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 MARCH 31, 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 No.)
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 April 30, 1997 was 37,509,577.
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
-----
Page
----
Part I - Financial Information
- --------------------------------
Item 1 - Financial Statements
Introduction to the Financial Statements 1
Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 2
Consolidated Statements of Operations -
Three Months Ended March 31, 1997 and 1996 3
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1996 4
Consolidated Statement of Stockholders' Equity -
Three Months Ended March 31, 1997 5
Notes to the Consolidated Financial Statements 6-7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-10
Part II - Other Information
- ---------------------------
Item 6 - Exhibits and Reports on Form 8-K 11
Signatures 11
<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.
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.
The discussions in this Quarterly Report on Form 10-Q, particularly those
relating to strategic alliances (including potential revenues from certain
existing joint ventures), potential acceleration of 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.
-1-
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 26,311 $ 27,907
Short-term investments 11,312 12,310
Other current assets 5,577 3,827
---------- ----------
Total current assets 43,200 44,044
Property - net 12,215 9,734
Patent costs - net 1,365 1,310
Other assets 2,172 1,413
---------- ----------
Total assets $ 58,952 $ 56,501
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 24 $ 23
Accounts payable 2,595 2,232
Accrued expenses 5,129 5,805
---------- ---------
Total current liabilities 7,748 8,060
---------- ---------
Long-term debt and capital lease
obligations (Note 3) 10,055 61
---------- ---------
Stockholders' equity:
Preferred Stock, $.01 par value; 1,000,000
shares authorized; none issued -- --
Common Stock, $.01 par value; 50,000,000
shares authorized; issued and outstanding,
37,507,547 shares at March 31, 1997 and
37,474,677 shares at December 31, 1996 375 375
Additional paid-in capital 188,307 188,006
Accumulated deficit (146,614) (139,082)
--------- ---------
42,068 49,299
Less note received in connection with
sale of Common Stock (919) (919)
--------- ---------
Total stockholders' equity 41,149 48,380
--------- ---------
Total liabilities and stockholders' equity $ 58,952 $ 56,501
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
-2-
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Revenues:
Contracts and fees -
Related parties $ 2,639 $ 648
Others 10 10
Product sales -- 302
---------- ----------
Total revenues 2,649 960
---------- ----------
Costs and expenses:
Research and development 4,968 5,229
Selling, general and administrative 3,120 1,922
Professional and consulting 674 628
Cost of goods sold -- 478
---------- ----------
Total costs and expenses 8,762 8,257
---------- ----------
Loss from operations before equity in
losses of joint ventures (6,113) (7,297)
Equity in losses of joint ventures (1,707) --
---------- ----------
Loss from operations (7,820) (7,297)
Other income (expense):
Interest income and other 293 267
Interest expense (5) (1)
---------- ----------
Net loss $ (7,532) $ (7,031)
========== ==========
Net loss per share $ (.20) $ (.21)
========== ==========
Weighted average number of common shares
used in computation of net loss per share 37,488 34,061
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
-3-
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Operating activities:
Net loss $ (7,532) $ (7,031)
Adjustments to reconcile net loss to
cash used in operating activities:
Equity in losses of joint ventures 1,707 --
Depreciation and amortization 510 412
Compensation for services paid in stock,
stock options or warrants -- 62
Other adjustments to net loss 56 45
Change in assets and liabilities:
Other current assets (1,750) (21)
Other assets (561) (154)
Accounts payable 363 (143)
Accrued expenses (676) 436
---------- ---------
Net cash used in operating activities (7,883) (6,394)
---------- ---------
Investing activities:
Purchases of short-term investments -- (9,998)
Maturities and sales of short-term investments 998 --
Acquisition of property (3,012) (392)
Equity investment in joint ventures (1,905) --
Patent application costs (90) (74)
---------- ---------
Net cash used in investing activities (4,009) (10,464)
---------- ---------
Financing activities:
Proceeds from borrowings 10,000 --
Payments of borrowings (5) (2)
Net proceeds from sale of equity -- 37,720
Options and warrants exercised 301 243
---------- ---------
Net cash provided by financing activities 10,296 37,961
---------- ---------
Net increase (decrease) in cash and cash
equivalents (1,596) 21,103
Cash and cash equivalents at beginning of period 27,907 18,929
---------- ---------
Cash and cash equivalents at end of period $ 26,311 $ 40,032
========== =========
</TABLE>
See accompanying notes to the consolidated financial statements.
