UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER: 0-016607
ADVANCED TISSUE SCIENCES, INC.
(Exact name of registrant as specified in charter)
Delaware 14-1701513
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10933 North Torrey Pines Road, La Jolla, California 92037
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 450-5730
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 12 months (or for such shorter period 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
--- ---
The number of shares of the Registrant's Common Stock, par value $.01 per
share, outstanding at August 1, 1997 was 37,561,172.
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997
INDEX
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Page
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Part I - Financial Information
- ------------------------------
Item 1 - Financial Statements
Introduction to the Financial Statements 1
Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996 2
Consolidated Statements of Operations -
Three and Six Months Ended June 30, 1997 and 1996 3
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1997 and 1996 4
Consolidated Statement of Stockholders' Equity -
Six Months Ended June 30, 1997 5
Notes to the Consolidated Financial Statements 6-8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-11
Part II - Other Information
- ----------------------------
Item 4 - Submission of Matters to a Vote of Security Holders 12
Item 5 - Other Information 12
Item 6 - Exhibits and Reports on Form 8-K 13
Signatures 13
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1 - FINANCIAL STATEMENTS
INTRODUCTION TO THE FINANCIAL STATEMENTS
The financial statements have been prepared by Advanced Tissue Sciences,
Inc. (the "Company"), without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes that the
disclosures are adequate to make the information presented not misleading when
read in conjunction with the financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and Quarterly Report on Form 10-Q for the three months ended
March 31, 1997.
The financial information presented in this Quarterly Report on Form 10-Q
reflects all adjustments, consisting only of normal recurring adjustments,
which are, in the opinion of management, necessary for a fair statement of the
results for the interim periods presented. The results for the interim
periods are not necessarily indicative of results to be expected for the full
year.
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<PAGE>
ADVANCED TISSUE SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,405 $ 27,907
Short-term investments 4,986 12,310
Other current assets 6,980 3,827
----------- -----------
Total current assets 30,371 44,044
Property - net 17,087 9,734
Patent costs - net 1,395 1,310
Other assets 4,242 1,413
----------- -----------
Total assets $ 53,095 $ 56,501
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 24 $ 23
Accounts payable 2,478 2,232
Accrued expenses 5,360 5,805
----------- -----------
Total current liabilities 7,862 8,060
----------- -----------
Long-term debt and capital lease
obligations (Note 3) 11,825 61
----------- -----------
Stockholders' equity:
Preferred Stock, $.01 par value; 1,000,000
shares authorized; none issued -- --
Common Stock, $.01 par value; 100,000,000
shares authorized; issued and outstanding,
37,553,452 shares at June 30, 1997 and
37,474,677 shares at December 31, 1996 376 375
Additional paid-in capital 188,678 188,006
Accumulated deficit (154,727) (139,082)
----------- -----------
34,327 49,299
Less note received in connection with sale
of Common Stock (919) (919)
----------- -----------
Total stockholders' equity 33,408 48,380
----------- -----------
Total liabilities and stockholders'
equity $ 53,095 $ 56,501
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
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<PAGE>
ADVANCED TISSUE SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Product sales -
Related parties $ 222 $ -- $ 222 $ --
Others 450 353 450 655
Contracts and fees -
Related parties 2,947 10,747 5,586 11,395
Others -- -- 10 10
----------- ---------- ----------- -----------
Total revenues 3,619 11,100 6,268 12,060
----------- ---------- ----------- -----------
Costs and expenses:
Research and development 4,497 6,064 9,465 11,293
Selling, general and administrative 4,004 2,326 7,124 4,248
Professional and consulting 678 1,167 1,352 1,795
Cost of goods sold 708 418 708 896
----------- ---------- ----------- -----------
Total costs and expenses 9,887 9,975 18,649 18,232
----------- ---------- ----------- -----------
Income (loss) from operations before
equity in losses of joint ventures (6,268) 1,125 (12,381) (6,172)
Equity in losses of joint ventures (2,642) -- (4,349) --
----------- ---------- ----------- -----------
Income (loss) from operations (8,910) 1,125 (16,730) (6,172)
Other income (expense):
Interest income and other 1,048 759 1,341 1,026
Interest expense (251) (2) (256) (3)
----------- ---------- ----------- -----------
Net income (loss) $ (8,113) $ 1,882 $ (15,645) $ (5,149)
=========== ========== =========== ===========
Net income (loss) per share $ (.22) $ .05 $ (.42) $ (.14)
=========== ========== =========== ===========
Weighted average number of common
shares used in computation of net
income (loss) per share 37,519 39,686 37,504 35,667
=========== ========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
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<PAGE>
ADVANCED TISSUE SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1997 1996
---------- ----------
(Unaudited)
<S> <C> <C>
Operating activities:
Net loss $ (15,645) $ (5,149)
Adjustments to reconcile net loss to cash used
in operating activities:
Equity in losses of joint ventures 4,348 --
Depreciation and amortization 1,038 840
Compensation for services paid in stock,
stock options or warrants -- 320
Other adjustments to net loss 60 52
Change in assets and liabilities:
Other current assets (3,153) (1,138)
Other assets (1,815) (211)
Accounts payable 246 (324)
Accrued expenses (445) 678
---------- ----------
Net cash used in operating activities (15,366) (4,932)
---------- ----------
Investing activities:
Purchases of short-term investments (2,248) (21,707)
Maturities and sales of short-term investments 9,572 --
Acquisition of property (8,405) (1,096)
Equity investment in joint ventures (5,362) --
Patent application costs (131) (157)
---------- ----------
Net cash used in investing activities (6,574) (22,960)
---------- ----------
Financing activities:
Proceeds from borrowings 11,776 --
Payments of borrowings (11) (5)
Net proceeds from sale of equity -- 40,253
Options and warrants exercised 673 2,640
---------- ----------
Net cash provided by financing activities 12,438 42,888
---------- ----------
Net increase (decrease) in cash and cash equivalents (9,502) 14,996
Cash and cash equivalents at beginning of period 27,907 18,929
---------- ----------
Cash and cash equivalents at end of period $ 18,405 $ 33,925
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
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<PAGE>
ADVANCED TISSUE SCIENCES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Total
Additional Stock-
Common Stock Paid-In Accumulated Note holders'
----------------------
Shares Amount Capital Deficit Receivable Equity
---------- ----------- --------- ----------- ---------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1996 37,475 $ 375 $ 188,006 $ (139,082) $ (919) $ 48,380
Options exercised 78 1 672 673
Net loss (15,645) (15,645)
------ -------- --------- ---------- --------- ---------
Balance,
June 30, 1997 37,553 $ 376 $ 188,678 $ (154,727) $ (919) $ 33,408
====== ======== ========= ========== ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
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<PAGE>
ADVANCED TISSUE SCIENCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
Organization - Advanced Tissue Sciences, Inc. (the "Company") is a tissue
engineering company utilizing its proprietary technology to develop and
manufacture human-based tissue products for transplantation. The Company is
focusing on the worldwide commercialization of skin, cartilage and
cardiovascular products. The Company's leading therapeutic products are
tissue engineered skin products for the temporary covering of severe burns,
approved for marketing in the United States by the U.S. Food and Drug
Administration ("FDA"), and for the treatment of diabetic foot ulcers, for
which the Company has filed an application with the FDA for marketing approval
and is performing multi-site clinical trials in the United States.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated. The Company's
interests in joint ventures with Smith & Nephew plc ("Smith & Nephew") are
accounted for under the equity method (see Note 2).
NOTE 2 - STRATEGIC ALLIANCES
In April 1996, the Company entered into an agreement with Smith & Nephew to
form a fifty-fifty joint venture for the worldwide commercialization of
Dermagraft(R), the Company's tissue engineered dermal skin replacement, for
the treatment of diabetic foot ulcers (the "Dermagraft Joint Venture"). Upon
signing, Smith & Nephew paid an up front fee of $10 million and agreed to pay
the Company up to an additional $60 million on the achievement of certain
milestones. Smith & Nephew is a worldwide health care company with extensive
sales and distribution capabilities. It manufactures a wide range of tissue
repair products, principally addressing the areas of bone, joints, skin and
other soft tissue. The companies are sharing equally in the expenses and
revenues of the Dermagraft Joint Venture effective January 1, 1997. During
the three and six months ended June 30, 1997, the Company recognized
$1,942,000 and $3,637,000, respectively, in contract revenues for research and
development activities performed for the Dermagraft Joint Venture. In
addition, during the three and six-month periods ended June 30, 1997, the
Company sold the Dermagraft Joint Venture $222,000 of Dermagraft product,
which was equal to the Company's cost of goods sold for such product.
In 1994, Smith & Nephew and the Company entered into a separate joint venture
for the development of tissue engineered cartilage for orthopedic applications
(the "Cartilage Joint Venture"). Under the Cartilage Joint Venture, Smith &
Nephew contributed the first $10 million in funding and the Company
contributed certain technology licenses. The Cartilage Joint Venture's total
funding since inception reached $10 million in January 1997 and, as provided
in the joint venture agreement, the Company and Smith & Nephew began sharing
equally in Cartilage Joint Venture revenues and expenditures. During the
three and six months ended June 30, 1997, the Company recognized $1,005,000
and $1,949,000, respectively, in contract revenues for research and
development activities performed for the Cartilage Joint Venture, as compared
with $747,000 and $1,395,000 during the corresponding periods of 1996.
The results of operations of the joint ventures for the three and six months
ended June 30, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Dermagraft Joint Venture
- ------------------------
Costs and expenses $ 3,651 $ -- $ 5,761 $ --
Net loss 3,651 -- 5,761 --
Cartilage Joint Venture
- ------------------------
Costs and expenses $ 1,781 $ 1,624 $ 3,646 $ 2,430
Net loss 1,781 1,624 3,646 2,430
</TABLE>
-6-
<PAGE>
NOTE 3 - LONG-TERM DEBT
In June 1997, the Company borrowed $1.7 million from Smith & Nephew pursuant
to a commitment as a part of the agreement to form the Cartilage Joint Venture
(see Note 2). Under the terms of that joint venture agreement, the Company
may borrow up to a total of $10 million. The loan bears interest at the
90-day London Interbank Offered Rate ("LIBOR") plus 4% and is due on the
earlier of (i) June 2000 or (ii) the date on which the Company no longer has
an ownership interest in the Cartilage Joint Venture.
In March 1997, the Company borrowed $10 million from Smith & Nephew pursuant
to a commitment as a part of the agreement to form the Dermagraft Joint
Venture (see Note 2). The loan bears interest at 90-day LIBOR plus 4% and is
due on the earlier of (i) March 2000 or (ii) the date on which the Company no
longer has an ownership interest in the Dermagraft Joint Venture. At the
option of the Company, the loan may be paid in cash or Common Stock valued at
the then current fair market value.
