factors. The timing and extent of additional cycles of chemotherapy is often limited by the recovery of a patient's white blood cells and platelets 24 because a delayed recovery of these cells can leave the patient susceptible to life-threatening infection and bleeding episodes, and this limitation may allow for the regrowth of residual tumor cells. Many cancer patients are routinely treated with growth factors including G-CSF, such as Neupogen and GM-CSF, such as Leukine, which enhance the development of mature circulating white blood cells and platelets from the early progenitor bone-marrow derived cells, thereby decreasing the time between cycles of therapy and the probability of infection. However, during high dose or multicycle therapy, the stem and progenitor cells on which these growth factors act are often depleted. Without these cells, growth factors have a limited or negligible effect. Stem cell therapy generally enhances the effectiveness of growth factors by introducing target stem and progenitor cells for growth factors to act upon such that patients generally exhibit a more rapid and consistent hematopoietic recovery. CURRENT STEM CELL COLLECTION METHODS Currently, the bone marrow-derived cells required for stem cell therapy are collected primarily either through the bone marrow harvest method or the PBPC collection method. Bone Marrow Harvest A traditional bone marrow harvest is a costly and invasive surgical procedure in which a physician removes approximately one liter of bone marrow from a patient or donor. This volume of bone marrow is removed using needles inserted into the cavity of the hip bone. The bone marrow harvest procedure typically requires between two to four hours of operating room time, with the physician often making more than 90 separate puncture sites in the hip bone to collect the necessary amount of bone marrow. Due to the length of the procedure and the trauma to the patient, general surgical anesthesia is administered and the patient is often hospitalized for a day. Frequently, the patient suffers pain from the procedure for several days after being discharged from the hospital. Furthermore, complications resulting from the general anesthesia or invasive nature of the procedure occur in a small percentage of patients. Bone marrow harvest provides a reliable source of stem and stromal accessory cells and has been the preferred source of cells in allogeneic transplants. PBPC Mobilization and Collection PBPC mobilization is a technique in which bone marrow-derived cells are harvested from a patient's or donor's circulating blood, rather than from bone marrow. In a PBPC mobilization procedure, the patient receives multiple injections of growth factors or cytotoxic drugs, or both, over the course of a week or more, which cause stem and progenitor cells resident in the bone marrow to mobilize into the circulating blood. The mobilized cells are then collected by connecting the patient to a blood apheresis device, which draws and returns large volumes of the patient's or donor's blood in order to selectively remove the therapeutic volume of stem and progenitor cells. Each collection procedure typically lasts for two to six hours and is typically repeated on two to five consecutive days, however, procedure time has decreased and is expected to continue to decrease as the procedure is further optimized. Specialized laboratory testing over the period of mobilization and cell harvesting is necessary to determine that a sufficient quantity of desired cells has been collected, adding to the cost of the procedure. The PBPC process has become the predominant procedure in autologous stem cell therapy. Procedure Considerations Although stem cell therapy is being utilized to treat more patients for a broader range of diseases, its availability continues to be limited by the high costs of procuring cells, the invasive nature of traditional cell procurement techniques, and by the technical difficulties related to those collection procedures. The Company believes that current charges for bone marrow harvest, processing and infusion are approximately $10,000 to $15,000 per procedure, with considerable variability between institutions. The Company believes that current charges for PBPC collection, including mobilization and infusion, are approximately $12,000 to $20,000 for a two to three cycle procedure, with considerable variability between institutions depending on the mobilization regimen and the total volume, time and number of aphereses required. 25 Overall costs of stem cell therapy include the costs of the cell collection and infusion procedures, and the costs associated with supporting the patient during post-transplant recovery. Post-transplant costs include hospitalization time, antibiotic support, management of adverse reactions to the large volume cell infusions, and infusions of platelets and red blood cells. Any new stem cell therapy process will generally need to provide similar recovery endpoints to be competitive with the current procedures. In this regard, PBPC procedures have gained popularity compared with bone marrow harvests because the number of platelet transfusions is reduced for some patients. Recently, products to implement a cell isolation method known as CD34 selection have been developed by other companies in conjunction with bone marrow harvest and PBPC collections. CD34 selection is a process designed to isolate specific types of cells in order to decrease storage and infusion problems associated with the large volume of fluids collected in bone marrow or multiple apheresis procedures. CD34 selection is used after the initial collection of stem and progenitor cells and, therefore, does not address the difficulties or costs associated with the basic cell collection procedures. A future objective of CD34 selection is to assist in depleting tumor cells from the transplant cells collected, thereby expanding the availability of stem cell therapy to new patient populations. UMBILICAL CORD BLOOD UCB, which is collected directly from the umbilical cord of newborn infants, without pain or risk to the infant or the mother, is emerging as a new source of cells for stem cell therapy. UCB has been reported to have stem cell concentrations that are much higher than that typically obtained from traditional bone marrow and PBPC collection methods. After collection, UCB is typically frozen for later use in a stem cell therapy procedure. Storage of UCB samples involves small volumes of cells, compared to typical bone marrow or PBPC storage. Accordingly, the costs of collection and storage of UCB cells are comparatively low. This source of cells is also "tumor-free," such that UCB would be preferred for many current stem cell therapy procedures in metastatic cancer patients. Before UCB can become a major supply source for stem cell therapy, a coordinated UCB banking system must emerge. In this regard, several UCB banking institutions have been established to date, and the group is growing in both number and size. The establishment of these UCB banking institutions is an initial step which may lead to a coordinated UCB banking system. Current disadvantages of UCB include the relatively low number of available cells which may contribute to prolonged engraftment times for the cells once transplanted into the patient. Unlike bone marrow or PBPC harvest, where the collection of more cells to meet a particular treatment is typically achievable, the number of cells available from a UCB donor is limited. This problem is exacerbated by the required cryopreservation of the cells, which causes significant cell loss. The resultant low cell number is believed to be responsible for the longer hematopoietic recovery times observed with UCB transplants, as compared with bone marrow or PBPC transplants. Further, because of the low cell number, UCB transplants are typically restricted to small patients. Therefore, increasing the number of therapeutic cells from a UCB sample may facilitate the more widespread use of UCB transplants. Aastrom believes that providing the transplant site with the capability to carry out the UCB cell expansion will be a major factor in the increased use of UCB for stem cell therapy and a significant business opportunity. AASTROM TECHNOLOGY Aastrom is developing proprietary process technologies that are pioneering the ex vivo production of human stem and progenitor cells. The Company has also developed a proprietary cell culture device that mimics the biological and physical environment necessary for the growth of certain human cells and tissues, including bone marrow. The Company's initial product candidate, the Aastrom CPS, utilizes the Company's process technology and is designed to enable the ex vivo production of human stem and progenitor cells as an alternative to bone marrow harvest and PBPC mobilization methods and to enhance the clinical utility of UCB cells. The Company believes that the Aastrom CPS may be used for other cell production processes, such as immunotherapy and solid tissue repair, which are being developed by third parties and, in combination with the Company's proprietary gene transfer process, may have application in the developing field of ex vivo gene therapy. 26 CORE TECHNOLOGY Stem Cell Growth Process Aastrom has developed proprietary process technologies for ex vivo production of therapeutic stem and progenitor cells as well as other key cells found in human bone marrow. The Company's proprietary process entails the placement of a stem cell mixture in a culture environment that mimics the biology and physiology of natural bone marrow. This process enables the stem and early and late-stage progenitor cells needed for an effective stem cell therapy procedure to be concurrently expanded. Growth factors can be added to stimulate specific cell lineages to grow or to increase cell growth to meet a particular therapeutic objective. The stem cell growth process can best be completed with little or no additional stem cell selection or purification procedures. This stem cell replication process can also enable or augment the genetic modification of cells by providing the cell division step needed for new genes to integrate into the stem cell DNA. Currently available cell culture methods tend to result in a loss of stem cells, either through death or through differentiation into mature cells. The Company has exclusive rights to several issued U.S. patents that cover these processes and cell compositions. See "--Additional Stem Cell and Other Cell Therapies." Aastrom Cell Culture Chamber Aastrom has developed a proprietary cell culture chamber to implement the Company's process technology. The culture chamber produces cells on a clinical scale and allows for simple, sterile recovery of the cells for therapeutic use. The Company believes that the Aastrom cell culture chamber may also be used for growing other human therapeutic cells, such as T-Cells and dendritic cells used for immunotherapies, chondrocytes for cartilage replacement, and mesenchymal tissues for bone and cartilage replacement. The Company holds exclusive rights to issued U.S. patents and additional applications for its cell culture chamber device technology. See "--Additional Stem Cell and Other Cell Therapies." Efficient Gene Transfer Aastrom has developed proprietary processes and device technology that may enable increased efficiency of vector-mediated gene transfer into cells as compared to conventional procedures. This directed-motion gene transfer or gene loading technology is being pursued by the Company for application in most cell and tissue types and most vector technologies. The Company intends to develop products based upon its gene loading technology. Development of additional products, however, will require the Company to raise additional funds or to seek collaborative partners, or both, to finance related research and development activities, as to which there can be no assurance of success. Furthermore, due to the uncertainties involved, the Company is unable to estimate the length of time such development may take. If successfully developed into products, the Company believes that such products would facilitate the advancement of numerous gene therapy protocols into the clinic and ultimately the market. The Company has exclusive rights to three issued U.S. patents, and has additional applications pending, for this technology. See "Aastrom Product Candidates For Ex Vivo Gene Therapy." THE AASTROM CPS The Aastrom CPS is the Company's lead product under development. While potentially applicable to multiple cell therapy applications such as immunotherapy, solid tissue repair and ex vivo gene therapy, the Aastrom CPS is being developed initially by the Company for stem cell therapy. The Aastrom CPS is a proprietary system that the Company believes will enable the large scale ex vivo production of a variety of therapeutic cells at healthcare facilities, independent laboratories, transplant centers and blood banks, and has been designed to implement Aastrom's stem cell growth process as well as processes for the production of other cell types. The Aastrom CPS is comprised of several components, including single-use Cell Cassettes and reagents and microprocessor-controlled instruments, which are at various stages of development. The Cell Cassette is a single-use cartridge which contains the Aastrom cell culture chamber and the related media supply waste reservoirs and harvest bag. The microprocessor-controlled instruments include the Incubator which controls the culture 27 conditions for the operation of the Cell Cassette, and the Processor which automates the priming and harvesting of the cells from the Cell Cassette. The System Manager is a user interface computer that is being developed to simultaneously track and monitor the cell production process in over thirty CPS Incubators and record relevant process variables and operator actions. Prototype components of the Aastrom CPS are currently being used in clinical trials and ongoing development activities are directed at completing other production level components of the Aastrom CPS. The Aastrom CPS is designed to be operated with minimal operator activity by a medical or laboratory technician and can implement clinical scale cell production at the patient care site. The end product of the Aastrom CPS process is a blood-bag container with the cell product. The control and documentation features of the Aastrom CPS have been designed to meet cGMP requirements for the therapeutic production of cells. AASTROM CPS FOR STEM CELL THERAPY The Company's initial application for the Aastrom CPS is expected to be in the growing field of stem cell therapy, where the Company believes that the Aastrom CPS may address many of the limitations of existing procedures. The Aastrom CPS is based on a comparatively simple process in which a small volume of bone marrow cells are collected from the patient or donor using a needle aspiration procedure typically under a local anesthetic or sedative. This cell mixture is quantified, and an appropriate volume of cells is then inoculated into one or more Cell Cassettes with the necessary growth media. Growth- factor-stimulated cells are produced using the Aastrom CPS in approximately 12 to 13 days, with no further patient involvement. Depending upon the cell quantity necessary for a therapeutic application, single or multiple Cell Cassettes may be required, with a different volume requirement of starting cells taken from the patient at the initial visit. The Aastrom CPS has been designed to minimize operator involvement during the cell production process, and the steps required before and after the Aastrom CPS are standard laboratory procedures. Cells derived from UCB may also serve as a tumor-free source of stem and progenitor cells for expansion in the Aastrom CPS. Potential Advantages of Aastrom CPS The Company believes that the Aastrom CPS, if approved for commercial sale by the FDA and foreign regulatory agencies, may provide certain improvements and efficiencies over traditional cell collection and infusion processes. The following table, which sets forth estimates based on a 1996 survey conducted by the Company of 11 stem cell transplant physicians at different transplant institutions throughout the United States, compares estimated patient care episodes and procedure time for currently established cell collection and infusion techniques with the Aastrom CPS method of cell procurement: -------- (1) Includes all outpatient, inpatient, and home care episodes. (2) Includes operating room procedure and all preparatory and recovery procedures. (3) Based on an average of three rounds of apheresis following cell mobilization injections. (4) Projections, based on data accumulated during the Company's research and clinical trials. The Company believes that the Aastrom CPS may provide the following benefits when compared to current cell collection and infusion methods: Cost-Effectiveness. The Company believes the Aastrom CPS has the potential to cost-effectively replace the labor intensive and invasive cell collection and infusion procedures currently employed for stem cell therapy and to reduce physician, staff and patient time requirements. Reduced Patient and Physician Burden. Cell production with the Aastrom CPS is expected to require the collection of a small volume of starting material compared to current collection procedures, eliminating the 28
PROCEDURE TIME CELL SOURCE CARE EPISODES(1) (HOURS)(1) ----------- ---------------- -------------- Bone Marrow Harvest (2)................... 8 16 PBPC Mobilization and Collection (3)...... 21 39 Aastrom CPS (4)........................... 2 1-3 requirement for general surgical anesthesia, multiple drug injections or blood apheresis. Patient benefits are expected to include fewer needle sticks than with current cell collection and infusion methods and a reduction in overall patient procedure time. Additionally, Aastrom's process for cell expansion is expected to minimize the time requirement for physicians compared with bone marrow harvest. Enhanced Multicycle High-Dose Chemotherapy. The long restoration period for the hematopoietic system following myeloablative therapy effectively limits patients to one opportunity for cell collection prior to cancer therapy. The Aastrom CPS may enhance the practice of multicycle, high-dose chemotherapy by providing the ability to produce a therapeutic dose of cells from a small starting volume. The initial cell collection can be divided into multiple samples and stored frozen until expansion at a later time is required. Reduced Quantity of Lymphocytes. The Company believes its approach to stem cell therapy may provide an additional benefit over current methods by depleting potentially harmful cells such as T-cells and B-cells. These cells are believed to be primarily responsible for graft-versus-host disease, a common manifestation of allogeneic transplants in which the grafted donor's cells attack the host's tissues and organs. Tumor Cell Purging. Cancer patients with tumor metastases, in which the cancer has spread to the blood and bone marrow, have not traditionally been candidates for autologous stem cell transplants because such transplant might reintroduce cancer cells into the patient. Additionally, patients may have undetected tumor cells present in their marrow or PBPC transplant, which could re-establish cancer in the patient following transplant. The Company's initial clinical results, as well as studies conducted by third-party investigators, have shown that some primary human tumor cells die or do not grow during hematopoietic cell culture. The smaller volume of starting cells used for the Aastrom CPS compared with bone marrow harvest or PBPC transplants may provide approximately 10 to 70 fold less tumor cells in a transplant. Further, in an evaluation of seven tumor-contaminated bone marrow samples that were expanded with the Aastrom CPS process, the presence of breast cancer cells in each sample was either substantially reduced or was no longer detectable. The Company believes that this combination of passive depletion during culture with the lower starting volume of tumor cells may result in a tumor-free or tumor-reduced cell product for transplant. The clinical benefit of such tumor depletion, if any, will vary depending upon the type of cancer and state of disease. CLINICAL DEVELOPMENT The Company's clinical development plan is initially to obtain regulatory approval in the United States to market the Aastrom CPS for autologous stem cell therapy and UCB transplantation, and in Europe for more general cell therapy applications. The Company also intends to pursue approval of the Aastrom CPS for additional clinical indications. The Company believes that the Aastrom CPS for stem cell therapy will be regulated as a medical device and that the Company will be required to submit a PMA application to, and obtain approval from, the FDA to allow it to market this product in the United States. In order to obtain PMA registration, the Company will be required to complete clinical trials under an IDE. See "-- Government Regulation--Devices." Aastrom is currently conducting a pre-pivotal stem cell therapy clinical trial at four U.S. sites. This clinical trial is designed to demonstrate that cells produced using the Aastrom CPS can alone provide hematopoietic recovery in accordance with trial endpoints in breast cancer patients who have received myeloablative chemotherapy. Bone marrow or mobilized PBPC obtained from the patients by traditional methods will be available for precautionary reasons at defined clinical stages. Initial patient data from one trial site have been presented and demonstrate that cells produced in the Aastrom CPS can lead to engraftment of stem cells in patients within a recovery time frame that is comparable with that of conventional bone marrow transplantation following ablative chemotherapy. These patients started to recover their white blood cell counts within a median time of approximately seven days post-transplant and reached safe levels of neutrophils at approximately 16 days and platelets at approximately 23 days. Prior to implementing the trial protocol used for these patients, the Company had evaluated the cells produced in the Aastrom CPS in Stage IV breast cancer patients who had received significant prior cytotoxic therapy for their advanced cancer. 29 The Company has also initiated clinical trials at one site for adult patients and at another site for pediatric patients to evaluate the use of the Aastrom CPS to expand cells obtained from UCB for use in patients who have received myeloablative radiation or chemotherapy. The objective of the current and anticipated future trials is to establish the protocols for pivotal trials of the Aastrom CPS in stem cell therapy. Provided that these pre-pivotal trials provide further evidence of the feasibility and safety of cells produced in the Aastrom CPS, the Company anticipates initiating pivotal clinical trials at multiple sites no earlier than late 1997, with patient enrollment to support a PMA filing, although this schedule is subject to numerous risks and uncertainties. Aastrom, in partnership with Cobe, has initiated two clinical sites in Europe to evaluate the use of Aastrom CPS cells to promote hematopoietic recovery in breast cancer patients undergoing aggressive myelosuppressive or myelotoxic chemotherapy. Assuming the successful completion of these and other clinical trials, the Company intends to seek approval to market the Aastrom CPS in Europe through CE Mark Registration. See "--Government Regulation-- Regulatory Process in Europe." The ongoing trials were preceded by earlier studies designed to evaluate safety and process feasibility. Aastrom completed the first feasibility trial of its cell production system technology at the M.D. Anderson Cancer Center in October 1995. In this trial, ten breast cancer patients, who were subjected to myeloablative chemotherapy, were treated with cells obtained from a standard bone marrow harvest and with cells produced from a sample of such cells with a predecessor of the Aastrom CPS. The patients exhibited standard clinical recoveries, providing evidence of the clinical safety of cells obtained from the Company's cell production process and of the feasibility of cell production with a predecessor of the Aastrom CPS by clinical personnel at an investigational site. With this study completed, a five-patient study was then conducted to begin to evaluate the use of cells obtained from the Company's cell production process alone in the transplant setting. The results from these patients provided evidence of the clinical safety of the Aastrom CPS-produced cells in patients and that the hematopoietic recovery endpoints specified for the trial are achievable. Four of these five patients received the delayed administration of the precautionary bone marrow pursuant to the trial protocol. Following further review by the FDA, the IDE was amended to expand the trail to the four additional sites where the clinical trail is now ongoing. The amended IDE provided for the enrollment of Stage II, III and IV patients, and a delayed use of the precautionary bone marrow. In a dose-ranging study conducted by the University of Michigan (the "University") in 1993, ex vivo produced cells utilizing the Company's proprietary cell production technology were infused into seven patients with non-Hodgkin's lymphoma after they received myeloablative chemotherapy. These patients also received cells obtained from either an autologous bone marrow harvest or PBPC procedure. No safety issues attributable to the infused cells were observed in this trial and the patients exhibited recovery profiles consistent with traditional transplantation techniques. The preliminary results of the Company's pre-pivotal trials may not be predictive of results that will be obtained from subsequent patients in the trials or from more extensive trials. Further, there can be no assurance that the Company's pre-pivotal or pivotal trials will be successful, or that PMA registration or required foreign regulatory approvals for the Aastrom CPS will be obtained in a timely fashion, or at all. See "Risk Factors--Uncertainties Related to Clinical Trials." BUSINESS STRATEGY Aastrom's objective is to build a leadership position in cell therapy process technology. The primary elements of the Company's business strategy are as follows: Establish Consumable Based Business Model. Aastrom's strategy is to sell the Aastrom CPS to institutions, hospitals, and other clinical care or commercial cell production facilities that are producing cells for patient treatments. The Company plans to obtain ongoing revenue from the sale of single-use Cell Cassettes and related cell culture media and reagents, which are utilized in individual cell therapy applications. After cells are cultured, the Cell Cassette is discarded and a new Cell Cassette is utilized for a subsequent cell production 30 procedure. Cell Cassettes are specifically designed for particular cell types, allowing for different marketing strategies for different cell therapy indications. Along with ongoing revenue from the sale of instruments and single-use Cell Cassettes and reagents for cell therapy applications, the Company believes it will be able to obtain license revenue from its stem cell therapy applications for its proprietary stem cell processes. Focus Initially on Established and Reimbursed Therapies. Aastrom will seek to establish the use of the Aastrom CPS in the field of stem cell therapy for the treatment of hematopoietic system toxicity resulting from many cancer therapies, including those for breast cancer, lymphoma, ovarian cancer, germ cell cancers, leukemias and aplastic anemias. Stem cell therapy is a well- established and growing treatment modality in cancer therapy, and current cell collection procedures are widely reimbursed by third party payors. Leverage Platform Technology Across Multiple Market Opportunities. In addition to stem cell therapy applications, the Company believes that the Aastrom CPS may serve as a platform product that can be used to produce a variety of other cells for multiple therapeutic applications, such as T-cells and dendritic cells for use in cellular immunotherapies, chondrocytes for cartilage replacement, and mesenchymal cells for use in certain solid tissue repair applications. The Company believes that by providing systems with broad cell processing capabilities, hospitals or other cell production facilities may use the Aastrom CPS for multiple cell therapy applications. Enter Into Collaborative Relationships. The Company plans to market its products and establish reimbursement for such products through corporate collaborations. The Company currently plans to establish corporate relationships in its targeted market segments, which include immunotherapy, solid tissue repair and ex vivo gene therapy. For the stem cell therapy market segment, the Company has formed a strategic collaboration with Cobe, a leading provider of blood processing equipment systems. Under the terms of this agreement, Cobe will be the Company's exclusive worldwide marketing, distribution and service provider for the Aastrom CPS for stem cell therapy applications, other than stem cell gene therapy. For selected emerging cell therapies, additional alliances will be sought by the Company to (i) secure additional technology, such as gene vectors or growth factors, or regulatory or marketing capability which may augment the Aastrom CPS or Aastrom Gene Loader; (ii) assist with regulatory and reimbursement matters for new therapy applications; and (iii) assist with marketing new therapy applications to physicians. To assist the Company in securing new strategic alliances, the Company has entered into an agreement with Burrill & Company, LLC ("Burrill"). Under this agreement, Burrill will work with the Company to identify and transact cell therapy collaborations, and a majority of Burrill's compensation under the agreement is contingent upon the Company successfully entering into new corporate alliances. See "--Strategic Relationships." ADDITIONAL STEM CELL AND OTHER CELL THERAPIES The Company believes that the Aastrom CPS hardware and single-use Cell Cassettes may be developed to serve as platform products for application in a variety of other emerging cell therapies in addition to stem cell therapy. The Company believes that the Aastrom CPS has the potential to supplant current manual cell culture methods to produce therapeutic quantities of cell types such as T-cells, chondrocytes, mesenchymal cells, keratinocytes, neuronal cells and dendritic cells. Other than a limited application of chondrocyte therapy, novel cell therapies are still in early stages of development by third parties, and no assurance can be given that such other cell therapies will be successfully developed. Potential advantages of the Aastrom CPS in these therapies may include: (i) reducing labor and capital costs; (ii) enhancing process reliability; (iii) automating quality assurance; (iv) reducing the need for specialized, environmentally controlled facilities; and (v) providing greater accessibility of these procedures to care providers and patients and, in certain cases, providing a more biologically active cell product. Modification of such processes and application of the Company's products to the expansion of other cell types may require substantial additional development of specialized cell culture environments which may need to be incorporated within the Company's existing Cell Cassettes. Such modifications may require the Company to raise substantial additional funds, or to seek additional collaborative partners, or both. There can be no assurance that the Company will be able to successfully modify or develop existing or future products to enable such additional cell production processes. The Company's business opportunity is dependent upon successful development and regulatory approval of these novel cell therapies. No assurance can be given that such novel 31 therapies will be successfully developed by other companies or approved by applicable regulatory authorities, or that the Company's processes or product candidates will find successful application in such therapies. In addition, the Company may be required to obtain license rights to such technologies in order to develop or modify existing or future products for use in such therapies. No assurance can be given that the Company will be able to obtain such licenses or that such licenses, if available, could be obtained on commercially reasonable terms. See "--Business Strategy" and "--Clinical Development," "Use of Proceeds," and "Risk Factors--Future Capital Needs; Uncertainty of Additional Funding." Immunotherapies Immunotherapy involves using cells of the immune system to eradicate a disease target. T-cell lymphocytes and dendritic cells are being actively investigated by other companies for this purpose, and the Company anticipates that many of these procedures will require ex vivo cell production. T-cells, a class of lymphocyte white blood cells, play a critical role in the human immune system and are responsible for the human immune response in a broad spectrum of diseases, including cancers and infectious diseases. Cytotoxic T-lymphocytes ("CTLs") is a new process that involves collecting T- cells from a patient and culturing them in an environment resulting in T-cells with specificity for a particular disease target. Clinical trials by third parties have been initiated to demonstrate CTL effectiveness. The ex vivo production of these cells under conditions for use in medical treatment represents a critical step in the advancement of this therapy. Dendritic cells (the potent antigen presenting cells) are believed to play an important role in the function of the immune system. Researchers believe that cultured dendritic cells could augment the natural ability of a patient to present antigens from the infectious agents to the immune system and aid in the generation of a cytotoxic T-cell response to the infectious agent. Solid Tissue Cell Therapies One of the newest areas of cell therapy involves the production of chondrocytes for the restoration of cartilage. Chondrocyte therapy involves the surgical removal of a small amount of tissue from the patient's knee and a therapeutic quantity of chondrocytes is produced from this surgical biopsy. The cells are then implanted into the patient's knee. Published reports indicate that such cells then reestablish mature articular cartilage. Currently, this cell production process is completed in highly specialized laboratory facilities using trained scientists and manual laboratory procedures. The Company believes that the Aastrom CPS may have the potential to reduce costs associated with the cell production procedure and, if successfully developed by the Company for this application, may eventually facilitate the transfer of the cell production capability away from specialized facilities directly to the clinical care sites. Other Stem Cell Therapies Autoimmune Diseases. Stem cell therapy is under clinical investigation by third parties for the treatment of other diseases. Clinical studies have suggested a potential role for stem cell therapy in treatment of autoimmune diseases such as rheumatoid arthritis, multiple sclerosis and lupus erythematosus. The generic cause of these diseases is a malfunctioning immune system, including T-lymphocytes. Clinical trials in which the patient receives treatment resulting in immune ablation (usually involving myelotoxic cancer drugs or radiation), followed by stem cell therapy to restore the bone marrow and cells of the blood and immune system, have demonstrated remission of the autoimmune disease in some patients. Organ Transplantation. Recently, a number of academic and corporate researchers and companies have identified the potential use of stem cell therapy to facilitate successful solid organ and tissue transplants between human donors and recipients, as well as using organs from non-human species for transplantation into humans. These proposed applications are based on the observation that donor-specific bone marrow, infused concurrent 32 with or prior to the organ transplant, can provide for reduction of the normal immune rejection response by the transplant recipient (e.g. heart, lung, liver or kidney transplants). A major limitation to the use of stem cell therapy in solid organ transplant is the limited availability of sufficient amounts of bone marrow to obtain a desired therapeutic response of immune tolerization. This limitation is particularly problematic when cadaveric donor organs are used, which has traditionally been the source of cells for these procedures. Bone marrow is also often available from the cadaveric donor, but only in a limited amount. Normally this amount may be sufficient for one transplant, but a donor might provide multiple organs for transplant into multiple recipients. Aastrom believes that the ability to expand the available bone marrow ex vivo will enhance the use of stem cell therapy for such transplant procedures and may pursue development of its products for application in such therapy in the future. AASTROM PRODUCT CANDIDATES FOR EX VIVO GENE THERAPY A novel form of cell therapy is ex vivo gene therapy. For this type of cell therapy, cells procured from the patient or a donor are genetically modified prior to their infusion into the patient. Analogous to other cell therapies, the ability to produce a therapeutic dose of these gene-modified cells is a major limitation to the commercialization of these cell therapies. This limitation is further exacerbated by the additional requirement that the cells be genetically modified under conditions that are sterile and comply with GMP. Gene therapy is a therapeutic modality that holds the potential to significantly impact the delivery of healthcare and the delivery of therapeutically useful protein-based drugs within the body. Gene therapies are generally targeted at the introduction of a missing normal gene into otherwise defective human tissue, or the introduction of novel biologic capability into the body via the introduction of a gene not ordinarily present (for example, genes providing for the enhanced recognition and destruction or inhibition of the HIV-1 virus). The major developmental focus of the ex vivo gene therapy industry has been to identify the therapeutic gene of interest, insert it into a suitable vector that can be used to transport and integrate the gene into the DNA of the target cell, and then cause the gene to become expressed. The Company believes that for ex vivo gene therapy to progress to clinical applications, a process to produce a sufficient quantity of therapeutic cells is required as is an efficient means to insert the gene vector into target cells. Gene therapy is still in an early stage of development by third parties. The Company's business opportunity is dependent upon the successful development and regulatory approval of individual gene therapy applications. No assurance can be given that such applications will be developed or approved or that the Company's processes or product candidates will find successful applications in such therapies. Successful development of the Company's processes and product candidates for application in ex vivo gene therapy will require substantial additional research and development, including clinical testing, and will be subject to the Company's ability to finance such activities on acceptable terms, if at all. See "Risk Factors--Future Capital Needs; Uncertainty of Additional Funding." THE AASTROM CPS FOR GENE THERAPY (GT-CPS) The Aastrom CPS has been designed to produce cells for therapy and the Company believes that the Aastrom CPS may be useful in many potential ex vivo gene therapy applications. Further, the Company anticipates that its proprietary stem cell production process technology implemented by the Aastrom CPS may provide the conditions for clinical scale stem cell division, and enable or enhance the introduction of therapeutic genes into stem cell DNA. The Company believes that its technology may also enable expansion of more mature progeny of these stem cells to create a gene therapy cell product with potential short and long term therapeutic effect. The Company has two principal objectives for the development of Aastrom GT- CPS: (i) the enablement of stem cell gene therapies for a variety of hematologic and other disorders, based on the GT-CPS's ability to enable large scale stem cell division ex vivo; and (ii) the enablement of gene transfer and therapeutic cell production by local and regional primary patient care facilities and ancillary service laboratories. 