1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED: 0-19871 JUNE 30, 1997 COMMISSION FILE NUMBER CYTOTHERAPEUTICS, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-3078125 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) TWO RICHMOND SQUARE PROVIDENCE, RI 02906 -------------------- (Address of principal executive offices including zip code) (401) 272-3310 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter periods that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes___X____ No_________ At July 31, 1997 there were 16,536,172 shares of Common Stock, $.01 par value, issued and outstanding. There were no issued and outstanding shares of Preferred Stock. Page 1 of 17
2 CYTOTHERAPEUTICS, INC. INDEX PART I. FINANCIAL INFORMATION Page Number - ------------------------------ ----------- Item 1. Financial Statements Condensed Consolidated Balance Sheets (unaudited) June 30, 1997 and December 31, 1996 3 Condensed Consolidated Statements of Operations (unaudited) Three and six months ended June 30, 1997 and 1996 4 Condensed Consolidated Statements of Cash Flows (unaudited) Six months ended June 30, 1997 and 1996 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-14 PART II. OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security-Holders 15 Item 5. Other matters 15 Item 6. Exhibits and Reports on Form 8-K 15-16 SIGNATURES 17 Page 2 of 17
3 PART I - ITEM 1 - FINANCIAL STATEMENTS - -------------------------------------- CYTOTHERAPEUTICS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> June 30, 1997 December 31, 1996 (unaudited) (audited) ---------------- ---------------- <S> <C> <C> Assets Current assets: Cash and cash equivalents $ 12,434,980 $ 19,921,584 Marketable securities 18,821,289 22,685,855 Receivables from collaborative agreement 162,967 70,681 Other current assets 1,167,613 1,074,091 ------------ ------------ Total current assets 32,586,849 43,752,211 Property, plant and equipment, net 14,329,002 10,732,102 Other assets 4,385,865 3,912,430 ------------ ------------ Total assets $ 51,301,716 $ 58,396,743 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses $ 4,125,335 $ 4,159,769 Deferred revenue 20,371 1,859,092 Current maturities of capitalized lease obligations 519,418 553,557 Current maturities of long term debt 647,613 695,570 ------------ ------------ Total current liabilities 5,312,737 7,267,988 Capitalized lease obligations, less current maturities 3,710,000 3,971,594 Long term debt, less current maturities 3,921,342 4,251,008 Redeemable common stock 6,667,681 8,158,798 Stockholders' equity Common stock 158,401 156,144 Additional paid in capital 109,486,998 107,649,659 Accumulated deficit (77,802,237) (72,922,674) Deferred compensation (35,359) (90,118) Unrealized currency loss (100,765) (60,416) Unrealized gain (loss) on marketable securities (17,082) 14,760 ------------ ------------ Total stockholders' equity 31,689,956 34,747,355 ------------- ------------- Total liabilities and stockholders' equity $ 51,301,716 $ 58,396,743 ============= ============= </TABLE> See accompanying notes to condensed consolidated financial statements. Page 3 of 17
4 PART I - ITEM 1 - FINANCIAL STATEMENTS - ------------------------------------------ CYTOTHERAPEUTICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 ---------------- ---------------- ------------- ------------- <S> <C> <C> <C> <C> Revenue from collaborative arrangements $ 5,084,864 $ 1,850,632 $ 6,941,486 $ 3,514,849 Operating expenses: Research and development 4,449,727 4,175,341 9,099,227 8,080,500 General and administrative 1,684,917 1,173,221 3,481,347 2,407,269 ------------ ------------ ------------ ------------ 6,134,644 5,348,562 12,580,574 10,487,769 ------------ ------------ ------------ ------------ Loss from operations (1,049,780) (3,497,930) (5,639,088) (6,972,920) Other income (expense): Investment income 467,769 572,744 1,116,399 1,207,269 Interest expense (70,583) (149,145) (246,094) (304,740) Other income (expense) (15,360) 342,500 (110,780) 342,500 ------------ ------------ ------------ ------------ 381,826 766,099 759,525 1,245,029 ------------ ------------ ------------ ------------ Net loss ($ 667,954) ($ 2,731,831) ($ 4,879,563) ($ 5,727,891) ============ ============ ============ ============ Net loss per share ($ 0.04) ($ 0.18) ($ 0.30) ($ 0.37) ============ ============ ============ ============ Shares used in calculation 16,498,374 15,368,009 16,484,864 15,320,989 ============ ============ ============ ============ </TABLE> See accompanying notes to condensed consolidated financial statements. Page 4 of 17