NOTE 4 - IN VITRO LABORATORY TESTING BUSINESS
In October 1996, the Company closed its In Vitro Laboratory Testing ("IVLT")
business and focused all of its resources on its therapeutic programs.
Although the Company was a leader in the in vitro testing business and
continuously broadened applications for its products, the market for the in
vitro laboratory testing products was evolving too slowly for the Company to
continue to devote its resources to this business. The statements of
operations for the three and six months ended June 30, 1996, include product
sales of $353,000 and $655,000, respectively, and costs and expenses of
$804,000 and $1,669,000, respectively, associated with the IVLT business.
NOTE 5 - NET INCOME (LOSS) PER SHARE
The net loss per share for the three months ended June 30, 1997 and the six
months ended June 30, 1997 and 1996 are based on the weighted average number
of shares of Common Stock outstanding during the periods. Shares to be issued
under options and warrants have not been included in the calculation of net
loss per share as their effect is antidilutive. Net income per share for the
three-month period ended June 30, 1996 is based on the weighted average number
of shares of Common Stock and dilutive common stock equivalents outstanding
during the period. Common stock equivalents include outstanding options and
warrants to purchase shares of the Company's Common Stock.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share," which is required to be adopted for periods
ending on or after December 15, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options and warrants
will be excluded. As their effect has been antidilutive, shares to be issued
under options and warrants have not been included in the calculation of net
loss per share for the three months ended June 30, 1997 and the six months
ended June 30, 1997 and 1996. The adoption of Statement No. 128 will not have
a material impact on the calculation of net loss per share for such periods.
Because the Company reported a net income for the three months ended June 30,
1996, the dilutive effect of stock options and warrants were included in the
calculation of net income per share. The adoption of Statement No. 128 would
not have had a material impact on the calculation of net income per share for
such period.
NOTE 6 - COMMITMENTS
As of June 30, 1997, the Company had commitments of approximately $1.4 million
in connection with the expansion of its manufacturing facilities and for
related processing equipment. These expenditures are expected to be made
during 1997. The Company intends to finance the expansion through a term
loan with The Chase Manhattan Bank (see Note 8).
-7-
<PAGE>
NOTE 7 - STOCK OPTIONS
At the 1997 Annual Meeting of Stockholders, the 1997 Stock Incentive Plan (the
"1997 Plan") was approved. The 1997 Plan makes an additional 3,000,000 shares
of Common Stock available for grant and serves as the successor to the 1992
Stock Option/Stock Issuance Plan (the "1992 Plan"). Upon adoption of the 1997
Plan, shares granted under outstanding options and available for grant under
the 1992 Plan were transferred to the 1997 Plan. All outstanding options
under the 1992 Plan will continue to be governed by the terms and conditions
of the existing option agreements for those grants. At June 30, 1997, a total
of 6,969,642 shares were outstanding under options or available for grant
under the 1997 Plan.
The following table summarizes activity under the Company's 1997 Plan and for
other options and warrants for Common Stock for the six months ended June 30,
1997:
<TABLE>
<CAPTION>
1997 Plan Other Options and Warrants
------------------------ --------------------------
Weighted Weighted
Number Average Price Number Average Price
of Shares Per Share of Shares Per Share
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1996 3,773,701 $ 9.58 1,469,640 $ 7.18
Granted 297,100 $11.75 -- --
Exercised (78,775) $ 8.54 -- --
Canceled (73,180) $ 9.38 -- --
--------- ---------
Outstanding, June 30, 1997 3,918,846 $ 9.77 1,469,640 $ 7.18
========= =========
</TABLE>
NOTE 8 - SUBSEQUENT EVENTS
Long-term Debt. In August 1997, DermEquip, L.L.C. ("DermEquip"), entered into
- ---------------
a term loan agreement with The Chase Manhattan Bank (the "Chase Loan") to
borrow up to $16 million through June 1998 to apply toward capital
expenditures relating to the expansion of the Company's manufacturing
facility (see Note 6). The Chase Loan is to bear interest payable quarterly,
at 90-day LIBOR plus 1/4 percent. Principal is payable in equal quarterly
installments beginning in June 1998 through June 2004. The loan is secured
by joint and several guarantees issued by both Smith & Nephew and the
Company. DermEquip is jointly owned by Smith & Nephew and the Company, and
will be consolidated in the Company's financial statements.
-8-
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Advanced Tissue Sciences, Inc. (the "Company") is engaged in the
development and manufacture of living human tissue products for therapeutic
applications using its proprietary tissue engineering technology. In March
1997, the Company received marketing approval from the U.S. Food and Drug
Administration (the "FDA") for its first therapeutic product,
Dermagraft-TC(TM), a temporary covering for severe burns. The Company, in
conjunction with its joint venture partner, Smith & Nephew plc ("Smith &
Nephew"), has also submitted an application for approval to market the
Company's dermal skin replacement product, Dermagraft(R) for the treatment
of diabetic foot ulcers to the FDA. The joint venture is currently
completing a fifty patient confirmatory trial which will be submitted as an
amendment to the marketing application, and is performing additional trials
in selected European countries. In addition to its Dermagraft-TC and
Dermagraft skin products, the Company is focusing its resources on the
development of tissue engineered cartilage and cardiovascular products.
The Company has incurred, and expects to continue to incur, substantial
expenditures in support of the commercialization, development and clinical
trials of its Dermagraft-TC and Dermagraft products for burn and skin ulcer
applications, in developing manufacturing systems and facilities for the
production and commercialization of Dermagraft, in building its sales and
marketing capabilities, and in advancing other applications of the Company's
core technology. These activities have been supported by a variety of
strategic relationships over the past several years.
As noted above, in April 1996, the Company entered into an agreement with
Smith & Nephew to form a fifty-fifty joint venture (the "Dermagraft Joint
Venture") for the worldwide commercialization of Dermagraft in the treatment
of diabetic foot ulcers. Beginning in January 1997, all expenses and revenues
associated with the development and commercialization of Dermagraft for
diabetic foot ulcers are being shared equally by the joint venture partners.
In May 1994, the Company and Smith & Nephew entered into a separate,
fifty-fifty joint venture (the "Cartilage Joint Venture") for the worldwide
development, manufacture and marketing of human tissue engineered cartilage
for orthopedic applications. Smith & Nephew was responsible for funding the
first $10 million in costs incurred in the Cartilage Joint Venture. In
January 1997, the joint venture partners began sharing equally in the
Cartilage Joint Venture's expenses. See Note 2 to the consolidated financial
statements.
In October 1996, the Company discontinued sales of its Skin2(R)
laboratory testing kits. See Note 4 to the consolidated financial statements.
Results of Operations
- ---------------------
Product sales were $672,000 for the three and six months ended June 30,
1997 as compared to $353,000 and $655,000 for the corresponding periods of
1996. Product sales to related parties reflect sales of Dermagraft to the
Dermagraft Joint Venture at cost (see Note 2 to the consolidated financial
statements). Sales to outside customers in 1997 are from Dermagraft-TC which
was introduced in April following marketing approval from the FDA. Sales in
1996 were from the Company's Skin2 product line.
Revenues from contracts and fees were $2,947,000 and $5,596,000 for the
three and six months ended June 30, 1997, respectively, compared to
$10,747,000 and $11,405,000 for the corresponding periods in 1996. The
revenues reported for the three and six months ended June 30, 1996 included a
$10 million up front fee from Smith & Nephew upon signing the agreement to
enter into the Dermagraft Joint Venture. Contract revenues, excluding the $10
million payment, increased $2,200,000 and $4,191,000 in the three and six
months ended June 30, 1997, respectively, reflecting higher contract revenues
recognized for research and development activities performed for the
Dermagraft and the Cartilage Joint Ventures and associated administrative
costs. See Note 2 to the consolidated financial statements. Contract
revenues from the joint ventures are expected to continue to exceed 1996
levels throughout the balance of the year. Contract revenues in 1996 were
primarily from the Cartilage Joint Venture.
Cost of goods sold in the three and six months ended June 30, 1997
represents the cost of the Company's Dermagraft-TC product since its
introduction in April 1997 and the cost of Dermagraft sold to the Dermagraft
Joint Venture. Products were sold to the Dermagraft Joint Venture at cost.
Cost of goods sold in the three and six months ended June 30, 1996 represents
the cost of the Company's Skin2 laboratory testing kits. As noted above, the
Company discontinued its Skin2 business in October 1996.
-9-
<PAGE>
Research and development expenditures decreased to $4,497,000 and
$9,465,000 in the three and six months ended June 30, 1997, respectively, as
compared to $6,064,000 and $11,293,000 in the corresponding periods of 1996.
The decrease in research and development costs primarily reflects lower costs
for both clinical trials and production for clinical trials of Dermagraft-TC
and Dermagraft. The decrease was partially offset by increased research and
development costs to support the development of tissue engineered cartilage.
Selling, general and administrative costs were $4,004,000 and $7,124,000
for the three and six months ended June 30, 1997, respectively, as compared to
$2,326,000 and $4,248,000 in the corresponding periods of the prior year. The
increase in selling, general and administrative expenses principally reflects
higher sales and marketing costs related to the commercialization of
Dermagraft-TC and costs associated with supporting the Dermagraft and
Cartilage Joint Ventures. These increases are reflected primarily in higher
costs for selling and promotional materials, and personnel and associated
costs.
Professional and consulting costs for legal, accounting and other
consulting services incurred in the three and six months ended June 30, 1997,
respectively, were $678,000 and $1,352,000 as compared to $1,167,000 and
$1,795,000 for the corresponding periods of 1996. The decrease in
professional and consulting fees in the 1997 periods principally reflects the
absence of fees paid to financial advisors related to the Dermagraft Joint
Venture and the Company's In Vitro Laboratory Testing business in 1996 and
lower fees for regulatory consultants, partially offset by increased costs for
marketing consultants.
Equity in losses of joint ventures was $2,642,000 and $4,349,000 for the
three and six months ended June 30, 1997, respectively and represent the
Company's share of losses of the Dermagraft and Cartilage Joint Ventures. The
Company began sharing in such costs in January 1997 (see Note 2 to the
consolidated financial statements). The joint ventures' losses are expected
to continue to increase throughout 1997 as Dermagraft is commercially
introduced in certain markets and orthopedic cartilage moves toward clinical
trials.
Interest and other income increased to $1,048,000 and $1,341,000 in the
three and six months ended June 30, 1997, respectively, as compared to
$759,000 and 1,026,000 in the corresponding periods in 1996. The increases
primarily reflect interest income from higher average cash balances in 1997
versus the corresponding periods of 1996 and interest charged to the
Dermagraft Joint Venture for capital employed.