33 THE AASTROM GENE LOADER The Aastrom Gene Loader product technology, which is under development, is being designed to enhance the efficiency and reliability of the transfer of new therapeutic genes, which are carried by vectors, into the target cell. This process, which is typically inefficient in many human cells inhibits many ex vivo gene therapies from moving forward in the clinic. The Aastrom Gene Loader is being designed to incorporate the Company's proprietary directed motion gene transfer technology. Complete product development is expected to require additional funding sources or collaborations with others, or both. The Company believes that these issues represent a general bottleneck for other companies pursuing ex vivo gene therapy clinical applications. The Company's technology under development may favorably influence these gene therapy applications, the development of which are impeded due to low transduction efficiencies and the resultant need for use of extreme quantities of gene vectors and/or target "delivery" tissues. STRATEGIC RELATIONSHIPS On October 22, 1993, the Company entered into a Distribution Agreement (the "Distribution Agreement") with Cobe for Cobe to be the Company's exclusive, worldwide marketing, distribution and service provider for the Aastrom CPS for stem cell therapy applications (the "Stem Cell Therapy Applications"). Under the terms of the Company's Distribution Agreement with Cobe, other than with respect to sales to affiliates, the Company is precluded from selling the Aastrom CPS to customers for stem cell therapy applications. The Company has, however, reserved the right to sell the Aastrom CPS for: (i) all diagnostic or other non-therapeutic clinical applications; (ii) all gene therapy or gene transfer applications, including those for stem cells; (iii) all non-human applications; (iv) certain permitted clinical research applications; and (v) all applications that are labeled not for human use. The Company has also reserved the unconditional right to sell other products under development, including but not limited to products based upon its gene loading technology. The initial term of the Distribution Agreement expires on October 22, 2003, and Cobe has the option to extend the term for an additional ten-year period. The Company is responsible for the expenses to obtain FDA and other regulatory approval in the United States, while Cobe is responsible for the expenses to obtain regulatory approval in foreign countries to allow for worldwide marketing of the Aastrom CPS for Stem Cell Therapy Applications. See "Risk Factors--Consequences of Cobe Relationship." Under the terms of the Distribution Agreement, the Company will realize approximately 58% to 62% of the net sales price at which Cobe ultimately sells the Aastrom CPS for Stem Cell Therapy Applications, subject to certain negotiated discounts and volume-based adjustments and subject to the obligation of the Company to make aggregate royalty payments of up to 5% to certain licensors of its technology. The Company is also entitled to a premium on United States sales in any year in which worldwide sales exceed specified levels. The Distribution Agreement may be terminated by Cobe upon twelve months prior notice to the Company in the event that any person or entity other than Cobe beneficially owns more than 50% of the Company's outstanding Common Stock or voting securities. The Distribution Agreement may also be terminated by Cobe at any time after December 31, 1997 if Cobe determines that commercialization of the Aastrom CPS for stem cell therapy on or prior to December 31, 1998 is unlikely. In conjunction with the Distribution Agreement, the Company also entered into a Stock Purchase Agreement with Cobe (the "Cobe Stock Agreement"), whereby Cobe acquired certain option, registration, preemptive and other rights pertaining to shares of the Company's stock. Pursuant to such preemptive rights, Cobe elected to purchase 714,200 shares of Common Stock in the Company's initial public offering in February 1997. See "Description of Capital Stock--Rights of Cobe" and "Certain Transactions." The Company has entered into a Strategic Planning Consulting Services and Collaboration Agreement (the "Consulting Agreement") with Burrill, pursuant to which Burrill will advise the Company on potential strategic alliances and seek to identify potential collaborations. Pursuant to the Consulting Agreement, Burrill will be paid a monthly retainer of $10,000 and will be reimbursed for expenses incurred pursuant to an approved budget. 34 Aastrom has issued Burrill an immediately exercisable warrant to purchase 100,000 shares of Common Stock at an exercise price of $7.24 and a second warrant, which vests over a one-year period, to purchase 100,000 shares at an exercise price of $7.24. The Consulting Agreement is terminable by either party following periods of up to 30 days following notice. The Consulting Agreement also provides for payments to Burrill that are based on the timing and amount of proceeds Aastrom may receive from any future strategic alliances. In the event that the Company enters into strategic alliances (which exclude minor technology license agreements and customary manufacturing or supply agreements that do not involve equity investments in Aastrom, as well as performance pursuant to any of Cobe's existing agreements with Aastrom), the Company will pay Burrill a success fee ranging from 4% to 7.5% of the proceeds in connection with the strategic alliance. In addition to the success fee, Aastrom will issue to Burrill additional warrants to purchase up to 500,000 shares of Common Stock, depending upon the achievement of certain milestones. MANUFACTURING The Company has no current intention of internally manufacturing its product candidates and, accordingly, is developing relationships with third party manufacturers which are FDA registered as suppliers for the manufacture of medical products. In May 1994, the Company entered into a Collaborative Product Development Agreement with SeaMED Corporation, ("SeaMED"). Pursuant to this agreement, the Company and SeaMED will collaborate on the further design of certain instrument components in the Aastrom CPS, and enable SeaMED to manufacture pre-production units of the instrument components for laboratory and clinical evaluation. The Company is paying SeaMED for its design and pre-production work on a "time and materials" basis, utilizing SeaMED's customary hourly billing rates and actual costs for materials. Subject to certain conditions, the Company has committed to enter into a manufacturing agreement with SeaMED for commercial manufacture of the instrument components for three years after shipment by SeaMED of the first commercial unit pursuant to a pricing formula set forth in the agreement. The Company retains all proprietary rights to its intellectual property which is utilized by SeaMED pursuant to this agreement. In November 1994, the Company entered into a Collaborative Product Development Agreement with Ethox Corporation ("Ethox"). Pursuant to this agreement, the Company and Ethox collaborated on the design of certain bioreactor assembly and custom tubing kit components of the Aastrom CPS. The Company is paying Ethox for its design and production work on a "time and materials" basis, utilizing Ethox's customary hourly billing rates and actual costs for materials. The Company retains all proprietary rights to its intellectual property which are utilized by Ethox pursuant to this agreement. 35 In March 1996, the Company entered into a five-year License and Supply Agreement with Immunex to purchase and resell certain cytokines and ancillary materials for use in conjunction with the Aastrom CPS. The agreement required the Company to pay Immunex an initial up-front fee of $1,500,000 to be followed by subsequent annual renewal payments equal to $1,000,000 per year during the term of the agreement in addition to payment for supplies purchased by the Company. In August 1997, the Company and Immunex amended the agreement to expand the Company's territorial rights to use and sell such materials to a worldwide basis. Unless earlier terminated or renewed by the Company for an additional five-year term, the agreement will expire in April 2001. The agreement may be terminated by either party effective immediately upon written notice of termination to the other party in the event that such party materially breaches the agreement and such breach continues unremedied after notice and expiration of a specified cure period or in the event that a bankruptcy proceeding is commenced against a party and is not dismissed or stayed within a 45-day period. In addition, Immunex has the right to cease the supply to the Company of cytokines and ancillary materials if the Company fails to purchase a minimum amount of its forecasted annual needs from Immunex after notice to the Company and expiration of a specified cure period. The Company also has the right to terminate the agreement at any time subject to the payment to Immunex of a specified amount for liquidated damages. In the event that Immunex elects to cease to supply to the Company cytokines and ancillary materials or is prevented from supplying such materials to the Company by reason of force majeure, limited manufacturing rights will be transferred to the Company under certain circumstances. There is, however, no assurance that the Company could successfully manufacture the compounds itself or identify others that could manufacture these compounds to acceptable quality standards and costs, if at all. In December 1996, the Company entered into a Collaborative Supply Agreement with Anchor Advanced Products, Inc., Mid-State Plastics Division ("MSP"). Under this agreement, MSP will conduct both pre-production manufacturing development and commercial manufacturing and assembly of the Cell Cassette component of the Aastrom CPS for the Company. During the initial phase of the seven-year agreement, the Company will pay MSP for its development activities on a time and materials basis. Upon reaching certain commercial manufacturing volumes, MSP will be paid by the Company on a per unit basis for Cell Cassettes delivered to the Company under a pricing formula specified in the agreement. Throughout the term of this agreement, the Company has agreed to treat MSP as its preferred supplier of Cell Cassettes, using MSP as its supplier of at least 60% of its requirements for Cell Cassettes. There can be no assurance that the Company will be able to continue its present arrangements with its suppliers, supplement existing relationships or establish new relationships or that the Company will be able to identify and obtain the ancillary materials that are necessary to develop its product candidates in the future. The Company's dependence upon third parties for the supply and manufacture of such items could adversely affect the Company's ability to develop and deliver commercially feasible products on a timely and competitive basis. See "Risk Factors--Manufacturing and Supply Uncertainties; Dependence on Third Parties." PATENTS AND PROPRIETARY RIGHTS The Company's success depends in part on its ability, and the ability of its licensors, to obtain patent protection for its products and processes. The Company has exclusive rights to twelve issued U.S. patents and one patent with respect to which the Company has received notice of allowance that present claims to (i) certain methods for ex vivo stem cell division as well as ex vivo human hematopoietic stem cell stable genetic transformation and expanding and harvesting a human hematopoietic stem cell pool; (ii) certain apparatus for cell culturing, including a bioreactor suitable for culturing human stem cells or human hematopoietic cells; (iii) certain methods of infecting or transfecting target cells with vectors; and (iv) a cell composition containing human stem cells or progenitor cells, or genetically modified stem cells, when such cells are produced in an ex vivo medium exchange culture. Patents equivalent to two of these U.S. patents have also been issued in other jurisdictions: one in Australia and another in Canada and under the European Patent Convention. These twelve 36 issued patents, in addition to the one patent with respect to which the Company has received notice of allowance, are due to expire beginning in 2006, through 2014. In addition, the Company and its exclusive licensors have filed applications for patents in the United States and equivalent applications in certain other countries claiming other aspects of the Company's products and processes, including a number of U.S. patent applications and corresponding applications in other countries related to various components of the Aastrom CPS. The validity and breadth of claims in medical technology patents involve complex legal and factual questions and, therefore, may be highly uncertain. No assurance can be given that any patents based on pending patent applications or any future patent applications of the Company or its licensors will be issued, that the scope of any patent protection will exclude competitors or provide competitive advantages to the Company, that any of the patents that have been or may be issued to the Company or its licensors will be held valid if subsequently challenged or that others will not claim rights in or ownership of the patents and other proprietary rights held or licensed by the Company. Furthermore, there can be no assurance that others have not developed or will not develop similar products, duplicate any of the Company's products or design around any patents that have been or may be issued to the Company or its licensors. Since patent applications in the United States are maintained in secrecy until patents issue, the Company also cannot be certain that others did not first file applications for inventions covered by the Company's and its licensors' pending patent applications, nor can the Company be certain that it will not infringe any patents that may issue to others on such applications. The Company relies on certain licenses granted by the University of Michigan and Dr. Cremonese for the majority of its patent rights. If the Company breaches such agreements or otherwise fails to comply with such agreements, or if such agreements expire or are otherwise terminated, the Company may lose its rights under the patents held by the University of Michigan and Dr. Cremonese, which would have a material adverse effect on the Company's business, financial condition and results of operations. See "--Research and License Agreements." The Company also relies on trade secrets and unpatentable know-how which it seeks to protect, in part, by confidentiality agreements. It is the Company's policy to require its employees, consultants, contractors, manufacturers, outside scientific collaborators and sponsored researchers, and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with the Company. These agreements provide that all confidential information developed or made known to the individual during the course of the individual's relationship with the Company is to be kept confidential and not disclosed to third parties except in specific limited circumstances. The Company also requires signed confidentiality or material transfer agreements from any company that is to receive its confidential data. In the case of employees, consultants and contractors, the agreements generally provide that all inventions conceived by the individual while rendering services to the Company shall be assigned to the Company as the exclusive property of the Company. There can be no assurance, however, that these agreements will not be breached, that the Company would have adequate remedies for any breach, or that the Company's trade secrets or unpatentable know-how will not otherwise become known or be independently developed by competitors. The Company's success will also depend in part on its ability to develop commercially viable products without infringing the proprietary rights of others. The Company has not conducted freedom of use patent searches and no assurance can be given that patents do not exist or could not be filed which would have an adverse effect on the Company's ability to market its products or maintain its competitive position with respect to its products. If the Company's technology components, devices, designs, products, processes or other subject matter are claimed under other existing United States or foreign patents or are otherwise protected by third party proprietary rights, the Company may be subject to infringement actions. In such event, the Company may challenge the validity of such patents or other proprietary rights or be required to obtain licenses from such companies in order to develop, manufacture or market its products. There can be no assurances that the Company would be able to obtain such licenses or that such licenses, if available, could be obtained on commercially reasonable terms. Furthermore, the failure to either develop a commercially viable alternative or obtain such licenses could result in delays in marketing the Company's proposed products or the inability to proceed with 37 the development, manufacture or sale of products requiring such licenses, which could have a material adverse effect on the Company's business, financial condition and results of operations. If the Company is required to defend itself against charges of patent infringement or to protect its own proprietary rights against third parties, substantial costs will be incurred regardless of whether the Company is successful. Such proceedings are typically protracted with no certainty of success. An adverse outcome could subject the Company to significant liabilities to third parties and force the Company to curtail or cease its development and sale of its products and processes. Certain of the Company's and its licensors' research has been or is being funded in part by the Department of Commerce and by a Small Business Innovation Research Grant obtained from the Department of Health and Human Services. As a result of such funding, the U.S. Government has certain rights in the technology developed with the funding. These rights include a non- exclusive, paid-up, worldwide license under such inventions for any governmental purpose. In addition, the government has the right to require the Company to grant an exclusive license under any of such inventions to a third party if the government determines that (i) adequate steps have not been taken to commercialize such inventions, (ii) such action is necessary to meet public health or safety needs or (iii) such action is necessary to meet requirements for public use under federal regulations. Additionally, under the federal Bayh Dole Act, a party which acquires an exclusive license for an invention that was partially funded by a federal research grant is subject to the following government rights: (i) products using the invention which are sold in the United States are to be manufactured substantially in the United States, unless a waiver is obtained; (ii) if the licensee does not pursue reasonable commercialization of a needed product using the invention, the government may force the granting of a license to a third party who will make and sell the needed product; and (iii) the U.S. Government may use the invention for its own needs. RESEARCH AND LICENSE AGREEMENTS In August 1989, the Company entered into a Research Agreement (the "Research Agreement") with the University, pursuant to which the Company funded a research project at the University under the direction of Stephen G. Emerson, M.D., Ph.D., as the principal inventor, together with Michael F. Clarke, M.D., and Bernhard O. Palsson, Ph.D., as co-inventors. Pursuant to the Research Agreement, the Company was granted the right to acquire an exclusive, worldwide license to utilize all inventions, know-how and technology derived from the research project. By Extension Agreements, the Company and the University extended the scope and term of the Research Agreement through December 1994. In March 1992, the Company and the University entered into the License Agreement, as contemplated by the Research Agreement. There have been clarifying amendments to the License Agreement, in March 1992, October 1993 and June 1995. Pursuant to this License Agreement, (i) the Company acquired exclusive worldwide license rights to the patents and know-how for the production of blood cells and bone marrow cells as described in the University's research project or which resulted from certain further research conducted through December 1994, and (ii) the Company is obligated to pay to the University a royalty equal to 2% of the net sales of products which are covered by the University's patents. Unless it is terminated earlier at the Company's option or due to a material breach by the Company, the License Agreement will continue in effect until the latest expiration date of the patents to which the License Agreement applies. In July 1992, the Company entered into a License Agreement with Joseph G. Cremonese pursuant to which the Company obtained exclusive worldwide license rights for all fields of use, to utilize U.S. Patent No. 4,839,292, entitled "Cell Culture Flask Utilizing a Membrane Barrier," which patent was issued to Dr. Cremonese on June 13, 1989, and to utilize any other related patents that might be issued to Dr. Cremonese. Pursuant to the License Agreement, the Company has reimbursed Dr. Cremonese for $25,000 of his patent costs. Under the terms of the License Agreement, the Company is to pay to Dr. Cremonese a royalty of 3% of net sales of the products which are covered by said patent, subject to specified minimum royalty payments ranging from $20,000 to $50,000 per year, commencing in calendar year 1997. Unless earlier terminated, the License 38 Agreement will continue in effect until the latest expiration date of the patents to which the License Agreement applies, which latest expiration date is currently August 2009. The License Agreement may be terminated by either party upon default by the other party of any of its obligations under the agreement without cure after expiration of a 30-day notice period. The Company also has the right to terminate the License Agreement at any time without cause upon 30 days prior written notice to Dr. Cremonese. GOVERNMENT REGULATION The Company's research and development activities and the manufacturing and marketing of the Company's products are subject to the laws and regulations of governmental authorities in the United States and other countries in which its products will be marketed. Specifically, in the United States, the FDA, among other activities, regulates new product approvals to establish safety and efficacy of these products. Governments in other countries have similar requirements for testing and marketing. In the United States, in addition to meeting FDA regulations, the Company is also subject to other federal laws, such as the Occupational Safety and Health Act and the Environmental Protection Act, as well as certain state laws. REGULATORY PROCESS IN THE UNITED STATES To the Company's knowledge, it is the first to develop a cell culture system for ex vivo human cell production to be sold for therapeutic applications. Therefore, to a certain degree, the manner in which the FDA will regulate the Company's products is uncertain. The Company's products are potentially subject to regulation as medical devices under the Federal Food, Drug, and Cosmetic Act, and as biological products under the Public Health Service Act, or both. Different regulatory requirements may apply to the Company's products depending on how they are categorized by the FDA under these laws. To date, the FDA has indicated that it intends to regulate the Aastrom CPS product for stem cell therapy as a Class III medical device through the Center for Biologics Evaluation and Research. However, there can be no assurance that FDA will ultimately regulate the Aastrom CPS as a medical device. Further, it is unclear whether the FDA will separately regulate the cell therapies derived from the Aastrom CPS. The FDA is still in the process of developing its requirements with respect to somatic cell therapy and gene cell therapy products and has recently issued draft documents concerning the regulation of umbilical cord blood stem cell products, as well as cellular and tissue-based products. If the FDA adopts the regulatory approach set forth in the draft document, the FDA may require separate regulatory approval for such cells in some cases. The FDA also recently proposed a new type of license, called a biologic license application ("BLA"), for autologous cells manipulated ex vivo and intended for structural repair or reconstruction. This proposal may indicate that the FDA will extend a similar approval requirement to other types of autologous cellular therapies, such as autologous cells for stem cell therapy. Any such additional regulatory or approval requirements could significantly delay the introduction of the Company's product candidates to the market, and have a material adverse impact on the Company. Approval of new medical devices and biological products is a lengthy procedure leading from development of a new product through preclinical and clinical testing. This process takes a number of years and the expenditure of significant resources. There can be no assurance that the Company's product candidates will ultimately receive regulatory approval. Regardless of how the Company's product candidates are regulated, the Federal Food, Drug, and Cosmetic Act and other Federal statutes and regulations govern or influence the research, testing, manufacture, safety, labeling, storage, recordkeeping, approval, distribution, use, reporting, advertising and promotion of such products. Noncompliance with applicable requirements can result in civil penalties, recall, injunction or seizure of products, refusal of the government to approve or clear product approval applications or to allow the Company to enter into government supply contracts, withdrawal of previously approved applications and criminal prosecution. 39 DEVICES In order to obtain FDA approval of a new medical device sponsors must generally submit proof of safety and efficacy. In some cases, such proof entails extensive clinical and preclinical laboratory tests. The testing, preparation of necessary applications and processing of those applications by the FDA is expensive and may take several years to complete. There can be no assurance that the FDA will act favorably or in a timely manner in reviewing submitted applications, and the Company may encounter significant difficulties or costs in its efforts to obtain FDA approvals which could delay or preclude the Company from marketing any products it may develop. The FDA may also require postmarketing testing and surveillance of approved products, or place other conditions on the approvals. These requirements could cause it to be more difficult or expensive to sell the products, and could therefore restrict the commercial applications of such products. Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. For patented technologies, delays imposed by the governmental approval process may materially reduce the period during which the Company will have the exclusive right to exploit such technologies. If human clinical trials of a proposed device are required and the device presents significant risk, the manufacturer or distributor of the device will have to file an IDE submission with the FDA prior to commencing human clinical trials. The IDE submission must be supported by data, typically including the results of pre-clinical and laboratory testing. If the IDE submission is granted, human clinical trials may commence at a specified number of investigational sites with the number of patients approved by the FDA. The FDA categorizes devices into three regulatory classifications subject to varying degrees of regulatory control. In general, Class I devices require compliance with labeling and recordkeeping regulations, GMPs, 510(k) pre- market notification, and are subject to other general controls. Class II devices may be subject to additional regulatory controls, including performance standards and other special controls, such as postmarket surveillance. Class III devices, which are either invasive or life-sustaining products, or new products never before marketed (for example, non- "substantially equivalent" devices), require clinical testing to demonstrate safety and effectiveness and FDA approval prior to marketing and distribution. The FDA also has the authority to require clinical testing of Class I and Class II devices. If a manufacturer or distributor of medical devices cannot establish that a proposed device is substantially equivalent, the manufacturer or distributor must submit a PMA application to the FDA. A PMA application must be supported by extensive data, including preclinical and human clinical trial data, to prove the safety and efficacy of the device. Upon receipt, the FDA conducts a preliminary review of the PMA application. If sufficiently complete, the submission is declared filed by the FDA. By regulation, the FDA has 180 days to review a PMA application once it is filed, although PMA application reviews more often occur over a significantly protracted time period, and may take approximately one year or more from the date of filing to complete. Some of the Company's products may be classified as Class II or Class III medical devices. The Company has submitted several IDEs for the Aastrom CPS, and is currently conducting pre-pivotal clinical studies under these IDEs. The Company believes that the Aastrom CPS product will be regulated by the FDA as a Class III device, although there can be no assurance that the FDA will not choose to regulate this product in a different manner. The Company and any contract manufacturer are required to be registered as a medical device manufacturer with the FDA. As such, they will be inspected on a routine basis by the FDA for compliance with the FDA's GMP regulations. These regulations will require that the Company and any contract manufacturer manufacture products and maintain documents in a prescribed manner with respect to manufacturing, testing, distribution, storage, design control and service activities, and that adequate design and service controls are implemented. The Medical Device Reporting regulation requires that the Company provide information to the FDA on deaths or serious injuries alleged to be associated with the use of its devices, as well as product malfunctions that are likely to cause or contribute to death or serious injury if the malfunction were to recur. In addition, the FDA prohibits a company from promoting an approved device for unapproved applications and reviews company labeling for accuracy. 40 BIOLOGICAL PRODUCTS For certain of the Company's new products which may be regulated as biologics, the FDA requires (i) preclinical laboratory and animal testing, (ii) submission to the FDA of an investigational new drug ("IND") application which must be effective prior to the initiation of human clinical studies, (iii) adequate and well-controlled clinical trials to establish the safety and efficacy of the product for its intended use, (iv) submission to the FDA of a product license application ("PLA") and establishment license application ("ELA") and (v) review and approval of the PLA and ELA as well as inspections of the manufacturing facility by the FDA prior to commercial marketing of the product. Preclinical testing covers laboratory evaluation of product chemistry and formulation as well as animal studies to assess the safety and efficacy of the product. The results of these tests are submitted to the FDA as part of the IND. Following the submission of an IND, the FDA has 30 days to review the application and raise safety and other clinical trial issues. If the Company is not notified of objections within that period, clinical trials may be initiated. Clinical trials are typically conducted in three sequential phases. Phase I represents the initial administration of the drug or biologic to a small group of humans, either healthy volunteers or patients, to test for safety and other relevant factors. Phase II involves studies in a small number of patients to assess the efficacy of the product, to ascertain dose tolerance and the optimal dose range and to gather additional data relating to safety and potential adverse effects. Once an investigational drug is found to have some efficacy and an acceptable safety profile in the targeted patient population, multi-center Phase III studies are initiated to establish safety and efficacy in an expanded patient population and multiple clinical study sites. The FDA reviews both the clinical plans and the results of the trials and may request the Company to discontinue the trials at any time if there are significant safety issues. The results of the preclinical tests and clinical trials are submitted to the FDA in the form of a PLA for marketing approval. The testing and approval process is likely to require substantial time and effort and there can be no assurance that any approval will be granted on a timely basis, if at all. Additional animal studies or clinical trials may be requested during the FDA review period that may delay marketing approval. After FDA approval for the initial indications, further clinical trials may be necessary to gain approval for the use of the product for additional indications. The FDA requires that adverse effects be reported to the FDA and may also require post-marketing testing to monitor for adverse effects, which can involve significant expense. Under current requirements, facilities manufacturing biological products must be licensed. To accomplish this, an ELA must be filed with the FDA. The ELA describes the facilities, equipment and personnel involved in the manufacturing process. An establishment license is granted on the basis of inspections of the applicant's facilities in which the primary focus is on compliance with cGMP and the ability to consistently manufacture the product in the facility in accordance with the PLA. If the FDA finds the inspection unsatisfactory, it may decline to approve the ELA, resulting in a delay in production of products. Although reviewed separately, approval of both the PLA and ELA must be received prior to commercial marketing of a cellular biologic. As part of the approval process for human biological products, each manufacturing facility must be registered and inspected by FDA prior to marketing approval. In addition, state agency inspections and approvals may also be required for a biological product to be shipped out of state. REGULATORY PROCESS IN EUROPE The Company believes that the Aastrom CPS will be regulated in Europe as a Class IIb medical device, under the authority of the new Medical Device Directives ("MDD") being implemented by European Union ("EU") member countries. This classification applies to medical laboratory equipment and supplies including, among other products, many devices that are used for the collection and processing of blood for patient therapy. Certain ancillary products (e.g., biological reagents) used with the Aastrom CPS may be considered Class III medical devices. The MDD regulations vest the authority to permit affixing of the "CE Mark" with various "Notified Bodies." These are private and state organizations which operate under license from the EU to certify that 41 appropriate quality assurance standards and compliance procedures are followed by developers and manufacturers of medical device products or, alternatively, that a manufactured medical product meets a more limited set of requirements. Notified Bodies are also charged with responsibility for determination of the appropriate standards to apply to a medical product. Receipt of permission to affix the CE Mark enables a company to sell a medical device in all EU member countries. Other registration requirements may also need to be satisfied in certain countries, although there is a general trend among EU member countries not to impose additional requirements beyond those specified for CE Mark certification. COMPETITION The biotechnology and medical device industries are characterized by rapidly evolving technology and intense competition. The Company's competitors include major pharmaceutical, medical device, medical products, chemical and specialized biotechnology companies, many of which have financial, technical and marketing resources significantly greater than those of the Company. In addition, many biotechnology companies have formed collaborations with large, established companies to support research, development and commercialization of products that may be competitive with those of the Company. Academic institutions, governmental agencies and other public and private research organizations are also conducting research activities and seeking patent protection and may commercialize products on their own or through joint ventures. The Company's product development efforts are primarily directed toward obtaining regulatory approval to market the Aastrom CPS for stem cell therapy. That market is currently dominated by the bone marrow harvest and PBPC collection methods. The Company's clinical data, although early, suggests that cells expanded in the Aastrom CPS using its current process will enable hematopoietic recovery within the time frames currently achieved by bone marrow harvest, however, neutrophil and platelet recovery times may be slower than with PBPC collection methods. The Company is evaluating techniques and methods to optimize the cells produced in the Aastrom CPS to reduce the recovery time of neutrophils and platelets in patients. There can be no assurance that if such procedure optimization does not lead to recovery times equal to or faster than those of PBPC collection methods, such outcome would not have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the bone marrow harvest and PBPC collection methods have been widely practiced for a number of years and, recently, the patient costs associated with these procedures have begun to decline. There can be no assurance that the Aastrom CPS method, if approved for marketing, will prove to be competitive with these established collection methods on the basis of hematopoietic recovery time, cost or otherwise. The Company is aware of certain other products manufactured or under development by competitors that are used for the prevention or treatment of certain diseases and health conditions which the Company has targeted for product development. In particular, the Company is aware that competitors such as Amgen, Inc., CellPro, Incorporated, Novartis, A.G., Baxter Healthcare Corp. and RPR are in advanced stages of development of technologies and products for use in stem cell therapy and other market applications currently being pursued by the Company. In addition, Cobe, a significant shareholder of the Company, is a market leader in the blood cell processing products industry and, accordingly, a potential competitor of the Company. There can be no assurance that developments by others will not render the Company's product candidates or technologies obsolete or noncompetitive, that the Company will be able to keep pace with new technological developments or that the Company's product candidates will be able to supplant established products and methodologies in the therapeutic areas that are targeted by the Company. The foregoing factors could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's products under development are expected to address a broad range of existing and new markets. The Company believes that its stem cell therapy products will, in large part, face competition by existing procedures rather than novel new products. The Company's competition will be determined in part by the potential indications for which the Company's products are developed and ultimately approved by regulatory authorities. In addition, the first product to reach the market in a therapeutic or preventive area is often at a significant competitive advantage relative to later entrants to the market. Accordingly, the relative speed with which the Company or its corporate partners can develop products, complete the clinical trials and approval processes and supply commercial quantities of the products to the market are expected to be important competitive factors. The Company's competitive position will also depend on its ability to attract and retain 42 qualified scientific and other personnel, develop effective proprietary products, develop and implement production and marketing plans, obtain and maintain patent protection and secure adequate capital resources. The Company expects its products, if approved for sale, to compete primarily on the basis of product efficacy, safety, patient convenience, reliability, value and patent position. FACILITIES The Company leases approximately 20,000 square feet of office and research and development space in Ann Arbor, Michigan under a lease agreement expiring in May 1998. The lease is renewable at the option of the Company for up to an additional five-year term. The Company believes that its facilities will be adequate for its currently anticipated needs. Contract manufacturing or additional facilities will be required in the future to support expansion of research and development and to manufacture products. EMPLOYEES As of August 31, 1997, the Company employed approximately 72 individuals full-time. A significant number of the Company's management and professional employees have had prior experience with pharmaceutical, biotechnology or medical product companies. None of the Company's employees are covered by collective bargaining agreements, and management considers relations with its employees to be good. LEGAL PROCEEDINGS The Company is not party to any material legal proceedings, although from time to time it may become involved in disputes in connection with the operation of its business. 43 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company, and their respective ages as of August 31, 1997, are as follows: - -------- (1) Member of Audit Committee. (2) Member of Executive Committee. All directors hold office until the next election of the class for which such directors have been chosen and until their successors have been duly elected and qualified. The Company's Bylaws provide that the Board of Directors will consist of between five and nine members, and the number of directors is currently set at six members. The Bylaws also provide that the Board of Directors will serve staggered three-year terms, or until their successors are elected and qualified. The terms of office of the Company's current directors expire as follows: Mr. Jones and Mr. Wood, 1999; Mr. Kunze and Dr. Emerson, 1998; and Dr. Armstrong and Dr. Witzel, 1997. Pursuant to the Stock Purchase Equity Commitment with Cobe, dated October 29, 1996, the Company agreed to use reasonable and good faith efforts to cause a nominee of Cobe, who most be deemed by the Board of Directors to be qualified, to be elected to the Board of Directors for so long as Cobe owns at least 15% of the outstanding shares of Common Stock. There are no family relationships among the directors or officers of the Company. Officers of the Company are elected by and serve at the discretion of the Board of Directors. Robert J. Kunze, a director of the Company since its inception in 1989, is a founder of the Company and served as its President and Chief Executive Officer through May 1991. Mr. Kunze is a general partner of McFarland and Dewey, an investment bank. From 1987 through early 1997, he was a General Partner of H&Q Life Science Venture Partners, a venture capital fund specializing in medical products and biotechnology investments. Previous to that, Mr. Kunze was Managing Partner of Hambrecht & Quist Venture Partners. Prior to that he served as a senior executive with W.R. Grace & Co. and General Electric. Mr. Kunze also serves on the Board of Directors of Escalon Medical Corporation. R. Douglas Armstrong, Ph.D. joined the Company in June 1991 as a director and as its President and Chief Executive Officer. From 1987 to 1991, Dr. Armstrong served in different capacities, including as Executive Vice President and a Trustee of the La Jolla Cancer Research Foundation ("LJCRF"), a 250-employee scientific research institute located in San Diego, California. Dr. Armstrong received his doctorate in Pharmacology and Toxicology from the Medical College of Virginia, and has held faculty and staff positions at Yale University, University of California, San Francisco, LJCRF and University of Michigan. Dr. Armstrong also serves on the Board of Directors of Nephros Therapeutics, Inc. 44