5 PART I - ITEM 1 - FINANCIAL STATEMENTS - ------------------------------------------- CYTOTHERAPEUTICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> (unaudited) Six Months Ended June 30, 1997 1996 ------------------------------------ <S> <C> <C> Cash flows from operating activities: Net loss ($ 4,879,563) ($ 5,727,891) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 967,350 794,645 Compensation expense relating to the grant of stock options 27,413 31,061 Loss on sale of fixed assets 825 -- Changes in operating assets and liabilities (1,963,479) (639,653) ------------ ------------ Net cash used in operating activities (5,847,454) (5,541,838) ------------ ------------ Cash flows from investing activities: Proceeds from sale of marketable securities 9,936,929 6,207,051 Purchases of marketable securities (6,104,205) (3,083,620) Purchase of property, plant and equipment (4,504,373) (1,149,202) Proceeds from the sale of fixed assets 1,941 -- Acquisition of other assets (572,576) (305,791) ------------ ------------ Net cash provided by (used in) investing activities (1,242,284) 1,668,438 ------------ ------------ Cash flows from financing activities: Proceeds from the exercise of stock options 375,825 1,085,138 Proceeds from financing transactions -- 821,172 Principal payments under capitalized lease obligations and mortgage payable (538,485) (497,425) ------------ ------------ Net cash provided by (used in) financing activities (162,660) 1,408,885 Effect of exchange rate on cash and cash equivalents (234,206) -- ------------ ------------ Decrease in cash and cash equivalents (7,486,604) (2,464,515) Cash and cash equivalents, January 1 19,921,584 9,548,579 ------------ ------------ Cash and cash equivalents, June 30 $ 12,434,980 $ 7,084,064 ============ ============ </TABLE> See accompanying notes to condensed consolidated financial statements. Page 5 of 17
6 PART I - ITEM 1 - FINANCIAL STATEMENTS -------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1997 AND 1996 NOTE 1. BASIS OF PRESENTATION The accompanying, unaudited, condensed consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying financial statements include all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. Results of operations for the three and six months ended June 30, 1997 are not necessarily indicative of the results that may be expected for the entire fiscal year ended December 31, 1997. For further information, refer to the audited financial statements and footnotes thereto as of December 31, 1996 included in the Company's Annual Report to Stockholders and the Annual Report on Form 10-K filed with the Securities and Exchange Commission. NOTE 2. NET LOSS PER SHARE Net loss per share is computed using the weighted average number of shares of common stock outstanding. Common equivalent shares from stock options and warrants are excluded as their effect is antidilutive. NOTE 3. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS The Company will adopt Statement of Accounting Standards No. 128, Earnings per Share (EPS) which is effective for both interim and annual financial statements for periods ended after December 15, 1997. Under Statement 128, primary EPS computed in accordance with Opinion 15 will be replaced with a simpler calculation called basic EPS. Basic EPS will be calculated by dividing income available to common stockholders by the weighted average common shares outstanding. Fully dilutive EPS will not change significantly, but has been renamed diluted EPS. The adoption of Statement 128 is not expected to have any effect on the Company's financial statements since in the past common equivalent shares from stock options and warrants have been excluded as their effect is antidilutive. NOTE 4. LEGAL PROCEDINGS The Company has settled its dispute with NeuroSpheres LTD. The pending action in the United States District Court and its counterpart actions in Calgary, as well as all arbitration proceedings have been discontinued. Under the terms of the settlement, the Company has an exclusive royalty-bearing license to growth-factor responsive stem cells for transplantation. NeuroSpheres has an option to acquire co-exclusive rights in exchange for an up front payment of $5,000,000. NeuroSpheres' option expires in 1998, if unexercised. The parties have no further research obligations to each other. Page 6 of 17
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company for the three and six months ended June 30, 1997 and 1996 should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related footnotes thereto. This report may contain certain forward-looking statements regarding, among other things, the Company's results of operations, the progress of the Company's product development and clinical programs, the need for, and timing of, additional capital and capital expenditures, partnering prospects, the need for additional intellectual property rights, effects of regulations, the need for additional facilities and potential market opportunities. The Company's actual results may vary materially from those contained in such forward-looking statements because of risks to which the Company is subject such as risks of delays in research, development and clinical testing programs, obsolescence of the Company's technology, lack of available funding, competition from third parties, failure of the Company's collaborators to perform, regulatory constraints, litigation and other risks to which the Company is subject. See "Cautionary Factors Relevant to Forward-Looking-Information" filed herewith as Exhibit 99 and incorporated herein by reference. OVERVIEW Since its inception in August 