Interest expense was $251,000 and $256,000 in the three and six months
ended June 30, 1997, respectively, as compared to $2,000 and $3,000 in the
corresponding periods in 1996. The increase reflects interest on notes
payable to Smith & Nephew. See Note 3 to the consolidated financial
statements.
Liquidity and Capital Resources
- -------------------------------
As of June 30, 1997, the Company had available working capital of
$22,509,000, a decrease of $13,475,000 from December 31, 1996. The decrease
principally reflects the use of funds for operations and for capital
expenditures offset by the Company's receipt of $11.7 million in loans from
Smith & Nephew. See Note 3 to the consolidated financial statements. Capital
expenditures of $8,405,000 in the first six months of 1997 relate primarily to
the expansion of the Company's manufacturing facility and related process
equipment. As of June 30, 1997, the Company had approximately $1.4 million in
commitments and had expended $10.2 million for additional capital
expenditures and deposits, principally relating to the manufacturing
expansion. The Company intends to finance the expansion through a term loan
with The Chase Manhattan Bank. See note 8 to the consolidated financial
statements.
The Company expects to use working capital at an accelerated rate as it
continues to incur substantial research and development expenses, increasing
selling, general and administrative costs in support of product
commercialization, and additional expenditures for capital equipment and
patents. These increases are expected to be only partially offset by revenues
received from the Cartilage and Dermagraft Joint Ventures with Smith & Nephew.
In addition to available working capital, the Company has entered into a
two-year equity line which could provide up to $50 million in funding through
the sale of Common Stock and, subject to certain conditions, is available
through February 1998. Any decision to draw any funds under the equity line
and the timing of any such draw are solely at the
-10-
<PAGE>
Company's discretion. The Company currently believes it has sufficient
funds, including those available under the equity line and from borrowings
available under a joint venture arrangement, to support its operations
through 1998. To the extent necessary, further sources of funds may include
existing or future strategic alliances or other joint venture arrangements
which provide funding to the Company, and additional public or private
offerings of debt or equity securities, among others. There can be no
assurance, however, that funds will be available when needed or on terms
favorable to the Company, under existing arrangements or otherwise, or that
the Company will be successful in entering into any other strategic alliances
or joint ventures.
The Company continually reviews its product development activities in an
effort to allocate its resources to those products the Company believes have
the greatest commercial potential. Factors considered by the Company in
determining the products to pursue include projected markets and need,
potential for regulatory approval and reimbursement under the existing health
care system as well as anticipated health care reforms, technical feasibility,
expected and known product attributes and estimated costs to bring the product
to market. Based on these and other factors which the Company considers
relevant, the Company may from time to time reallocate its resources among its
product development activities. Additions to products under development or
changes in products being pursued can substantially and rapidly change the
Company's funding requirements.
Financial Condition
- -------------------
Cash, cash equivalents and short-term investments as of June 30, 1997
decreased from December 31, 1996 reflecting the use of cash to fund operations
and capital expenditures during the quarter partially offset by proceeds of
loans from Smith & Nephew. Long-term debt increased by $11.7 million
reflecting the loans from Smith & Nephew. See Note 3 to the consolidated
financial statements. Other current assets increased over 1996 as inventory
increased to support the marketing of Dermagraft-TC and due to increases in
accounts receivable. Other assets have increased principally reflecting
deposits made on equipment for the expansion of the Company's manufacturing
facility.
-11-
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 20, 1997.
During the Annual Meeting, the stockholders elected the following nominees to
the Company's Board of Directors to serve for the term of one year or until
their successors have been elected and qualified. The votes of the
stockholders for each of the director nominees was as follows:
Nominee In Favor Withheld
----------------- -------- --------
Arthur J. Benvenuto 34,056,398 1,150,269
Dr. Gail K. Naughton 34,187,728 1,018,939
Jerome E. Groopman, M.D. 34,184,318 1,022,349
Jack L. Heckel 34,053,719 1,152,948
Dayton Ogden 34,062,748 1,143,919
David S. Tappan, Jr. 34,037,319 1,169,348
Dr. Gail R. Wilensky 34,059,493 1,147,174
The stockholders also approved (a) an amendment to the Company's Restated
Certificate of Incorporation to increase the number of authorized shares of
Common Stock, $.01 par value per share, from 50,000,000 to 100,000,000 with
31,410,032 shares in favor of the proposal, 3,440,373 shares opposed and
356,262 shares abstaining; (b) the Company's 1997 Stock Incentive Plan with
12,348,918 shares in favor of the proposal 7,752,549 shares opposed, 415,062
shares abstaining and 14,690,138 broker non-voting shares; and (c) the
appointment of Ernst & Young LLP as independent auditors of the Company for
the fiscal year ending December 31, 1997 with 34,120,325 shares in favor of
the proposal, 345,075 shares opposed and 741,267 shares abstaining.
ITEM 5 - OTHER INFORMATION
The discussions in this Quarterly Report on Form 10-Q, particularly those
relating to strategic alliances (including potential revenues from certain
existing joint ventures), the use of working capital, the sufficiency and
availability of funds to support operations, and commercialization of the
Company's products, are forward-looking statements involving risks and
uncertainties within the meaning of the Securities Act of 1933 and the
Securities Exchange Act of 1934. No assurance can be given that the Company
will successfully complete clinical trials, obtain U.S. Food and Drug
Administration approval, scale up manufacturing processes, successfully market
such products, achieve the milestones required to receive additional funding,
or enter into new strategic alliances. These and other risks are detailed in
publicly available filings with the Securities and Exchange Commission such as
the Company's Annual Report on Form 10-K for the year ended December 31, 1996
and a Registration Statement on Form S-3 (File No. 333-01185). The
forward-looking statements are qualified in their entirety by reference to the
risks and risk factors described in such reports and registration statement.
-12-
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Title Method of Filing
------- --------------------------------------- ----------------
3.1 Restated Certificate of Incorporation of Filed Herewith
Advanced Tissue Sciences, Inc. as in
effect June 12, 1997
10.1 Advanced Tissue Sciences, Inc. 1997 Stock Filed Herewith
Incentive Plan
10.2 Promissory Note between Advanced Tissue Filed Herewith
Sciences, Inc. and Smith & Nephew
SNATS, Inc. Dated June 11, 1997
27 Financial Data Schedule Filed with
Electronic Copy
Only
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED TISSUE SCIENCES, INC.
Date: August, 11, 1997 /s/ Arthur J. Benvenuto
---------------- -------------------------------
Arthur J. Benvenuto
Chairman of the Board and
Chief Executive Officer
Date: August 11, 1997 /s/ Michael V. Swanson
--------------- --------------------------------
Michael V. Swanson
Vice President, Finance and
Administration
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-Q for the period ended June 30, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 18,405
<SECURITIES> 4,986
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 30,371
<PP&E> 24,219
<DEPRECIATION> 7,132
<TOTAL-ASSETS> 53,095
<CURRENT-LIABILITIES> 7,862
<BONDS> 11,825
0
0
<COMMON> 376
<OTHER-SE> 33,408
<TOTAL-LIABILITY-AND-EQUITY> 53,095
<SALES> 672
<TOTAL-REVENUES> 6,268
<CGS> 708
<TOTAL-COSTS> 708
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (256)
<INCOME-PRETAX> (15,645)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,645)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,645)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> (.42)
</TABLE>
Exhibit 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ADVANCED TISSUE SCIENCES, INC.
(UNDER SECTION 245 OF THE GENERAL CORPORATION LAW)
The undersigned, being the Chairman of the Board of Directors and Chief
Executive Officer, and the Secretary, respectively, of Advanced Tissue
Sciences, Inc., a corporation organized and existing under the laws of the
State of Delaware (the "Corporation"), do hereby amend, restate and certify as
follows:
1. The name of the Corporation is Advanced Tissue Sciences, Inc.
pursuant to the Certificate of Ownership and Merger merging Advanced Tissue
Sciences, Inc. into Marrow-Tech Incorporated filed in the Office of the
Secretary of State of Delaware on December 19, 1991.
2. The original Certificate of Incorporation of the Corporation was
filed in the Office of the Secretary of State of the State of Delaware on July
17, 1987.
3. This Amended and Restated Certificate of Incorporation of the
Corporation was duly authorized by the Board of Directors of the Corporation
and by the holders of a majority of the outstanding shares of stock of the
Corporation entitled to vote thereon, in accordance with the provisions of
Sections 242 and 245 of the Delaware General Corporation Law.
4. The text of the existing Certificate of Incorporation of the
Corporation, as heretofore amended is amended and restated to read in its
entirety as follows:
FIRST: The name of the Corporation is Advanced Tissue Sciences,
Inc.
SECOND: The address of the Corporation's registered office in
Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington,
County of New Castle. The name of its registered agent at that address is The
Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any
lawful act or activity for which corporations may be organized under the
Delaware General Corporation Law.
<PAGE>
FOURTH: I. The Corporation is authorized to issue two classes
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of shares which the Corporation is authorized to issue is
One-Hundred One Million (101,000,000) shares. One-Hundred Million
(100,000,000) shares shall be Common Stock, par value $.01 per share, and One
Million (1,000,000) shares shall be Preferred Stock, par value $.01 per
share."
II. The Board of Directors of the Corporation is
authorized, subject to limitations prescribed by law and the provisions of
this Article FOURTH, to provide for, from time to time, in one or more series
of any number, the issuance of shares of Preferred Stock, and, by filing a
certificate pursuant to the Corporation law of the State of Delaware, to
establish the number of shares to be included in each such series and to fix
the designation, relative rights, preferences, qualifications and limitations
of the shares of each such series. The authority of the Board of Directors
with respect to each series shall include, but not be limited to,
determination of each of the following:
A. The number of shares constituting that series
and the distinctive designation of that series;
B. The dividend rate on the shares of the series,
whether dividends shall be cumulative and, if so, from which date or dates,
and whether they shall be payable in preference to, or in another relation
to, the dividends payable on any other class or classes or series of stock;
C. Whether that series shall have voting rights,
in addition to the voting rights provided by law, and, if so, the terms of
such voting rights;
D. Whether that series shall have conversion or
exchange privileges, and, if so, the terms and conditions of such conversion
or exchange, including provision for adjustments of the conversion or exchange
rate in such events as the Board of Directors shall determine;
E. Whether or not the shares of that series shall
be redeemable, and, if so, the terms and conditions of such redemption,
including the manner of selecting shares for redemption if less than all such
shares are to be redeemed, the date or dates upon or after which they shall be
redeemable, and the amount per share payable in case of redemption, which
amount may vary under different conditions and at different redemption dates;
F. Whether that series shall be entitled to the
benefit of a sinking fund to be applied to the purchase or redemption of
shares of that series and, if so, the terms and amount of such sinking fund;
2
<PAGE>
G. The right of the shares of that series to the
benefit of conditions and restrictions upon the creation of indebtedness of
the Corporation or any subsidiary, upon the issue of any additional stock
(including additional shares of such series or of any other series) and upon
the payment of dividends or the making of other distributions on and the
purchase, redemption or other acquisition by the Corporation or any subsidiary
of any outstanding stock of the Corporation;
H. The right of the shares of that series in the
event of any voluntary or involuntary liquidation, dissolution or winding up
of the Corporation, and whether such rights shall be in preference to or in
another relation to the comparable rights of any other class or classes or
series of stock; and
I. Any other relative, participating, optional or
other special rights, qualifications, limitations or restrictions of that
series.