NAME AGE POSITION ---- --- -------- Robert J. Kunze(2).................... 62 Chairman of the Board and Director R. Douglas Armstrong, Ph.D.(2)........ 44 President, Chief Executive Officer and Director James Maluta.......................... 50 Vice President, Product Development Todd E. Simpson....................... 36 Vice President, Finance & Administration, Chief Financial Officer, Secretary and Treasurer Walter C. Ogier....................... 40 Vice President, Marketing Thomas E. Muller, Ph.D. .............. 61 Vice President, Regulatory Affairs Alan K. Smith, Ph.D. ................. 42 Vice President, Research Stephen G. Emerson, M.D., Ph.D. ...... 43 Director and Scientific Advisor G. Bradford Jones(1)(2)............... 42 Director Horst R. Witzel, Dr.-Ing.............. 70 Director Edward C. Wood, Jr.(1)(2)............. 52 Director James Maluta joined the Company in August 1992 as Vice President, Product Development. Mr. Maluta has a broad background in the development and manufacturing of medical devices, with over 25 years of experience in the industry, principally with OHMEDA and with Cobe BCT, Inc. While with Cobe BCT, Inc., Mr. Maluta was Program Manager for the Cobe Spectra Apheresis System, a device for blood cell processing and apheresis. Mr. Maluta held other engineering management positions and also was director of Quality Assurance for Cobe BCT. Mr. Maluta received his degree in electrical engineering from the University of Wisconsin, Madison. Todd E. Simpson joined the Company in January 1996 as Vice President, Finance and Administration and Chief Financial Officer and is also the Company's Secretary and Treasurer. Prior to that, Mr. Simpson was Treasurer of Integra LifeSciences Corporation ("Integra"), a biotechnology company, which acquired Telios Pharmaceuticals, Inc. ("Telios") in August 1995 in connection with the reorganization of Telios under Chapter 11 of the U.S. Bankruptcy Code. Mr. Simpson served as Vice President of Finance and Chief Financial Officer of Telios up until its acquisition by Integra and held various other financial positions at Telios after joining that company in February 1992. Telios was a publicly-held company engaged in the development of pharmaceutical products for the treatment of dermal and ophthalmic wounds, fibrotic disease, vascular disease, and osteoporosis. From August 1983 through February 1992, Mr. Simpson practiced public accounting with the firm of Ernst & Young, LLP. Mr. Simpson is a Certified Public Accountant and received his B.S. degree in Accounting and Computer Science from Oregon State University. Walter C. Ogier joined the Company in March 1994 as Director of Marketing and was promoted to Vice President, Marketing during 1995. Prior to that, Mr. Ogier was at Baxter Healthcare Corporation's Immunotherapy Division, where he served as Director, Business Development from 1992 to 1994 and as Manager, Marketing and Business Development in charge of the company's cell therapy product lines from 1990 to 1992. Mr. Ogier previously held positions with Ibbottson Associates and with the Business Intelligence Center at SRI International (formerly Stanford Research Institute). Mr. Ogier received his B.A. degree in Chemistry from Williams College in 1979 and his Masters of Management degree from the Yale School of Management in 1987. Thomas E. Muller, Ph.D. joined the Company in May 1994 as Vice President, Regulatory Affairs. Prior to that, Dr. Muller was Director, Biomedical Systems with W.R. Grace & Company in Lexington, Massachusetts. Prior to this, Dr. Muller was Vice President, Engineering and Director of Research and Development with the Renal Division of Baxter Healthcare in Deerfield, Illinois. Dr. Muller has also served as Adjunct Professor at Columbia University and as Visiting Professor at the University of Gent, Belgium. Dr. Muller graduated from the Technical University in Budapest, Hungary, in 1956 with a B.S. in Chemical Engineering. Dr. Muller received his M.S. degree in 1959 and was awarded a Ph.D. in 1964, both in Polymer Chemistry, from McGill University. Alan K. Smith, Ph.D. joined the Company in November 1995 as Vice President, Research. Previously, Dr. Smith was Vice President of Research and Development at Geneic Sciences, Inc., a developmental stage bone marrow transplantation company. Prior to that, Dr. Smith held the position of Director, Cell Separations Research and Development of the Immunotherapy Division of Baxter Healthcare Corporation. In this capacity, he was responsible for the research and development activities for a stem cell concentration system approved for clinical use in Europe and currently in pivotal clinical trials in the United States. Dr. Smith has also held positions as Research and Development Manager at BioSpecific Technologies, as Director of Biochemistry at HyClone Laboratories and as a member of the Board of Directors of Dallas Biomedical. Dr. Smith received his B.S. degree in Chemistry from Southern Utah State College in 1976 and a Ph.D. in Biochemistry from Utah State University in 1983. Stephen G. Emerson, M.D., Ph.D., a director since the inception of the Company in 1989, is a scientific founder of the Company and has been an active advisor of the Company since that time. Dr. Emerson has been a Professor of Medicine at the University of Pennsylvania since 1994 where he serves as head of Hematology and Oncology. From 1991 to 1994, Dr. Emerson was an Associate Professor of Medicine at the University of Michigan. Dr. Emerson received his doctorate degrees in Medicine and Cell Biology/Immunology from Yale 45 University. He completed his internship and residency at Massachusetts General Hospital and his clinical and research fellowship in hematology at the Brigham and Women's Hospital, the Dana-Farber Cancer Institute and Children's Hospital Medical Center. G. Bradford Jones, a director since April 1992, is a general partner of Brentwood V Ventures, L.P., the general partner of Brentwood Associates V, L.P. Brentwood Associates V, L.P. is a partnership organized by the firm Brentwood Venture Capital, which Mr. Jones joined in 1981. Mr. Jones was elected to the Board of Directors of the Company pursuant to the terms of the Series B Preferred Stock Purchase Agreement dated April 7, 1992 with the Company, of which Brentwood Associates V, L.P. is a party. Mr. Jones received a B.A. degree in Chemistry and an M.A. degree in Physics from Harvard University and M.B.A. and J.D. degrees from Stanford University. Mr. Jones also serves on the Board of Directors of Interpore International, ISOCOR, Onyx Acceptance Corporation, Plasma & Materials Technologies, and several privately-held companies. Horst R. Witzel, Dr.-Ing., a director since June 1994, served as Chairman of the Board of Executive Directors of Schering AG in Berlin, Germany from 1986 until his retirement in 1989, whereupon he became a member of the Supervisory Board of Schering AG until 1994. Prior to that, Dr. Witzel held various leadership positions in research and development with Schering AG where he was responsible for worldwide production and technical services. Dr. Witzel received his doctorate in chemistry from the Technical University of West Berlin. Dr. Witzel also serves on the Board of Directors of The Liposome Company, Inc. and Cephalon, Inc. and is a member of the Supervisory Board of Brau and Brunnen AG. Edward C. Wood, Jr., a director since August 1994, has served as president of Cobe BCT, Inc., a division of Cobe Laboratories, Inc., since 1991. Cobe is a subsidiary of Gambro AB, a Swedish company, and is a leading provider of blood cell processing products. Prior to that, Mr. Wood held various positions in manufacturing, research and development, and marketing with Cobe. Mr. Wood received degrees in chemistry from Harvey Mudd College and in management from the University of Colorado. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company has adopted provisions in its Restated Articles of Incorporation that limit the liability of its directors for monetary damages arising from a breach of their fiduciary duty as directors, except under certain circumstances which include breach of the director's duty of loyalty to the Company or its shareholders, acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of the law. The Company's Bylaws provide that the Company shall indemnify its directors to the fullest extent authorized or permitted by the Michigan Business Corporation Act. Additionally, the Company has entered into an Indemnification Agreement, originally dated as of December 14, 1993 (the "Indemnification Agreement"), with certain of its directors, officers and other key personnel, which may, in certain cases, be broader than the specific indemnification provisions contained under applicable law. The Indemnification Agreement may require the Company, among other things, to indemnify such officers, directors and key personnel against certain liabilities that may arise by reason of their status or service as directors, officers or employees of the Company, to advance the expenses incurred by such parties as a result of any threatened claims or proceedings brought against them as to which they could be indemnified, and to cover such officers, directors and key employees under the Company's directors' and officers' liability insurance policies to the maximum extent that insurance coverage is maintained. At present, there is no pending litigation or proceeding involving a director, officer, employee or agent of the Company where indemnification by the Company will be required or permitted. The Company is not aware of any threatened litigation or proceeding which may result in a claim for such indemnification. 46 EXECUTIVE COMPENSATION The following table sets forth information concerning the compensation of the Chief Executive Officer of the Company and each of the Company's five other most highly compensated executive officers (the "Named Executive Officers") for services rendered in all capacities to the Company, during the fiscal years ended June 30, 1996 and 1997. SUMMARY COMPENSATION TABLE - -------- (1) Consists of vacation pay. (2) Mr. Simpson began his employment with the Company in January 1996. (3) Consists of relocation expenses. (4) Dr. Smith began his employment with the Company in October 1995. 47
LONG TERM COMPENSATION AWARDS ------------ ANNUAL COMPENSATION ---------------------- SHARES NAME AND PRINCIPAL UNDERLYING ALL OTHER POSITION YEAR SALARY BONUS OPTIONS COMPENSATION ------------------ ---- ---------- --------- ------------ ------------ R. Douglas Armstrong, Ph.D. ................. 1997 $ 183,583 -- 333,333 $ 7,108(1) President and Chief Executive Officer 1996 156,962 $ 55,000 -- 8,885(1) James Maluta............ 1997 130,354 -- 120,000 -- Vice President, Product Development 1996 118,942 10,000 -- -- Walter C. Ogier......... 1997 120,265 -- 80,000 -- Vice President, Marketing 1996 106,250 7,500 6,667 -- Todd E. Simpson......... 1997 125,593 12,500 75,000 -- Vice President, Finance 1996 60,779(2) -- 40,000 48,061(3) and Administration and Chief Financial Officer Alan K. Smith, Ph.D. ... 1997 128,685 -- 75,000 60(3) Vice President, Research 1996 77,740(4) -- 40,000 76,000(3) Thomas E. Muller, Ph.D.. 1997 119,517 -- 20,000 -- Vice President, Regulatory Affairs 1996 118,560 -- 6,667 -- The following table provides information with respect to stock option grants to the Named Executive Officers during the year ended June 30, 1997. OPTION GRANTS IN LAST FISCAL YEAR - -------- (1) The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of the future price of the Common Stock. (2) Each of these options was granted under the Company's Amended and Restated 1992 Incentive and Non-Qualified Stock Option Plan (the "1992 Plan") at an exercise price equal to the fair market value of the Common Stock on the date of grant. With the exception of the option grant to Dr. Armstrong, which is immediately exercisable, all such options vest over a four-year period, subject to continued employment with the Company. The following table provides information with respect to exercises of stock options during the year ended June 30, 1997, and unexercised options held as of June 30, 1997, by the Named Executive Officers. AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM(1) ------------------------------------------------ --------------------- NUMBER OF % OF TOTAL SHARES OPTIONS UNDERLYING GRANTED TO EXERCISE OR OPTIONS EMPLOYEES PRICE PER EXPIRATION NAME GRANTED(2) IN FISCAL YEAR SHARE(2) DATE 5% 10% - ---- ---------- -------------- ----------- ---------- ---------- ---------- R. Douglas Armstrong, Ph.D................... 333,333 42.5% $7.00 2/3/07 $3,800,750 $6,052,060 James Maluta............ 120,000 15.3 7.00 2/3/07 1,368,271 2,178,744 Walter C. Ogier......... 80,000 10.2 7.00 2/3/07 912,181 1,452,496 Todd E. Simpson......... 75,000 9.6 7.00 2/3/07 855,170 1,361,715 Alan K. Smith, Ph.D..... 75,000 9.6 7.00 2/3/07 855,170 1,361,715 Thomas E. Muller, Ph.D.. 20,000 2.6 7.00 2/3/07 228,045 363,124 - -------- (1) "Value Realized" represents the fair market value of the underlying shares of Common Stock on the exercise date, minus the aggregate exercise price of such options. (2) The value of "in-the-money" stock options represents the difference between the exercise price of such options and the fair market value of $7.125 per share of Common Stock as of June 30, 1997, the closing price of the Common Stock reported on the Nasdaq National Market on such date. 48
NUMBER OF SHARES VALUE OF UNEXERCISED IN- UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT JUNE OPTIONS AT JUNE 30, 1997 30, 1997(2) ------------------------- ------------------------- SHARES ACQUIRED ON VALUE NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- ----------- ----------- ------------- ----------- ------------- R. Douglas Armstrong, Ph.D................... -- -- 333,333 -- $ 41,667 -- James Maluta............ 16,667 $99,169 -- 120,000 -- $ 15,000 Walter C. Ogier......... -- -- 22,083 92,917 130,842 86,533 Todd E. Simpson......... -- -- 12,500 102,500 74,063 172,313 Alan K. Smith, Ph.D..... -- -- 15,000 100,000 88,875 157,500 Thomas E. Muller, Ph.D.. -- -- 22,083 31,251 130,842 69,162 No compensation intended to serve as incentive for performance to occur over a period longer than one fiscal year was paid pursuant to a long-term incentive plan during the last fiscal year to any of the Named Executive Officers. The Company does not have any defined benefit or actuarial plan with any of the Named Executive Officers under which benefits are determined primarily by final compensation or average final compensation and years of service. EMPLOYMENT AGREEMENTS The Company has a policy of entering into employment agreements with all of its employees, and has entered into such agreements with all of its executive officers other than Dr. Armstrong. Such employment agreements generally establish salary levels (which are subject to periodic review) and provide for customary fringe benefits such as vacation leave, sick leave and health insurance. The agreements also generally provide for the protection of confidential information and the assignment to the Company of inventions conceived by the employee during his or her employment and permit the termination of the employment relationship by either party upon fourteen days prior written notice. The Company entered into employment agreements with James Maluta, Walter C. Ogier, Thomas E. Muller, Ph.D., Alan K. Smith, Ph.D. and Todd E. Simpson in June 1992, February 1994, April 1994, October 1995 and December 1995, respectively. Pursuant to these agreements, the Company agreed to pay Messrs. Maluta, Ogier, Muller, Smith and Simpson annual base salaries of $90,000, $87,500, $110,000, $122,500 and $122,500, respectively, certain of which base salaries have been increased by the Board of Directors and are subject to annual review and adjustment. Pursuant to the terms of the foregoing employment agreements, either party may generally terminate the employment relationship without cause at any time upon 14 days prior written notice to the other party or immediately with cause upon notice. STOCK OPTION AND EMPLOYEE BENEFIT PLANS 1989 STOCK OPTION PLAN In 1989, the Company established the 1989 Stock Option Plan. As of September 30, 1997, options to purchase an aggregate of 932,266 shares of Common Stock have been exercised at $0.15 per share. Options to purchase 13,127 shares of Common Stock were cancelled unexercised. No additional shares remain available for grant under the 1989 Stock Option Plan. ANCILLARY PLAN In 1991, the Company established an Ancillary Plan to grant options to individuals who were not eligible to receive options under the 1989 Stock Option Plan. Options to purchase an aggregate of 7,498 shares of the Company's Common Stock were granted under the Ancillary Plan, of which options to purchase 4,328 shares have been exercised at $0.15 per share and the remaining options to purchase 3,170 shares have been cancelled. No additional shares remain available for grant under the Ancillary Plan. AMENDED AND RESTATED 1992 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN In 1992, the Company adopted the 1992 Plan, providing for the grant of options to purchase 666,667 shares of Common Stock. The Company allocated an additional 100,000 shares of Common Stock during 1992, an additional 333,333 shares of Common Stock in 1994 and an additional 800,000 shares of Common Stock in 1996 to the 1992 Plan, resulting in a total share reserve of 1,900,000 shares. The 1992 Plan was amended and restated to its current form in 1996. Options under the 1992 Plan for a total of 508,530 shares have been exercised as of September 30, 1997. As of September 30, 1997, options to purchase 1,076,908 shares of Common Stock were outstanding. The 1992 Plan provides for grants to employees and officers of "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, provided that such employee or 49 officer is an employee on the date of grant. The 1992 Plan also provides for grants to employees, officers, consultants or service providers of nonqualified stock options. The 1992 Plan previously has been administered by the Board of Directors, but is currently administered by the Compensation Committee of the Board of Directors (the "Committee"). Each option granted pursuant to the 1992 Plan is authorized by the Committee and evidenced by a notice in such form as the Committee may from time to time determine. The exercise price of each incentive stock option granted under the 1992 Plan must be at least equal to the fair market value of a share of Common Stock on the date of grant, except for incentive stock options granted to individuals who, at the time of grant, own stock possessing more than 10% of the total combined voting power of the Company, which options must have an exercise price of at least 110% of the fair market value of a share of Common Stock on the date of grant and must expire five years from the date of grant. The exercise price of each nonqualified stock option granted under the 1992 Plan must be at least 85% of the fair market value of the shares on the date of grant. No option shall be treated as an incentive stock option to the extent that such option would cause the aggregate fair market value (determined as of the date of grant of such option) of the shares with respect to which incentive stock options are exercisable by such optionee for the first time during any calendar year to exceed $100,000. The terms of all incentive stock options and nonqualified stock options granted under the 1992 Plan may not exceed ten years. The exercise price may be paid in cash or, at the Committee's discretion, by delivery of previously owned shares of the Company's Common Stock, by a combination of cash and shares, or any other form of legal consideration acceptable to the Committee. Options under the 1992 Plan generally may not be granted after April 2006. In the event of a transfer of control of the Company, as defined under the 1992 Option Plan, the Company must cause any successor corporation to assume the options or substitute similar options for outstanding options or continue such options in effect. In the event that any successor to the Company in a merger, consolidation or dissolution will not assume the options or substitute similar options, then the options become exercisable in full and such options will be terminated if not exercised prior to such merger, consolidation or dissolution. The vesting of certain options granted to executive officers of the Company accelerates if such officer is terminated following a change of control. 1996 OUTSIDE DIRECTORS STOCK OPTION PLAN A total of 150,000 shares of Common Stock have been reserved for issuance under the Company's 1996 Outside Directors Stock Option Plan (the "Directors Plan"). As of September 30, 1997, options to purchase 30,000 shares of Common Stock have been granted under the Directors Plan. The Directors Plan provides for the automatic granting of non-qualified stock options to directors of the Company who are not employees of the Company ("Outside Directors"). Under the Directors Plan, each Outside Director will automatically be granted an option to purchase 5,000 shares of Common Stock on the date of his or her election or appointment. In addition, each serving Outside Director will thereafter automatically be granted an option to purchase 5,000 shares of Common Stock following each annual meeting of shareholders after their election, provided that the Outside Director continues to serve in such capacity and that the Outside Director has served continuously as a director for at least six months. The exercise price of the options in all cases will be equal to the fair market value of the Common Stock on the date of grant. Options granted under the Directors Plan generally vest over a one-year period in equal monthly installments and must be exercised within ten years from the date of grant. 1996 EMPLOYEE STOCK PURCHASE PLAN A total of 250,000 shares of the Company's Common Stock have been reserved for issuance under the Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan"). As of September 30, 1997, 6,961 shares of Common Stock have been issued under the Purchase Plan. The Purchase Plan permits eligible employees to purchase Common Stock at a discount through payroll deductions, during sequential 24-month offering periods. Each offering period is divided into four consecutive six-month purchase periods. Unless otherwise provided by the Board of Directors prior to the commencement of an offering period, the price at which stock is purchased under the Purchase Plan for such offering period is equal to 85% of the lesser of the fair market value of the 50 Common Stock on the first day of such offering period or the last day of the purchase period of such offering period. SECTION 401(K) PLAN Effective January 1, 1994, the Company adopted the Aastrom Biosciences, Inc. 401(k) Plan (the "Plan"). The Plan is intended to be a qualified retirement plan under the Internal Revenue Code. Employees of the Company are eligible to participate in the Plan upon the completion of three consecutive months of employment. Participants may make salary deferral contributions to the Plan of up to 15% of compensation, subject to the limitations imposed under the Internal Revenue Code. The Company may, but is not required to, make matching contributions to the Plan based on the participants' salary-defined contributions. Employer contributions are subject to a graduated vesting schedule based upon an employee's years of service with the Company. It is not anticipated that the Company will make any contributions to the Plan for the 1998 Plan Year. All contributions to the Plan are held in a trust which is intended to be exempt from income tax under Section 501(a) of the Internal Revenue Code. The Plan's trustees are R. Douglas Armstrong and Todd E. Simpson. Participants may direct the investment of their contributions among specified Merrill Lynch investment funds. The Plan may be amended or terminated by the Company at any time, subject to certain restrictions imposed by the Internal Revenue Code and the Employee Retirement Income Security Act of 1974. COMPENSATION OF DIRECTORS Each Outside Director receives a cash payment of $1,000 for each meeting of the Board of Directors attended in person and a cash payment of $500 for each telephonic meeting of the Board of Directors attended telephonically. In lieu of such cash payments for attending meetings, Mr. Kunze receives $5,000 per month for his services as Chairman of the Board of Directors, which payments have been approved through the date of the Company's 1997 annual meeting of shareholders. Directors also receive reimbursement for expenses incurred in attending each meeting of the Board of Directors and its committees. In addition, Outside Directors receive annual grants of options to purchase shares of Common Stock in accordance with the Directors Plan. See "--Stock Option and Employee Benefit Plans--1996 Outside Directors Stock Option Plan." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS During the fiscal year ended June 30, 1997, Robert J. Kunze, who served as President and Chief Executive Officer of the Company until 1991 and currently serves as its Chairman of the Board, and Albert B. Deisseroth, M.D., Ph.D., a former director of the Company, were initially the members of the Compensation Committee of the Board of Directors. Currently, all of the Company's directors comprise the Compensation Committee, including Mr. Kunze and R. Douglas Armstrong, Ph.D., the Company's President and Chief Executive Officer. During the last fiscal year, none of the executive officers who serve on the Board of Directors participated in deliberations regarding their own compensation. No member of the Board of Directors of the Company serves as a member of the board of directors or compensation committee of an entity that has one or more executive officers serving as members of the Company's Board of Directors. 51 CERTAIN TRANSACTIONS In April 1995, the Company sold 775,001 shares of Series D Preferred Stock at a price per share of $4.00 to the following investors: (i) H&Q Life Science Technology Fund I purchased 167,001 shares for a purchase price of $668,004, (ii) H&Q London Ventures purchased 100,000 shares for a purchase price of $400,000, (iii) Brentwood Associates V, L.P. ("Brentwood") purchased 231,250 shares for a purchase price of $925,000, (iv) Windpoint Partners II, L.P. purchased 89,250 shares for a purchase price of $357,000, and (v) the State Treasurer of the State of Michigan ("Michigan") purchased 187,500 shares for a purchase price of $750,000. In May 1995, Cobe purchased 1,250,000 shares of Series D Preferred Stock for a purchase price of $5,000,000. Upon the closing of the Company's initial public offering in February 1997, each outstanding share of Series D Preferred Stock was converted into two-thirds of a share of Common Stock. In April 1995, Dr. Armstrong and Dr. Emerson agreed to grant to Brentwood an option to purchase up to 28,000 shares and 14,667 shares of Common Stock, respectively, and, together with two other shareholders of the Company, an aggregate of up to 66,667 shares of Common Stock at a purchase price of $100,000. Brentwood exercised this option in April 1996, purchasing an aggregate of 66,667 shares of Common Stock at a purchase price of $100,000 from such shareholders. In September 1995, the Company and RPR entered into a collaborative relationship for use of the Aastrom CPS as a component of its lymphoid cell therapy program. During September 1996, RPR notified the Company that it would not exercise its option to continue the collaboration. As a result, $3,500,000 of option payments previously paid to the Company by RPR were converted into 205,882 shares of the Company's Series E Preferred Stock. Upon the closing of the Company's initial public offering in February 1997, each outstanding share of Series E Preferred Stock was converted into two-thirds of a share of Common Stock. In October 1995, the Company repurchased 62,500 shares of Series D Preferred Stock from Brentwood at the original purchase price of $250,000 and in December 1995 resold these shares to Northwest Ohio Venture Fund, a shareholder of the Company, for a total purchase price of $250,000. In January 1996, the Company sold 1,411,765 shares of Series E Preferred Stock at a price per share of $4.25 to the following investors: (i) Michigan purchased 470,588 shares for a total purchase price of $1,999,999, and (ii) SBIC Partners, L.P. purchased 941,177 shares for a total purchase price of $4,000,002. In November 1993, in connection with the purchase of Common Stock upon exercise of stock options granted under the 1989 Stock Option Plan to R. Douglas Armstrong, the Company's President and Chief Executive Officer, the Company loaned to Dr. Armstrong $120,000 at an interest rate of 4% per annum pursuant to a full recourse promissory note. During September 1997, Dr. Armstrong repaid the outstanding principal under the note plus $18,467 in accrued interest by surrendering 15,711 shares of Common Stock to the Company, which shares were cancelled. In October 1993, in connection with the purchase of Common Stock upon exercise of stock options granted under the 1989 Stock Option Plan and the 1992 Plan to Stephen G. Emerson, a director of the Company, the Company loaned to Dr. Emerson $47,303 at an interest rate of 6% per annum pursuant to a full recourse promissory note. Interest on the note is payable on an annual basis, and all principal and accrued but unpaid interest is due on June 30, 1998. The loan is secured by the shares of Common Stock held by Dr. Emerson. During May 1997, the Company and Dr. Emerson entered into an agreement, pursuant to which Dr. Emerson may repay the outstanding balance under the note by surrendering shares of Common Stock to the Company. In October 1996, the Company executed a financing commitment with Cobe to provide the Company with up to $5,000,000 (the "Equity Commitment") and up to $5,000,000 in funding from Michigan under a convertible loan commitment agreement ("Convertible Loan Commitment"). Both the Equity Commitment and the Convertible Loan Commitment terminated in February 1997 upon the closing of the Company's initial public offering. The Company issued warrants to Michigan to purchase 69,444 shares of Common Stock as 52 consideration for securing the Convertible Loan Commitment. The warrants expire on October 15, 2000 if not exercised, and may be exercised, in whole or in part, at a price equal to the lesser of (a) $9.00 per share, which price increases by $3.00 per share on each of February 7, 1998, 1999 and 2000; and (b) 85% of the fair market value of the Company's Common Stock at the time of exercise. Cobe Laboratories, Inc. purchased 714,200 shares of Common Stock in the Company's initial public offering at the initial public offering price of $7.00 per share. See "Description of Capital Stock--Rights of Cobe." The Company has entered into employment agreements with certain of its executive officers. See "Management--Employment Agreements." The Company has also entered into an Indemnification Agreement with certain of its directors, officers and other key personnel. See "Management--Limitation of Liability and Indemnification Matters." The Company believes that all of the foregoing transactions were on terms no less favorable to the Company than would be obtained from unrelated third parties. Any future transactions between the Company and its executive officers, directors and affiliates will be on terms no less favorable to the Company than can be obtained from unaffiliated third parties, and any material transactions with any such person will be approved by a majority of the members of the Company's Board of Directors and by a majority of the disinterested members of the Company's Board of Directors. 53 PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the outstanding shares of the Company's Common Stock as of August 31, 1997, and as adjusted to give effect to the sale of 1,500,000 shares of Common Stock in this offering by (i) each person known by the Company to be the beneficial owner of 5% or more of the outstanding shares of Common Stock, (ii) each Named Executive Officer, (iii) each director of the Company, and (iv) all executive officers and directors of the Company as a group. - -------- * Represents less than 1% of outstanding Common Stock or voting power. (1) Shares beneficially owned and percentage of ownership are based on 13,285,511 shares of Common Stock outstanding before this offering and 14,785,511 shares of Common Stock to be outstanding after the closing of this offering. Beneficial ownership determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or disposition power with respect to such shares. (2) Pursuant to an agreement between Cobe and the Company, Cobe has an option to purchase the number of shares in this offering necessary to maintain its current percentage ownership of the Company. As of the date of this Prospectus, the Company is not aware of Cobe's determination with respect to this option. In addition, Cobe has an option to purchase from the Company an amount of Common Stock equal to 30% of the Company's fully diluted shares after the exercise of such option, at a purchase price equal to 120% of the public market trading price of the Company's Common Stock. The option expires on February 6, 2000. Cobe also has a "right of first negotiation" in the event the Company receives any proposal concerning, or otherwise decides to pursue, a merger, consolidation or other transaction in which all or a majority of the Company's equity securities or all or substantially all of the Company's assets, or any material portion of 54