1988, the Company has been primarily engaged in research and development of human therapeutic products. No revenues have been derived from the sale of any products, and the Company does not expect to receive revenues from product sales for at least several years. The Company expects that its research and development expenditures will increase substantially in future years as research and product development efforts accelerate and clinical trials are initiated or broadened. The Company has incurred annual operating losses since inception and expects to incur substantial operating losses in the future. As a result, the Company is dependent upon external financing from equity and debt offerings and revenues from collaborative research arrangements with corporate sponsors to finance its operations. The Company's results of operations have varied significantly from year to year and quarter to quarter and may vary significantly in the future due to the occurrence of material, nonrecurring events, including without limitation, the receipt of one-time, nonrecurring licensing payments. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1997 AND 1996 For the quarter ended June 30, 1997 and 1996, revenues from collaborative Page 7 of 17
8 agreements totaled $5,085,000 and $1,851,000, respectively. The revenues were earned primarily from a Development, Marketing, and License Agreement with Astra AB. For the quarter ended June 30, 1997, the Company recognized a $3,000,000 milestone payment from Astra related to the Phase II clinical program for ACTID (Analgesic Cell Therapy Implantable Device), the Company's cell-containing, pain control implant. Research and development expenses totaled $4,450,000 for the three months ended June 30, 1997, compared with $4,175,000 for the same period in 1996 The increase of $275,000, or 7%, from 1996 to 1997 is principally due to increases in the number of scientists and the addition of Modex, a 50% owned subsidiary, which contributed $347,000 to the expense increase, partially offset by a decrease in expenses related to research agreements. General and administrative expenses were $1,685,000 for the three months ended June 30, 1997, compared with $1,173,000 for the same period in 1996. The increase of 512,000 or 44%, from 1996 to 1997 was primarily attributable to legal expenses incurred related to arbitration proceedings with NeuroSpheres, an increase in patent expenses and the addition of Modex, a 50% owned subsidiary, which contributed $211,000 to the increase. Other income in the amount of $343,000 was received in May 1996 for settlement of a legal suit filed on behalf of the Company. Interest income for the three months ended June 30, 1997 and 1996 was $468,000 and $573,000, respectively. The average investment balances were $34,672,000 and $38,807,000 in the second quarter of 1997 and 1996, respectively. Interest expense was $71,000 for the three months ended June 30, 1997, compared with $149,000 for the same period in 1996. The decrease from 1997 to 1996 was attributable to the capitalization of interest for the new facility in the amount of $99,000. Net loss for the three months ended June 30, 1997 was $668,000, or $0.04 per share, as compared to net loss of $2,732,000, or $0.18 per share, for the comparable period in 1996. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 AND 1996 For the six months ended June 30, 1997 and 1996, revenues from collaborative agreements totaled $6,941,000 and $3,515,000. The revenues were earned primarily from a Development, Marketing and License Agreement with Astra AB. Included in the 1997 revenues is a $3,000,000 milestone payment from Astra Page 8 of 17
9 related to the Phase II clinical program for ACTID (Analgesic Cell Therapy Implantable Device), the Company's cell-containing, pain control implant. Research and development expenses totaled $9,099,000 for the six months ended June 30, 1997, compared with $8,081,000 for the same period in 1996. The increase of $1,018,000 or 13%, from 1996 to 1997 is principally due to increases in the number of scientists and related expenses and the addition of Modex, a 50% owned subsidiary, which contributed $704,000 to the increase. General and administrative expenses were $3,481,000 for the six months ended June 30, 1997, compared with $2,407,000 for the same period in 1996. The increase of $1,074,000 or 45%, from 1996 to 1997 was primarily attributable to increased spending for legal fees associated with the NeuroSpheres litigation, patents, recruiting fees and other professional services, as well as, the addition of Modex, a 50% owned subsidiary, which contributed $286,000 to the increase. Other income in the amount of $343,000 was received in May 1996 for settlement of a legal suit filed on behalf of the Company. Interest income for the six months ended June 30, 1997 and 1996 was $1,116,000 and $1,207,000, respectively. The average investment balances were $37,555,000 and $40,517,000 for the first six months of 1997 and 1996, respectively. Interest expense was $246,000 for the six months ended June 30, 1997, compared with $305,000 for the same period in 1996. The decrease from 1996 to 1997 was attributable to the capitalization of interest for the new facility in the amount of $99,000. Net loss for the six months ended June 30, 1997 was $4,880,000, or $0.30 per share, as compared to net loss of $5,728,000, or $0.37 per share, for the comparable period in 1996. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has financed its operations through the sale of common and preferred stock, the issuance of long-term debt and capitalized lease obligations, revenues from collaborative agreements, research grants and interest income. The Company had unrestricted cash, cash equivalents and marketable securities totaling $31,256,000 at June 30, 1997. Cash equivalents and marketable securities are invested in agencies of the U.S. government, Page 9 of 17
10 investment grade corporate bonds and money market funds. The Company currently occupies all of its laboratory and administrative office space, other than that at its pilot manufacturing site, under the terms of operating leases subject to termination upon nine months notice by the Company. As a result of an anticipated increase in the number of employees, the Company's current facilities will not be sufficient to accommodate the Company's needs past the end of 1997. The Company has purchased land and a building and began construction of a new headquarters and laboratory facility in the fourth quarter of 1996. The total cost of the project is estimated to be $7,800,000. The Company has spent $6,273,000 on the project through June 30, 1997. In October 1996, the Company obtained financing of $5,500,000 from a bank, secured by a mortgage on the new facility. The Company had borrowed $1,450,000 under this agreement as of June 30, 1997. Any unused commitment expires October 31, 1997. Quarterly principal payments of 1/40 of the loan balance commence September 30, 1997 with the balance due at maturity, October 2001. The loan agreement requires the Company provide full cash collateral if the Company's unencumbered cash balance falls below $18,000,000 and to comply with certain financial covenants. In May 1996, the Company secured an equipment loan facility with a bank in the amount of $2,000,000. The Company has borrowed $741,000 under this agreement as of June 30, 1997. The loan requires interest payments only for the first two years; principal payments are payable over a three-year period beginning May 1998. Any unused commitment expires on May 15, 1998. The loan is secured by equipment purchased with the proceeds of the credit facility. In April 1997, CytoTherapeutics entered into an agreement with NeuroSpheres LTD replacing all previous agreements and resolving its dispute with NeuroSpheres. The pending action in the United State District Court and its counterpart actions in Calgary, as well as all arbitration proceedings have been discontinued. Under the terms of the settlement, the Company has an exclusive royalty-bearing license to growth-factor responsive stem cells for transplantation. NeuroSpheres has an option to acquire co-exclusive rights in exchange for an up front payment of $5,000,000. NeuroSpheres' option expires in 1998, if unexercised. The parties have no further research obligations to each other. In February 1997, CytoTherapeutics and Cognetix, Inc. entered into a Collaboration and Development Agreement to screen selected peptides isolated by Cognetix for possible development into therapeutic products aimed at a broad range of human disease states using CytoTherapeutics' cell-based delivery technology. Based on in vitro data, a screening committee comprised of an equal number of representatives from CytoTherapeutics Page 10 of 17
11 and Cognetix will determine which compounds to select for in vivo studies and possible clinical trials. The companies will generally share expenses associated with the development of any specific product candidate and any resulting revenues, except as otherwise determined on a product-by-product basis. As part of the agreement with Cognetix, CytoTherapeutics has purchased $250,000 of Cognetix preferred stock and subject to certain milestones, is obligated to purchase up to a total of $1,750,000 of Cognetix stock over the next year. In July 1997, the Company loaned $250,000 to Cognetix. The loan will bear interest and is payable on the earlier of February 20, 1998 or the completion of a financing greater than $2,000,000 by Cognetix. In November 1996, the Company signed collaborative development and licensing agreements with Genentech, Inc. relating to the development of products using the Company's technology to deliver certain of Genentech's proprietary growth factors to treat Parkinson's disease, Huntington's disease and amyotrophic lateral sclerosis ("ALS"). Under the terms of the agreement for Parkinson's disease, Genentech purchased 829,171 shares of common stock for $8,300,000 to fund development of products to treat Parkinson's disease. Additional equity purchases and other funding by Genentech is available for future clinical development as determined by the parties. If the Parkinson's