III. Except as otherwise provided by the resolution or
resolutions providing for the issue of any series of Preferred Stock, in the
event of any liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary, the holders of the Common Stock shall be
entitled, after payment shall have been made to the holders of Preferred Stock
of the full amount to which they shall be entitled pursuant to the resolution
or resolutions providing for the issuance of any series of Preferred Stock, to
share, to the exclusion of the holders of Preferred Stock of any and all
series, in all remaining assets of the Corporation available for distribution
to its stockholders ratably according to the number of shares of Common Stock
held by them.
IV. Except as provided by the resolution or resolutions
providing for the issue of any series of Preferred Stock, after payment shall
have been made to the holders of Preferred Stock of the full amount of
dividends to which they shall be entitled pursuant to the resolution or
resolutions providing for the issuance of any series of Preferred Stock, the
holders of Common Stock shall be entitled, to the exclusion of the holders of
Preferred Stock of any and all series, to receive such dividends as from time
to time may be declared by the Board of Directors.
V. The number of authorized shares of any class may be
increased or decreased by the affirmative vote of the holders of a majority of
the stock of the Corporation entitled to vote.
3
<PAGE>
FIFTH: Meetings of stockholders may be held at such places, within
or without the State of Delaware, as may be fixed by the Board pursuant to the
authority granted in the by-laws. Special meetings of stockholders may be
called by the President or by the Board of Directors only. Elections of
directors need not be by ballot unless the by-laws of the Corporation shall
provide otherwise or a stockholder demands election by ballot at the election
and before the voting begins. The books of the Corporation may be kept
outside the State of Delaware at such place or places as may be designated
from time to time by the Board of Directors or in the by-laws of the
Corporation.
SIXTH: The number of directors which shall constitute the entire
Board of Directors of the Corporation shall be not less than three, the exact
number to be fixed from time to time by the Board of Directors pursuant to a
resolution duly adopted by a majority of the entire Board. A director shall
hold office for a period of one year or until his or her successor is elected
and qualified. In case of any increase in the number of directors or any
vacancy, the additional directorships or vacancies may be filled by a majority
of the directors then in office, though less than a quorum, and any director
so elected shall hold office until the next annual meeting of stockholders,
and until his or her successor shall have been elected and qualified. Any or
all of the directors may be removed only for cause by the stockholders or by
the Board of Directors.
SEVENTH: No directors of the Corporation shall be personally
liable to the Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that this Article SEVENTH shall not
eliminate or limit the liability of a director (i) for any breach of such
director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions of such director not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the Delaware General Corporation Law, or (iv) for any transaction from
which such director derived an improper personal benefit; nor shall this
Article SEVENTH eliminate or limit the liability of a director for any act or
omission occurring prior to the date this Article SEVENTH becomes effective.
EIGHTH: The Corporation may lend money to, or guarantee an
obligation of, or otherwise assist, any directors, officer or other employee
of the Corporation when authorized by a majority of the Board, subject to
Section 143 of the Delaware General Corporation Law.
NINTH: The Corporation shall, to the full extent permitted by law,
indemnify all persons whom it may indemnify pursuant thereto.
4
<PAGE>
IN WITNESS WHEREOF, the undersigned being duly elected officers of the
Corporation, have executed this Amended and Restated Certificate of
Incorporation and acknowledged the statements herein contained on the 12th day
of June, 1997.
ADVANCED TISSUE SCIENCES, INC.
/s/ Arthur J. Benvenuto
----------------------------------
Arthur J. Benvenuto
Chairman of the Board of Directors
Chief Executive Officer
ATTEST:
- ---------------------------
Richard A. Fink
Secretary
ADVANCED TISSUE SCIENCES, INC
1997 STOCK INCENTIVE PLAN
-----------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1997 Stock Incentive Plan is intended to promote the interests
of Advanced Tissue Sciences Inc., a Delaware corporation, by providing
eligible persons with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to remain in the service of the Corporation. This Plan
shall serve as the successor equity incentive program to the Corporation's
1992 Stock Option/Stock Issuance Plan.
Capitalized terms shall have the meanings assigned to such terms
in the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into three separate equity programs:
- the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock,
- the Stock Issuance Program under which eligible persons
may, at the discretion of the Plan Administrator, be issued shares of Common
Stock directly, either through the immediate purchase of such shares or as a
bonus for services rendered the Corporation (or any Parent or Subsidiary), and
- the Automatic Option Grant Program under which eligible
non-employee Board members shall automatically receive option grants at
periodic intervals to purchase shares of Common Stock.
B. The provisions of Articles One and Five shall apply to all
equity programs under the Plan and shall govern the interests of all persons
under the Plan.
<PAGE>
III. ADMINISTRATION OF THE PLAN
A. The Primary Committee shall have sole and exclusive
authority to administer the Discretionary Option Grant and Stock Issuance
Programs with respect to Section 16 Insiders.
B. Administration of the Discretionary Option Grant and Stock
Issuance Programs with respect to all other persons eligible to participate in
those programs may, at the Board's discretion, be vested in the Primary
Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons. The members of
the Secondary Committee may be Board members who are Employees eligible to
receive discretionary option grants or direct stock issuances under the Plan
or any other stock option, stock appreciation, stock bonus or other stock plan
of the Corporation (or any Parent or Subsidiary).
C. Members of the Primary Committee or any Secondary Committee
shall serve for such period of time as the Board may determine and may be
removed by the Board at any time. The Board may also at any time terminate
the functions of any Secondary Committee and reassume all powers and authority
previously delegated to such committee.
D. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority
(subject to the provisions of the Plan) to establish such rules and
regulations as it may deem appropriate for proper administration of the
Discretionary Option Grant and Stock Issuance Programs and to make such
determinations under, and issue such interpretations of, the provisions of
such programs and any outstanding options or stock issuances thereunder as it
may deem necessary or advisable. Decisions of the Plan Administrator within
the scope of its administrative functions under the Plan shall be final and
binding on all parties who have an interest in the Discretionary Option Grant
and Stock Issuance Programs under its jurisdiction or any option or stock
issuance thereunder.
E. Service on the Primary Committee or the Secondary Committee
shall constitute service as a Board member, and members of each such
committee shall accordingly be entitled to full indemnification and
reimbursement as Board members for their service on such committee. No
member of the Primary Committee or the Secondary Committee shall be liable
for any act or omission made in good faith with respect to the Plan or any
option grants or stock issuances under the Plan.
F. Administration of the Automatic Option Grant Program shall be
self-executing in accordance with the terms of that program, and no Plan
Administrator shall exercise any discretionary functions with respect to any
option grants or stock issuances made under such program.
-2-
<PAGE>
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary
Option Grant and Stock Issuance Programs are as follows:
(i) employees,
(ii) non-employee members of the Board or the board
of directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who
provide services to the Corporation (or any Parent or Subsidiary).
B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive option grants, the time or
times when such option grants are to be made, the number of shares to be
covered by each such grant, the status of the granted option as either an
Incentive Option or a Non-Statutory Option, the time or times when each option
is to become exercisable, the vesting schedule (if any) applicable to the
option shares and the maximum term for which the option is to remain
outstanding and (ii) with respect to stock issuances under the Stock Issuance
Program, which eligible persons are to receive stock issuances, the time or
times when such issuances are to be made, the number of shares to be issued to
each Participant, the vesting schedule (if any) applicable to the issued
shares and the consideration for such shares.
C. The Plan Administrator shall have the absolute discretion
either to grant options in accordance with the Discretionary Option Grant
Program or to effect stock issuances in accordance with the Stock Issuance
Program.
D. The individuals who shall be eligible to participate in the
Automatic Option Grant Program shall be limited to (i) those individuals who
first become non-employee Board members on or after the Plan Effective Date,
whether through appointment by the Board or election by the Corporation's
stockholders, and (ii) those individuals who continue to serve as non-employee
Board members at one or more Annual Stockholders Meetings held on or after the
Plan Effective Date.
-3-
<PAGE>
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares
repurchased by the Corporation on the open market. The maximum number of
shares of Common Stock initially reserved for issuance over the term of the
Plan shall not exceed 7,005,642 shares. Such authorized share reserve is
comprised of (i) the number of shares which remain available for issuance, as
of the Plan Effective Date, under the Predecessor Plan as last approved by
the Corporation's stockholders (consisting of 4,005,642 shares, including the
shares subject to the outstanding options to be incorporated into the Plan),
and (ii) an increase of 3,000,000 shares, adopted by the Board in March 1997
and approved by the Corporation's stockholders at the 1997 Annual Meeting.
B. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances
for more than 750,000 shares of Common Stock in the aggregate per calendar
year, beginning with the 1997 calendar year.
C. Shares of Common Stock subject to outstanding options
(including options incorporated into this Plan from the Predecessor Plan)
shall be available for subsequent issuance under the Plan to the extent those
options expire or terminate for any reason prior to exercise in full.
Unvested shares issued under the Plan and subsequently cancelled or
repurchased by the Corporation, at the original exercise or issue price paid
per share, pursuant to the Corporation's repurchase rights under the Plan
shall be added back to the number of shares of Common Stock reserved for
issuance under the Plan and shall accordingly be available for reissuance
through one or more subsequent option grants or direct stock issuances under
the Plan. However, should the exercise price of an option under the Plan be
paid with shares of Common Stock or should shares of Common Stock otherwise
issuable under the Plan be withheld by the Corporation in satisfaction of the
withholding taxes incurred in connection with the exercise of an option or
the vesting of a stock issuance under the Plan, then the number of shares of
Common Stock available for issuance under the Plan shall be reduced by the
gross number of shares for which the option is exercised or which vest under
the stock issuance, and not by the net number of shares of Common Stock
issued to the holder of such option or stock issuance.
D. If any change is made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as
a class without the Corporation's receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the number and/or class of
securities for which any one person may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances under this
Plan per calendar year, (iii) the number and/or class of securities for which
grants are subsequently to be made under the Automatic Option Grant Program
to new and continuing non-employee Board members, (iv) the number and/or
class of securities and the exercise price per share in effect under each
outstanding option under the Plan and (v) the number and/or class of
-4-
<PAGE>
securities and price per share in effect under each outstanding option
incorporated into this Plan from the Predecessor Plan. Such adjustments to
the outstanding options are to be effected in a manner which shall preclude
the enlargement or dilution of rights and benefits under such options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.