PERCENTAGE BENEFICIALLY OWNED(1) ------------------------- NUMBER OF SHARES OF COMMON STOCK BEFORE THE AFTER THE BENEFICIAL OWNER BENEFICIALLY OWNED(1) OFFERING OFFERING ---------------- -------------------- ---------- --------- Cobe Laboratories, Inc.(2)...................... 3,214,199 24.2% 21.7% 1185 Oak Street Lakewood, CO 80215 State Treasurer of the State of Michigan(3)..... 1,408,168 10.5 9.5 Custodian of Certain Retirement Systems c/o Venture Capital Division 430 West Allegan Lansing, MI 48992 H&Q London Ventures............................. 816,666 6.1 5.5 One Bush Street, 18th Floor San Francisco, CA 94104 R. Douglas Armstrong, Ph.D.(4).................. 822,888 6.0 5.4 Albert B. Deisseroth, M.D., Ph.D.(5)............ 28,333 * * Stephen G. Emerson, M.D., Ph.D.(6).............. 260,122 2.0 1.8 G. Bradford Jones(7)............................ 381,220 2.9 2.6 Robert J. Kunze(8).............................. 46,810 * * James Maluta(9)................................. 83,332 * * Thomas E. Muller, Ph.D.(10)..................... 24,167 * * Walter C. Ogier(11)............................. 31,667 * * Todd E. Simpson(12)............................. 17,500 * * Alan K. Smith, Ph.D.(13)........................ 18,988 * * Horst R. Witzel, Dr.-Ing.(14)................... 14,620 * * Edward C. Wood, Jr.(15)......................... 3,220,532 24.2 21.8 All officers and directors as a group (12 per- sons)(16)...................................... 4,950,179 36.1 32.5 the assets of the Company used by the Company in performing its obligations under Cobe's distribution agreement with the Company would be acquired by a third party outside of the ordinary course of business. Edward C. Wood, Jr., a director of the Company, is the President of Cobe BCT, Inc., an affiliate of Cobe. See footnote 15, below and "Description of Capital Stock--Rights of Cobe." (3) Includes 69,444 shares issuable upon exercise of warrants held by the State Treasurer of the State of Michigan ("Michigan") that are exercisable until October 15, 2000. (4) Includes 333,333 shares issuable upon exercise of options held by Dr. Armstrong that are exercisable within the 60-day period following August 31, 1997. Also includes 15,711 shares that were surrendered to the Company and cancelled in payment of the outstanding balance under a promissory note subsequent to August 31, 1997. See "Certain Transactions." Dr. Armstrong's address is 24 Frank Lloyd Wright Drive, Ann Arbor, MI 48106. (5) Includes 3,333 shares issuable upon exercise of options held by Dr. Deisseroth that are exercisable within the 60-day period following August 31, 1997. Dr. Deisseroth resigned from his position as a director of the Company in October 1997. 6,250 of the shares held by Dr. Deisseroth are subject to vesting and a right of repurchase by the Company until December 15, 1997. (6) Includes 3,333 shares issuable upon exercise of options held by Dr. Emerson that are exercisable within the 60-day period following August 31, 1997. Also includes 90,000 shares which, to the Company's knowledge, Dr. Emerson intends to transfer as a gift. (7) Includes 370,831 shares held by Brentwood Associates V, L.P. Mr. Jones, as a general partner of Brentwood Associates V Ventures, L.P., which is the general partner of Brentwood Associates V, L.P., may be deemed to beneficially own such shares, but Mr. Jones disclaims beneficial ownership of all such shares except to the extent of his pecuniary interest therein. Also includes 3,333 shares issuable upon exercise of options held by Mr. Jones that are exercisable within the 60-day period following August 31, 1997. (8) Includes 3,333 shares issuable upon exercise of options held by Mr. Kunze that are exercisable within the 60-day period following August 31, 1997. (9) Consists of shares held of record by James Maluta and Deborah Vincent, as Trustees, with shared voting and investment power, of the James Maluta and Deborah Vincent Living Trust dated October 26, 1993. (10) Consists of shares issuable upon exercise of options held by Dr. Muller that are exercisable within the 60-day period following August 31, 1997. (11) Includes 26,667 shares issuable upon exercise of options held by Mr. Ogier that are exercisable within the 60-day period following August 31, 1997. (12) Consists of shares issuable upon exercise of options held by Mr. Simpson that are exercisable within the 60-day period following August 31, 1997. (13) Includes 17,500 shares issuable upon exercise of options held by Dr. Smith that are exercisable within the 60-day period following August 31, 1997. (14) Includes 8,620 shares issuable upon exercise of options held by Dr. Witzel that are exercisable within the 60-day period following August 31, 1997. (15) Mr. Wood, as the President of Cobe BCT, Inc., an affiliate of Cobe, may be deemed to beneficially own shares held by Cobe, but Mr. Wood disclaims beneficial ownership of all such shares. Includes 3,333 shares issuable upon exercise of options that are exercisable within the 60-day period following August 31, 1997. Mr. Wood's address is 1201 Oak Street, Lakewood, CO 80215. (16) Includes 444,452 shares issuable upon exercise of options that are exercisable within the 60-day period following August 31, 1997. Does not include any shares which Cobe may elect to purchase in this offering pursuant to its contractual preemptive rights. See footnote 2, above. 55 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 40,000,000 shares of Common Stock, no par value, and 5,000,000 shares of Preferred Stock, no par value. COMMON STOCK As of August 31, 1997, there were 13,285,511 shares of Common Stock outstanding held by approximately 140 shareholders of record. The holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the Company's shareholders. Subject to preferences that may be applicable to outstanding shares of Preferred Stock, the holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of any liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior liquidation rights of holders of Preferred Stock then outstanding. The Common Stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are set forth in the Company's Restated Articles of Incorporation, which Articles may only be amended by the holders of at least two-thirds of the outstanding shares of Common Stock. The rights of the holders of Common Stock are also subject to, and may be adversely affected by, the rights of the holders of any shares of any Preferred Stock which the Company may designate and issue in the future. PREFERRED STOCK No shares of Preferred Stock are outstanding. The Board of Directors of the Company is authorized, without further shareholder approval, to issue up to 5,000,000 shares of Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions granted or imposed upon any unissued shares of Preferred Stock and to fix the number of shares constituting any series and the designations of such series. The issuance of Preferred Stock may have the effect of delaying or preventing a change in control of the Company. The issuance of Preferred Stock could decrease the amount of earnings and assets available for distribution to the holders of Common Stock or could adversely affect the rights and powers, including voting rights, of the holders of the Common Stock. In certain circumstances, such issuance could have the effect of decreasing the market price of the Common Stock. The Company currently has no plans to issue any shares of Preferred Stock. MICHIGAN LAW AND CERTAIN CHARTER PROVISIONS The Company is a Michigan corporation and is subject to certain anti- takeover provisions of the Michigan Business Corporation Act (the "MBCA") which could delay or make more difficult a merger or tender offer involving the Company. Chapter 7A of the MBCA prevents, in general, an "interested shareholder" (defined generally as a person owning 10% or more of a corporation's outstanding voting shares) from engaging in a "business combination" (as defined therein) with a Michigan corporation unless: (a) the Board of Directors issues an advisory statement, holders of 90% of the shares of each class of stock entitled to vote approve the transaction, and holders of two-thirds of the "disinterested" shares of each class of stock approve the transaction; or (b) the interested shareholder has been an interested shareholder for at least five years and has not acquired beneficial ownership of any additional shares of the corporation subsequent to the transaction which resulted in such shareholder being classified as an interested shareholder, and meets certain requirements, including, but not limited to, provisions relating to the fairness of the price and the form of consideration paid; or (c) the Board of Directors, by resolution, exempts a particular interested shareholder from these provisions prior to the interested shareholder becoming an interested shareholder. The MBCA also contains certain other provisions which could have anti-takeover effects, including, but not limited to, Section 368, which pertains to "greenmail." The Company's Bylaws provide that the Board of Directors is divided into three classes of directors, with each class serving a staggered three-year term. The classification system of electing directors may tend to 56 discourage a third party from making a tender offer or otherwise attempting to obtain control of the Company and may maintain the incumbency of the Board of Directors, as it generally makes it more difficult for shareholders to replace a majority of the directors. The Company's Restated Articles of Incorporation eliminate the right of shareholders to act without a meeting, do not provide for cumulative voting in the election of directors and provide that the holders of at least two-thirds of the outstanding shares of Common Stock must approve certain transactions resulting in a change of control of the Company. The amendment of any of these provisions would require approval by holders of at least two-thirds of the outstanding shares of Common Stock. The foregoing and other statutory provisions and provisions of the Company's Restated Articles of Incorporation could have the effect of deterring certain takeovers or delaying or preventing certain changes in control or management of the Company, including transactions in which shareholders might otherwise receive a premium for their shares over then-current market prices. REGISTRATION RIGHTS Pursuant to the Amended and Restated Investors Rights Agreement, dated as of April 7, 1992, as amended (the "Investors Agreement"), the provisions of which are incorporated into the agreements relating to the purchase of the Company's Series D and Series E Preferred Stock, certain holders of outstanding shares of Common Stock are entitled to certain demand and incidental registration rights with respect to such shares, subject to certain customary limitations. Under the Investors Agreement, subject to certain exceptions, the holders of at least 50% of the Registrable Securities (as defined therein) may require the Company to use its diligent best efforts to register Registrable Securities for public resale on one occasion (so long as such registration includes at least 20% of the Registrable Securities or a lesser percentage if the anticipated aggregate offering price net of underwriting discounts and commissions would exceed $2 million). In addition, whenever the Company proposes to register any of its securities under the Act, holders of Registrable Securities are entitled, subject to certain restrictions (including customary underwriters "cut back" limitations), to include their Registrable Securities in such registration. Subject to certain limitations, the holders of Registrable Securities may also require the Company to register such shares on Form S-3 no more than once every twelve months, provided that the anticipated aggregate proceeds would exceed $500,000. The Company is required to bear all registration and selling expenses (other than underwriter's discounts and commissions and more than a single special counsel to the selling shareholders) in connection with the registration of Registrable Securities in one demand registration and two piggy-back registrations. The participating investors are required to bear all expenses in connection with the registration of Registrable Securities on Form S-3. Registration rights may be transferred to an assignee or transferee provided that such assignee or transferee acquires at least 66,667 shares of the Registrable Securities held by the transferring holder (13,333 shares in the case of a transfer from the holder of certain stock options). These registration rights may be amended or waived (either generally or in a particular instance) only with the written consent of the Company and the holders of a majority of the Registrable Securities then outstanding. The registration rights granted under the Investors Agreement shall not be exercisable by a holder during the period in which the holder may sell all of the holder's shares under Rule 144 or Rule 144A during a single 90-day period. Pursuant to the Stock Purchase Agreement dated October 22, 1993 by and between Cobe and the Company (the "Cobe Stock Agreement"), the Company granted to Cobe certain stock registration rights for any and all of the Company's Common Stock which Cobe acquires by conversion or otherwise. Cobe's stock registration rights commence during August 2000, or earlier in the event of any termination of the Distribution Agreement. Pursuant to Cobe's registration rights, Cobe is entitled to two demand registration rights, and an unlimited number of piggyback registration rights. Cobe's stock registration rights are subject to customary underwriter's "cut back" requirements. The registration rights granted to Cobe shall not be exercisable during the period in which Cobe has the ability to sell all of its shares pursuant to Rule 144 during a single 90-day period. Subject to certain conditions, these registration rights may be transferred with the transfer of stock to certain affiliates of the transferor or to a transferee who acquires the greater of 66,667 shares or 20% of the transferor's registrable stock. 57 RIGHTS OF COBE Pursuant to the Cobe Stock Agreement, Cobe purchased an aggregate of $10,000,000 of shares of the Company's Series C Preferred Stock. Such shares of Series C Preferred Stock automatically converted into 1,666,666 shares of Common Stock upon the closing of the Company's initial public offering in February 1997. Pursuant to the Cobe Stock Agreement, Cobe also has certain preemptive rights to purchase a portion of any new stock issued by the Company, subject to certain exceptions, so as to enable Cobe to maintain its relative percentage ownership and voting power interests in the Company. Pursuant to such preemptive rights, Cobe elected to purchase 714,200 shares of Common Stock for approximately $5,000,000 in the Company's initial public offering in February 1997. Under the terms of the Cobe Stock Agreement, the Company also has the right to require Cobe to purchase stock issued by the Company in certain qualifying offerings, under certain circumstances (the "Put Option"). The Put Option may generally require Cobe to purchase up to 25% of the stock issued by the Company in a qualifying offering upon the same terms and conditions as the underwriters or other purchasers participating in the offering provided that Cobe shall not be required to purchase stock having an aggregate purchase price of more than $5,000,000. If the Company exercises the Put Option with respect to any such qualifying offering, Cobe has the option to purchase the greater of up to 40% of the number of shares to be offered in the qualifying offering or the number of shares necessary to maintain its percentage ownership interest in the Company. The Put Option was not exercised by the Company in connection with its initial public offering in February 1997. The Put Option does not apply to any public offerings, including this offering. The Company and Cobe are evaluating whether or not the Put Option remains in effect as to any future private offerings of the Company's equity securities. Additionally, until February 2000, Cobe has an option to purchase from the Company a quantity of new shares of the Company's Common Stock at a price equal to 120% of the public market trading price for the Company's Common Stock. The quantity of Common Stock to be purchased if Cobe exercises this option shall be equal to 30% of the Company's fully diluted shares after the exercise of this option. In the Cobe Stock Agreement, the Company also granted to Cobe a "right of first negotiation" in the event the Company receives any proposal concerning, or otherwise decides to pursue, a merger, consolidation or other transaction in which all or a majority of the Company's equity securities or all or substantially all of the Company's assets, or any material portion of the assets of the Company used by the Company in performing its obligations under the Distribution Agreement would be acquired by a third party outside of the ordinary course of business. Pursuant to the Stock Purchase Commitment Agreement with Cobe, dated October 29, 1996, the Company agreed to use reasonable and good faith efforts to cause a nominee of Cobe, who must be deemed by the Board of Directors to be qualified, to be elected to the Board of Directors for as long as Cobe owns at least 15% of the outstanding shares of Common Stock. RIGHT OF FIRST REFUSAL Pursuant to the Investors Agreement and the agreement relating to the purchase of the Company's Series E Preferred Stock, certain shareholders of the Company have a right of first refusal to purchase their pro rata share (determined on a fully diluted basis) of any new issuances of shares of Common Stock or Preferred Stock, or of options, warrants or other rights to purchase such shares, other than issuances (i) in public offerings, (ii) in connection with acquisitions, or (iii) under the Company's stock option plans. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is Continental Stock Transfer & Trust Company. Its telephone number in New York, New York is (212) 509-4000. 58 SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market following this offering could adversely affect the prevailing market price of the Common Stock and the Company's ability to raise capital in the future. Upon completion of this offering, the Company will have 14,772,674 shares of Common Stock outstanding, based upon the number of shares outstanding as of September 30, 1997, all of which are eligible for resale in the public market, subject in some cases to certain volume restrictions and other conditions imposed by Rule 144 under the Securities Act. However, 5,707,252 outstanding shares of Common Stock are subject to lock-up agreements expiring 90 days following the date of this Prospectus. Such agreements provide that Cowen & Company may, in its sole discretion and at any time without notice, release all or a portion of the shares subject to these lock-up agreements. Certain existing shareholders have rights to include shares of Common Stock owned by them in future registrations by the Company for the sale of Common Stock or to request that the Company register their shares under the Securities Act. See "Plan of Distribution" and "Description of Capital Stock--Registration Rights." 59 PLAN OF DISTRIBUTION The shares of Common Stock offered hereby are being offered, on an all or none basis, for sale by the Company principally to selected investors. The Placement Agent has been retained to act as agent for the Company in connection with the arrangement of such offers and sales on a best efforts basis. The Placement Agent is not obligated and does not intend to itself take (or purchase) any of the shares offered hereby. It is anticipated that the Placement Agent will obtain indications of interest from potential investors for the number of shares offered hereby and that effectiveness of the Registration Statement of which this Prospectus forms a part will not be requested, and no investor funds will be accepted, until indications of interest have been received for all of the shares offered hereby. Confirmation and definitive prospectuses will be distributed to all investors at the time of pricing, informing investors of the closing date, which will be scheduled for three business days after pricing. No investor funds will be accepted prior to the effectiveness of the Registration Statement. Prior to the closing date, an escrow account with the Escrow Agent will be established for the benefit of the investors. Prior to the closing date, the Placement Agent from time to time will cause to be wired to or deposited with the Escrow Agent funds or checks of the investors delivered in payment for the shares offered hereby. The Placement Agent will promptly place all investor funds in the escrow account. Such investor funds will be wired to or deposited with the Escrow Agent not later than 12:00 noon on the date following the date on which it is received by the Placement Agent. Any checks delivered to the Escrow Agent shall be made payable to or endorsed to the order of the Escrow Agent. The Escrow Agent, upon receipt of such checks, will present such checks for payment to the drawee-bank under such checks. Any checks not honored by the drawee-bank after the first presentment for payment will be returned to the Company. Upon receipt of funds or checks from the Placement Agent, the Escrow Agent will credit such funds and the amount of such checks to the escrow account. The Escrow Agent will invest such funds in accordance with Rule 15c2- 4 promulgated under the Securities Exchange Act of 1934, as amended. Prior to the closing date, the Escrow Agent will advise the Company that payment for the purchase of the shares offered hereby has been affirmed by the investors and that the investors have deposited the requisite funds in the escrow account with the Escrow Agent. Upon receipt of such notice, the Company will deposit with The Depository Trust Company the shares to be credited to the respective accounts of the investors. Investor funds, together with interest thereon, if any, will be collected by the Company through the facilities of the Escrow Agent on the scheduled closing date. This offering will not continue after the closing date, as extended by the parties. In the event that investor funds are not received in the full amount necessary to satisfy the requirements of this offering, all funds deposited in the escrow account will promptly be returned. The Company has agreed to pay the Placement Agent, as the Placement Fee, an aggregate of 6% of the gross proceeds of the sale of the shares of Common Stock offered hereby and to indemnify the Placement Agent against certain liabilities, including liabilities under the Securities Act. The Company and its directors and certain of its officers and other shareholders, have entered into agreements providing that, for a period of 90 days after the date of this Prospectus, they will not, without the prior written consent of Cowen & Company, offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into, or exchangeable for, or warrants to purchase, any shares of Common Stock, or grant any option to purchase or right to acquire, or acquire any option to dispose of any shares of Common Stock, except in certain limited circumstances. See "Shares Eligible for Future Sale." LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Pepper, Hamilton & Scheetz, Detroit, Michigan. Gray Cary Ware & Freidenrich, A Professional Corporation, San Diego, California, has acted as special counsel to the Company in connection with this offering. Certain legal matters in connection with this offering will be passed upon for the Placement Agent by Brobeck Phleger & Harrison LLP, New York, New York. 60 EXPERTS The balance sheets of the Company as of June 30, 1996 and 1997, and the statements of operations, shareholders' equity, and cash flows for the years ended June 30, 1995, 1996 and 1997 and the cumulative period from March 24, 1989 (Inception) to June 30, 1997 included in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in accounting and auditing. The statements in this Prospectus concerning the patents and patent applications either owned or licensed by the Company under the captions "Risk Factors--Uncertainty Regarding Patents and Proprietary Rights" and "Business-- Patents and Proprietary Rights" and the other references herein concerning the patents and patent applications either owned or licensed by the Company have been reviewed and approved by Oblon, Spivak, McClelland, Maier & Neustadt, P.C., Arlington, Virginia, patent counsel to the Company, as experts on such matters, and are included herein in reliance upon that review and approval. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), Washington, D.C., a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act with respect to the Common Stock offered hereby. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith files reports and other information with the Securities and Exchange Commission. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statement and the exhibits and schedules filed as a part thereof. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and, in each instance, if such contract or document is filed as an exhibit to the Registration Statement, reference is made to the copy of such contract or document filed as an exhibit, each such statement being qualified in all respects by such reference. The Registration Statement, including exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 10661. Copies of all or any part of such materials may be obtained from the Commission upon the payment of certain fees prescribed by the Commission. Such reports and other information may also be inspected without charge at the Commission's Web site, located at http://www.sec.gov. 61 AASTROM BIOSCIENCES, INC. (A DEVELOPMENT STAGE COMPANY) INDEX TO FINANCIAL STATEMENTS F-1
PAGE ---- Report of Independent Accountants......................................... F-2 Balance Sheets as of June 30, 1996 and 1997............................... F-3 Statements of Operations for the years ended June 30, 1995, 1996 and 1997 and for the period from March 24, 1989 (Inception) to June 30, 1997...... F-4 Statements of Shareholders' Equity from March 24, 1989 (Inception) to June 30, 1997................................................................. F-5 Statements of Cash Flows for the years ended June 30, 1995, 1996 and 1997 and for the period from March 24, 1989 (Inception) to June 30, 1997...... F-6 Notes to Financial Statements............................................. F-7 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Aastrom Biosciences, Inc. In our opinion, the accompanying balance sheets and the related statements of operations, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Aastrom Biosciences, Inc. (a development stage company) at June 30, 1996 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1997, and for the period from March 24, 1989 (Inception) to June 30, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Detroit, Michigan August 15, 1997 F-2 AASTROM BIOSCIENCES, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS The accompanying notes are an integral part of these financial statements. F-3
JUNE 30, -------------------------- 1996 1997 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents........................ $ 10,967,000 $ 1,943,000 Short-term investments........................... -- 15,064,000 Receivables...................................... 81,000 229,000 Prepaid expenses................................. 437,000 126,000 ------------ ------------ Total current assets........................... 11,485,000 17,362,000 PROPERTY, NET...................................... 1,188,000 1,048,000 ------------ ------------ Total assets................................... $ 12,673,000 $ 18,410,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses............ $ 1,192,000 $ 1,508,000 Accrued employee expenses........................ 97,000 130,000 Current portion of capital lease obligations..... 223,000 124,000 Deferred revenue................................. 122,000 -- ------------ ------------ Total current liabilities...................... 1,634,000 1,762,000 CAPITAL LEASE OBLIGATIONS.......................... 189,000 65,000 COMMITMENTS (Note 7) SHAREHOLDERS' EQUITY: Preferred Stock, no par value; shares authorized-- 9,951,765 and 5,000,000, respectively; shares issued and outstanding-- 9,451,766 and 0, respectively..................... 34,218,000 -- Common Stock, no par value; shares authorized-- 18,500,000 and 40,000,000, respectively; shares issued and outstanding-- 1,886,479 and 13,275,208, respectively............ 324,000 58,073,000 Deficit accumulated during the development stage... (27,025,000) (41,313,000) Shareholder notes receivable....................... (167,000) (167,000) Stock purchase rights.............................. 3,500,000 -- Unrealized losses on investments................... -- (10,000) ------------ ------------ Total shareholders' equity....................... 10,850,000 16,583,000 ------------ ------------ Total liabilities and shareholders' equity..... $ 12,673,000 $ 18,410,000 ============ ============ AASTROM BIOSCIENCES, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS The accompanying notes are an integral part of these financial statements. F-4
YEAR ENDED JUNE 30, --------------------------------------- MARCH 24, 1989 (INCEPTION) TO JUNE 30, 1995 1996 1997 1997 ----------- ------------ ------------ -------------- REVENUES: Research and develop- ment agreements...... $ 396,000 $ 1,342,000 $ 230,000 $ 2,017,000 Grants................ 121,000 267,000 148,000 2,143,000 ----------- ------------ ------------ ------------ Total revenues...... 517,000 1,609,000 378,000 4,160,000 COSTS AND EXPENSES: Research and develop- ment................. 4,889,000 10,075,000 13,357,000 38,432,000 General and adminis- trative.............. 1,558,000 2,067,000 1,953,000 9,042,000 ----------- ------------ ------------ ------------ Total costs and ex- penses............. 6,447,000 12,142,000 15,310,000 47,474,000 ----------- ------------ ------------ ------------ LOSS FROM OPERATIONS.... (5,930,000) (10,533,000) (14,932,000) (43,314,000) OTHER INCOME (EXPENSE): Interest income....... 279,000 678,000 676,000 2,252,000 Interest expense...... (66,000) (62,000) (32,000) (251,000) ----------- ------------ ------------ ------------ Other income........ 213,000 616,000 644,000 2,001,000 ----------- ------------ ------------ ------------ NET LOSS................ $(5,717,000) $ (9,917,000) $(14,288,000) $(41,313,000) =========== ============ ============ ============ NET LOSS PER SHARE...... $ (.66) $ (.98) $ (1.26) =========== ============ ============ Weighted average num- ber of common and common equivalent shares outstanding... 8,644,000 10,103,000 11,315,000 =========== ============ ============ AASTROM BIOSCIENCES, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF SHAREHOLDERS' EQUITY The accompanying notes are an integral part of these financial statements. F-5
DEFICIT ACCUMULATED UNREALIZED PREFERRED STOCK COMMON STOCK DURING THE SHAREHOLDER STOCK GAIN ----------------------- ----------------------- DEVELOPMENT NOTES PURCHASE (LOSSESS) ON SHARES AMOUNT SHARES AMOUNT STAGE RECEIVABLE RIGHTS INVESTMENTS ---------- ----------- ---------- ----------- ------------ ----------- ---------- ------------ BALANCE, MARCH 24, 1989 (Inception)..... -- $ -- -- $ -- $ -- $ -- $ -- $ -- Non-cash issuance of Common Stock... 454,545 -- Issuance of Series A Preferred Stock at $1.00 per share in August 1989........... 1,500,000 1,500,000 Issuance of Series A Preferred Stock in March 1991 at $1.00 per share, net of issuance costs of $5,000...... 1,000,000 995,000 Issuance of Series B Preferred Stock in April 1992 at $2.00 per share, net of issuance costs of $46,000..... 3,030,000 6,014,000 Issuance of Common Stock for services... 33,333 10,000 Issuance of Series C Preferred Stock in October 1993 at $1,000 per share, net of issuance costs of $175,000.... 10,000 9,825,000 Exercise of stock options.. 1,229,482 230,000 (198,000) Net loss........ (11,391,000) ---------- ----------- ---------- ----------- ------------ --------- ---------- -------- BALANCE, JUNE 30, 1994............ 5,540,000 18,334,000 1,717,360 240,000 (11,391,000) (198,000) -- -- Issuance of Series D Preferred Stock in April and May 1995 at $4.00 per share, net of issuance costs of $81,000..... 2,500,001 9,919,000 Exercise of stock options.. 39,103 8,000 Retirement of Common Shares outstanding.... (25,000) (7,000) Unrealized loss on investments. (2,000) Net loss........ (5,717,000) ---------- ----------- ---------- ----------- ------------ --------- ---------- -------- BALANCE, JUNE 30, 1995............ 8,040,001 28,253,000 1,731,463 241,000 (17,108,000) (198,000) -- (2,000) Issuance of Series E Preferred Stock in January 1996 at $4.25 per share, net of issuance costs of $35,000..... 1,411,765 5,965,000 Exercise of stock options.. 130,016 53,000 Issuance of Common Stock at $1.20 per share.......... 25,000 30,000 Issuance of Stock Purchase Rights for cash in September 1995 and March 1996........... 3,500,000 Repurchase of Series D Preferred Stock at $4.00 per share.......... (62,500) (250,000) Sale of Series D Preferred Stock at $4.00 per share.......... 62,500 250,000 Principal payment received under shareholder note receivable..... 31,000 Unrealized gain on investments. 2,000 Net loss........ (9,917,000) ---------- ----------- ---------- ----------- ------------ --------- ---------- -------- BALANCE, JUNE 30, 1996............ 9,451,766 34,218,000 1,886,479 324,000 (27,025,000) (167,000) 3,500,000 -- Exercise of stock options.. 40,307 26,000 Issuance of Series E Preferred Stock at $17.00 per share.......... 205,882 3,500,000 (3,500,000) Issuance of Common Stock at $7.00 per share, net of issuance costs of $2,865,000.. 3,250,000 19,885,000 Conversion of Preferred Stock.......... (9,657,648) (37,718,000) 8,098,422 37,718,000 Compensation expense related to stock options granted........ 120,000 Unrealized losses on investments.... (10,000) Net loss........ (14,288,000) ---------- ----------- ---------- ----------- ------------ --------- ---------- -------- BALANCE, JUNE 30, 1997............ -- $ -- 13,275,208 $58,073,000 $(41,313,000) $(167,000) $ -- $(10,000) ========== =========== ========== =========== ============ ========= ========== ======== TOTAL SHAREHOLDERS' EQUITY ------------- BALANCE, MARCH 24, 1989 (Inception)..... $ -- Non-cash issuance of Common Stock... -- Issuance of Series A Preferred Stock at $1.00 per share in August 1989........... 1,500,000 Issuance of Series A Preferred Stock in March 1991 at $1.00 per share, net of issuance costs of $5,000...... 995,000 Issuance of Series B Preferred Stock in April 1992 at $2.00 per share, net of issuance costs of $46,000..... 6,014,000 Issuance of Common Stock for services... 10,000 Issuance of Series C Preferred Stock in October 1993 at $1,000 per share, net of issuance costs of $175,000.... 9,825,000 Exercise of stock options.. 32,000 Net loss........ (11,391,000) ------------- BALANCE, JUNE 30, 1994............ 6,985,000 Issuance of Series D Preferred Stock in April and May 1995 at $4.00 per share, net of issuance costs of $81,000..... 9,919,000 Exercise of stock options.. 8,000 Retirement of Common Shares outstanding.... (7,000) Unrealized loss on investments. (2,000) Net loss........ (5,717,000) ------------- BALANCE, JUNE 30, 1995............ 11,186,000 Issuance of Series E Preferred Stock in January 1996 at $4.25 per share, net of issuance costs of $35,000..... 5,965,000 Exercise of stock options.. 53,000 Issuance of Common Stock at $1.20 per share.......... 30,000 Issuance of Stock Purchase Rights for cash in September 1995 and March 1996........... 3,500,000 Repurchase of Series D Preferred Stock at $4.00 per share.......... (250,000) Sale of Series D Preferred Stock at $4.00 per share.......... 250,000 Principal payment received under shareholder note receivable..... 31,000 Unrealized gain on investments. 2,000 Net loss........ (9,917,000) ------------- BALANCE, JUNE 30, 1996............ 10,850,000 Exercise of stock options.. 26,000 Issuance of Series E Preferred Stock at $17.00 per share.......... -- Issuance of Common Stock at $7.00 per share, net of issuance costs of $2,865,000.. 19,885,000 Conversion of Preferred Stock.......... -- Compensation expense related to stock options granted........ 120,000 Unrealized losses on investments.... (10,000) Net loss........ (14,288,000) ------------- BALANCE, JUNE 30, 1997............ $16,583,000 ============= AASTROM BIOSCIENCES, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS The accompanying notes are an integral part of these financial statements. F-6
MARCH 24, 1989 YEAR ENDED JUNE 30, (INCEPTION) TO --------------------------------------- JUNE 30, 1995 1996 1997 1997 ------------ ----------- ------------ -------------- OPERATING ACTIVITIES: Net loss............... $ (5,717,000) $(9,917,000) $(14,288,000) $(41,313,000) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization........ 329,000 536,000 564,000 1,831,000 Loss on property held for resale.......... -- -- -- 110,000 Amortization of discounts and premiums on investments......... (9,000) (110,000) (84,000) (203,000) Stock compensation expense............. -- -- 120,000 130,000 Changes in assets and liabilities: Receivables........ 132,000 18,000 (148,000) (229,000) Prepaid expenses... (59,000) (332,000) 311,000 (126,000) Accounts payable and accrued expenses.......... (40,000) 864,000 316,000 1,508,000 Accrued employee expenses.......... 28,000 (33,000) 33,000 130,000 Deferred revenue... 79,000 (103,000) (122,000) -- ------------ ----------- ------------ ------------ Net cash used for operating activities.. (5,257,000) (9,077,000) (13,298,000) (38,162,000) ------------ ----------- ------------ ------------ INVESTING ACTIVITIES: Organizational costs... -- -- -- (73,000) Purchase of short-term investments........... (10,981,000) -- (19,190,000) (31,138,000) Maturities of short- term investments...... 3,567,000 8,500,000 4,200,000 16,267,000 Capital purchases...... (118,000) (445,000) (424,000) (2,142,000) Proceeds from sale of property held for resale................ -- -- -- 400,000 ------------ ----------- ------------ ------------ Net cash provided by (used for) investing activities............ (7,532,000) 8,055,000 (15,414,000) (16,686,000) ------------ ----------- ------------ ------------ FINANCING ACTIVITIES: Issuance of Preferred Stock................. 9,919,000 5,965,000 -- 34,218,000 Issuance of Common Stock................. 1,000 83,000 19,911,000 20,027,000 Payments received for stock purchase rights................ -- 3,500,000 -- 3,500,000 Payments received under shareholder notes................. -- 31,000 -- 31,000 Principal payments under capital lease obligations........... (214,000) (270,000) (223,000) (985,000) ------------ ----------- ------------ ------------ Net cash provided by financing activities.. 9,706,000 9,309,000 19,688,000 56,791,000 ------------ ----------- ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... (3,083,000) 8,287,000 (9,024,000) 1,943,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.... 5,763,000 2,680,000 10,967,000 -- ------------ ----------- ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD................. $ 2,680,000 $10,967,000 $ 1,943,000 $ 1,943,000 ============ =========== ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid......... $ 66,000 $ 62,000 $ 32,000 $ 251,000 Additions to capital lease obligations.... 270,000 -- -- 1,174,000 AASTROM BIOSCIENCES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Aastrom Biosciences, Inc. (the Company) was incorporated in March 1989 (Inception) under the name Ann Arbor Stromal, Inc. The Company changed its name in 1991 concurrent with the commencement of employee-based operations. The Company is in the development stage with its principal business activities being research and product development, conducted both on its own behalf and in connection with various collaborative research and development agreements with other companies, involving the development of processes and instrumentation for the ex vivo production of human stem cells and their progeny, and hematopoetic and other tissues. Successful future operations are subject to several technical and business risks, including satisfactory product development, obtaining regulatory approval and market acceptance for its products and the Company's continued ability to maintain adequate levels of funding. SIGNIFICANT REVENUE RELATIONSHIPS--Two companies accounted for 49% and 28% of total revenues for the year ended June 30, 1995 and one company accounted for 83% and 52% of total revenues for the year ended June 30, 1996 and 1997, respectively. One company accounted for 43% of total revenues for the period from Inception to June 30, 1997. Grant revenues consist of grants sponsored by the U.S. government. CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash and short- term investments with original maturities of three months or less. SHORT-TERM INVESTMENTS--Short-term investments consist of U.S. government securities and commercial paper with original maturities of over three months but less than one year. Short-term investments are classified as available- for-sale, and are presented at market value, with unrealized gains and losses on investments reflected as a component of shareholders' equity. DIVERSITY OF CREDIT RISK--The Company invests its excess cash in U.S. government securities and commercial paper, maintained in U.S. financial institutions, and has established guidelines relative to diversification and maturities in an effort to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. The Company has not experienced any significant realized losses on its cash equivalents or short-term investments. PROPERTY--Property is recorded at cost and depreciated or amortized using the straight-line method over the estimated useful life of the asset (primarily five years), or the remaining lease term, if shorter, with respect to leasehold improvements and certain capital lease assets. REVENUE RECOGNITION--Revenue from grants and research agreements is recognized on a cost reimbursement basis consistent with the performance requirements of the related agreement. Funding received in advance of costs incurred is presented as deferred revenue in the accompanying financial statements. RESEARCH AND DEVELOPMENT COSTS--Research and development costs are expensed as incurred. Such costs and expenses related to programs under collaborative agreements with other companies totaled $146,000, $1,294,000 and $154,000 for the years ended June 30, 1995, 1996 and 1997, respectively, and $1,642,000 for the period from Inception to June 30, 1997. STOCK COMPENSATION--The Company adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation" (SFAS 123) as of July 1, 1996. As permitted by SFAS 123, the Company continues to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," (APB 25) and related interpretations in accounting for its plans and does not recognize compensation expense for its employee stock-based compensation plans as prescribed in SFAS 123. F-7 AASTROM BIOSCIENCES, INC (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) INCOME TAXES--The Company recognizes deferred tax assets and liabilities for the differences between the carrying amounts and the tax basis of assets and liabilities, as well as net operating loss and tax credit carryforwards. Additionally, the Company establishes a valuation allowance to reflect the likelihood of realization of deferred tax assets. NET LOSS PER SHARE--Net loss per share is computed using the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares are not included in the per share calculation where the effect of their inclusion would be anti-dilutive. However, common and common equivalent shares issued during the twelve month period preceding the filing of the registration statement for the Company's initial public offering which was completed in February 1997, (the IPO) at a price below the expected offering price are considered to be cheap stock and are included in the calculation for periods prior to the IPO, as if they were outstanding for all periods using the treasury stock method, as applicable, even though their inclusion is anti-dilutive. Due to the automatic conversion of all outstanding shares of Preferred Stock into Common Stock upon the completion of the IPO, Preferred Stock is assumed to have been converted into Common Stock at the time of issuance, except for those shares considered to be cheap stock which are treated as outstanding for all periods presented. During March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128) which amends the standards for computing earnings per share previously set forth in Accounting Principles Board Opinion No. 15 "Earnings per Share" (APB 15). SFAS 128, which will be adopted by the Company for the periods ending December 31, 1997, will not have a material effect on the computation of net loss per share for the periods presented in the accompanying financial statements. USE OF ESTIMATES--The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to financial statements. Actual results could differ from those estimates. FINANCIAL INSTRUMENTS--The Company evaluates the fair value of those assets and liabilities identified as financial instruments and estimates that the fair value of such financial instruments generally approximates the carrying value in the accompanying financial statements. Fair values have been determined through information obtained from market sources and management estimates. LONG-LIVED ASSETS--The Company adopted Statement of Financial Accounting Standards No. 121 (SFAS 121) as of July 1, 1996 and evaluates the impairment of long-lived assets and long-lived assets to be disposed of whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. Adoption of this pronouncement has not significantly impacted the accompanying financial statements as no impairment losses have been identified by the Company. 2. SHORT-TERM INVESTMENTS All short-term investments are available-for-sale and have maturities of one year or less and are summarized as follows: F-8
GROSS GROSS UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE ----------- ---------- ---------- ----------- June 30, 1997: U.S. Government Securities...... $13,574,000 $1,000 $(11,000) $13,564,000 Commercial Paper................ 1,500,000 -- -- 1,500,000 ----------- ------ -------- ----------- $15,074,000 $1,000 $(11,000) $15,064,000 =========== ====== ======== =========== AASTROM BIOSCIENCES, INC (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 3. PROPERTY Property consists of the following: Equipment under capital leases totaled $1,131,000 at June 30, 1996 and 1997, with related accumulated amortization of $622,000 and $844,000, respectively (Note 7). 4. SHAREHOLDERS' EQUITY INITIAL PUBLIC OFFERING--In February 1997, the Company completed an underwritten initial public offering of 3,000,000 shares of its Common Stock at an offering price of $7.00 per share. In March 1997, the underwriters elected to purchase an additional 250,000 shares of Common Stock pursuant to the underwriters' over-allotment option at a price of $7.00 per share. Proceeds from the offering, net of underwriter's commissions and expenses, were $19,885,000. PREFERRED STOCK--The Company had the following classes of preferred stock outstanding as of June 30, 1996. As a result of the IPO, all 9,657,648 shares of previously outstanding preferred stock were automatically converted into 8,098,422 shares of Common Stock.