program is terminated and the funds the Company received from the sale of stock to Genentech pursuant to the Parkinson's agreement exceed the expenses incurred by the Company in connection with such studies by more than $1 million, Genentech has the right to require the Company to repurchase from Genentech shares of Company Common Stock having a value equal to the amount of the overfunding, based upon the share price paid by Genentech. As such, the Common Stock purchased by Genentech is classified as Redeemable Common Stock until such time as the related funds are expended on the program. Upon commercialization, Genentech and the Company will share profits in the U.S. at an agreed upon percentage, and Genentech will pay the Company a royalty based upon deals outside the U.S. The Company retains manufacturing rights and will be paid manufacturing costs for products sold. The Company also licensed certain growth factors for the treatment of Huntington's disease and amyotrophic lateral sclerosis ("ALS"). Under the terms of the agreements, the Company is responsible for conducting and funding all preclincal and clinical development, subject to specified rights of Genentech to participate in the development and marketing of the proposed products. Should Genentech share in the development cost of the proposed products, the companies will share profits at a negotiated percentage upon commercialization. Should Genentech elect not to participate in the Page 11 of 17
12 development, upon commercialization, the Company will pay Genentech an agreed upon royalty based upon sales. These agreements supersede the Development Collaboration and License Agreement between the Company and Genentech entered into in March 1994. In July 1996, the Company invested $2 million in Modex, a 50% owned Swiss subsidiary, to pursue extensions of the Company's encapsulated-cell technology for specific applications outside the central nervous system, with a commitment to invest an additional Sfr 2.4 million on the second anniversary of the agreement if Modex has, prior to that time, achieved one or more specified scientific milestones. An investment fund, managed by Swiss private bank, has invested $2 million in Modex, with a commitment to invest an additional Sfr 1.2 million on the second anniversary of the agreement, in exchange for a 15% stake in the company. The remaining 35% of Modex is owned by the scientific founders of Modex. The Company has granted to Modex an exclusive, royalty-bearing license to the Company's proprietary encapsulated-cell technology for three applications outside the central nervous system: diabetes, obesity and anemia. Modex granted the Company an exclusive royalty-bearing license to any technology developed or obtained by Modex for application to diseases, conditions and disorders which affect the central nervous system. In addition to its royalty obligations, the Company is also obligated to issue to Modex up to 300,000 shares of the Company's Common Stock on the achievement by Modex of certain scientific milestones. Substantially all of these shares are expected to be awarded by Modex as incentive compensation to Modex' founding scientists and other researchers upon achievement of such milestones. Under the terms of its agreement with the investment fund, during the first two years following closing, the Company has the right to acquire the fund's interest in Modex for the greater of a 30% annual return or Sfr 3.6 million. Following this two-year period, the Company has the right to purchase the fund's interest at 110% of fair market value. Following the second anniversary of the agreement and prior to the tenth anniversary of the agreement, if no public market exists for the common stock of Modex, the fund has the right to require the Company to purchase the fund's interest in Modex for 90% of the fair market value of such interest. Any purchase made by the Company under any of the circumstances described in this paragraph may be made at the Company's option in cash or shares of the Company's Common Stock valued at the market price at the time of purchase. The Company also has the right to acquire, and the founders have the right to require the Company to acquire, the founders' initial equity interest in Modex in exchange for the issuance of an aggregate of approximately 92,000 shares of the Company's Common Stock. In March 1995, the Company signed a collaborative research and development agreement with Astra for the development and marketing of certain Page 12 of 17