-5-
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the
Fair Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Five and the documents evidencing the option, be payable in one or
more of the forms specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or
(iii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to
which the Optionee shall concurrently provide irrevocable instructions
to (a) a Corporation-designated brokerage firm to effect the immediate
sale of the purchased shares and remit to the Corporation, out of the
sale proceeds available on the settlement date, sufficient funds to
cover the aggregate exercise price payable for the purchased shares plus
all applicable Federal, state and local income and employment taxes
required to be withheld by the Corporation by reason of such exercise
and (b) the Corporation to deliver the certificates for the purchased
shares directly to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
-6-
<PAGE>
B. EXERCISE AND TERM OF OPTIONS. Each option shall be
exercisable at such time or times, during such period and for such number of
shares as shall be determined by the Plan Administrator and set forth in the
documents evidencing the option. However, no option shall have a term in
excess of ten (10) years measured from the option grant date.
C. EFFECT OF TERMINATION OF SERVICE.
1. The following provisions shall govern the exercise of
any options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the
Optionee's cessation of Service for any reason shall remain exercisable
for such period of time thereafter as shall be determined by the Plan
Administrator and set forth in the documents evidencing the option, but
no such option shall be exercisable after the expiration of the option
term.
(ii) Any option exercisable in whole or in part by
the Optionee at the time of death may be subsequently exercised by the
personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's
will or in accordance with the laws of descent and distribution.
(iii) During the applicable post-Service exercise
period, the option may not be exercised in the aggregate for more than
the number of vested shares for which the option is exercisable on the
date of the Optionee's cessation of Service. Upon the expiration of the
applicable exercise period or (if earlier) upon the expiration of the
option term, the option shall terminate and cease to be outstanding for
any vested shares for which the option has not been exercised. However,
the option shall, immediately upon the Optionee's cessation of Service,
terminate and cease to be outstanding to the extent the option is not
otherwise at that time exercisable for vested shares.
(iv) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to be outstanding.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
-7-
<PAGE>
(i) extend the period of time for which the option is
to remain exercisable following the Optionee's cessation of Service from
the limited exercise period otherwise in effect for that option to such
greater period of time as the Plan Administrator shall deem appropriate,
but in no event beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's cessation of Service but also
with respect to one or more additional installments in which the
Optionee would have vested had the Optionee continued in Service.
D. STOCKHOLDER RIGHTS. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. REPURCHASE RIGHTS. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of
Common Stock. Should the Optionee cease Service while holding such unvested
shares, the Corporation shall have the right to repurchase, at the exercise
price paid per share, any or all of those unvested shares. The terms upon
which such repurchase right shall be exercisable (including the period and
procedure for exercise and the appropriate vesting schedule for the purchased
shares) shall be established by the Plan Administrator and set forth in the
document evidencing such repurchase right.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of
the Optionee, Incentive Options shall be exercisable only by the Optionee and
shall not be assignable or transferable other than by will or by the laws of
descent and distribution following the Optionee's death. However, a
Non-Statutory Option may, in connection with the Optionee's estate plan, be
assigned in whole or in part during the Optionee's lifetime to one or more
members of the Optionee's immediate family or to a trust established
exclusively for one or more such family members. The assigned portion may
only be exercised by the person or persons who acquire a proprietary interest
in the option pursuant to the assignment. The terms applicable to the assigned
portion shall be the same as those in effect for the option immediately
prior to such assignment and shall be set forth in such documents issued to
the assignee as the Plan Administrator may deem appropriate.
-8-
<PAGE>
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Five shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
when issued under the Plan shall not be subject to the terms of this Section
II.
A. ELIGIBILITY. Incentive Options may only be granted to
Employees.
B. EXERCISE PRICE. The exercise price per share shall not be
less than one hundred percent (100%) of the Fair Market Value per share of
Common Stock on the option grant date.
C. DOLLAR LIMITATION. The aggregate Fair Market Value of the
shares of Common Stock (determined as of the respective date or dates of
grant) for which one or more options granted to any Employee under the Plan
(or any other option plan of the Corporation or any Parent or Subsidiary) may
for the first time become exercisable as Incentive Options during any one
calendar year shall not exceed the sum of One Hundred Thousand Dollars
($100,000). To the extent the Employee holds two (2) or more such options
which become exercisable for the first time in the same calendar year, the
foregoing limitation on the exercisability of such options as Incentive
Options shall be applied on the basis of the order in which such options are
granted.
D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option
is granted is a 10% Stockholder, then the exercise price per share shall not
be less than one hundred ten percent (110%) of the Fair Market Value per share
of Common Stock on the option grant date, and the option term shall not exceed
five (5) years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable with respect to the total number of shares of Common Stock
at the time subject to such option and may be exercised for any or all of
those shares as fully-vested shares of Common Stock. However, an outstanding
option shall not so accelerate if and to the extent: (i) such option is, in
connection with the Corporate Transaction, to be assumed by the successor
corporation (or parent thereof), (ii) such option is to be replaced with a
cash incentive program of the successor corporation which preserves the spread
existing on the unvested option shares at the time of the Corporate
Transaction and provides for subsequent payout in accordance with the same
vesting schedule applicable to those option shares or (iii) the acceleration
of such option is subject to other limitations imposed by the Plan
Administrator at the time of the option grant.
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B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated
rights shall immediately vest in full, in the event of any Corporate
Transaction, except to the extent: (i) those repurchase rights are to be
assigned to the successor corporation (or parent thereof) in connection with
such Corporate Transaction or (ii) such accelerated vesting is precluded by
other limitations imposed by the Plan Administrator at the time the repurchase
right is issued.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction
had the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be
made to (i) the exercise price payable per share under each outstanding
option, provided the aggregate exercise price payable for such securities
shall remain the same, (ii) the maximum number and/or class of securities
available for issuance over the remaining term of the Plan and (iii) the
maximum number and/or class of securities for which any one person may be
granted stock options, separately exercisable stock appreciation rights and
direct stock issuances under the Plan per calendar year.
E. The Plan Administrator shall have full power and authority to
grant one or more options under the Discretionary Option Grant Program which
will automatically accelerate in the event the Optionee's Service subsequently
terminates by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any
Corporate Transaction in which those options are assumed or replaced and do
not otherwise accelerate. Any options so accelerated shall remain exercisable
for fully-vested shares until the earlier of (i) the expiration of the option
term or (ii) the expiration of the one (1)-year period measured from the
effective date of the Involuntary Termination. In addition, the Plan
Administrator may provide that one or more of the Corporation's outstanding
repurchase rights with respect to shares held by the Optionee at the time of
such Involuntary Termination shall immediately terminate, and the shares
subject to those terminated repurchase rights shall accordingly vest in full.
F. The Plan Administrator shall have full power and authority to
grant one or more options under the Discretionary Option Grant Program which
will automatically accelerate in the event the Optionee's Service subsequently
terminates by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any
Change in Control. Each option so accelerated shall remain exercisable for
fully-vested shares until the earlier of (i) the expiration of the option term
or (ii) the expiration of the one (1)-year period measured from the effective
date of the Involuntary Termination. In addition, the Plan Administrator may
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provide that one or more of the Corporation's outstanding repurchase rights
with respect to shares held by the Optionee at the time of such Involuntary
Termination shall immediately terminate, and the shares subject to those
terminated repurchase rights shall accordingly vest in full.
G. The portion of any Incentive Option accelerated in
connection with a Corporate Transaction or Change in Control shall remain
exercisable as an Incentive Option only to the extent the applicable One
Hundred Thousand Dollar limitation is not exceeded. To the extent such
dollar limitation is exceeded, the accelerated portion of such option shall
be exercisable as a Non-Statutory Option under the Federal tax laws.
H. The outstanding options shall in no way affect the right of
the Corporation to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any
time and from time to time, with the consent of the affected option holders,
the cancellation of any or all outstanding options under the Discretionary
Option Grant Program (including outstanding options incorporated from the
Predecessor Plan) and to grant in substitution new options covering the same
or different number of shares of Common Stock but with an exercise price per
share based on the Fair Market Value per share of Common Stock on the new
grant date.
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ARTICLE THREE
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening option
grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below.
A. PURCHASE PRICE.
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the
Fair Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Five,
shares of Common Stock may be issued under the Stock Issuance Program for any
of the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or
any Parent or Subsidiary).
B. VESTING PROVISIONS.
1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified
performance objectives. The elements of the vesting schedule applicable to
any unvested shares of Common Stock issued under the Stock Issuance Program,
namely:
(i) the Service period to be completed by the
Participant or the performance objectives to be attained,
(ii) the number of installments in which the shares
are to vest,
(iii) the interval or intervals (if any) which are to
lapse between installments, and
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(iv) the effect which death, Permanent Disability or
other event designated by the Plan Administrator is to have upon the
vesting schedule,
shall be determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which
the Participant may have the right to receive with respect to the
Participant's unvested shares of Common Stock by reason of any stock dividend,
stock split, recapitalization, combination of shares, exchange of shares or
other change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration shall be issued subject to (i) the same
vesting requirements applicable to the Participant's unvested shares of Common
Stock and (ii) such escrow arrangements as the Plan Administrator shall deem
appropriate.
3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the
Stock Issuance Program, whether or not the Participant's interest in those
shares is vested. Accordingly, the Participant shall have the right to vote
such shares and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and
shall cancel the unpaid principal balance of any outstanding purchase-money
note of the Participant attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock
which would otherwise occur upon the cessation of the Participant's Service
or the non-attainment of the performance objectives applicable to those shares.
Such waiver shall result in the immediate vesting of the Participant's
interest in the shares as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.
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II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights under
the Stock Issuance Program shall terminate automatically, and all the shares
of Common Stock subject to those terminated rights shall immediately vest in
full, in the event of any Corporate Transaction, except to the extent (i)
those repurchase rights are to be assigned to the successor corporation (or
parent thereof) in connection with such Corporate Transaction or (ii) such
accelerated vesting is precluded by other limitations imposed in the Stock
Issuance Agreement.
B. The Plan Administrator shall have the discretionary
authority, exercisable either at the time the unvested shares are issued or
any time while the Corporation's repurchase rights with respect to such shares
remain outstanding under the Stock Issuance Program, to provide that those
rights shall automatically terminate in whole or in part, and the shares of
Common Stock subject to those terminated rights shall immediately vest, in the
event the Participant's Service should subsequently terminate by reason of an
Involuntary Termination within a designated period (not to exceed eighteen
(18) months) following the effective date of any Corporate Transaction in
which those repurchase rights are assigned to the successor corporation (or
parent thereof).