JUNE 30, ------------------------ 1996 1997 ----------- ----------- Machinery and equipment........................ $ 1,337,000 $ 1,425,000 Office equipment............................... 482,000 733,000 Leasehold improvements......................... 520,000 605,000 ----------- ----------- 2,339,000 2,763,000 Less accumulated depreciation and amortiza- tion.......................................... (1,151,000) (1,715,000) ----------- ----------- $ 1,188,000 $ 1,048,000 =========== =========== No dividends have ever been declared or paid. COBE LABORATORIES, INC. STOCK PURCHASE RIGHTS--In connection with the purchase of the Series C Convertible Preferred Stock by Cobe Laboratories, Inc. (Cobe) in October 1993, Cobe received a preemptive right to purchase a pro-rata portion of any newly issued shares of stock by the Company in order to maintain its then current percentage ownership interest. Any such purchase of newly issued shares shall be at the net price to the Company after deducting underwriter's discounts and commissions, if any. The agreements establishing the Company's relationship with Cobe provide the Company with an option (the Put Option) to require Cobe to F-9
SHARES ISSUED SHARES AND LIQUIDATION AUTHORIZED OUTSTANDING PREFERENCE ---------- ------------- ----------- Series A........................... 2,500,000 2,500,000 $ 2,500,000 Series B........................... 3,030,000 3,030,000 6,060,000 Series C........................... 10,000 10,000 10,000,000 Series D........................... 3,000,000 2,500,001 10,000,000 Series E........................... 1,411,765 1,411,765 6,000,000 --------- --------- ----------- Balance, June 30, 1996............. 9,951,765 9,451,766 $34,560,000 ========= ========= =========== AASTROM BIOSCIENCES, INC (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) purchase the lesser of 20%, or $5,000,000, in an initial public offering or a private offering meeting certain minimum requirements. In the event that the Company exercises the Put Option, Cobe then has the option to purchase up to 40% of that offering. While the Put Option was not exercised by the Company in connection with the IPO, Cobe elected to purchase an additional $5,000,000 in Common Stock as part of the IPO. The Company and Cobe are evaluating whether or not the Put Option remains in effect as it relates to the Company's ability to exercise the option in a subsequent private offering of its equity securities. Cobe has an option to purchase additional shares from the Company equal to 30% of the total number of shares outstanding assuming exercise of the option. Such option, which is exercisable until February 2000, must be exercised in full with the purchase price of the shares equal to 120% of the public market trading price as determined by the 30-day average market price preceding the date of exercise of the option. The Company has granted Cobe a right of first negotiation in the event the Company receives any proposal concerning, or otherwise decides to pursue, a merger, consolidation or other transaction in which all or a majority of the Company's equity securities or substantially all of the Company's assets, or any material portion of the assets of the Company used by the Company in performing its obligation under the Distribution Agreement (Note 6), would be acquired by a third party outside of the ordinary course of business. STOCK OPTION PLANS--The Company has various stock option plans which provide for the issuance of nonqualified and incentive stock options to acquire up to 2,986,594 shares of Common Stock. Such options may be granted by the Company's Board of Directors to certain of the Company's founders, employees, directors and consultants. The exercise price of incentive stock options shall not be less than the fair market value of the shares on the date of grant. In the case of individuals who are also holders of 10% or more of the outstanding shares of Common Stock, the exercise price of incentive stock options shall not be less than 110% of the fair market value of the shares on the date of grant. The exercise price of non-qualified stock options shall not be less than 85% of the fair market value on the date of grant. Options granted under these plans expire no later than ten years from the date of grant and generally become exercisable ratably over a four-year period following the date of grant. For certain options granted, the Company recognizes compensation expense for the difference between the deemed value for accounting purposes and the option exercise price on the date of grant. During the year ended June 30, 1997, compensation expense totaling approximately $120,000 has been charged with respect to these options. Additional future compensation expense with respect to the issuance of such options totals approximately $135,000 and will be recognized through December 2001. As permitted by SFAS 123, the Company continues to apply APB 25 and related interpretations in accounting for its stock option plans and does not recognize compensation expense for its employee stock-based compensation plans as prescribed in SFAS 123. If the Company had elected to recognize compensation expense based upon the fair value at the grant dates for stock option awards granted in 1996 and 1997, in accordance with SFAS No. 123, the pro forma net loss and net loss per share would be as follows. F-10
JUNE 30, ----------------------- 1996 1997 ---------- ----------- Net Loss: As reported................................... $9,917,000 $14,288,000 Pro forma..................................... 9,942,000 14,793,000 Net Loss per common share: As reported................................... $ (.98) $ (1.26) Pro forma..................................... (.98) (1.31) AASTROM BIOSCIENCES, INC (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The fair value of options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions; no dividend yields, 40% volatility, risk free interest rates ranging from 5.2% to 6.8% and expected option lives of three to five years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the use of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in subjective assumptions can materially affect the fair value estimates, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock based compensation plans. The following table summarizes option activity under the Company's stock option plans: OUTSIDE DIRECTORS' STOCK OPTION PLAN--The Company has an outside directors' stock option plan which provides for the issuance of options to purchase up to 150,000 shares of Common Stock to outside directors. Under this plan, non- qualified options to purchase 5,000 shares of Common Stock are granted to each outside director on the day of the Annual Shareholders' meeting. These options generally vest over a one-year period and expire ten years after the date of grant. As of June 30, 1997, options to purchase 30,000 shares of Common Stock at $7.00 per share are outstanding under this plan, of which options to purchase 10,002 shares of Common Stock are exercisable. F-11
OPTIONS OPTIONS WEIGHTED AVERAGE OPTIONS OPTIONS AVAILABLE EXERCISE PRICE EXERCISABLE OUTSTANDING FOR GRANT PER SHARE AT PERIOD END ----------- --------------- ---------------- ------------- March 24, 1989 (Incep- tion) Options authorized.... -- 1,703,261 Options granted....... 1,727,111 (1,727,111) $ .31 Options exercised..... (1,229,482) -- $ .19 Options canceled...... (103,964) 103,964 $ .66 ---------- ---------- Balance, June 30, 1994.. 393,665 80,114 $ .61 77,682 Options authorized.... -- 333,333 Options granted....... 55,333 (55,333) $1.20 Options exercised..... (39,103) -- $ .21 Options canceled...... (60,230) 60,230 $ .34 ---------- ---------- Balance, June 30, 1995.. 349,665 418,344 $ .78 108,492 Options authorized.... -- 800,000 Options granted....... 155,337 (155,337) $1.44 Options exercised..... (130,016) -- $ .41 Options canceled...... (44,690) 44,690 $ .85 ---------- ---------- Balance, June 30, 1996.. 330,296 1,107,697 $1.20 101,021 Options authorized.... -- 150,000 Options granted....... 785,200 (785,200) $6.78 Options exercised..... (40,307) -- $ .65 Options canceled...... (16,818) 16,818 $1.83 ---------- ---------- Balance, June 30, 1997.. 1,058,371 489,315 $5.36 483,376 ---------- ---------- ---------- ---------- AASTROM BIOSCIENCES, INC (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The following table summarizes information about stock-based compensation plans outstanding as of June 30, 1997: The weighted average fair value of options granted during the year ended June 30, 1997 was $6.78 per share. EMPLOYEE STOCK PURCHASE PLAN--The Company has an employee stock purchase plan under which eligible employees can purchase Common Stock, at a discount to the market price, through payroll deductions up to 10% of the employees base compensation, subject to certain limitations, during sequential 24-month offering periods. Each offering period is divided into four consecutive six- month purchase periods ending on March 1 and September 1 of each year. Unless otherwise provided by the Board of Directors prior to the commencement of an offering period, the price at which stock is purchased under the plan for such offering period is equal to 85% of the lesser of the fair market value of the Common Stock on the first day of such offering period or the last day of the purchase period of such offering period. The initial purchase date under this plan is August 31, 1997, accordingly, no shares have been sold under this plan as of June 30, 1997. STOCK PURCHASE WARRANTS--The Company has issued warrants to purchase 69,444 shares of Common Stock which expire on October 15, 2000. These warrants may be exercised, in whole or in part, at a price equal to the lesser of (a) $9.00 per share, which price increases by $3.00 per share on February 7, 1998, 1999 and 2000; or (b) 85% of the fair market value of the Company's Common Stock at the time of exercise. COMMON SHARES RESERVED--As of June 30, 1997, the Company has reserved shares of Common Stock for future issuance as follows:
WEIGHTED AVERAGE WEIGHTED EXERCISE RANGE OF NUMBER OF REMAINING AVERAGE PRICE OF EXERCISE OPTIONS CONTRACTUAL EXERCISE NUMBER EXERCISABLE PRICES OUTSTANDING LIFE-YEARS PRICE EXERCISABLE OPTIONS -------------- ----------- ----------- -------- ----------- ----------- $ .30 - $ 1.20 260,170 7.7 $1.15 135,542 $1.11 $ 3.20 - $3.88 58,418 9.2 $3.24 4,501 $3.20 $7.00 - $ 7.13 739,783 9.6 $7.00 343,333 $7.00 --------- ------- 1,058,371 483,376 ========= ======= F-12
Issuance under stock option plans: 1992 Incentive and Non-Qualified Stock Option Plan........ 1,397,686 1995 Outside Director Stock Option Plan................... 150,000 --------- 1,547,686 Issuance under 1996 Employee Stock Purchase Plan............ 250,000 Exercise of Stock Purchase Warrants......................... 69,444 --------- 1,867,130 ========= AASTROM BIOSCIENCES, INC (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 5. INCOME TAXES Deferred tax assets consist of the following: Due to the historical losses incurred by the Company, a full valuation allowance for deferred tax assets has been provided. If the Company achieves profitability, these deferred tax assets may be available to offset future income taxes. At June 30, 1997, the Company's Federal tax net operating loss and tax credit carryfowards were $40,420,000 and $971,000, respectively, which will expire from 2004 through 2012, if not utilized. The Company underwent an ownership change in October 1993 which has resulted in a limitation under which the Company can utilize a portion of its federal net operating loss carryforward amounting to $1,153,000 per year. As of June 1997, the portion of the Company's net operating loss that remains subject to this limitation is $2,490,000 and therefore is not expected to ultimately effect the Company's ability to utilize the benefit. If certain changes in ownership should occur again in the future, the Company's ability to utilize its net operating loss and tax credit carryforwards may become subject to further annual limitation. 6. LICENSES, ROYALTIES AND COLLABORATIVE AGREEMENTS: UNIVERSITY OF MICHIGAN--In August 1989, the Company entered into a research agreement with the University of Michigan (the University). Under the terms of this research agreement, as amended, the Company agreed to reimburse the University for certain research costs through the date of its expiration in December 1994. Payments made to the University under the aforementioned agreements totaled $121,000 and $2,521,000 for the years ended June 30, 1995 and for the period from Inception to June 30, 1997, respectively, which amounts are included in research and development expense in the accompanying Statements of Operations. As part of this relationship, the Company issued to the University 454,545 shares of Common Stock in August 1989. No value has been assigned to these shares in the accompanying financial statements. In March 1992, and as provided for under the research agreement, the Company entered into a license agreement for the technology developed under the research agreement. The license agreement, as amended, provides for a royalty to be paid to the University equal to 2% of net sales of products containing the licensed technology sold by the Company. COBE BCT, INC.--In connection with the issuance of the Series C Preferred Stock to Cobe in October 1993, the Company and Cobe BCT, Inc. (Cobe BCT), an affiliate of Cobe, entered into an agreement which grants to Cobe BCT exclusive worldwide distribution and marketing rights to the Company's Cell Production System (CPS) for stem cell therapy applications (Distribution Agreement). The term of the Distribution Agreement is ten years, with an option, exercisable by Cobe BCT, to extend the term for an additional ten years. Cobe has the right to terminate its Distribution Agreement with the Company with twelve months' notice upon a change of control of the Company, other than to Cobe, or at any time after December 31, 1997, if Cobe determines that commercialization of the Aastrom CPS for stem cell therapy on or prior to December 31, 1998 is unlikely. Pursuant to the Distribution Agreement, Cobe BCT will perform worldwide marketing and distribution activities of the CPS for use in stem cell therapy and will receive a share of the resulting net sales, as defined, ranging from 38% to 42%, subject to certain negotiated discounts and volume-based adjustments. F-13
JUNE 30, ------------------------- 1996 1997 ----------- ------------ Net operating loss carryforwards............... $ 9,210,000 $ 14,150,000 Tax credits and other.......................... 440,000 1,162,000 ----------- ------------ Gross deferred tax assets...................... 9,650,000 15,312,000 Deferred tax assets valuation allowance........ (9,650,000) (15,312,000) ----------- ------------ $ -- $ -- =========== ============ AASTROM BIOSCIENCES, INC (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The agreements establishing this collaboration provided for payments totaling $5,000,000 to be made by Cobe BCT upon the Company meeting certain development milestones. In May 1995, the Company accepted, as part of the sale of the Series D Preferred Stock, an equity investment of $5,000,000 from Cobe in lieu of those future milestone payments. LICENSE AND ROYALTY AGREEMENTS--In July 1992, the Company licensed certain cell culture technology under which it obtained an exclusive worldwide license to the technology in exchange for a royalty payable of up to 3% of net sales on products containing the licensed technology. In March 1996, the Company executed a license agreement which provides for the use of licensed products in the CPS. Pursuant to this license agreement, the Company recorded a charge to research and development expense of $1,500,000 representing the license fee payable upon execution of the agreement. The license agreement provides for annual renewal fees of $1,000,000 over the five year license term, if renewed by the Company, and can be extended at the Company's option for an additional five years. RHONE-POULENC RORER, INC.--In September 1995, the Company entered into a research and development collaboration with Rhone-Poulenc Rorer, Inc. (RPR), granting RPR a right to license the Company's CPS for Lymphoid cell applications. Pursuant to the agreements establishing this collaboration, RPR was obligated to fund certain research costs associated with the development of the CPS for Lymphoid cell applications and was entitled to make equity purchases of up to $12,500,000 subject to the Company's satisfaction of certain milestones and RPR's decision to exercise certain options. In September 1996, RPR notified the Company of its intent to not exercise its additional options under the collaboration. This notification was made after RPR had determined that for strategic reasons it would not pursue Lymphoid cell therapy applications, including those being pursued under the collaboration the Company. The Company received $3,500,000 in equity payments and recognized $1,538,000 in research revenue under this collaboration. As a result of this termination, no further equity payments or research funding is due from RPR and RPR's license rights to the Company's CPS for Lymphoid cell applications have been terminated. 7. COMMITMENTS The Company leases certain machinery and equipment and office equipment under capital leases. Obligations under these leasing arrangements bear interest at rates ranging from 9.7% to 12.1% and mature through May 1999. Additionally, the Company leases its facility under an operating lease which expires in May 1998, at which time the Company has the option to renew the lease for an additional period of up to five years. Future minimum payments under capital leases and non-cancelable operating leases are as follows: Certain of the Company's capital lease agreements contain restrictive provisions which require that the Company's total assets exceed its total liabilities by at least $1,000,000. Should the Company fall out of compliance with this provision, and a waiver cannot be obtained from the lessor, remaining amounts due under the lease agreements become immediately due and payable. F-14
CAPITAL OPERATING LEASES LEASES -------- --------- Year Ending June 30, 1998.................................................... $138,000 $435,000 1999.................................................... 69,000 -- -------- -------- Total minimum lease payments.............................. 207,000 $435,000 ======== Less amount representing interest......................... (18,000) -------- Obligations under capital lease........................... $189,000 ======== AASTROM BIOSCIENCES, INC (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Rent expense for the years ended June 30, 1995, 1996 and 1997, was $241,000, $338,000 and $456,000, respectively, and for the period from Inception to June 30, 1997 was $1,278,000. 8. EMPLOYEE SAVINGS PLAN The Company has a 401(k) plan that became effective in January 1994. The plan allows participating employees to contribute up to 15% of their salary, subject to annual limits and minimum qualifications. The Board may, at its sole discretion, approve Company contributions. Through June 30, 1997, the Company has made no contributions to the plan. F-15 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- No dealer, salesperson or other person has been authorized to give any information or to make any representations other than those contained in this Prospectus, and, if given or made, such information or representation must not be relied upon as having been authorized by the Company, the Placement Agent or any other person. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the shares of Common Stock offered hereby, nor does it constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby to any person in any jurisdiction in which it is unlawful to make such offer or solicitation to such person. Neither the delivery of this Prospectus nor any sale made hereunder shall under any circumstances create an implication that the information contained herein is correct as of any date subsequent to the date hereof. --------------- TABLE OF CONTENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1,500,000 SHARES [LOGO]AASTROM BIOSCIENCES INC --------------------- COMMON STOCK --------------- PROSPECTUS --------------- COWEN & COMPANY ,1997 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 6 The Company............................................................... 16 Use of Proceeds........................................................... 16 Price Range of Common Stock............................................... 16 Dividend Policy........................................................... 16 Dilution.................................................................. 17 Capitalization............................................................ 18 Selected Financial Data................................................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 20 Business.................................................................. 23 Management................................................................ 44 Certain Transactions...................................................... 52 Principal Shareholders.................................................... 54 Description of Capital Stock.............................................. 56 Shares Eligible for Future Sale........................................... 59 Plan of Distribution...................................................... 60 Legal Matters............................................................. 60 Experts................................................................... 61 Additional Information.................................................... 61 Index to Financial Statements............................................. F-1 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Other expenses in connection with the registration of the securities hereunder, which will be paid by the Registrant, will be substantially as follows: - -------- * Estimated expenses. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Sections 1561 through 1565 of the Michigan Business Corporation Act (the "MBCA") authorize a corporation to grant or a court to award indemnity to directors, officers, employees and agents in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933. The Bylaws of the Registrant (see Exhibit 3.2), provide that the Registrant shall, to the fullest extent authorized or permitted by the MBCA, or other applicable law, indemnify a director or officer who was or is a party or is threatened to be made a party to any proceeding by or in the right of the Registrant to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, employee or agent of the Registrant, against expenses, including actual and reasonable attorneys' fees, and amounts paid in settlement incurred in connection with the action or suit, if the indemnitee acted in good faith and in a manner the person reasonably believed to be in, or not opposed to, the best interests of the Registrant or its shareholders. This section also authorizes the Registrant to advance expenses incurred by any agent of the Registrant in defending any proceeding prior to the final disposition of such proceeding upon receipt of an undertaking by or on behalf of the agent to repay such amount unless it shall be determined ultimately that the agent is entitled to be indemnified. The Bylaws also authorize the Registrant to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Registrant against any liability asserted against or incurred by such person in such capacity or arising out of such person's status as such, regardless of whether the Registrant would have the power to indemnify such person against such liability under the provisions of the MBCA. The Registrant has entered into an indemnification agreement with certain of its directors, officers and other key personnel, which contains provisions that may in some respects be broader than the specific indemnification provisions contained under applicable law. The indemnification agreement may require the Registrant, among other things, to indemnify such directors, officers and key personnel against certain liabilities that may arise by reason of their status or service as directors, officers or employees of the Registrant, to advance the expenses incurred by such parties as a result of any threatened claims or proceedings brought against them as to which they could be indemnified and, to the maximum extent that insurance coverage of such directors, officers and key employees under the Registrant's directors' and officers' liability insurance policies is maintained. II-1
ITEM AMOUNT ---- -------- Securities and Exchange Commission registration fee............. $ 3,239 NASD filing fee................................................. 1,569 Nasdaq National Market fee...................................... 17,500 Blue sky qualification fees and expenses*....................... 5,000 Accounting fees and expenses*................................... 25,000 Legal fees and expenses*........................................ 100,000 Printing and engraving expenses*................................ 100,000 Transfer agent and registrar fees*.............................. 5,000 Escrow agent fees*.............................................. 10,000 Miscellaneous expenses*......................................... 82,692 -------- Total*........................................................ $350,000 ======== Section 1209 of the MBCA permits a Michigan corporation to include in its Articles of Incorporation a provision eliminating or limiting a director's liability to a corporation or its shareholders for monetary damages for breaches of fiduciary duty. The enabling statute provides, however, that liability for breaches of the duty of loyalty, acts or omissions not in good faith or involving intentional misconduct or knowing violation of the law, or the receipt of improper personal benefits cannot be eliminated or limited in this manner. The Registrant's Restated Articles of Incorporation include a provision which eliminates, to the fullest extent permitted by the MBCA, director liability for monetary damages for breaches of fiduciary duty. Section 7 of the Placement Agent Agreement filed as Exhibit 1.1 hereto sets forth certain provisions with respect to the indemnification of certain controlling persons, directors and officers against certain losses and liabilities, including certain liabilities under the Securities Act. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (A) ISSUANCES OF COMMON STOCK Since October 1, 1994, the Registrant has sold the following shares of Common Stock: In October 1995, the Registrant issued and sold 37,500 shares of Common Stock to Albert B. Deisseroth at a price of $0.80 per share. (B) ISSUANCES OF PREFERRED STOCK Since October 1, 1994, the Registrant has sold the following shares of Preferred Stock: In April and May 1995, the Registrant issued an aggregate of 2,500,001 shares of Series D Preferred Stock to 11 accredited investors at a price of $4.00 per share. In December 1995, the Registrant issued 62,500 shares of Series D Preferred Stock to Northwest Ohio Venture Fund, L.P., at a purchase price of $4.00 per share. In January 1996, the Registrant issued an aggregate of 1,411,765 shares of Series E Preferred Stock to SBIC Partners, L.P., and the State Treasurer of the State of Michigan ("Michigan") at a purchase price of $4.25 per share. Pursuant to a Governance Agreement between the Company and Rhone-Poulenc Rorer, Inc. ("RPR"), dated September 15, 1995, RPR terminated its contractual relationship with the Registrant on September 6, 1996. As a result of such termination, the Registrant issued 205,882 shares of Series E Preferred Stock to RPR at a purchase price of $17.00 per share. (C) ISSUANCES OF WARRANTS Since October 1, 1994, the Registrant has issued the following warrants: In October 1996, the Registrant issued warrants to Michigan to purchase 69,444 shares of Common Stock as consideration for entering into the Convertible Loan Commitment. In October 1997, the Registrant entered into an agreement with Burrill & Company, pursuant to which the Registrant issued warrants to purchase 200,000 shares of Common Stock as consideration for certain services to be rendered by Burrill & Company under such agreement. (D) OPTION ISSUANCES TO, AND EXERCISES BY, EMPLOYEES, DIRECTORS AND CONSULTANTS From January 18, 1990 to April 11, 1997, the Registrant issued options to purchase a total of 2,719,231 shares of Common Stock at exercise prices ranging from $0.15 to $7.125 per share to 99 employees and consultants and six non-employee directors. From October 30, 1992 to April 11, 1997, the Registrant issued a total of 1,434,534 shares of Common Stock to 31 employees and consultants and one non-employee director upon exercise of stock options at exercise prices ranging from $0.15 to $1.20 per share. II-2 There were no underwriters employed in connection with any of the transactions set forth in Item 15. The issuances described in Items 15(a), 15(b) and 15(c) were exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. The issuances described in item 15(d) were exempt from registration under the Securities Act in reliance on Rule 701 promulgated thereunder as transactions pursuant to compensatory benefit plans and contracts relating to compensation. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates or other instruments issued in such transactions. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits See Exhibit Index. (b) Financial Statement Schedules All such schedules have been omitted because they are not applicable or not required under the instructions contained in Regulation S-X or because the information is included elsewhere in the Financial Statements or the notes thereto. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant, pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant undertakes that: (1) For purposes of determining any liability under the Securities act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 4340A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) of (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective; and (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Ann Arbor, State of Michigan, on the 8th day of October, 1997. AASTROM BIOSCIENCES, INC. By: /s/R. Douglas Armstrong ---------------------------------- R. DOUGLAS ARMSTRONG, PH.D. PRESIDENT AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints R. Douglas Armstrong and Todd E. Simpson, or either of them, as his attorney-in-fact, each with full power of substitution for him in any and all capacities, to sign any and all amendments to this registration statement, including, but not limited to, post-effective amendments and any and all new registration statements filed pursuant to Rule 462 under the Securities Act of 1933 in connection with or related to the offering contemplated by this registration statement, as amended, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorney-in-fact or his substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURES TITLE DATE /s/ R. Douglas Armstrong President, Chief Executive October 8, - --------------------------------- Officer, and Director 1997 R. DOUGLAS ARMSTRONG, PH.D (Principal Executive Officer) /s/ Todd E. Simpson Vice President, Finance & October 8, - --------------------------------- Administration, Secretary 1997 TODD E. SIMPSON and Treasurer, Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Robert J. Kunze Chairman of the Board and October 8, - --------------------------------- Director 1997 ROBERT J. KUNZE /s/ Stephen G. Emerson Director October 8, - --------------------------------- 1997 STEPHEN G. EMERSON, M.D., PH.D /s/ G. Bradford Jones Director October 8, - --------------------------------- 1997 G. BRADFORD JONES /s/ Horst R. Witzel Director October 8, - --------------------------------- 1997 HORST R. WITZEL, DR. -ING /s/ Edward C. Wood, Jr. Director October 8, - --------------------------------- 1997 EDWARD C. WOOD, JR. II-4 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated August 15, 1997, relating to the financial statements of Aastrom Biosciences, Inc., which appears in such Prospectus. We also consent to the reference to us under the heading "Experts" in such Prospectus. Price Waterhouse LLP Detroit, Michigan October 7, 1997 II-5 EXHIBIT INDEX II-6
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 1.1 Form of Placement Agent Agreement between Cowen & Company and the Company. 3.1* Restated Articles of Incorporation of the Company. 3.2** Bylaws, as amended. 4.1** Specimen Common Stock Certificate. 4.2** Amended and Restated Investors' Rights Agreement, dated April 7, 1992. 5.1 Opinion of Pepper, Hamilton & Scheetz. 10.1** Form of Indemnification Agreement. 10.2** Amended and Restated 1992 Incentive and Non-Qualified Stock Option Plan and forms of agreements thereunder. 10.3** 1996 Outside Directors Stock Option Plan and forms of agreements thereunder. 10.4** 1996 Employee Stock Purchase Plan and form of agreement thereunder. 10.5** Stock Purchase Agreement, dated October 22, 1993, between Cobe Laboratories, Inc. and the Company and amendment thereto dated October 29, 1996. 10.6**+ Distribution Agreement, dated October 22, 1993, between Cobe BCT, Inc. and the Company and amendments thereto dated March 29, 1995, September 11, 1995 and October 29, 1996. 10.7** Lease Agreement, dated May 18, 1992, between Domino's Farms Holdings, L.P. and the Company and amendments thereto dated February 26, 1993, October 3, 1994, November 16, 1994 and July 29, 1996. 10.8** Promissory Note, dated November 18, 1993, for $120,000 loan by the Company to R. Douglas Armstrong, Ph.D. and amendment thereto dated October 30, 1996. 10.9** Promissory Note, dated October 20, 1993, for $47,303 loan by the Company to Stephen G. Emerson, M.D., Ph.D. and amendment thereto dated October 30, 1996. 10.10** Clinical Trial Agreement dated August 28, 1996 between the Company and Loyola University Medical Center Cancer Center. 10.11** Stock Purchase Commitment Agreement, dated October 15, 1996, between the State Treasurer of the State of Michigan and the Company. 10.12** Convertible Loan Commitment Agreement, dated October 15, 1996, between the State Treasurer of the State of Michigan and the Company. 10.13** Letter Agreement, dated November 11, 1996, between the Company and Cobe Laboratories, Inc. 10.14** Termination Agreement, dated November 14, 1996, between the Company and Rhone-Poulenc Rorer Inc. 10.15** Stock Purchase Agreement, dated November 14, 1996, between the Company and Rhone-Poulenc Rorer Inc. 10.16** Collaborative Supply Agreement, dated December 16, 1996, between the Company and Anchor Advanced Products, Inc. Mid-State Plastics Division. 10.17** 1989 Stock Option Plan and form of agreement thereunder. 10.18** Ancillary Stock Option Plan and form of agreement thereunder. 10.19** 401(k) Plan. 10.20** Form of Employment Agreement. 10.21** License Agreement, dated July 17, 1992, between J.G. Cremonese and the Company and related addenda thereto dated July 14, 1992 and July 7, 1993.II-7
10.22**+ Collaborative Product Development Agreement, dated May 10, 1994, between SeaMED Corporation and the Company. 10.23**+ Collaborative Product Development Agreement, dated November 8, 1994, between Ethox Corporation and the Company. 10.24**+ License and Supply Agreement, dated April 1, 1996, between Immunex Corporation and the Company. 10.25** Clinical Trial Agreement, dated April 19, 1996, between the Company and the University of Texas M.D. Anderson Cancer Center. 10.26** License Agreement, dated March 13, 1992, between the Company and the University of Michigan and amendments thereto dated March 13, 1992, October 8, 1993 and June 21, 1995. 10.27** Employee Proprietary Information and Invention Agreement, effective June 1, 1991, between the Company and R. Douglas Armstrong, Ph.D. 10.28** Employment Agreement, dated June 19, 1992, between the Company and James Maluta. 10.29** Employment Agreement, dated December 8, 1995, between the Company and Todd E. Simpson. 10.30** Employment Agreement, dated February 10, 1994, between the Company and Walter C. Ogier. 10.31** Employment Agreement, dated April 19, 1994, between the Company and Thomas E. Muller, Ph.D. 10.32** Employment Agreement, dated October 26, 1995, between the Company and Alan K. Smith, Ph.D. 10.33** Consulting Agreement, dated June 1, 1995, between the Company and Stephen G. Emerson, M.D., Ph.D. 10.34** Form of Subscription Agreement for the purchase of Series D Preferred Stock (Enterprise Development Fund L.P., Enterprise Development Fund II, L.P. and Northwest Ohio Venture Fund Limited Partnership). 10.35** Stock Purchase Agreement, dated January 8, 1996, among the Company, SBIC Partners, L.P. and the State Treasurer of the State of Michigan. 10.36** Form of Subscription Agreement for the purchase of Series D Preferred Stock (Brentwood Associates V, L.P., Candice E. Appleton Family Trust, Candis J. Stern, Helmut F. Stern, H&Q Life Science Technology Fund, H&Q London Ventures, State Treasurer of the State of Michigan and Windpoint Partners II, Limited Partnership). 10.37** Subscription Agreement, dated December 11, 1995, between the Company and Northwest Ohio Venture Fund Limited Partnership. 10.38# Second Amendment to Promissory Note payable to the Company by Stephen G. Emerson, M.D., Ph.D., dated June 30, 1997. 10.39# Second Amendment to Promissory Note payable to the Company by R. Douglas Armstrong, Ph.D., dated June 30, 1997. 10.40# Amendment to License and Supply Agreement, dated August 25, 1997, between Immunex Corporation and the Company. 10.41 Strategic Planning Consulting Services and Collaboration Agreement, dated October 7, 1997, between Burrill & Company, LLC and the Company. 11.1# Statement regarding computation of net loss per share. 16.1*** Letter from Coopers & Lybrand L.L.P., dated July 15, 1997. 23.1 Consent of Price Waterhouse LLP (see page II-5). 23.2 Consent of Pepper, Hamilton & Scheetz (included in Exhibit 5.1). 23.3 Consent of Oblon, Spivak, McClelland, Maier & Neustadt, P.C.- -------- * Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, as filed on March 7, 1997. ** Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 333-15415), declared effective on February 3, 1997. *** Incorporated by reference to the Company's Current Report on Form 8-K, as filed on July 16, 1997. # Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1997, as filed on September 25, 1997. + Confidential treatment has been granted as to a portion of this exhibit. II-8