13 encapsulated-cell products to treat pain. Astra made an initial, nonrefundable payment of $5,000,000, a milestone payment of $3,000,000 in the first quarter of 1997 which was recognized as revenue in the second quarter of 1997 and may make up to $13,000,000 in additional payments subject to the achievement of certain development milestones. Under the agreement, the Company is obligated to conduct certain research and development pursuant to a four-year research plan agreed upon by the parties. Over the term of the research plan, the Company expects to receive annual research payments from Astra of $5 million to $7 million, which the Company expects should approximate the research and development costs incurred by the Company under the plan. Subject to the successful development of such products and obtaining necessary regulatory approvals, Astra is obligated to conduct all clinical trials of products arising from the collaboration and to seek approval for their sale and use. Astra has the exclusive worldwide right to market products covered by the agreement. Until the later of either the last to expire of all patents included in the licensed technology or a specified fixed term, the Company is entitled to a royalty on the worldwide net sales of such products in return for the license granted to Astra and the Company's obligation to manufacture and supply products. Astra has the right to terminate the agreement after April 1, 1998. Substantial additional funds will be required to support the Company's research and development programs, for acquisition of technologies and intellectual property rights, for preclinical and clinical testing of its anticipated products, pursuit of regulatory approvals, acquisition of capital equipment, expansion of laboratory and office facilities, establishment of production capabilities and for general and administrative expenses. Until the Company's operations generate significant revenues from product sales, cash reserves and proceeds from equity and debt offerings, and funding from collaborative arrangements will be used to fund operations. The Company intends to pursue opportunities to obtain additional financing in the future through equity and debt financings, lease agreements related to capital equipment, grants and collaborative research arrangements. The source, timing and availability of any future financing will depend principally upon equity market conditions, interest rates and, more specifically, on the Company's continued progress in its exploratory, preclinical and clinical development programs. There can be no assurance that such funds will be available on favorable terms, if at all. The Company expects that its existing capital resources, revenues from collaborative agreements and income earned on invested capital will be sufficient to fund its operations into the first half of 1999. The Company's cash requirements may vary, however, depending on numerous factors. Lack of necessary funds may require the Company to delay, scale back or eliminate some Page 13 of 17
14 or all of its research and product development programs and/or its capital expenditures or to license its potential products or technologies to third parties. Page 14 of 17
15 PART II - ITEM 1 - ---------------- LEGAL PROCEEDINGS The Company has settled its dispute with NeuroSpheres LTD. The pending action in the United States District Court and its counterpart actions in Calgary, as well as all arbitration proceedings have been discontinued. Under the terms of the settlement, the Company has an exclusive royalty-bearing license to growth-factor responsive stem cells for transplantation. NeuroSpheres has an option to acquire co-exclusive rights in exchange for an up front payment of $5,000,000. NeuroSpheres' option expires in 1998, if unexercised. The parties have no further research obligations to each other. PART II - ITEM 4 - ---------------- SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS (a) On May 6, 1997 the 1997 Annual Meeting of Stockholders was held in Providence, Rhode Island. (b) Not applicable. (c) The following is a brief description of each matter voted upon at the meeting and a breakdown of the votes cast for, against or withheld, as well as the number of abstentions voted for each proposal. 1. Proposal to elect the following nominees as Directors of the Company: Patrick Aebischer, Peter Simon, Richard Ramsden Dr. Aebischer - 13,247,349 votes in favor 17,966 votes withheld Mr. Simon - 13,247,468 votes in favor 17,847 votes withheld Mr. Ramsden - 13,247,468 votes in favor 16,847 votes withheld 2. Proposal to increase by 100,000 the number of shares of Common Stock available for issuance under the Company's 1992 Employee Stock Purchase Plan. 12,706,879 votes in favor 74,487 votes against 43,980 votes abstaining 439,969 votes delivered - not voted PART II - ITEM 5 - ---------------- OTHER INFORMATION Effective as of August 4, 1997, Sandra Nusinoff Lehrman, M.D. resigned from the Company. Dr. Lehrman had served as the President, Chief Operating Officer and a Director of the Company. E. Edward Baetge, Ph.D. Vice President, Research, has also resigned from the Company. PART II - ITEM 6 - ---------------- EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit 99 - Cautionary Factors Relevant to Forward-Looking-Information. Page 15 of 17
16 (b) REPORTS ON FORM 8-K None. Page 16 of 17
17 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CYTOTHERAPEUTICS, INC. (Name of Registrant) August 14, 1997 /s/ John S. McBride - --------------- ------------------------------ (Date) Senior Vice President and Chief Financial Officer (principal financial officer and principal accounting officer) Page 17 of 17