C. The Plan Administrator shall have the discretionary
authority, exercisable either at the time the unvested shares are issued or
any time while the Corporation's repurchase rights with respect to such shares
remain outstanding under the Stock Issuance Program, to provide that those
rights shall automatically terminate in whole or in part, and the shares of
Common Stock subject to those terminated rights shall immediately vest, in the
event the Participant's Service should subsequently terminate by reason of an
Involuntary Termination within a designated period (not to exceed eighteen
(18) months) following the effective date of any Change in Control.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be
held in escrow by the Corporation until the Participant's interest in such
shares vests or may be issued directly to the Participant with restrictive
legends on the certificates evidencing those unvested shares.
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ARTICLE FOUR
AUTOMATIC OPTION GRANT PROGRAM
------------------------------
I. OPTION TERMS
A. GRANT DATES. Option grants shall be made on the dates
specified below:
1. Each individual who is first elected or appointed as a
non-employee Board member on or at any time after the Plan Effective Date
shall automatically be granted, on the date of such initial election or
appointment, a Non-Statutory Option to purchase 50,000 shares of Common Stock.
2. Each non-employee Board member, whether elected or
appointed to the Board before or after the Plan Effective Date, shall receive
a series of additional 50,000-share Non-Statutory Options over his or her
period of continued Board service. The first such additional 50,000-share
option grant shall be made at the Annual Stockholders Meeting held in the
calendar year in which the final one-third (1/3) annual installment of the
shares subject to the last previous automatic option grant made to such
individual under either the Predecessor Plan or this Plan vests. Such
non-employee Board member shall receive an additional 50,000-share
Non-Statutory Option under this Automatic Option Grant Program on the date of
every third Annual Stockholders Meeting thereafter during his or her period of
continued Board service, and there will be no limit on the number of such
additional 50,000-share automatic option grants any one individual may receive
over his or her period of Board service. Each such 50,000-share option grant
shall be made to the non-employee Board member, whether or not he or she is
standing for re-election at the Annual Stockholders Meeting at which the grant
is to be made, so long as he or she is to continue to serve as a non-employee
Board member.
B. EXERCISE PRICE.
1. The exercise price per share shall be equal to one
hundred percent (100%) of the Fair Market Value per share of Common Stock on
the option grant date.
2. The exercise price shall be payable in one or more of
the alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made
on the Exercise Date.
C. OPTION TERM. Each option shall have a term of ten (10) years
measured from the option grant date.
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D. EXERCISE AND VESTING OF OPTIONS. Each option shall be
immediately exercisable for any or all of the option shares. However, any
shares purchased under the option shall be subject to repurchase by the
Corporation, at the exercise price paid per share, upon the Optionee's
cessation of Board service prior to vesting in those shares. The shares
subject to each option grant shall vest, and the Corporation's repurchase
right with respect to those shares shall lapse, in a series of three (3)
successive equal annual installments upon the optionee's completion of each
year of Board service over the three (3)-year period measured from the option
grant date.
E. TERMINATION OF BOARD SERVICE. The following provisions shall
govern the exercise of any options held by the Optionee at the time the
Optionee ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's
death, the personal representative of the Optionee's estate or the
person or persons to whom the option is transferred pursuant to the
Optionee's will or in accordance with the laws of descent and
distribution) shall have a twelve (12)-month period following the date
of such cessation of Board service in which to exercise each such option.
(ii) During the twelve (12)-month exercise period,
the option may not be exercised in the aggregate for more than the
number of vested shares of Common Stock for which the option is
exercisable at the time of the Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board
member by reason of death or Permanent Disability, then all shares at
the time subject to the option shall immediately vest so that such
option may, during the twelve (12)-month exercise period following such
cessation of Board service, be exercised for all or any portion of those
shares as fully-vested shares of Common Stock.
(iv) In no event shall the option remain exercisable
after the expiration of the option term. Upon the expiration of the
twelve (12)-month exercise period or (if earlier) upon the expiration of
the option term, the option shall terminate and cease to be outstanding
for any vested shares for which the option has not been exercised.
However, the option shall, immediately upon the Optionee's cessation of
Board service for any reason other than death or Permanent Disability,
terminate and cease to be outstanding to the extent the option is not
otherwise at that time exercisable for vested shares.
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<PAGE>
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, the shares of
Common Stock at the time subject to each outstanding option but not otherwise
vested shall automatically vest in full so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable for all of the shares of Common Stock at the time subject to
such option and may be exercised for all or any portion of those shares as
fully-vested shares of Common Stock. Immediately following the consummation
of the Corporate Transaction, each automatic option grant shall terminate and
cease to be outstanding, except to the extent assumed by the successor
corporation (or parent thereof).
B. In connection with any Change in Control, the shares of
Common Stock at the time subject to each outstanding option but not otherwise
vested shall automatically vest in full so that each such option shall,
immediately prior to the effective date of the Change in Control, become fully
exercisable for all of the shares of Common Stock at the time subject to such
option and may be exercised for all or any portion of those shares as
fully-vested shares of Common Stock. Each such option shall remain
exercisable for such fully-vested option shares until the expiration or sooner
termination of the option term.
C. All outstanding repurchase rights under the Automatic Option
Grant Program shall also terminate automatically, and the unvested shares of
Common Stock subject to those terminated rights shall immediately vest in
full, in the event of any Corporate Transaction or Change in Control.
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction
had the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.
E. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic
Option Grant Program shall be the same as the terms in effect for option
grants made under the Discretionary Option Grant Program.
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ARTICLE FIVE
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to
pay the option exercise price under the Discretionary Option Grant Program or
the purchase price of shares issued under the Stock Issuance Program by
delivering a full-recourse, interest bearing promissory note payable in one
or more installments. The terms of any such promissory note (including the
interest rate and the terms of repayment) shall be established by the Plan
Administrator in its sole discretion. In no event may the maximum credit
available to the Optionee or Participant exceed the sum of (i) the aggregate
option exercise price or purchase price payable for the purchased shares plus
(ii) any Federal, state and local income and employment tax liability incurred
by the Optionee or the Participant in connection with the option exercise or
share purchase.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common
Stock upon the exercise of options or the issuance or vesting of such shares
under the Plan shall be subject to the satisfaction of all applicable Federal,
state and local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or
all holders of Non-Statutory Options or unvested shares of Common Stock under
the Plan (other than the options granted or the shares issued under the
Automatic Option Grant Program) with the right to use shares of Common Stock
in satisfaction of all or part of the Taxes incurred by such holders in
connection with the exercise of their options or the vesting of their shares.
Such right may be provided to any such holder in either or both of the
following formats:
Stock Withholding: The election to have the Corporation
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the
Taxes (not to exceed one hundred percent (100%)) designated by the holder.
Stock Delivery: The election to deliver to the Corporation, at
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes)
with an aggregate Fair Market Value equal to the percentage of the Taxes (not
to exceed one hundred percent (100%)) designated by the holder.
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III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board in March 1997 and became
effective upon approval by the Corporation's stockholders at the 1997 Annual
Meeting held on the Plan Effective Date.
B. The Plan shall serve as the successor to the Predecessor
Plan, and no further option grants or direct stock issuances shall be made
under the Predecessor Plan after the Plan Effective Date. All options
outstanding under the Predecessor Plan on the Plan Effective Date shall be
incorporated into the Plan at that time and shall be treated as outstanding
options under the Plan. However, each outstanding option so incorporated
shall continue to be governed solely by the terms of the documents evidencing
such option, and no provision of the Plan shall be deemed to affect or
otherwise modify the rights or obligations of the holders of such incorporated
options with respect to their acquisition of shares of Common Stock.
C. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Corporate Transactions and Changes in Control, may, in the Plan
Administrator's discretion, be extended to one or more options incorporated
from the Predecessor Plan which do not otherwise contain such provisions.
D. The Plan shall terminate upon the earliest of (i) May 19,
2007, (ii) the date on which all shares available for issuance under the Plan
shall have been issued as fully-vested shares or (iii) the termination of all
outstanding options in connection with a Corporate Transaction. Upon such
plan termination, all outstanding option grants and unvested stock issuances
shall thereafter continue to have force and effect in accordance with the
provisions of the documents evidencing such grants or issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and
authority to amend or modify the Plan in any or all respects. However, no
such amendment or modification shall adversely affect the rights and
obligations with respect to stock options or unvested stock issuances at the
time outstanding under the Plan unless the Optionee or the Participant
consents to such amendment or modification. In addition, certain amendments
may require stockholder approval pursuant to applicable laws or regulations.
B. Options to purchase shares of Common Stock may be granted
under the Discretionary Option Grant Program and shares of Common Stock may be
issued under the Stock Issuance Program that are in each instance in excess of
the number of shares then available for issuance under the Plan, provided any
excess shares actually issued under those programs shall be held in escrow
until there is obtained stockholder approval of an amendment sufficiently
increasing the number of shares of Common Stock available for issuance under
the Plan. If such stockholder approval is not obtained within twelve (12)
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months after the date the first such excess issuances are made, then (i) any
unexercised options granted on the basis of such excess shares shall terminate
and cease to be outstanding and (ii) the Corporation shall promptly refund to
the Optionees and the Participants the exercise or purchase price paid for any
excess shares issued under the Plan and held in escrow, together with interest
(at the applicable Short Term Federal Rate) for the period the shares were
held in escrow, and such shares shall thereupon be automatically cancelled and
cease to be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock
option under the Plan and the issuance of any shares of Common Stock (i) upon
the exercise of any granted option or (ii) under the Stock Issuance Program
shall be subject to the Corporation's procurement of all approvals and permits
required by regulatory authorities having jurisdiction over the Plan, the
stock options granted under it and the shares of Common Stock issued pursuant
to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance
with all applicable requirements of Federal and state securities laws,
including the filing and effectiveness of the Form S-8 registration statement
for the shares of Common Stock issuable under the Plan, and all applicable
listing requirements of any stock exchange (or the Nasdaq National Market, if
applicable) on which Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific
duration or interfere with or otherwise restrict in any way the rights of the
Corporation (or any Parent or Subsidiary employing or retaining such person)
or of the Optionee or the Participant, which rights are hereby expressly
reserved by each, to terminate such person's Service at any time for any
reason, with or without cause.
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APPENDIX
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The following definitions shall be in effect under the Plan:
A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant
program in effect under the Plan.
B. BOARD shall mean the Corporation's Board of Directors.
C. CHANGE IN CONTROL shall mean a change in ownership or control of
the Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders which the Board
does not recommend such stockholders to accept, or
(ii) a change in the composition of the Board over a period
of twenty-four (24) consecutive months or less such that a majority of
the Board members ceases, by reason of one or more contested elections
for Board membership, to be comprised of individuals who either (A) have
been Board members continuously since the beginning of such period or
(B) have been elected or nominated for election as Board members during
such period by at least a majority of the Board members described in
clause (A) who were still in office at the time the Board approved such
election or nomination.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
E. COMMON STOCK shall mean the Corporation's common stock.
F. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction, or
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(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
G. CORPORATION shall mean Advanced Tissue Sciences Inc., a Delaware
corporation, and its successors.
H. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary
option grant program in effect under the Plan.
I. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible
to participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Article One.
J. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and
direction of the employer entity as to both the work to be performed and the
manner and method of performance.
K. EXERCISE DATE shall mean the date on which the Corporation shall
have received written notice of the option exercise.
L. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be deemed equal
to the closing selling price per share of Common Stock on the date in
question, as such price is reported on the Nasdaq National Market or any
successor system. If there is no closing selling price for the Common
Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such
quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be deemed equal to the
closing selling price per share of Common Stock on the date in question
on the Stock Exchange determined by the Plan Administrator to be the
primary market for the Common Stock, as such price is officially quoted
in the composite tape of transactions on such exchange. If there is no
closing selling price for the Common Stock on the date in question, then
the Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
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M. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.
N. INVOLUNTARY TERMINATION shall mean the termination of the Service of
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge
by the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following
(A) a change in his or her position with the Corporation which
materially reduces his or her level of responsibility, (B) a reduction
in his or her level of compensation (including base salary, fringe
benefits and participation in any corporate-performance based bonus or
incentive programs) by more than fifteen percent (15%) or (C) a
relocation of such individual's place of employment by more than fifty
(50) miles, provided and only if such change, reduction or relocation
is effected by the Corporation without the individual's consent.
O. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized
use or disclosure by such person of confidential information or trade secrets
of the Corporation (or any Parent or Subsidiary), or any other intentional
misconduct by such person adversely affecting the business or affairs of the
Corporation (or any Parent or Subsidiary) in a material manner. The foregoing
definition shall not be deemed to be inclusive of all the acts or omissions
which the Corporation (or any Parent or Subsidiary) may consider as grounds
for the dismissal or discharge of any Optionee, Participant or other person
in the Service of the Corporation (or any Parent or Subsidiary).
P. 1934 ACT shall mean the Securities Exchange Act of 1934, as
amended.
Q. NON-STATUTORY OPTION shall mean an option not intended to satisfy
the requirements of Code Section 422.
R. OPTIONEE shall mean any person to whom an option is granted under
the Discretionary Option Grant or Automatic Option Grant Program.
S. PARENT shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
T. PARTICIPANT shall mean any person who is issued shares of Common
Stock under the Stock Issuance Program.
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U. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of
twelve (12) months or more. However, solely for purposes of the Automatic
Option Grant Program, Permanent Disability or Permanently Disabled shall mean
the inability of the non-employee Board member to perform his or her usual
duties as a Board member by reason of any medically determinable physical or
mental impairment expected to result in death or to be of continuous duration
of twelve (12) months or more.
V. PLAN shall mean the Corporation's 1997 Stock Incentive Plan, as
set forth in this document.
W. PLAN ADMINISTRATOR shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized
to administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity
is carrying out its administrative functions under those programs with respect
to the persons under its jurisdiction.
X. PLAN EFFECTIVE DATE shall mean May 20, 1997, the date of the 1997
Annual Stockholders Meeting at which the Plan was approved by the
Corporation's stockholders.
Y. PREDECESSOR PLAN shall mean the Corporation's 1992 Stock
Option/Stock Issuance Plan, in effect immediately prior to the Plan Effective
Date hereunder.
Z. PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders.
AA. SECONDARY COMMITTEE shall mean a committee of one (1) or more
Board members appointed by the Board to administer the Discretionary Option
Grant and Stock Issuance Programs with respect to eligible persons other than
Section 16 Insiders.
AB. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
AC. SERVICE shall mean the performance of services for the
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in
the documents evidencing the option grant or stock issuance.
AD. STOCK EXCHANGE shall mean either the American Stock Exchange or
the New York Stock Exchange.
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AE. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by
the Corporation and the Participant at the time of issuance of shares of
Common Stock under the Stock Issuance Program.
AF. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in
effect under the Plan.
AG. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in
the unbroken chain owns, at the time of the determination, stock possessing
fifty percent (50%) or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
AH. TAXES shall mean the Federal, state and local income and
employment tax liabilities incurred by the holder of Non-Statutory Options or
unvested shares of Common Stock in connection with the exercise of those
options or the vesting of those shares.
AI. 10% STOCKHOLDER shall mean the owner of stock (as determined
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any
Parent or Subsidiary).
A-5
Exhibit 10.2
PROMISSORY NOTE
June 11, 1997
FOR VALUE RECEIVED, the undersigned, ADVANCED TISSUE SCIENCES, INC.,
a Delaware corporation ("ATS"), HEREBY PROMISES TO PAY, in lawful money of the
United States of America and in immediately available funds, to SMITH & NEPHEW
SNATS, INC., a Delaware corporation ("S&N"), the principal sum loaned by S&N
to ATS or its Affiliate (this and certain other capitalized terms used herein
are defined in Article I of this Note) pursuant to Section 4.4 of the
Partnership Agreement, such principal to be payable on the earlier of (i) the
third anniversary of the first date amounts are loaned by S&N to ATS pursuant
to such Section 4.4 or (ii) the date upon which ATS and its Affiliates no
longer have an ownership interest in the Partnership as the result of exercise
of rights under the Partnership Agreement by either party thereto in
connection with (A) a material default by ATS or its Affiliates under such
agreement, (B) sale, assignment or other transfer by ATS or its Affiliates of
interests in the Partnership, (C) withdrawal by ATS or its Affiliates from the
Partnership or (D) a change of control (as specified in the Partnership
Agreement) of ATS or any ATS Affiliates having an ownership interest in the
Partnership. ATS further agrees to pay interest in like money on the unpaid
principal amount hereof from time to time from the date hereof until paid in
full (both before and after a judgement). Periodic interest ("Periodic
Interest") shall be paid on the unpaid principal amount hereof from time to
time at a fluctuating rate per annum equal to 4% per annum above the LIBOR
Rate, payable quarterly in arrears on the last Business Day of each Quarter,
commencing September 30, 1997, and upon payment in full of the unpaid
principal hereof. Upon the occurrence and during the continuance of an
uncured Event of Default, any unpaid principal, Periodic Interest shall be
payable upon S&N's demand in U.S. dollars and in immediately available funds.
Notwithstanding the foregoing, interest payable hereunder shall not exceed the
maximum rate permitted by applicable law.
ARTICLE I
DEFINITIONS
Section 1.1. Definitions. As used herein, the following terms
shall have the indicated meanings:
"Affiliate" shall mean, with respect to any Person, any other
Person which directly or indirectly controls, is controlled by or is under
common control with such Person.
"ATS" shall have the meaning specified in the first paragraph of
this Note.
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"Business Day" shall mean any day excluding Saturday, Sunday and
any day which is a legal holiday under the laws of the State of Delaware, or
is a day on which banking institutions located in such state are required or
authorized by law or other governmental action to close.
"Cartilage Heads of Agreement" shall mean the Agreement, dated
May 6, 1994, between ATS and Smith & Nephew plc.
"Event of Default" shall mean any of the events described or
listed in Section 3.1 of this Note.
"Indebtedness" shall mean (A) all indebtedness, obligations or
other liabilities for borrowed money or for the deferred purchase price of
property or services; (B) obligations as lessee under leases; (C) obligations
under direct or indirect guaranties, endorsements (other than for collection
or deposit in the ordinary course of business) and obligations (contingent or
otherwise) to purchase, repurchase or otherwise acquire or assure a creditor
against loss, in respect of indebtedness or obligations or to provide funds
for the payment or discharge thereof; (D) all indebtedness, obligations or
other liabilities evidenced by any stock, shares, voting trust certificates,
bonds, debentures, notes or other evidence of indebtedness, secured or
unsecured, convertible, subordinated or otherwise or any other instruments
commonly known as "securities" and all indebtedness, obligations or other
liabilities evidenced by any subscription, agreement or other undertaking to
purchase or acquire any of the foregoing "securities"; (E) all reimbursement
obligations and other liabilities with respect to letters of credit; (F) all
indebtedness, obligations or other liabilities secured by a lien on any asset
of ATS or any subsidiary of ATS, whether or not such indebtedness,
obligations or liabilities are assumed by or are a personal liability of ATS
or any subsidiary of ATS, all as of such time; and (G) all indebtedness,
obligations or other liabilities in respect of interest rate contracts and
foreign currency exchange agreements.
"LIBOR Rate" shall mean, as to interest payable for any Quarter,
the rate per annum listed in the Wall Street Journal under "Money Rates" as
the three month "London Interbank Offered Rates (LIBOR)" rate applicable for
the first Business Day of such Quarter, or if such rate is not published a
reasonable, comparable rate determined by S&N.
"Note" shall mean this Promissory Note, as amended or modified from
time to time.
"Partnership" shall mean ADVANCED TISSUE SCIENCES - SMITH &
NEPHEW, a Delaware general partnership formerly known as SNATS Partnership.
"Partnership Agreement" shall mean the Agreement of General
Partnership of ADVANCED TISSUE SCIENCES - SMITH & NEPHEW (formerly known as
SNATS Partnership), dated as of November 25, 1994, between ATS Orthopedics,
Inc. and S&N.
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"Periodic Interest" shall have the meaning specified in the first
paragraph of this Note.
"Person" shall mean any individual, corporation, limited liability
company, partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or governmental authority or regulatory body.
"Quarter" shall mean any period of three calendar months ending on
the last day of March, June, September or December.
"S&N" shall have the meaning specified in the first paragraph of
this Note.
Section 1.2. Terms. Terms used in this Note shall be deemed to
refer to the masculine, feminine, neuter, singular or plural, as the identity
of the person or persons, firm or corporation may in the context require.
ARTICLE II
DRAW DOWN; TERMS OF PAYMENT
Section 2.1. Draw Down. (a) ATS shall notify S&N in writing at
least 10 Business Days prior to ATS or its Affiliate borrowing any amount
pursuant to Section 4.4 of the Partnership Agreement. Promptly upon ATS or
its Affiliate borrowing any amount under Section 4.4 of the Partnership
Agreement or making a principal payment hereunder, an officer of ATS shall
deliver to S&N a revised version of Exhibit A hereto, indicating ATS'
determination of the amount borrowed or the principal paid, the principal
balance of this Promissory Note and the date of such borrowing or principal
payment; provided, that the failure of any such officer to so indicate any
amount borrowed shall not affect the obligations of ATS to pay such borrowed
amount.