24.1 Power of Attorney (see page II-4). 27.1# Financial Data Schedule.
EXHIBIT 1.1 1,500,000 Shares AASTROM BIOSCIENCES, INC. COMMON STOCK PLACEMENT AGREEMENT ------------------- , 1997 COWEN & COMPANY Financial Square New York, New York 10005 Ladies and Gentlemen: 1. Introductory. Aastrom Biosciences, Inc., a Michigan corporation (the ------------ ``Company''), hereby engages Cowen & Company (the ``Agent'') upon the terms and conditions set forth herein, as the Company's agent in connection with the proposed offering to the entities identified on Exhibit A of the number of shares set forth opposite such entity's name on Exhibit A (the ``Specified Placement Shares'') of the Company's authorized but unissued common stock, no par value (the ``Common Stock''). 2. Representations and Warranties of the Company. The Company represents --------------------------------------------- and warrants to, and agrees with, the Agent that: (a) A registration statement on Form S-1 (File No. 333- ) in the form in which it became or becomes effective and also in such form as it may be when any post-effective amendment thereto shall become effective with respect to the Specified Placement Shares, including any preeffective prospectuses included as part of the registration statement as originally filed or as part of any amendment or supplement thereto, or filed pursuant to Rule 424 under the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder, copies of which have heretofore been delivered to you, has been carefully prepared by the Company in conformity with the requirements of the Securities Act and has been filed with the Commission under the Securities Act; one or more amendments to such registration statement, including in each case an amended preeffective prospectus, copies of which amendments have heretofore been delivered to you, have been so prepared and filed. The term "Registration Statement" means the registration statement as amended at the time it became or becomes effective, including the information (if any) deemed to be a part of the registration statement at the time of effectiveness pursuant to Rule 430 of the Rules and Regulations. However, if it is contemplated, at the time this Agreement is executed, that a post- effective amendment to the registration statement will be filed and must be declared effective before the offering of the Specified Placement Shares may commence, the term "Registration Statement" as used in this Agreement means the registration statement as amended by said post-effective amendment. The term "Registration Statement" as used in this Agreement shall also include any registration statement relating to the Specified Placement Shares that is filed and declared effective pursuant to Rule 462(b) under the Securities Act. The term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement, or, (A) if the prospectus included in the Registration Statement omits information in reliance on Rule 430A under the Securities Act and such information is included in a prospectus filed with the Commission pursuant to Rule 424(b) under the Securities Act, the term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement as supplemented by the addition of the Rule 430A information contained in the prospectus filed with the Commission pursuant to Rule 424 (b) and (B) if prospectuses that meet the requirements of Section 10(a) of the Securities Act are delivered pursuant to Rule 434 under the Securities Act, then (i) the term "Prospectus" as used in this Agreement means the "prospectus subject to completion" (as such term is defined in Rule 434(g) under the Securities Act) as supplemented by (a) the addition of Rule 430A information or other information contained in the form of prospectus delivered pursuant to Rule 434(b)(2) under the Securities Act or (b) the information contained in the term sheets described in Rule 434(b)(3) under the Securities Act, and (ii) the date of such prospectuses shall be deemed to be the date of the term sheets. The term "Preeffective Prospectus" as used in this Agreement means the prospectus subject to completion in the form included in the Registration Statement at the time of the initial filing of the Registration Statement with the Commission, and as such prospectus shall have been amended from time to time prior to the date of the Prospectus. (b) The Commission has not issued or, to the knowledge of the Company, threatened to issue any order preventing or suspending the use of any Preeffective Prospectus, and, at its date of issue, each Preeffective Prospectus conformed in all material respects with the requirements of the Securities Act and did not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and, when the Registration Statement becomes effective and at all times subsequent thereto up to and including the Closing Date, the Registration Statement and the Prospectus and any amendments or supplements thereto contained and will contain all -2- material statements and information required to be included therein by the Securities Act and conformed and will conform in all material respects to the requirements of the Securities Act and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, included or will include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the foregoing representations, warranties and agreements shall not apply to information contained in or omitted from any Preeffective Prospectus or the Registration Statement or the Prospectus or any such amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of the Agent, directly or through you, specifically for use in the preparation thereof; there is no franchise, lease, contract, agreement or document required to be described in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed therein as required; and all descriptions of any such franchises, leases, contracts, agreements or documents contained in the Registration Statement are accurate and complete descriptions of such documents in all material respects. (c) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, and except as set forth or contemplated in the Prospectus, the Company has not incurred any material liabilities or obligations, direct or contingent, nor entered into any material transactions (in all cases other than in the ordinary course of business), and there has not been any material adverse change in the condition (financial or otherwise), properties, business, management, prospects, net worth (other than ordinary course changes) or results of operations of the Company or any change in the capital stock, short-term or long-term debt of the Company. (d) The financial statements, together with the related notes and schedules, set forth in the Prospectus and elsewhere in the Registration Statement fairly present, on the basis stated in the Registration Statement, the financial position and the results of operations and changes in financial position of the Company at the respective dates or for the respective periods therein specified. Such statements and related notes and schedules have been prepared in accordance with generally accepted accounting principles applied on a consistent basis except as may be set forth in the Prospectus. (e) Price Waterhouse LLP, who have expressed their opinions on the audited financial statements and related schedules included in the Registration Statement and the Prospectus are independent public accountants as required by the Securities Act and the Rules and Regulations. (f) The Company has been duly organized and is validly existing and in good standing as a corporation under the laws of the state of Michigan, with -3- power and authority (corporate and other) to own or lease its properties and to conduct its business as described in the Prospectus; except as otherwise described in the Prospectus, the Company is in possession of and operating in compliance with all franchises, grants, authorizations, licenses, permits, easements, consents, certificates and orders required for the conduct of its business as contemplated by the Prospectus, all of which are valid and in full force and effect, expect for such franchises, grants, authorizations, licenses, permits, easements, consents, certificates or orders the absence of which, alone or in the aggregate, do not or would not have a material adverse effect on the Company; and the Company is duly qualified to do business and in good standing as a foreign corporation in all other jurisdictions where its ownership or leasing of properties or the conduct of its business requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the Company. The Company has all requisite power and authority, and all necessary consents, approvals, authorizations, orders, registrations, qualifications, licenses and permits of and from all public regulatory or governmental agencies and bodies to own, lease and operate its properties and conduct its business as now being conducted and as described in the Prospectus, and no such consent, approval, authorization, order, registration, qualification, license or permit contains a materially burdensome restriction not adequately disclosed in the Registration Statement and the Prospectus. The Company does not own or control, directly or indirectly, any other corporations, associations or other entities. (g) The Company's authorized and outstanding capital stock is on the date hereof, and will be on the Closing Date, as set forth under the caption "Capitalization" in the Prospectus (excluding such changes as result solely from the exercise, after the date hereof, of options outstanding on the date hereof); the outstanding shares of common stock (including the outstanding shares of the Specified Placement Shares) of the Company conform to the description thereof in the Prospectus and have been duly authorized and validly issued and are fully paid and nonassessable; and have been issued in compliance with all federal and state securities laws and were not issued in violation of or subject to any preemptive rights or similar rights to subscribe for or purchase securities (except such rights as have been validly waived). Except as disclosed in and or contemplated by the Registration Statement and the Prospectus and the financial statements of the Company and related notes thereto included in the Prospectus, the Company does not have outstanding any options or warrants to purchase, or any preemptive rights or other rights to subscribe for or to purchase any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations, except for options granted subsequent to the date of information provided in the Prospectus pursuant to the Company's employee and stock option plans as disclosed in the Prospectus. The description of the Company's stock option and other stock plans or arrangements, and the options or other rights granted or exercised thereunder, as set forth in the Prospectus, accurately and -4- fairly presents in all material respects the information required to be shown with respect to such plans, arrangements, options and rights. (h) The Specified Placement Shares to be issued and sold by the Company to the Agent hereunder have been duly and validly authorized and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued, fully paid and nonassessable and free of any preemptive or similar rights and will conform to the description thereof in the Prospectus. (i) Except as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company is a party or of which any property of the Company is subject, which, if determined adversely to the Company might individually or in the aggregate (i) prevent or adversely affect the transactions contemplated by this Agreement, (ii) suspend the effectiveness of the Registration Statement, (iii) prevent or suspend the use of the Preeffective Prospectus in any jurisdiction or (iv) result in a material adverse change in the condition (financial or otherwise), properties, business, management, prospects, net worth or results of operations of the Company; and to the best of the Company's knowledge no such proceedings are threatened or contemplated against the Company by governmental authorities or others. The Company is not a party nor subject to the provisions of any material injunction, judgment, decree or order of any court, regulatory body or other governmental agency or body. The description of the Company's litigation under the heading "Legal Proceedings" in the Prospectus is true and correct and complies with the Rules and Regulations. (j) The execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms or provisions of or constitute a default under any indenture, mortgage, deed of trust, note or other agreement or instrument to which the Company is a party or by which it or any of its properties is or may be bound other than any such indenture, mortgage, deed of trust, note or other agreement or instrument which, alone or in the aggregate, is not material to the Company, the Articles of Incorporation, By-laws or other organizational documents of the Company, or any law, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its properties, other than any such law, order, rule or regulation which, alone or in the aggregate, is not material to the Company, or will result in the creation of a lien. (k) No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation by the Company of the transactions contemplated by this Agreement, except such as may be required by the National Association of Securities Dealers, Inc. (the "NASD") or under the Securities Act or the securities or "Blue Sky" laws of any jurisdiction in connection with the purchase and distribution of the Specified Placement Shares -5- by the Agent, all of which requirements have been satisfied in all material respects. (l) The Company has the full corporate power and authority to enter into this Agreement and to perform its obligations hereunder (including to issue, sell and deliver the Specified Placement Shares), and this Agreement has been duly and validly authorized, executed and delivered by the Company and is a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except to the extent that rights to indemnity and contribution hereunder may be limited by federal or state securities laws or the public policy underlying such laws and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally or by general equitable principles. (m) The Company is in all material respects in compliance with, and conducts its business in conformity with, all applicable federal, state, local and foreign laws, rules and regulations or any court or governmental agency or body; to the knowledge of the Company, otherwise than as set forth in the Registration Statement and the Prospectus, no prospective change in any of such federal or state laws, rules or regulations has been adopted which, when made effective, would have a material adverse effect on the operations of the Company. (n) The Company has filed all necessary federal, state, local and foreign income, payroll, franchise and other tax returns, subject to allowable extension periods, and has paid all taxes shown as due thereon or with respect to any of its properties, and there is no tax deficiency that has been, or to the knowledge of the Company is likely to be, asserted against the Company or any of its properties or assets that would materially adversely affect the financial position, business or operations of the Company. (o) Except as disclosed in the Registration Statement and the Prospectus, the Company is in compliance with all applicable existing federal, state, local and foreign laws and regulations relating to the protection of human health or the environment or imposing liability or requiring standards of conduct concerning any Hazardous Materials ("Environmental Laws"), except for such instances of noncompliance which, either singly or in the aggregate, would not have a material adverse effect on the Company. The term "Hazardous Material" means (i) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, (ii) any "hazardous waste" as defined by the Resource Conservation and Recovery Act, as amended, (iii) any petroleum or petroleum product, (iv) any polychlorinated biphenyl and (v) any pollutant or contaminant or hazardous, dangerous or toxic chemical, material, waste or substance regulated under or within the meaning of any other Environment Law. -6- (p) No person or entity has the right to require registration, as part of the Registration Statement, of shares of Common Stock or other securities of the Company because of the filing or effectiveness of the Registration Statement or otherwise, except for persons and entities who have expressly waived such right, who have been given proper notice and have failed to exercise such right within the time or times required under the terms and conditions of such right or who are not entitled to participate due to properly invoked cut-back rights of the Company. (q) Neither the Company nor, to the Company's best knowledge after reasonable inquiry, any of its officers, directors or affiliates has taken or will take, directly or indirectly, any action designed or intended to stabilize or manipulate the price of any security of the Company, or which caused or resulted in, or which might in the future reasonably be expected to cause or result in, stabilization or manipulation of the price of any security of the Company. (r) The Company has provided you with all financial statements of the Company requested by the Agent. (s) The Company owns or possesses license rights to all patents, trademarks, trademark registrations, service marks, service mark registrations, tradenames, copyrights, licenses, inventions, trade secrets and rights as described in the Prospectus as being owned or licensed by it, as being proprietary to the Company or, except as described in the Prospectus, as necessary for the conduct of its business as presently conducted or contemplated by the Prospectus, and the Company is not aware of any claim to the contrary or any challenge by any other person to the rights of the Company with respect to the foregoing. Without limiting the foregoing, each of the license agreement between the Company and Joseph G. Cremonese dated July 17, 1992 and relating to U.S. Patent No. 4,839,292, Canadian Patent No. 1,306,714 and European Patent Convention Patent No. 0.307.048 and the license agreement between the Company and the University of Michigan dated March 13, 1992, as amended, and relating to U.S. Patent No. 4,839,292, is a valid and binding agreement of Joseph G. Cremonese and of the University of Michigan, respectively, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally or by general equitable principles; and the Company is not in material breach or violation of any of the terms or provisions of either such agreement, and to the Company's knowledge, no default exists under either such agreement. Except as described in the Prospectus, the Company's business as now conducted and as proposed to be conducted does not and will not infringe or conflict with in any material respect patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses or other intellectual property or franchise right existing on the date hereof of any person. Except as described in the Prospectus, no claim has been made against the Company alleging the infringement by the Company of any patent, trademark, service mark, tradename, -7- copyright, trade secret, license in or other intellectual property right or franchise right of any person. (t) The Company has performed all material obligations currently required to be performed by it under all contracts required by Item 601(b)(10) of Regulation S-K under the Securities Act to be filed as exhibits to the Registration Statement, and neither the Company nor, to the Company's knowledge, any other party to such contract is in default under or in breach of any such obligations. The Company has not received any notice of such default or breach. (u) The Company is not involved in any labor dispute nor is any such dispute threatened. The Company is not aware that (A) any executive, key employee or significant group of employees of the Company plans to terminate employment with the Company or (B) any such executive or key employee is subject to any noncompete, nondisclosure, confidentiality, employment, consulting or similar agreement that would be violated by the present or proposed business activities of the Company. The Company does not have or expect to have any liability for any prohibited transaction or funding deficiency or any complete or partial withdrawal liability with respect to any pension, profit sharing or other plan which is subject to the "Employee Retirement Income Security Act of 1974, as amended ("ERISA"), to which the Company makes or ever has made a contribution and in which any employee of the Company is or has ever been a participant. With respect to such plans, the Company is in compliance in all material respects with all applicable provisions of ERISA. (v) The Company has obtained the written agreement described in Section 9(n) of this Agreement from each of its officers and directors. (w) The Company has and the Company as of the Closing Date will have, good and marketable title in fee simple to all real property and good and marketable title to all personal property owned or proposed to be owned by it which is material to the business of the Company, in each case free and clear of all liens, encumbrances and defects except such as are described the Prospectus or such as would not have a material adverse effect on the Company; and any real property and buildings and personal property held under lease by the Company or proposed to be held after giving effect to the transactions described in the Prospectus are, or will be as of the Closing Date, held by it under valid, subsisting and enforceable leases with such exceptions as would not have a material adverse effect on the Company, in each case except as described in or contemplated by the Prospectus. (x) The Company is insured by Chubb Insurance Company, CNA Insurance Companies and UniEurope against such losses and risks and in such amounts as are customary in the businesses in which it is engaged or proposes to engage after giving effect to the transactions described in the Prospectus; and the Company does not have any reason to believe that it will not be able to renew its -8- existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company except as described in or contemplated by the Prospectus. (y) Other than as contemplated by this Agreement, there is no broker, finder or other party that is entitled to receive from the Company any brokerage or finder's fee or other fee or commission as a result of any of the transactions contemplated by this Agreement. (z) The Company has complied with all provisions of Section 517.075 Florida Statutes (Chapter 92-198; Laws of Florida). (aa) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (ab) To the Company's knowledge, neither the Company nor any employee or agent of the Company has made any payment of funds of the Company or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus. (ac) The Company is not an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended. (ad) Each certificate signed by any officer of the Company and delivered to the Agent or counsel for the Agent shall be deemed to be a representation and warranty by the Company as to the matters covered thereby. (ae) The letter agreement between the Company and Cobe Laboratories, Inc. ("Cobe") dated November 11, 1996 (the "Cobe Agreement") is a valid and binding agreement of Cobe, enforceable in accordance with its terms; and the Company is not in material breach or violation of any of the terms or provisions of such agreement, and to the Company's knowledge, no default exists under such agreement. -9- (af) No transfer taxes are required to be paid in connection with the sale and delivery of the Specified Placement Shares hereunder. (ag) The Specified Placement Shares have been duly authorized, upon official notice of issuance, for quotation on the Nasdaq National Market. 3. Representations and Warranties of the Agent. The Agent ------------------------------------------- represents and warrants to the Company that (A) it is duly registered as a broker/dealer pursuant to the Securities Exchange Act of 1934 and is a member in good standing of the National Association of Securities Dealers, Inc. (the "NASD"), (B) it is licensed and qualified as a broker/dealer in each jurisdiction in which the Agent offers, or has offered any of the Specified Placement Shares, including without limitation, each jurisdiction in which the entities listed on Exhibit A are located, (C) its participation in the offering and sale of the Specified Placement Shares will be in accordance with the provisions of the Act, the regulations promulgated pursuant thereto, all other regulations of the Commission, and the rules and regulations of the NASD, and (D) it has not distributed and will not distribute prior to the Closing Date any offering material in connection with the offering and sale of the Specified Placement Shares, or any other shares, other than the Preliminary Prospectus, the Registration Statement and other materials permitted by the Act. 4. Purchase Sale and Delivery of the Specified Placement Shares. ------------------------------------------------------------ The purchase price per share to be paid by the several purchasers to the Company shall be determined by seperate agreement among the Company and the purchasers. The Company agrees to pay the Agent at the Closing Date a commission on each Specified Placement Shares sold equal to 6% of the purchase price. The Agent acknowledges and agrees that the Company is under no obligation to sell, or attempt to sell, any of the Specified Placement Shares, and that the Company shall have no liability to you as a result of the Company's failure to sell any of the Specified Placement Shares. Delivery of certificates for the Specified Placement Shares shall be made as agreed by the purchasers and the Company. 5. Covenants and Agreements of the Company. The Company covenants --------------------------------------- and agrees with the Agent that: (a) The Company will (i) if the Company and the Agent have determined not to proceed pursuant to Rule 430A, use its best efforts to cause the Registration Statement to become effective, (ii) if the Company and the Agent have determined to proceed pursuant to Rule 430A, use its best efforts to comply with the provisions of and make all requisite filings with the Commission pursuant to Rule 430A and Rule 424 of the Rules and Regulations and (iii) if the Company and the Agent have determined to deliver Prospectuses pursuant to Rule 434 of the Rules and Regulations, to use its best efforts to comply with all the applicable provisions thereof. The Company will advise the Agent promptly as -10- to the time at which the Registration Statement becomes effective, will advise the Agent promptly of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the institution of any proceedings for that purpose, and will use its best efforts to prevent the issuance of any such stop order and to obtain as soon as possible the lifting thereof, if issued. The Company will advise the Agent promptly of the receipt of any comments of the Commission or any request by the Commission for any amendment of or supplement to the Registration Statement or the Prospectus or for additional information and will not at any time file any amendment to the Registration Statement or supplement to the Prospectus which shall not previously have been submitted to the Agent a reasonable time prior to the proposed filing thereof or to which the Agent shall reasonably object in writing or which is not in compliance with the Securities Act and the Rules and Regulations. (b) The Company will prepare and file with the Commission, promptly upon the request of the Agent, any amendments or supplements to the Registration Statement or the Prospectus which in the reasonable opinion of the Agent may be necessary to enable the Agent to continue the distribution of the Specified Placement Shares and will use its best efforts to cause the same to become effective as promptly as possible. (c) If at any time after the effective date of the Registration Statement when a prospectus relating to the Specified Placement Shares is required to be delivered under the Securities Act, including under the Rules and Regulations, any event relating to or affecting the Company occurs as a result of which the Prospectus or any other prospectus as then in effect would include an untrue statement of a material fact, or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Securities Act, the Company will promptly notify the Agent thereof and will prepare an amended or supplemented prospectus which will correct such statement or omission; and in case the Agent is required to deliver a prospectus relating to the Specified Placement Shares nine (9) months or more after the effective date of the Registration Statement, the Company upon the request of the Agent and at the expense of such Agent will prepare promptly such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Securities Act. (d) The Company will deliver to the Agent, at or before the Closing Date, copies of the Registration Statement, as originally filed with the Commission, and all amendments thereto including all financial statements and exhibits thereto and will deliver to the Agent such number of copies of the Registration Statement, including such financial statements but without exhibits, and all amendments thereto, as the Agent may reasonably request. The Company will deliver or mail to or upon the order of the Agent, from time to time until the effective date of the Registration Statement, as many copies of the Preeffective -11- Prospectus as the Agent may reasonably request. The Company will deliver or mail to or upon the order of the Agent on the date of the public offering, and thereafter from time to time during the period when delivery of a prospectus relating to the Specified Placement Shares is required under the Securities Act, including under the Rules and Regulations, as many copies of the Prospectus, in final form or as thereafter amended or supplemented as the Agent may reasonably request; provided, however, that the expense of the preparation and delivery of any prospectus required for use nine (9) months or more after the effective date of the Registration Statement shall be borne by the Agent required to deliver such prospectus. (e) The Company will make generally available to its shareholders as soon as practicable, but not later than fifteen (15) months after the effective date of the Registration Statement, an earnings statement which will be in reasonable detail (but which need not be audited) and which will comply with Section 11(a) of the Securities Act, covering a period of at least twelve (12) months beginning after the "effective date" (as defined in Rule 158 under the Securities Act) of the Registration Statement. (f) The Company will cooperate with the Agent to enable the Specified Placement Shares to be registered or qualified for offering and sale by dealers under the securities laws of such jurisdictions as the Agent may reasonably designate and at the request of the Agent will make such applications and furnish such consents to service of process or other documents as may be required of it as the issuer of the Specified Placement Shares for that purpose; provided, however, that the Company shall not be required to qualify to do business or to file a general consent (other than that arising out of the offering or sale of the Specified Placement Shares) to service of process in any such jurisdiction where it is not now so subject. The Company will, from time to time, prepare and file such statements and reports as are or may be required of it as the issuer of the Specified Placement Shares to continue such qualifications in effect for so long a period as the Agent may reasonably request for the distribution of the Specified Placement Shares. The Company will advise the Agent promptly after the Company becomes aware of the suspension of the qualifications or registration of (or any such exception relating to) the Specified Placement Shares of the Company for offering, sale or trading in any jurisdiction or of any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any orders suspending such qualifications, registration or exception, the Company will, with the cooperation of the Agent use its best efforts to obtain the withdrawal thereof. (g) The Company will furnish to its shareholders annual reports containing financial statements certified by independent public accountants and will make available to its shareholders quarterly summary financial information in reasonable detail which may be unaudited. During the period of five (5) years from the date hereof, the Company will deliver to the Agent and, upon request, -12- as soon as they are available, copies of each annual report of the Company and each other report furnished by the Company to its shareholders and will deliver to the Agent, (i) as soon as they are available, copies of any other reports (financial or other) which the Company shall publish or otherwise make available to any of its shareholders generally, (ii) as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange and (iii) from time to time such other information concerning the Company as you may reasonably request. (h) The Company will use its best efforts to list the Specified Placement Shares, subject to official notice of issuance, on the Nasdaq National Market. (i) The Company will maintain a transfer agent and registrar for its Common Stock. (j) Prior to filing its quarterly statements on Form 10-Q, the Company will have its independent auditors review the Form 10-Q. (k) Prior to the Closing Date the Company will issue no press release or other communications directly or indirectly and hold no press conference with respect to the Company, the financial condition, results of operation, business, prospects, assets or liabilities of the Company, or the offering of the Specified Placement Shares, without your prior written consent, which shall not be unreasonably withheld. (l) Without the prior written consent of Cowen, the Company will not offer, sell, assign, transfer, encumber, contract to sell, grant an option to purchase or otherwise dispose of, directly or indirectly, any shares of Common Stock or securities convertible into or exercisable or exchangeable for Common Stock or warrants or other rights to purchase Common Stock (including, without limitation, Common Stock of the Company which may be deemed to be beneficially owned by the undersigned in accordance with the Rules and Regulations) during the 90 days following the date on which the price of the Specified Placement Shares is set, other than the Company's sale of Common Stock hereunder and the Company's issuance of Common Stock upon the exercise of warrants or stock options, or pursuant to contractual rights, in each case which are presently outstanding and described in the Prospectus or subsequently granted as contemplated by the Prospectus. (m) The Company will apply the net proceeds from the sale of the Specified Placement Shares substantially in the manner set forth in the description under "Use of Proceeds" in the Prospectus, in light of the totality of the disclosure in the Prospectus, which "Use of Proceeds" description complies in all respects with the requirements of Item 504 of Regulation S-K. -13- (n) The Company will supply you with copies of all correspondence to and from, and all documents issued to and by, the Commission in connection with the registration of the Specified Placement Shares under the Securities Act. (o) Prior to the Closing Date the Company will furnish to you, as soon as they have been prepared, copies of any unaudited interim consolidated financial statements of the Company for any periods subsequent to the periods covered by the financial statements appearing in the Registration Statement and the Prospectus. 