-4-
<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 33 301 301
Net loss (7,532) (7,532)
------ ------- --------- ---------- -------- ---------
Balance, March 31, 1997 37,508 $ 375 $ 188,307 $ (146,614) $ (919) $ 41,149
====== ====== ========= ========== ======== =========
</TABLE>
See accompanying notes to the consolidated financial statements.
-5-
<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 treatment of severe burns, approved
for marketing in the United States by the U.S. Food and Drug Administration
("FDA"), and for 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 inter-
company accounts and transactions have been eliminated. The Company's
interest 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 months ended March 31, 1997, the Company recognized $1,695,000 in
contract revenues for research and development activities performed for the
Dermagraft Joint Venture.
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 are sharing
equally in Cartilage Joint Venture revenues and expenditures. During the
three months ended March 31, 1997, the Company recognized $944,000 in contract
revenues for research and development activities performed for the Cartilage
Joint Venture compared with $648,000 for the corresponding period of 1996.
The results of operations of the joint ventures for the three months ended
March 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
Dermagraft Joint Venture Cartilage Joint Venture
------------------------ -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Costs and expenses $ 2,109 $ -- $ 1,863 $ 1,256
Net loss 2,109 -- 1,863 1,256
</TABLE>
-6-
<PAGE>
NOTE 3 - LONG-TERM DEBT
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 the London Interbank Offered
Rate (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 statement of operations
for the three months ended March 31, 1996, includes product sales and costs
and expenses of $302,000 and $853,000, respectively, associated with the IVLT
business.
NOTE 5 - NET LOSS PER SHARE
Net loss per share for the three months ended March 31, 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.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share," which is required to be adopted on
December 31, 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 earnings per share
for the three months ended March 31, 1997 and 1996 and, accordingly, the
adoption of Statement No. 128 will not have a material impact on the
calculation of earnings per share for such periods.
NOTE 6 - COMMITMENTS
As of March 31, 1997, the Company had commitments of approximately $4.8
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 is currently pursuing financing for a portion of
these expenditures with its joint venture partner, Smith & Nephew; however,
there can be no assurance such funding will be obtained or will be available
on terms favorable to the Company.
NOTE 7 - STOCK OPTIONS
The following table summarizes activity under the Company's 1992 Stock
Option/Stock Issuance Plan (the "1992 Plan") and for other options and
warrants for Common Stock for the three months ended March 31, 1997:
<TABLE>
<CAPTION>
1992 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 113,390 $12.16 -- --
Exercised (32,870) $ 9.18 -- --
Canceled (50,810) $ 8.79 -- --
--------- ---------
Outstanding, March 31, 1997 3,803,411 $ 9.67 1,469,640 $ 7.18
========= =========
</TABLE>
-7-
<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. In anticipation
of the approval, the Company began building its sales and marketing
capabilities and manufacturing product for inventory during the second half
of 1996.
In December 1996, the Company, in conjunction with its joint venture
partner, Smith & Nephew plc ("Smith & Nephew"), also submitted an application
for approval to market the Company's dermal skin replacement product,
Dermagraft(R) for the treatment of diabetic foot ulcers. The joint venture
is currently enrolling fifty patients into a 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
and increasing 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 has been responsible for funding
the first $10 million in costs incurred in the Cartilage Joint Venture.
Beginning in January 1997, the joint venture partners are 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
- ---------------------
Total revenues increased $1,689,000 to $2,649,000 in the three months
ended March 31, 1997 as compared to the corresponding period of 1996 as
increased contract revenues more than offset the discontinuance of sales of
the Company's Skin2 in vitro laboratory testing kits. The Company did
not begin commercial sales of Dermagraft-TC until April 1997. Skin2 product
sales reached $302,000 in the first quarter of 1996. See note 4 to the
consolidated financial statements.
Revenues from contracts and fees increased to $2,649,000 in the quarter
ended March 31, 1997 as compared to $658,000 in the corresponding period of
1996. The increase primarily reflects higher contract revenues recognized for
research and development activities performed for the Dermagraft and the
Cartilage Joint Ventures (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.
-8-
<PAGE>
Cost of goods sold in the first quarter of 1996 represents the cost of
manufacturing the Company's Skin2 laboratory testing kits. As noted above,
the Company discontinued its Skin2 business in October 1996.
Research and development expenditures decreased to $4,968,000 in the
quarter ended March 31, 1997 as compared to $5,229,000 in the first quarter 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 and other programs.