(b) S&N shall maintain its own record of (i) the date and amount
of each loan made under Section 4.4 of the Partnership Agreement, (ii) the
amount of any principal or interest due and payable or to become due and
payable from ATS or any of its Affiliates to S&N hereunder and (iii) the
amount and date of receipt of any sum received by S&N from ATS or any of its
Affiliates hereunder. Such record shall be conclusive and binding for all
purposes, absent ATS establishing the existence of an error.
Section 2.2. Payments and Computations. (a) ATS shall make each
payment hereunder not later than 12:00 noon (Delaware time) on the day when
due, in lawful money of the United States and immediately available funds, by
wire transfer addressed to the account of Smith & Nephew SNATS, Inc., Account
No. 0921750, The First National Bank of Chicago, ABA No. 071000013, by order
of Advanced Tissue Sciences, Inc.
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(b) Interest shall accrue from day to day and all computations
of interest shall be made by S&N on the basis of a year of 360 days and the
actual number of days elapsed.
(c) Whenever any payment to be made hereunder shall be stated
to be due on a day other than a Business Day, such payment shall be made on
the next succeeding Business Day, and such extension of time shall in such
case be included in the computation of payment of interest.
Section 2.3. Prepayment. ATS shall have the right to prepay the
unpaid principal outstanding under this Note, in whole or in part, at any time
and from time to time without penalty.
ARTICLE III
EVENTS OF DEFAULT; RIGHTS AND REMEDIES
Section 3.1. Events of Default. Each of the following occurrences
shall constitute an Event of Default under this Note and any such Event of
Default shall be deemed "continuing" until cured or waived in writing:
(a) Failure to Make Principal Payments When Due. ATS shall
fail to pay when due any principal under this Note and such failure shall
continue for more than ten (10) days after ATS receives notice of such failure;
(b) Failure to Make Interest Payments When Due. ATS shall fail
to pay when due any interest under this Note and such failure shall continue
for more than ten (10) days after ATS receives notice of such failure;
(c) Breach Under Any Joint Venture Documents. ATS, or any
Affiliate of ATS, shall have breached any of its representations and
warranties, covenants or other agreements contained in the Cartilage Heads of
Agreement, the Partnership Agreement, the License Agreement dated as of
November 25, 1994 between ATS Orthopedics, Inc. and the Partnership or any
other agreement or instrument relating to the joint venture formed pursuant to
the Cartilage Heads of Agreement, as any such agreement or instrument is
amended from time to time, and such breach shall continue for more than twenty
(20) days after ATS receives notice of the occurrence thereof; provided, that
no such grace period shall apply, and an Event of Default shall exist
immediately upon such breach, if such breach can not, in S&N's reasonable
determination, be cured by ATS or the applicable ATS Affiliate during such
grace period;
(d) Other Defaults. ATS shall default in the performance of or
compliance with any term contained in this Note (other than as covered by
subsection (a) or (b) above), and such default shall continue more than ten
(10) days after ATS receives notice of such default; provided, that no such
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grace period shall apply, and an Event of Default shall exist immediately upon
such default, if such default can not, in S&N's reasonable determination, be
cured by ATS during such grace period;
(e) Default As To Other Indebtedness. ATS or any of its
Affiliates shall fail to make any payment when due (whether by scheduled
maturity, required prepayment, acceleration, demand or otherwise) on any
Indebtedness (whether of principal or interest thereon), other than under this
Note, if the aggregate amount of such Indebtedness is Five Hundred Thousand
Dollars ($500,000) or more, and such failure shall continue after the
applicable grace period, if any, specified in the agreement or instrument
relating to such Indebtedness if the effect of such failure is to accelerate,
or to permit the acceleration of, the maturity of such Indebtedness; or any
other material default under any agreement or instrument relating to any such
Indebtedness, or any other event, shall occur and shall continue after the
applicable grace period, if any, specified in such agreement or instrument, if
the effect of such default or event is to accelerate, or to permit the
acceleration of, the maturity of such Indebtedness and such failure to make
payment, default or event has not been waived by the party or parties not in
breach under such agreement or instrument; or any such Indebtedness shall be
declared to be due and payable, or required to be prepaid (other than by a
regularly scheduled required prepayment), prior to the stated maturity
thereof; or the holder of any lien, in any amount, shall commence foreclosure
of such lien upon property of ATS or any of its Affiliates having a value in
excess of Five Hundred Thousand Dollars ($500,000); provided that no such
failure, default or event referred to in this subsection (e) shall be an Event
of Default if being contested in good faith by appropriate proceedings which
are sufficient to prevent imminent foreclosure or attachment of any asset, are
promptly instituted and diligently conducted and if such reserve or other
appropriate provision, if any, as shall be required in conformity with
generally accepted accounting principles, shall have been made therefor;
(f) Involuntary Bankruptcy; Appointment of Receiver, etc. (i)
An involuntary case shall be commenced against ATS, and the petition shall
not be dismissed within sixty (60) days after commencement of the case, or a
court having jurisdiction in the premises shall enter a decree or order for
relief in respect of ATS, in an involuntary case, under any applicable
bankruptcy, insolvency or other similar law now or hereinafter in effect; or
any other similar relief shall be granted under any applicable federal, state
or foreign law; or
(ii) A decree or order of a court having jurisdiction in the
premises for the appointment of a receiver, liquidator, sequestrator, trustee,
custodian or other officer having similar powers over ATS, or over all or a
substantial part of the property of ATS, shall be entered; or an interim
receiver, trustee or other custodian of ATS, or of all or a substantial part
of the property of ATS, shall be appointed or a warrant of attachment,
execution or similar process against any substantial part of the property of
ATS, shall be issued and any such event shall not be stayed, vacated,
dismissed, bonded or discharged within sixty (60) days after entry,
appointment or issuance;
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(g) Voluntary Bankruptcy; Appointment of Receiver, etc. ATS
shall have an order for relief entered with respect to it or commence a
voluntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, or shall consent to the entry of an order for
relief in an involuntary case, or to the conversion of an involuntary case to
a voluntary case, under any such law, or shall consent to the appointment of
or taking of possession by a receiver, trustee or other custodian for all or a
substantial part of its property; ATS shall make any assignment for the
benefit of creditors or shall be unable or fail, or admit in writing its
inability, to pay its debts as such debts become due; or ATS shall take any
corporate action to authorize any of the foregoing; and
(h) Dissolution. Any order, judgment or decree shall be
entered against ATS decreeing its involuntary dissolution or split up and
such order shall remain undischarged and unstayed for a period in excess of
thirty (30) days; or ATS shall otherwise dissolve or cease to exist.
Section 3.2. Rights and Remedies. Upon the occurrence of any
Event of Default described in the foregoing Section 3.1(e), 3.1(f) or 3.1(g)
with respect to ATS, the unpaid principal amount of and any and all accrued
interest on this Note shall automatically become immediately due and payable
in U.S. dollars and in immediately available funds, without presentment,
demand, or protest or other requirements of any kind (including, without
limitation, valuation and appraisement, diligence, presentment, notice of
intent to demand or accelerate and of acceleration), all of which are hereby
expressly waived by ATS; and upon the occurrence and during the continuance of
any other Event of Default, S&N may by written notice to ATS declare the
unpaid principal amount of and any and all accrued and unpaid interest on this
Note to be, and the same shall thereupon be, immediately due and payable in
U.S. dollars and in immediately available funds, without presentment, demand,
or protest or other requirements of any kind (including, without limitation,
valuation and appraisement, diligence, presentment, notice of intent to
demand or accelerate and of acceleration), all of which are hereby expressly
waived by ATS. The rights and remedies set forth in this Section 3.2 shall be
in addition to, and not in lieu of, S&N's rights under Section 4.4 of the
Partnership Agreement.
ARTICLE IV
MISCELLANEOUS
Section 4.1. Amendments, etc. No amendment or waiver of any
provision of this Note, nor consent to any departure by ATS herefrom, shall in
any event be effective unless the same shall be in writing and signed by S&N;
and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
Section 4.2. Notices. All notices, requests and other
communications under this Agreement shall be in writing and shall be deemed to
have been duly given when (a) delivered by hand, (b) sent by telecopier (with
receipt confirmed), provided that a copy is mailed by registered mail, return
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receipt requested, or (c) when received by the addressee, if sent by Express
Mail, Federal Express or other express delivery service (receipt requested),
in each case to the appropriate addresses and telecopier numbers set forth
below or as a party may designate as to itself by notice to the other
parties):
(a) If to S&N:
Smith & Nephew SNATS, Inc.
One Commerce Center, Suite 788
1201 North Orange Street
Wilmington, Delaware 19801
Attention: President
Telecopy: (302) 884-6752
with a copy to:
Smith & Nephew North America
1450 Brooks Road
Memphis, Tennessee 38116
Attention: General Counsel
Telecopy: (901) 396-7824
(b) If to ATS:
Advanced Tissue Sciences, Inc.
10933 Torrey Pines Road
La Jolla, California 92037
Attention: Vice President, Finance and Administration
Telecopy: (619) 450-5732
with a copy to:
Advanced Tissue Sciences, Inc.
10933 Torrey Pines Road
La Jolla, California 92037
Attention: Director, Legal Affairs
Telecopy: (619) 450-5732
Section 4.3. No Waiver; Remedies. No failure on the part of S&N
to exercise, and no delay in exercising, any right hereunder shall operate as
a waiver thereof; nor shall any single or partial exercise of any right
hereunder preclude any other or further exercise thereof or the exercise of
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any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
Section 4.4. Costs and Expenses. ATS agrees to pay on demand all
losses, costs and expenses, if any (including reasonable counsel fees and
expenses), in connection with the enforcement of this Note, including,
without limitation, costs and expenses sustained by S&N as a result of a
default by ATS in the performance of its obligations contained in this Note
or any document delivered in connection herewith.
Section 4.5. Binding Effect; Governing Law. This Note shall be
binding upon and inure to the benefit of ATS and S&N and their respective
successors and assigns. S&N may negotiate this Note or assign all or any
part, or any interest in, S&N's rights and benefits hereunder, to any
affiliate of S&N or, in connection with the sale of substantially all of S&N's
or its Affiliates' assets, to any person acquiring such assets, and to the
extent of such negotiation or assignment the transferee or assignee shall have
no less rights and benefits against ATS than it would have had if it were S&N
hereunder. This Note shall be governed by, and construed in accordance with,
the laws of the State of Delaware.
Section 4.6. Severability of Provisions. Any provision of this
Note which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
Section 4.7. Headings. The Article and Section headings of this
Note are for convenience of reference only and shall not, for any purpose, be
deemed a part of this Note.
IN WITNESS WHEREOF, ATS has caused this Note to be executed in its
name by its duly authorized officer and its corporate seal to be affixed
hereto.
ADVANCED TISSUE SCIENCES, INC.
[SEAL]
By /s/ Arthur J. Benvenuto
--------------------------------
Name: Arthur J. Benvenuto
Title: Chairman and Chief Executive
Officer
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