6. Payment of Expenses. (a) The Company will pay (directly or by ------------------- reimbursement) all costs, fees and expenses incurred in connection with expenses incident to the performance of its obligations under this Agreement and in connection with the transactions contemplated hereby, including but not limited to (i) all expenses and taxes incident to the issuance and delivery of the Specified Placement Shares; (ii) all expenses incident to the registration of the Specified Placement Shares under the Securities Act; (iii) the costs of preparing stock certificates (including printing and engraving costs); (iv) all fees and expenses of the registrar and transfer agent of the Specified Placement Agent; (v) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Specified Placement Shares; (vi) fees and expenses of the Company's counsel and the Company's independent accountants; (vii) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement, each Preeffective Prospectus and the Prospectus (including all exhibits and financial statements) and all amendments and supplements provided for herein; (viii) all filing fees, attorneys fees, and expenses incurred by the Company or the Agent in connection with exemptions from the qualifying or registering (or obtaining qualification or registration of) all or any part of the Specified Placement Shares for offer and sale and determination of its eligibility for investment under the Blue Sky or other securities laws of such jurisdictions as the Agent may reasonably designate; (ix) all fees and expenses paid or incurred in connection with filings made with the NASD; (x) all fees and expenses of the escrow agent related to closing the offering contemplated hereby; and (xi) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section. (b) In addition to its other obligations under Section 7(a) hereof, the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of, or based upon, (i) any statement or omission or any alleged statement or omission or (ii) any breach or inaccuracy in its representations and warranties, it will reimburse the Agent on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse the Agent for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Agent shall promptly return it to the Company together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from -14- time to timed by The Chase Manhattan Bank, New York, New York (the "Prime Rate"). Any such interim reimbursement payments which are not made to the Agent in a timely manner as provided below shall bear interest at the Prime Rate from the due date for such reimbursement. This expense reimbursement agreement will be in addition to any other liability which the Company may otherwise have. The request for reimbursement will be sent to the Company. (c) In addition to its other obligations under Section 6(b) hereof, the Agent agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in Section 7(b) hereof which relates to information furnished to the Company pursuant to Section 7(d) hereof, it will reimburse the Company (and, to the extent applicable, each officer, director or controlling person) on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Agent, obligation to reimburse the Company (and, to the extent applicable, each officer, director or controlling person) for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Company (and, to the extent applicable, each officer, director or controlling person) shall promptly return it to the Agent together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Company within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. This indemnity agreement will be in addition to any liability which such Agent may otherwise have. (d) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in paragraph (b) and/or (c) of this Section 6, including the amounts of any requested reimbursement payments and the method of determining such amounts, shall be settled by arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASD. Any such arbitration must be commenced by service of a written demand for arbitration or written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Such an arbitration would be limited to the operation of the interim reimbursement provisions contained in paragraph (b) and/or (c) of this Section 6, as the case may be, and would not resolve the ultimate propriety or enforceability of the obligation to reimburse expenses which is created by the provisions of Section 7. 7. Indemnification and Contribution. (a) The Company agrees to -------------------------------- indemnify and hold harmless the Agent and each person, if any, who controls the Agent within the meaning of the Securities Act and the respective officers, directors, partners, employees, representatives and agents of the Agent (collectively, the "Agent Indemnified Parties" and, each, an "Agent Indemnified Party"), against any losses, claims, damages, liabilities or expenses (including the reasonable cost of investigating and defending against any claims therefor and counsel fees -15- incurred in connection therewith), joint or several, which may be based in whole or in part upon the Securities Act, the Exchange Act or any other federal, state, local or foreign statute or regulation, or at common law, on the ground or alleged ground that any Preeffective Prospectus, the Registration Statement or the Prospectus (or any Preeffective Prospectus, the Registration Statement or the Prospectus as from time to time amended or supplemented) includes or allegedly includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, unless such statement or omission was made in solely reliance upon, and in conformity with, written information furnished to the Company by the Agent specifically for use in the preparation thereof provided, however, -------- ------- that in no case is the Company to be liable with respect to any claims made against any Agent Indemnified Party against whom the action is brought unless such Agent Indemnified Party shall have notified the Company in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon the Agent Indemnified Party, but failure to notify the Company of such claim shall not relieve the Company from any liability which it may have to any Agent Indemnified Party otherwise than on account of its indemnity agreement contained in this paragraph and, provided, further, that the indemnity agreement provided -------- ------- in this Section 7(a) with respect to any Preeffective Prospectus shall not inure to the benefit of the Agent from whom the person asserting any losses, claims, damages, liabilities or expenses based upon any untrue statement or alleged untrue statement of material fact or omission or alleged omission to state therein a material fact purchased Specified Placement Shares, if a copy of the Prospectus in which such untrue statement or alleged untrue statement or omission or alleged omission was corrected had not been sent or given to such person within the time required by the Securities Act and the Rules and Regulations, unless such failure is the result of noncompliance by the Company with Section 4(d) hereof. The Company will be entitled to participate at its own expense in the defense or, if it so elects, to assume the defense of any suit brought to enforce any such liability, but if the Company elects to assume the defense, such defense shall be conducted by counsel chosen by it. In the event the Company elects to assume the defense of any such suit and retain such counsel, any Agent Indemnified Parties, defendant or defendants in the suit, may retain additional counsel but shall bear the fees and expenses of such counsel unless (i) the Company shall have specifically authorized the retaining of such counsel or (ii) the parties to such suit include any such Agent Indemnified Parties, and the Company and such Agent Indemnified Parties at law or in equity have been advised by counsel to the Agent that one or more legal defenses may be available to it or them which may not be available to the Company, in which case the Agent Indemnified Party or Parties shall have the right to select a single separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties and the Company shall not be entitled to assume the defense of such suit notwithstanding its obligation to bear the fees and expenses of such counsel. The Company shall not be liable to indemnify any person for any settlement of any such claim effected without its consent. This indemnity agreement is not exclusive and will be in addition to any liability which the Company might otherwise have and shall not limit any rights or remedies which may otherwise be available at law or in equity to each Agent Indemnified Party. (b) The Agent severally agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement and each -16- person, if any, who controls the Company within the meaning of the Securities Act (collectively, the "Company Indemnified Parties"), against any losses, claims, damages, liabilities or expenses (including, unless the Agent elects to assume the defense, the reasonable cost of investigating and defending against any claims therefor and counsel fees incurred in connection therewith), joint or several, which arise out of or are based in whole or in part upon the Securities Act, the Exchange Act or any other federal, state, local or foreign statute or regulation, or at common law, on the ground or alleged ground that any Preeffective Prospectus, the Registration Statement or the Prospectus (or any Preeffective Prospectus, the Registration Statement or the Prospectus, as from time to time amended and supplemented) includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading, but only insofar as any such statement or omission was made in reliance upon, and in conformity with, written information furnished to the Company by such Agent, specifically for use in the preparation thereof; provided, however, that in no case is such Agent to be liable with respect to any claims made against any Company Indemnified Party against whom the action is brought unless such Company Indemnified Party shall have notified such the Agent in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon the Company Indemnified Party, but failure to notify the Agent of such claim shall not relieve it from any liability which it may have to any Company Indemnified Party otherwise than on account of its indemnity agreement contained in this paragraph. The Agent shall be entitled to participate at its own expense in the defense, or, if it so elects, to assume the defense of any suit brought to enforce any such liability, but, if the Agent elects to assume the defense, such defense shall be conducted by counsel chosen by it. In the event that the Agent elects to assume the defense of any such suit and retain such counsel, the Company Indemnified Parties and the Agent or controlling person or persons, defendant or defendants in the suit, shall bear the fees and expenses of any additional counsel retained by them, respectively, unless (i) the Agent shall have specifically authorized the retaining of such counsel or (ii) the parties to such suit include any such Company Indemnified Parties, and the Agent such Company Indemnified Parties at law or in equity have been advised by counsel to the Company that one or more legal defenses may be available to it or them which conflict with the defenses of the Agent, in which case the Company Indemnified Party or Parties shall have the right to select a single separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. The Agent against whom indemnity may be sought shall not be liable to indemnify any person for any settlement of any such claim effected without such Agent's consent. This indemnity agreement is not exclusive and will be in addition to any liability which the Agent might otherwise have and shall not limit any rights or remedies which may otherwise be available at law or in equity to any Company Indemnified Party. (c) If the indemnification provided for in this Section 7 is unavailable or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages, liabilities or expenses (or actions in respect thereof) referred to herein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Agent on the other from the offering of the Specified -17- Placement Shares. If however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Agent on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Agent on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Agent, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Agent and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Agent agree that it would not be just and equitable if contribution were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or expenses (or actions in respect thereof) referred to above shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating, defending, settling or compromising any such claim. Notwithstanding the provisions of this subsection (d), no Agent shall be required to contribute any amount in excess of the amount by which the total price at which the Specified Placement Shares placed by it and distributed to the public were offered to the public exceeds the amount of any damages which such Agent has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (d) The information set forth in the last paragraph on the front cover page (insofar as such information relates to the Agent) and under the caption ``Plan of Distribution'' in any Preeffective Prospectus and in the Prospectus constitutes the only information furnished by the Agent to the Company for inclusion in any Preeffective Prospectus, the Prospectus or the Registration Statement. (e) No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnification could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on all claims that are the subject matter of such proceeding. 8. Survival of Indemnities, Representations, Warranties, etc. The ---------------------------------------------------------- respective indemnities, covenants, agreements, representations, warranties and other statements of the Company and the Agent, as set forth in this Agreement or made by them respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation made by -18- or on behalf of the Agent, the Company or any of its officers or directors or any controlling person, and shall survive delivery of and payment for the Specified Placement Shares. 9. Conditions of Agent, Obligations. The obligations of the Agent -------------------------------- hereunder shall be subject to the accuracy, at and (except as otherwise stated herein) as of the date hereof and at and as of the Closing Date, of the representations and warranties made herein by the Company, to compliance at and as of the Closing Date by the Company with its covenants and agreements herein contained and other provisions hereof to be satisfied at or prior to the Closing Date, and to the following additional conditions: (a) The Registration Statement shall have become effective and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company or the Agent, shall be threatened by the Commission, and any request for additional information on the part of the Commission (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the reasonable satisfaction of the Agent. Any filings of the Prospectus, or any supplement thereto, required pursuant to Rule 424 (b) or Rule 434 of the Rules and Regulations, shall have been made in the manner and within the time period required by Rule 424(b) and Rule 434 of the Rules and Regulations, as the case may be. (b) The Agent shall have been satisfied that there shall not have occurred any change prior to the Closing Date in the condition (financial or otherwise) properties, business, management, prospects, net worth or results of operations of the Company or any change in the capital stock, short-term or long-term debt of the Company, such that (i) the Registration Statement or the Prospectus, or any amendment or supplement thereto, contains an untrue statement of fact which, in the opinion of the Agent, is material, or omits to state a fact which, in the opinion of the Agent is required to be stated therein or is necessary to make the statements therein not misleading, or (ii) it is impracticable in the reasonable judgment of the Agent to proceed with the public offering or purchase the Specified Placement Shares as contemplated hereby. (c) The Agent shall be satisfied that no legal or governmental action, suit or proceeding affecting the Company which is material and adverse to the Company or which affects or may affect the Company's ability to perform its obligations under this Agreement shall have been instituted or threatened and there shall have occurred no material adverse development in any existing such action, suit or proceeding. (d) At the time of execution of this Agreement, the Agent shall have received from Price Waterhouse LLP, independent certified public accountants, a letter, dated the date hereof, in form and substance satisfactory to the Agent. -19- (e) The Agent shall have received from Price Waterhouse LLP, independent certified public accountants, a letter, dated the Closing Date, to the effect that such accountants reaffirm, as of the Closing Dates, and as though made on the Closing Dates, the statements made in the letter furnished by such accountants pursuant to paragraph (d) of this Section 9. (f) The Agent shall have received from Gray Cary Ware & Freidenrich, counsel for the Company, an opinion, dated the Closing Date, to the effect set forth in Exhibit I hereto. (g) The Agent shall have received from Pepper, Hamilton & Scheetz, counsel for the Company, an opinion, dated the Closing Date, to the effect set forth in Exhibit II hereto. (h) The Agent shall have received from Oblon, Spivak, McClelland, Maier & Neustadt, P.C., patent counsel for the Company, an opinion, dated the Closing Date, to the effect set forth in Exhibit III hereto. (i) The Agent shall have received from Sheppard, Mullin, Richter & Hampton, patent counsel for the Company, an opinion, dated the Closing Date, to the effect set forth in Exhibit IV hereto. (j) The Agent shall have received from Campbell & Flores, patent counsel for the Company, an opinion, dated the Closing Date, to the effect set forth in Exhibit V hereto. (k) The Agent shall have received from Hyman, Phelps & McNamara, regulatory counsel for the Company, an opinion, dated the Closing Date, to the effect set forth in Exhibit VI hereto. (l) The Agent shall have received a certificate, dated the Closing Date, signed on behalf of the Company by its chief executive officer or the President and the chief financial or accounting officer of the Company to the effect that: (i) No stop order suspending the effectiveness of the Registration Statement has been issued, and, to the best of the knowledge of the signers, no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act; (ii) Neither any Preeffective Prospectus, as of its date, nor the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, as of the time when the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary -20- to make the statements therein, in light of the circumstances under which they were made, not misleading; (iii) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as set forth or contemplated in the Prospectus, the Company has not incurred any material liabilities or obligations, direct or contingent, nor entered into any material transactions not in the ordinary course of business and there has not been any material adverse change in the condition (financial or otherwise), properties, business, management, prospects, net worth (other than ordinary course changes) or results of operations of the Company, or any change in the capital stock (other than through the exercise of stock options), short-term or long-term debt of the Company; (iv) The representations and warranties of the Company in this Agreement are true and correct at and as of the Closing Date, and the Company has complied with all the agreements and performed or satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date; and (v) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as disclosed in or contemplated by the Prospectus, (i) there has not been any material adverse change or a development involving a material adverse change in the condition (financial or otherwise), properties, business, management, prospects, net worth or results of operations of the Company; (ii) the business and operations conducted by the Company have not sustained a loss by strike, fire, flood, accident or other calamity (whether or not insured) of such a character as to interfere materially with the conduct of the business and operations of the Company; (iii) no legal or governmental action, suit or proceeding is pending or threatened against the Company which is material to the Company, whether or not arising from transactions in the ordinary course of business, or which may materially and adversely affect the transactions contemplated by this Agreement; (iv) since such dates and except as so disclosed, the Company has not incurred any material liability or obligation, direct, contingent or indirect, made any change in its capital stock (except pursuant to its stock plans), made any material change in its short-term or funded debt or repurchased or otherwise acquired any of the Company's capital stock; and (v) the Company has not declared or paid any dividend, or made any other distribution, upon its outstanding capital stock payable to stockholders of record on a date prior to the Closing Date. (m) The Company shall have furnished to the Agent such additional certificates as the Agent may have reasonably requested as to the accuracy, at and as of the Closing Date, of the representations and warranties made herein by it -21- and as to compliance at and as of the Closing Date by it with its covenants and agreements herein contained and other provisions hereof to be satisfied at or prior to the Closing Date, and as to satisfaction of the other conditions to the obligations of the Agent hereunder. (n) Cowen shall have received the written agreements of the officers, directors and holders of Common Stock listed in Schedule B that each will not offer, sell, assign, transfer, encumber, contract to sell, grant an option to purchase or otherwise dispose of, directly or indirectly, any shares of Common Stock or securities convertible into or exchangeable for Common Stock or warrants or other rights to purchase Common Stock (including, without limitation, Common Stock of the Company which may be deemed to be beneficially owned by the undersigned in accordance with the Rules and Regulations) during the 90 days following the date of the final Prospectus, other than (i) by operation of law, (ii) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction or (iii) as a distribution to partners or stockholders of such person provided that the distributees thereof agree in writing to be bound by the terms of this restriction. All opinions, certificates, letters and other documents will be in compliance with the provisions hereunder only if they are satisfactory in form and substance to the Agent. The Company will furnish to the Agent conformed copies of such opinions, certificates, letters and other documents as the Agent shall reasonably request. If any of the conditions hereinabove provided for in this Section shall not have been satisfied when and as required by this Agreement, this Agreement may be terminated by the Agent by notifying the Company of such termination in writing or by telegram at or prior to the Closing Dates, but Cowen shall be entitled to waive any of such conditions. 10. Termination. (a) This Agreement (except for the provisions of ----------- Section 6) may be terminated by the Company at any time before it becomes effective in accordance with Section 9 by notice to the Agent and may be terminated by the Agent at any time before it becomes effective in accordance with Section 9 by notice to the Company. In the event of any termination of this Agreement under this or any other provision of this Agreement, there shall be no liability of any party to this Agreement to any other party, other than as provided in Sections 6 and 7. This Agreement shall also terminate at 5:00 p.m., California time, on the twentieth full business day after the Registration Statement shall have become effective if no sale of the Specified Placement Shares shall have occurred at or prior to such time. Any termination pursuant to this subsection (b) shall be without liability on the part of the Agent to the Company or on the part of the Company to the Agent except to the extent provided in Section 8 hereof. 11. Notices. All communications hereunder shall be in writing and, if ------- sent to the Agent shall be mailed, delivered or telegraphed and confirmed to Cowen & Company at Financial Square, New York, New York 10005 or, if sent to the Company, shall be mailed, delivered or telegraphed and confirmed c/o Douglas Armstrong. -22- 12. Successors. This Agreement shall inure to the benefit of and be ---------- binding upon the Agent, the Company and their respective successors and legal representatives. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person other than the persons mentioned in the preceding sentence any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person; except that the representations, warranties, covenants, agreements and indemnities of the Company contained in this Agreement shall also be for the benefit of the person or persons, if any, who control any Agent within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, and the indemnities of the Agent shall also be for the benefit of each director of the Company, each of its officers who has signed the Registration Statement and the person or persons, if any, who control the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act. 13. Applicable Law. This Agreement shall be governed by and construed -------------- in accordance with the laws of the State of New York. 14. Partial Unenforceability. The invalidity or unenforceability of ------------------------ any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. 15. General. This Agreement constitutes the entire agreement of the ------- parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. In this Agreement, the masculine, feminine and neuter genders and the singular and the plural include one another. The section headings in this Agreement are for the convenience of the parties only and will not affect the construction or interpretation of this Agreement. This Agreement may be amended or modified, and the observance of any term of this Agreement may be waived, only by a writing signed by the Company and the Agent. 16. Counterparts. This Agreement may be signed in two (2) or more ------------ counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. -23- If the foregoing correctly sets forth our understanding, please indicate your acceptance thereof in the space provided below for that purpose, whereupon this letter and your acceptance shall constitute a binding agreement between us. Very truly yours, AASTROM BIOSCIENCES, INC. By: ------------------------------------- R. Douglas Armstrong, Ph.D. President and Chief Executive Officer Accepted and delivered in New York, New York as of the date first above written. COWEN & COMPANY By: Cowen Incorporated, its general partner By: ----------------------------- Title: -24- SCHEDULE A Number of Specified Placement Shares to be Name Purchased ---- ----------- SCHEDULE B EXHIBIT I OPINION OF GRAY CARY WARE & FREIDENRICH (a) The Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company and its subsidiaries considered as one enterprise. To such counsel's knowledge, the Company does not own or control, directly or indirectly, any corporation, association or other entity; (b) To such counsel's knowledge, the Specified Placement Shares to be issued by the Company pursuant to the terms of this Agreement will not have been issued in violation of or subject to any co-sale right, registration right, right of first refusal or other similar right. (c) The license agreement between the Company and Joseph G. Cremonese dated July 17, 1992 and relating to U.S. Patent No. 4,839,292, Canadian Patent No. 1,306,714 and European Patent Convention Patent No. 0.307.048 is a valid and binding agreement of the Company, enforceable in accordance with its terms; and to such counsel's knowledge, the Company is not in material breach or violation of any of the terms or provisions of such agreement, and no default exists under such agreement; (d) The license agreement between the Company and the University of Michigan dated March 13, 1992, as amended, and relating to U.S. Patent No. 4,839,292 is a valid and binding agreement of the Company, enforceable in accordance with its terms; and to such counsel's knowledge, the Company is not in material breach or violation of any of the terms or provisions of such agreement and no default exists under such agreement; (e) This Agreement, assuming due authorization, execution and delivery by the Company and you, is a valid and binding agreement of the Company, enforceable in accordance with its terms, except insofar as indemnification and contribution provisions may be limited by applicable law and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally or by general equitable principles; (f) The Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act; (g) The Registration Statement and the Prospectus, and each amendment or supplement thereto (other than the financial statements (including supporting schedules) and financial data derived therefrom as to which such counsel need express no -2- opinion), as of the effective date of the Registration Statement, complied as to form in all material respects with the requirements of the Act and the applicable Rules and Regulations; (h) The description in the Registration Statement and the Prospectus of statutes other than Michigan Law are accurate and fairly present the information required to be presented by the Act and the applicable Rules and Regulations; (i) To such counsel's knowledge, there are no agreements, contracts, leases or documents to which the Company is a party of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement which are not described or referred to therein or filed as required; (j) The performance of this Agreement and the consummation of the transactions herein contemplated (other than performance of the Company's indemnification and contribution obligations hereunder, concerning which no opinion need be expressed) will not, to such counsel's knowledge, result in a material breach or violation of any of the terms and provisions of, or constitute a default under, any bond, debenture, note or other evidence of indebtedness, or any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument known to such counsel to which the Company is a party or by which its properties are bound, or any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court, government or governmental agency or body having jurisdiction over the Company or over any of its properties or operations; (k) No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body having jurisdiction over the Company, or over any of its properties or operations is necessary in connection with the consummation by the Company of the transactions herein contemplated, except such as have been obtained under the Act or such as may be required under state or other securities or Blue Sky laws in connection with the transactions contemplated hereby; (l) To such counsel's knowledge, there are no legal or governmental proceedings pending or threatened against the Company of a character required to be disclosed in the Registration Statement or the Prospectus by the Act or the Rules and Regulations, other than those described therein; (m) To such counsel's knowledge, the Company is not presently (a) in material violation of its charter or bylaws, or (b) in material breach of any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court or governmental agency or body having jurisdiction over the Company or over any of its properties or operations; and (n) To such counsel's knowledge, except as set forth in the Registration Statement and Prospectus, no holders of Common Stock or other securities of the Company have registration rights with respect to securities of the Company and, except as set forth in the Registration Statement and Prospectus, all holders of securities of the Company having rights -3- known to such counsel to registration of such shares of Common Stock or other securities as part of the offering contemplated by the Registration Statement have, with respect to the offering contemplated thereby, waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement. In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Agent, the Agent's Counsel and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not independently checked or verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that, (i) at the time the Registration Statement became effective, the Registration Statement and any amendment or supplement thereto (other than the financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) at the Closing Date the Prospectus and any amendment or supplement thereto (except as aforesaid) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Such counsel may state that they do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or Prospectus. Counsel rendering the foregoing opinion may rely as to questions of fact upon representations or certificates of officers of the Company and of government officials, in which case their opinion is to state that they are so relying and that they have no knowledge of any material misstatement or inaccuracy in any such opinion, representation or certificate. Copies of any opinion, representation or certificate so relied upon shall be delivered to you, and to Agent's Counsel. -4- EXHIBIT II OPINION OF PEPPER, HAMILTON & SCHEETZ (a) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the state of Michigan; (b) The Company has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; (c) The Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company and its subsidiaries considered as one enterprise. To such counsel's knowledge, the Company does not own or control, directly or indirectly, any corporation, association or other entity; (d) The Specified Placement Shares to be issued by the Company pursuant to the terms of this Agreement have been duly authorized and, upon issuance and delivery against payment therefor in accordance with the terms hereof, will be duly and validly issued and fully paid and nonassessable, and will not have been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right. (e) The Company has the corporate power and authority to enter into this Agreement and to issue, sell and deliver the Specified Placement Shares to be issued and sold by it hereunder; (f) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" as of the dates stated therein, the issued and outstanding shares of capital stock of the Company have been duly and validly issued and are fully paid and nonassessable, and, to such counsel's knowledge, will not have been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right; (g) This Agreement has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by the Company and, assuming due authorization, execution and delivery by you, is a valid and binding agreement of the Company, enforceable in accordance with its terms, except insofar as indemnification provisions may be limited by applicable law and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally or by general equitable principles; (h) The information in the Prospectus under the caption "Description of Capital Stock," to the extent that it constitutes matters of law or legal conclusions, has been -1- reviewed by such counsel and is a fair summary of such matters and conclusions; and the forms of certificates evidencing the Common Stock and filed as exhibits to the Registration Statement comply with Michigan law; (i) The description in the Registration Statement and the Prospectus of the charter and bylaws of the Company and of statutes are accurate and fairly present the information required to be presented by the Act and the applicable Rules and Regulations; (j) To such counsel's knowledge, there are no agreements, contracts, leases or documents to which the Company is a party of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement which are not described or referred to therein or filed as required; (k) The performance of this Agreement and the consummation of the transactions herein contemplated (other than performance of the Company's indemnification obligations hereunder, concerning which no opinion need be expressed) will not (a) result in any violation of the Company's charter or bylaws or (b) to such counsel's knowledge, result in a material breach or violation of any of the terms and provisions of, or constitute a default under, any bond, debenture, note or other evidence of indebtedness, or any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument known to such counsel to which the Company is a party or by which its properties are bound, or any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court, government or governmental agency or body having jurisdiction over the Company or over any of its properties or operations; (l) No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body having jurisdiction over the Company, or over any of its properties or operations is necessary in connection with the consummation by the Company of the transactions herein contemplated, except such as have been obtained under the Act or such as may be required under state or other securities or Blue Sky laws in connection with the purchase and the distribution of the Specified Placement Shares; (m) To such counsel's knowledge, there are no legal or governmental proceedings pending or threatened against the Company of a character required to be disclosed in the Registration Statement or the Prospectus by the Act or the Rules and Regulations, other than those described therein; (n) To such counsel's knowledge, the Company is not presently (a) in material violation of its charter or bylaws, or (b) in material breach of any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court or governmental agency or body having jurisdiction over the Company or over any of its properties or operations; and (o) To such counsel's knowledge, except as set forth in the Registration Statement and Prospectus, no holders of Common Stock or other securities of the Company have registration rights with respect to securities of the Company and, except as set forth in the -2- Registration Statement and Prospectus, all holders of securities of the Company having rights known to such counsel to registration of such shares of Common Stock or other securities, because of the filing of the Registration Statement by the Company have, with respect to the offering contemplated thereby, waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement or have included securities in the Registration Statement pursuant to the exercise of and in full satisfaction of such rights. In addition, such counsel shall state that although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the Closing Date, Registration Statement and any amendment or supplement thereto (other than the financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the Closing Date the Registration Statement, the Prospectus and any amendment or supplement thereto (except as aforesaid) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Counsel rendering the foregoing opinion may rely as to questions of law not involving the laws of the United States or the State of Michigan upon opinions of local counsel, and as to questions of fact upon representations or certificates of officers of the Company and of government officials, in which case their opinion is to state that they are so relying and that they have no knowledge of any material misstatement or inaccuracy in any such opinion, representation or certificate. Copies of any opinion, representation or certificate so relied upon shall be delivered to you, and to Agent's Counsel. -3- EXHIBIT III OPINION OF OBLON, SPIVAK, MCCLELLAND, MAIER & NEUSTADT, P.C. Attached -1- EXHIBIT IV OPINION OF SHEPPARD, MULLIN, RICHTER & HAMPTON Attached -1- EXHIBIT V OPINION OF CAMPBELL & FLORES Attached -1- EXHIBIT VI OPINION OF HYMAN, PHELPS & MCNAMARA a. The statements in the Registration Statement and Prospectus under the captions "Risk Factors -- Uncertainty of Regulatory Approval; Extensive Government Regulation" and "Business -- Government Regulation," insofar as such statements purport to summarize applicable provisions of the United Stated food and drug laws (the "Food and Drug Laws"), have been reviewed by such counsel and are accurate as to, and fairly describe, the regulatory status of the Company under the Food and Drug Laws; and to such counsel's knowledge, there are no presently existing Food and Drug Laws applicable to the Company and/or the Company's products that are required to be described or referred to in the Registration Statement and Prospectus that are not so described or referred to therein. b. To such counsel's knowledge, the Company is currently conducting its business in material compliance with all applicable provisions of the Food and Drug Laws. c. There are no judicial or administrative proceedings pending or, to such counsel's knowledge, threatened against the Company that may cause any regulatory permit that is material to the business of the Company, to be revoked, withdrawn, cancelled, suspended or not renewed. In rendering the foregoing opinions, such counsel may state that they have not independently verified nor do they take any responsibility for nor are they addressing in any way any statements of fact or statements of belief attributable to the Company. In addition to the foregoing opinions, counsel shall state that: During the course of preparation of the Registration Statement, such counsel participated in certain discussions with officers of the Company as to the regulatory matters dealt with under the captions "Risk Factors -- Uncertainty of Regulatory Approval; Extensive Government Regulation" and "Business -- Government Regulation" in the Prospectus. While such counsel has not undertaken to determine independently and such counsel does not assume any responsibility for, the accuracy, completeness or fairness of the statements under such captions in the Prospectus, such counsel shall state on the basis of these discussions that no facts have come to their attention which cause them to believe that the statements in the Prospectus under the captions "Risk Factors - - - Uncertainty of Regulatory Approval; Extensive Government Regulation" and "Business -- Government Regulation," insofar as such statements relate to regulatory matters, at the time the Registration Statement became effective, or at the Closing Date the Prospectus contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or as of the date hereof contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. -1-
EXHIBIT 5.1 [Letterhead of Pepper, Hamilton & Scheetz] October 7, 1997 Securities and Exchange Commission Judiciary Plaza 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Aastrom Biosciences, Inc. Registration Statement on Form S-1 File No. 333- _____________ Dear Gentlemen: We have acted as special counsel to Aastrom Biosciences, Inc., a Michigan corporation (the "Company"), in connection with the preparation and filing with the Securities and Exchange Commission (the "Commission") of a registration statement (the "Registration Statement") of the Company on Form S-1 under the Securities Act of 1933, as amended (the "Act"). The Registration Statement relates to the proposed offer and sale by the Company of shares (the "Shares") of the Company's Common Stock (the "Common Stock") covered by the Registration Statement. In this connection, we have examined the Registration Statement, including the exhibits thereto, the originals or copies, certified or otherwise identified to our satisfaction, of the Articles of Incorporation and the By-Laws of the Company amended to date, resolutions of the Company's Board of Directors and such other documents and corporate records relating to the Company, and the issuance and sale of the Shares as we have deemed appropriate. The opinion expressed herein is based exclusively on the applicable provisions of the Michigan Business Corporation Act as in effect on the date hereof. On the basis of the foregoing, we are of the opinion that the Shares identified in the above-referenced Registration Statement be issued and sold by the Company will be, upon effectiveness of the Registration Statement and receipt by the Company of payment therefor, duly authorized, validly issued, fully paid, and non-assessable. Securities and Exchange Commission October 7, 1997 Page 2 We hereby consent to the reference to our firm under caption "Legal Matters" in the Registration Statement and to the filing of this opinion as an exhibit to the Registration Statement. Such consent does not constitute a consent under Section 7 of the Act, since we have not certified any part of such Registration Statement and do not otherwise come within the categories of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission promulgated thereunder. Very truly yours, PEPPER, HAMILTON & SCHEETZ By: /s/ Michael B. Staebler -------------------------------- A Partner 1mf
EXHIBIT 10.41 STRATEGIC PLANNING CONSULTING SERVICES AND COLLABORATION AGREEMENT This Agreement is made as of October 7, 1997 (the "Effective Date"), by and between AASTROM BIOSCIENCES, INC., a Michigan corporation ("Aastrom"), and BURRILL & COMPANY, LLC, a California limited liability company ("Burrill"). RECITALS A. Burrill is a merchant bank engaged in the business, among other things, of identifying and creating strategic alliances between companies. B. Aastrom is a medical and biological products and technology company, and Aastrom desires to obtain one or more strategic alliances ("Strategic Alliances") with one or more companies in the pharmaceutical, biotechnology or medical device industry ("Strategic Partners"), and Aastrom wishes to engage the services of Burrill to assist Aastrom with planning and entering into Strategic Alliances. NOW THEREFORE, the parties agree as follows: 1. Definitions. ----------- Board is defined in Section 3.1. ----- Effective Date shall mean the date first written above. -------------- Initial Warrant is defined in Section 4.3.1. --------------- Monthly Retainer is defined in Section 4.1. ---------------- Percentage Success Fee is defined in Section 4.2. ------------------ Potential Partners are defined in Section 3.1. ------------------ Proceeds shall mean the aggregate of the net cash received by Aastrom -------- from Strategic Partners in connection with a Strategic Alliance prior to the fifth anniversary of the effective date of the Strategic Alliance for licensing fees, milestone payments, research and development funding, equity and like payments. Said proceeds to not include loan proceeds (other than loans which are converted into equity securities of Aastrom prior to the fifth anniversary of the effective date of the Strategic Alliance), royalties, or proceeds from any sale of the Aastrom products. (For a Strategic Alliance which does not include "Proceeds" but which does include some unique value to Aastrom, which unique value does not come within the definition of "Proceeds," Aastrom will give good faith consideration to placing a fair and reasonable monetary value on said unique value so that it can be treated as "Proceeds" pursuant to this Agreement.) Services are defined in Section 3. -------- 1 Strategic Alliance shall mean any transaction or series or combination ------------------ of transactions whereby one or more Strategic Partners enters into a transaction with Aastrom with the assistance of Burrill, pursuant to which transaction the Strategic Partner invests in Aastrom equity securities, or the Strategic Partner enters into an agreement with Aastrom in the form of a major license, collaboration, joint venture, partnership, merger, acquisition, or similar arrangement. Excluded from this Strategic Alliance definition are minor license agreements for technology, customary manufacturing or supply agreements that do not involve equity investment in Aastrom, and any performance pursuant to Cobe's existing agreements with Aastrom. (For avoidance of doubt, if Aastrom and Cobe enter into a new transaction, as distinguished from implementing or making minor modifications, to any of their existing agreements, then such a new transaction is included as a Strategic Alliance.) Strategic Partners are defined in Recital B. ------------------ Strategic Plan is defined in Section 3.1. -------------- Success Warrant is defined in Section 4.3.3. --------------- Term is defined in Section 2. ---- Term Sheet means the term sheet, letter of intent or memorandum of ---------- understanding signed by Aastrom and the Strategic Partner for a particular Strategic Alliance. Vesting Warrant is defined in Section 4.3.2. --------------- 2. Term. The term of this Agreement shall commence on the Effective Date ---- and shall continue until this Agreement is terminated as specified herein (the "Term"). Upon the expiration of the Term, this Agreement and all rights and obligations hereunder shall terminate (except the rights and obligations contained in Sections 5.2 and 6.) 3. Burrill's Services. Aastrom hereby retains Burrill, commencing as of ------------------ the Effective Date, to provide to Aastrom those services typically provided by Burrill (the "Services") including, but not limited to, the services set forth in this Section 3. The Services shall include the following: 3.1. Planning for Strategic Alliances. Burrill shall review and -------------------------------- evaluate Aastrom's current status and prospects, and Burrill shall directly work with Aastrom to develop a plan for Aastrom's potential Strategic Alliances, which plan shall include a list of companies which Burrill believes qualify as potential partners (the "Potential Partners") for a Strategic Alliance with Aastrom. Burrill will assist Aastrom in the implementation of the plan, including coordinating contacts with the Potential Partners, preparation of appropriate materials, negotiations for term sheets and definitive agreements, and proceeding with activities necessary to close the Strategic Alliance. Burrill shall facilitate meetings, communications and interactions between the Potential Partners and Aastrom to pursue negotiations, to make presentations, and to assist Aastrom in responding to "due diligence" requests. Burrill shall also, where necessary, based on the type of Strategic Alliance proposed, provide the Aastrom Board of Directors (the "Board") and/or shareholders with recommendations regarding any proposed Strategic Alliance. 2 3.2. Strategic Counsel to Aastrom's Board of Directors. At Aastrom's ------------------------------------------------- request, Steven Burrill shall attend meetings of the Board and/or Aastrom's senior management to discuss the performance of Burrill's services under this Agreement and to consult with the Board and senior management on strategies for achieving a desirable Strategic Alliance. 3.3. Advisory Boards. Burrill shall also provide Aastrom's President --------------- with periodic access to Burrill's Business Advisory Board and/or Scientific Advisory Board, to the same general extent and nature as for Burrill's other client companies. 3.4. Involvement of Steven Burrill. G. Steven Burrill shall (i) be ----------------------------- Aastrom's principal contact at Burrill, (ii) remain the principal Burrill employee involved with Aastrom matters, and (iii) be the principal Burrill employee to direct or coordinate interactions by Burrill with Potential Partners, the Board and senior management of Aastrom throughout the Term of this Agreement. 4. Compensation Payable to Burrill. ------------------------------- 4.1. Monthly Retainer. For the duration of the Term, Aastrom shall pay ---------------- to Burrill a monthly retainer (the "Monthly Retainer") in the sum of Ten Thousand Dollars ($10,000) cash, payable within ten (10) calendar days after the beginning of each month during the Term. 4.2. Percentage Success Fee. Following the closing of any Strategic ---------------------- Alliance for which a Term Sheet was signed by both the Strategic Partner and Aastrom during the Term (or signed within six (6) months after the Term as to a Proposed Partner with whom Burrill was actively involved during the Term on behalf of a potential Strategic Alliance with Aastrom), Aastrom shall pay to Burrill a Percentage Success Fee equal to four percent (4%) of the Proceeds actually received by Aastrom in connection with such Strategic Alliance prior to the fifth anniversary of the effective date of the Strategic Alliance. Aastrom shall pay said Percentage Success Fee by either of the following alternative methods, at Burrill's option: (i) cash, or (ii) Aastrom Common Stock, with such stock valued at the average of the closing sale price of Aastrom Common Stock on the Nasdaq National Market System for the twenty (20) trading days (on which Aastrom Common Stock actually traded) prior to the date of the closing of such Strategic Alliance. Percentage Success Fee shall be paid in increments as Aastrom receives the Proceeds from the Strategic Partner. 4.2.1. Adjustments. ----------- (a) If the Proceeds of the first two (2) Strategic Alliances entered into by Aastrom do not exceed fifteen million dollars ($15,000,000) within eighteen (18) months after the first closing of the first Strategic Alliance, then the Percentage Success Fee shall be increased to seven and one-half percent (7.5%) of the Proceeds from such Strategic Alliance and Burrill shall not be entitled to any Success Warrants as provided in Section 4.3.3 herein. (b) In the event that the first Strategic Alliance is for less than fifteen million dollars ($15,000,000) of Proceeds within the eighteen (18) months specified in Section 4.2.1(a), and Aastrom pays the seven and one-half percent (7.5%) Percentage Success 3 Fee for said first Strategic Alliance, but thereafter within the eighteen (18) months specified in Section 4.2.1(a) a second Strategic Alliance is closed which causes the aggregate Proceeds to exceed fifteen million dollars ($15,000,000) within the eighteen (18) months specified in Section 4.2.1(a), such that the Percentage Success Fee is to be only four percent (4%), then Burrill and Aastrom shall make such adjustments, payments or refunds as may be needed so that only the four percent (4%) Success Fee is paid on the aggregate Proceeds from the first and second Strategic Alliances received by Aastrom within the 18 months specified in Section 4.2.1(a). Further, once said fifteen million dollar ($15,000,000) level is reached, the Success Warrant earned pursuant to Section 4.3.3 hereof shall be issued. (c) If Aastrom enters into a Strategic Alliance that includes (i) the merger or consolidation of Aastrom with or into another corporation pursuant to which the shareholders of Aastrom immediately prior to such Strategic Alliance shall own less than 50% of the voting securities of the surviving corporation, or (ii) the sale, transfer or lease (but not involving a transfer or lease by pledge or mortgage to a bona fide lender) of all or substantially all of the assets of Aastrom, then the Percentage Success Fee shall be reduced to the greater of (i) one-half of one percent (0.5%) of the value of Aastrom in such Strategic Alliance, or (ii) $1,400,000. 4.3. Stock Warrants. -------------- 4.3.1. Initial Warrant. Promptly after the Effective Date, Aastrom shall --------------- issue and grant to Burrill a warrant to purchase one hundred thousand (100,000) shares of Aastrom Common Stock at an exercise price equal to the average of the closing sale price for Aastrom Common Stock on the Nasdaq National Market System for the five (5) trading days (on which Aastrom Common Stock actually traded) prior to the Effective Date (the "Initial Warrant'). The expiration date of the Initial Warrant shall be the fifth anniversary of the Effective Date. 4.3.2. Vesting Warrant. Promptly after the Effective Date, Aastrom shall --------------- issue and grant to Burrill a warrant to purchase one hundred thousand (100,000) shares of Aastrom Common Stock at an exercise price equal to the average of the closing sale price for Aastrom Common Stock or the Nasdaq National Market System for the five (5) trading days (on which Aastrom Common Stock actually traded) prior to the Effective Date (the "Vesting Warrant"). The Vesting Warrant shall be subject to vesting during the Term, such that half (50,000 shares) shall become vested and exercisable six (6) months after the Effective Date so long as the Term of this Agreement has continued to that time, and the other half (50,000 shares) shall become vested and exercisable on the first anniversary of the Effective Date so long as the Term of this Agreement has continued to that time. 4.3.3. Success Warrant. Aastrom shall issue and grant to Burrill one of --------------- three (3) stock warrants described below (the "Success Warrant") promptly following the closing of a Strategic Alliance (or the first two (2) Strategic Alliances) and depending upon the dollar value of the Strategic Alliances, as follows: (a) If the Strategic Alliance (or the first two Strategic Alliances) entered into by Aastrom results in Proceeds to Aastrom exceeding fifteen million 4 dollars ($15,000,000) within eighteen (18) months after the effective date of the Strategic Alliance, Aastrom shall issue to Burrill a warrant to purchase three hundred thousand (300,000) shares of Aastrom Common Stock. This warrant shall be exercisable immediately, in whole or in part, at an exercise price equal to the average of the closing sale price for Aastrom Common Stock on the Nasdaq National Market System for the twenty (20) trading days (on which Aastrom Common Stock actually traded) prior to the date of execution of the Term Sheet for such Strategic Alliances; provided, however, that if the definitive agreement for such Strategic Alliance is executed by Aastrom and the Strategic Partner within fifteen (15) months after the Effective Date, the exercise price shall be based on the average of the closing sale price on the five (5) trading days (on which Aastrom Common Stock actually traded) prior to the Effective Date. (b) If the Strategic Alliance (or the first two Strategic Alliances) entered into by Aastrom results in Proceeds to Aastrom exceeding twenty-five million dollars ($25,000,000) within twenty-four (24) months after the effective date of the Strategic Alliance, Aastrom shall issue to Burrill a warrant to purchase four hundred thousand (400,000) shares of Aastrom Common Stock. This warrant shall be exercisable immediately, in whole or in part, at an exercise price equal to the average of the closing sale price for Aastrom Common Stock on the Nasdaq National Market System for the twenty (20) trading days (on which Aastrom Common Stock actually traded) prior to the date of execution of the Term Sheet for such Strategic Alliance; provided, however, that if the definitive agreement for such Strategic Alliance is executed by Aastrom and the Strategic Partner within fifteen (15) months after the Effective Date, the exercise price shall be based on the average of the closing sale price on the five (5) trading days (on which Aastrom Common Stock actually traded) prior to the Effective Date. (c) If the Strategic Alliance (or the first two Strategic Alliances) entered into by Aastrom results (i) in Proceeds to Aastrom exceeding thirty-five million dollars ($35,000,000) within twenty-four (24) months after the effective date of the Strategic Alliance, or (ii) in the immediate merger or consolidation of Aastrom into or with another corporation in which the shareholders of Aastrom shall own less than fifty percent (50%) of the voting securities of the surviving corporation, or in the sale, transfer or lease (but not including a transfer or lease by pledge or mortgage to a bona fide lender) of all or substantially all of the assets of Aastrom, then Aastrom shall issue to Burrill a warrant to purchase five hundred thousand (500,000) shares of Aastrom Common Stock. This warrant shall be exercisable immediately, in whole or in part, at an exercise price equal to the average of the closing sale price for Aastrom Common Stock on the Nasdaq National Market System for the twenty (20) trading days (on which Aastrom Common Stock actually traded) prior to the date of execution of the Term Sheet for such Strategic Alliance; provided, however, that if the definitive agreement for such Strategic Alliance is executed by Aastrom and the Strategic Partner within fifteen (15) months after the Effective Date, the exercise price shall be based on the average of the closing sale price on the five (5) trading days (on which Aastrom Common Stock actually traded) prior to the Effective Date. 4.3.4. Each of the Vesting Warrants and Success Warrants shall have an expiration date on the fifth anniversary of the date of grant of the warrant. If this Agreement is terminated for any reason, then all stock warrants issued pursuant to this Section 4.3 which are 5 outstanding at that time shall expire early, if not exercised sooner, on a date 120 days following the date of the termination of this Agreement. 4.3.5 With respect to each of the stock warrants (Initial Warrant, Vesting Warrant and Success Warrant), Aastrom shall have the right, upon Burrill's written notice of election to exercise the warrant, to proceed with a "net issuance" or "cashless exercise" arrangement, such that in lieu of Burrill paying the warrant exercise price, Aastrom issues to Burrill a number of shares of Aastrom Common Stock having an aggregate value equal to the value of the warrant being exercised (i.e., the "spread" between the then current value per share of the Aastrom Common Stock and the warrant exercise price per share, multiplied by the number of warrant shares). Said value per share shall be determined as the average of the closing sale price for Aastrom Common Stock on Nasdaq National Market System for the twenty (20) trading days (on which Aastrom Common Stock actually traded) prior to the date of Burrill's written notice of election to exercise the warrant. 4.3.6. With respect to all shares of Aastrom Common Stock acquired upon the exercise of the warrants, Burrill agrees to adhere to all customary and reasonable resale restrictions and limitations, similar to those imposed on other large shareholders by Aastrom's underwriters and to those imposed by applicable securities laws and regulations. 4.4. Reimbursable Expenses. In addition to the fees and compensation --------------------- described above, Aastrom agrees to reimburse Burrill, in accordance with the activities reviewed with Aastrom, for reasonable out-of-pocket expenses incurred by Burrill in connection with its services hereunder, regardless of whether or not Burrill's efforts result in the consummation of a Strategic Alliance. In lieu of actual itemized charges for miscellaneous phone, fax, postage and photocopying, Burrill shall invoice Aastrom for a fair allocable percentage share of Burrill's costs for such items, which share is estimated to be approximately $200 per month. 5. Termination. ----------- 5.1. Termination Events. This Agreement and all rights and obligations ------------------ hereunder (except the rights and obligations contained in Sections 1, 5.2 and 6) shall terminate upon occurrence of any of the following: 5.1.1. The termination of this Agreement by Aastrom, and Aastrom may terminate this Agreement at any time, without cause, upon written notice to Burrill. Notwithstanding this right, Aastrom hereby agrees that it will not exercise this right in order to avoid paying a Percentage Success Fee or a Successor Warrant which otherwise would have become earned in the near term. 5.1.2. The termination of this Agreement by Aastrom on account of a material breach by Burrill of any of Burrill's obligations contained in this Agreement, which breach is not cured within thirty (30) calendar days after Burrill's receipt of written notice thereof from Aastrom. 5.1.3. The termination of this Agreement by Burrill, and Burrill may terminate this Agreement at any time, without cause, upon written notice to Aastrom. 6 5.1.4. The termination of this Agreement by Burrill on account of a material breach by Aastrom of any of its obligations contained in this Agreement, which breach is not cured within thirty (30) calendar days of receipt after Aastrom's written notice thereof from Burrill. 5.2. Consequences of Termination. If this Agreement is terminated --------------------------- pursuant to Sections 5.1.1 or 5.1.4, Burrill still shall be entitled to that compensation which Burrill is entitled to receive pursuant to Sections 4.2 and 4.4 herein upon the closing of a Strategic Alliance (i) for which a Term Sheet was executed by both parties before said termination, or (ii) for which a Term Sheet is executed by both parties within six (6) months following such a termination for such Strategic Alliance or with a Potential Partner with whom Burrill had been actively involved with discussions or negotiations for such Strategic Alliance prior to such termination. If this Agreement is terminated, any unvested warrants shall immediately be forfeited and shall be surrendered to Aastrom by Burrill. If this Agreement is terminated pursuant to Sections 5.1.2 or 5.1.3, Burrill shall not earn or receive any further compensation pursuant to Sections 4.2 and 4.3 herein. 6. Confidentiality. Burrill agrees that the "Confidential Information" (as --------------- defined below) will not be used or disclosed by Burrill for any purpose except as described herein and that such Confidential Information will be kept confidential by Burrill and its agents; provided, however, that (1) any such Confidential Information may be disclosed to Burrill's managers, employees and representatives who need to know such information for the purpose described in this Agreement (it being understood that such managers, employees and representatives shall be informed by Burrill of the confidential nature of such information and shall be required by Burrill to treat such information confidentially, and (2) any disclosure of such Confidential Information may be made to any person which the Company consents in writing. The term "Confidential Information" means all information concerning Aastrom except such information that (i) is or becomes publicly available or available to a knowledgeable person in Aastrom's industry other than as a result of disclosure by Burrill's agents, representatives or employees, (ii) was known by Burrill prior to its disclosure to Burrill by Aastrom, or (iii) is to become available to Burrill on a nonconfidential basis from a source other than Aastrom or its agents which , to Burrill's knowledge, is not prohibited from disclosing such information by a legal, contractual or fiduciary obligation to Aastrom. 7. Indemnification. --------------- 7.1. By Aastrom. In connection with the services that Burrill ---------- has agreed to render hereunder, Aastrom hereby agrees to indemnify and hold harmless Burrill and its controlling persons, directors, officers, employees, agents and affiliates (each an "indemnified person"), to the full extent lawful, from and against all losses, claims, damages, liabilities and expenses incurred by them (including fees and disbursements of counsel, but excluding any lost profits or consequential damages of any kind) suffered or alleged to have been suffered by Burrill or any other indemnified person that (a) are related to or arise out of (i) actions taken or omitted to be taken (including any untrue statements made or any statements omitted to be made) by Aastrom or (ii) actions taken or omitted to be taken by an indemnified person with the consent, or upon the instructions, of Aastrom or (b) are otherwise related to or arise out of Burrill's activities hereunder, and Aastrom will reimburse Burrill and any other indemnified person for all 7 expenses (including fees and disbursements of counsel) as they are incurred by Burrill or such other indemnified person in connection with investigating, preparing or defending any such action or claim, whether or not in connection with pending or threatened litigation in which Burrill or such other indemnified person is a party. Aastrom will not be responsible, however, for any losses, claims, damages, liabilities or expenses pursuant to clause (b) of the preceding sentence that are finally judicially determined to have resulted primarily from the negligence or willful misconduct of Burrill or of the person seeking indemnification hereunder. Neither Burrill, nor any of its controlling persons, directors, officers, employees, agents and affiliates, shall have any liability to Aastrom in connection herewith except for such liability for losses, claims, damages, liabilities or expenses incurred by Aastrom as is finally judicially determined to have resulted primarily from Burrill's negligence or willful misconduct; provided that in no event will Burrill have any liability to Aastrom hereunder in excess of the aggregate amount of consideration received by Burrill from Aastrom hereunder. Aastrom further agrees that it will not, without the prior written consent of Burrill, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not Burrill or any other indemnified person is an actual or potential party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of Burrill and each other indemnified person from all liability arising out of such claim, action, suit or proceeding. 7.2. Notice and Defense. Promptly after receipt by an indemnified person ------------------ of notice of any complaint or the commencement of any action or proceeding with respect to which indemnification is being sought hereunder, such person will notify Aastrom in writing of such complaint or of the commencement of such action or proceeding, but failure to so notify Aastrom will not relieve Aastrom from any liability that it may have hereunder or otherwise, except to the extent that such failure materially prejudices Aastrom rights or its ability to defend against such complaint, action or proceeding. If Aastrom so elects or is requested by such indemnified person, Aastrom will assume the defense of such action or proceeding, including the employment of counsel (which may be counsel to Aastrom) reasonably satisfactory to Burrill and the payment of the fees and disbursements of such counsel. In the event, however, such indemnified person reasonably determines in its judgment that having common counsel would present such counsel with a conflict of interest, or if Aastrom fails to assume the defense of the action or proceeding in a timely manner, then such indemnified person may employ separate counsel to represent or defend it in any such action or proceeding and Aastrom will pay the fees and disbursements of such counsel; provided, however, that Aastrom will not be required to pay the fees and disbursements of more than one separate counsel for all indemnified persons in any jurisdiction in any single action or proceeding. In any action or proceeding the defense of which is assumed by Aastrom, any indemnified person will have the right to participate in such litigation and to retain its own counsel at such indemnified person's own expense. 7.3. Allocations. Aastrom agrees that if any indemnification sought ----------- hereunder by an indemnified person in connection with a transaction is held by a court to be unavailable for any reason other than as specified in the second sentence of Section 7.1, then (whether or not Burrill is the indemnified person), Aastrom and Burrill will contribute to the losses, claims, damages, liabilities and expenses for which such indemnification is held unavailable in such proportion as is appropriate to reflect (a) the relative benefits to Aastrom, on the one hand, and 8 Burrill, on the other hand, in connection with such transaction, (b) the relative fault of Aastrom, on the one hand, and Burrill, on the other hand, in connection therewith and (c) any relevant equitable considerations; provided, however, that in any event Burrill's aggregate contribution to all losses, claims, damages, liabilities and expenses in connection with a transaction will not exceed the value of compensation actually received by Burrill from Aastrom in connection with such transaction. It is hereby agreed that the relative benefits to Aastrom, on the one hand, and Burrill, on the other hand with respect to Burrill's engagement in connection with a transaction shall be deemed to be in the same proportion as (a) the total value paid or proposed to be paid in such transaction bears to (b) the value of the compensation paid or proposed to be paid to Burrill in connection with such transaction. 7.4. Other Rights; Waiver of Trial by Jury. The indemnity, reimbursement ------------------------------------- and contribution obligations under this Agreement shall be in addition to any rights that Burrill or any other indemnified person may have at common law or otherwise. Aastrom and Burrill hereby agree, to the extent permitted by applicable law, to waive any right to trial by jury with respect to any claim, counter-claim or action arising out of the engagement or the transactions contemplated hereby. 8. Miscellaneous. ------------- 8.1. Binding Effect. This Agreement shall be binding upon and shall -------------- inure to the benefit of both parties and their permitted assigns and other successors; provided, however, that Burrill may not assign its rights or obligations hereunder to any party, whether by merger, operation of law, or otherwise, without the express, prior written approval of Aastrom. 8.2. Attorneys' Fees. In the event of any proceeding arising out of or --------------- related to this Agreement, the prevailing party shall be entitled to recover from the losing party all of the prevailing party's costs and expenses incurred in connection with such proceeding, including court costs and reasonable attorneys' fees whether or not such proceeding is prosecuted to judgment. 8.3. Written Amendments. No amendment or addition to, or modification ------------------ of, any provision contained in this Agreement shall be effective unless fully set forth in writing and signed by both of the parties hereto. 8.4. Entire Agreement. This Agreement constitutes the entire agreement ---------------- between the parties hereto pertaining to the subject matter hereof, and the final complete and exclusive expression of the terms and conditions thereof. All prior agreements, representations, negotiations and understandings of the parties hereto, oral or written, express or implied, are hereby superseded and merged herein. 8.5. Governing Law. This Agreement will be governed by and construed in ------------- accordance with the laws of the State of Michigan, without giving effect to any choice of law or conflict of law provisions (whether of the State of Michigan] or any other state, country or jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Michigan. 9 8.6. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be an original, but all of which together shall constitute one instrument. Signatures may be delivered and transmitted by facsimile, and this Agreement shall become binding and effective when both parties have transmitted a signed copy of this Agreement to the other party. 10 IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date. BURRILL & COMPANY, LLC AASTROM BIOSCIENCES, INC.: /s/ G. Steven Burrill By: /s/ R. Douglas Armstrong, Ph.D. - ------------------------- ----------------------------------- G. Steven Burrill R. Douglas Armstrong, Ph.D. President and Chief Executive Officer 11
EXHIBIT 23.3 CONSENT OF OBLON SPIVAK MCCLELLAND MAIER & NEUSTADT PATENT COUNSEL We consent to the reference of our firm under the caption "Experts" regarding patents and pending patent applications either owned by or licensed to Aastrom Biosciences, Inc. ("Aastrom") relating to aspects of Aastrom's product and process technology, as set forth in this Registration Statement on Form S-1, and the prospectus which forms a part thereof, and any amendments thereto, which we have reviewed and approved, as set forth under the captions "Risk Factors--Uncertainty Regarding Patents and Proprietary Rights" and "Business--Patents and Proprietary Rights," and the other references therein concerning such patents and patent applications. /s/ OBLON SPIVAK MCCLELLAND MAIER & NEUSTADT OBLON SPIVAK MCCLELLAND MAIER & NEUSTADT Arlington, Virginia October 7, 1997