Selling, general and administrative costs were $3,120,000 for the quarter
ended March 31, 1997, as compared to $1,922,000 in the corresponding period 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 to establish marketing and
administrative support for Dermagraft. These increases are reflected
primarily in higher costs for instructional and promotional materials and
personnel and associated costs.
Professional and consulting costs for legal, accounting and other
consulting services incurred in the three months ended March 31, 1997 were
$674,000 as compared to $628,000 for the first quarter of 1996. The increase
in professional and consulting fees in the three months ended March 31, 1997
principally reflects costs for marketing consultants partially offset by lower
fees for regulatory consultants and for the recruitment of personnel.
Interest and other income increased to $293,000 in the quarter ended
March 31, 1997 as compared to $267,000 in the corresponding quarter in 1996.
The increase primarily reflects interest income from higher cash balances
reflecting funds raised in a March 1996 public offering and from the receipt
of a $10 million up front fee in April 1996 from Smith & Nephew in connection
with the formation of the Dermagraft Joint Venture.
Liquidity and Capital Resources
- -------------------------------
As of March 31, 1997, the Company had available working capital of
$35,452,000, a decrease of $532,000 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 a $10 million loan from
Smith & Nephew (see note 3 to the consolidated financial statements).
Capital expenditures of $3,012,000 in the first three months of 1997 relate
primarily to the expansion of the Company's manufacturing facility and for
related process equipment. As of March 31, 1997, the Company had
approximately $4.8 million in commitments for additional capital expenditures
relating to the manufacturing expansion. The Company is currently pursuing
financing for a portion of these expenditures with its joint venture partner,
Smith & Nephew; however, there can be no assurance such funding will be
obtained.
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 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 any
additional 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.
-9-
<PAGE>
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 March 31, 1997
decreased from December 31, 1996 reflecting the use of cash to fund operations
and capital expenditures during the quarter substantially offset by proceeds
from the loan from Smith & Nephew (see note 3 to the consolidated financial
statements). Other current assets increased over 1996 as inventories of
Dermagraft-TC were built in anticipation of product approval. Accounts
payable at March 31, 1997 increased from 1996 principally due to
manufacturing, sales and marketing costs associated with the
commercialization of Dermagraft-TC. Accrued expenses at March 31, 1997
declined from 1996 principally due to lower accruals for wages and benefits.
Long-term debt increased by $10 million reflecting the March 1997 borrowing
from Smith & Nephew.
-10-
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Title Method of Filing
------- ----- ------------------
10.1 Promissory Note between Advanced Tissue Filed Herewith
Sciences, Inc. and Smith & Nephew SNATS, Inc.
Dated March 31, 1997
(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: May 9, 1997 /s/ Arthur J. Benvenuto
------------------ --------------------------------
Arthur J. Benvenuto
Chairman of the Board and
Chief Executive Officer
Date: May 9, 1997 /s/ Michael V. Swanson
------------------ ---------------------------------
Michael V. Swanson
Vice President, Finance and
Administration
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-Q for the period ended March 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 26,311
<SECURITIES> 11,312
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 43,200
<PP&E> 18,931
<DEPRECIATION> 6,716
<TOTAL-ASSETS> 58,952
<CURRENT-LIABILITIES> 7,748
<BONDS> 10,055
0
0
<COMMON> 375
<OTHER-SE> 40,774
<TOTAL-LIABILITY-AND-EQUITY> 58,952
<SALES> 0
<TOTAL-REVENUES> 2,649
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5)
<INCOME-PRETAX> (7,532)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,532)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,532)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
PROMISSORY NOTE
$10,000,000 March 31, 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, or ATS Common
Stock (this and certain other capitalized terms used herein are defined in
Article 1 of this Note) at ATS' election in accordance with Section 2.3
hereof, to SMITH & NEPHEW SNATS, INC., a Delaware corporation ("S&N"), the
principal sum of TEN MILLION DOLLARS ($10,000,000), such principal to be
payable on the earlier of (i) March 31, 2000 or (ii) the date upon which ATS
and its Affiliates no longer have an ownership interest in the Dermagraft
Company as the result of exercise of rights under the Dermagraft Company
Formation 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 Dermagraft
Company, (C) withdrawal by ATS or its Affiliates from the Dermagraft Company
or (D) a change of control (as specified in the Dermagraft Company Formation
Agreement) of ATS or any ATS Affiliates having an ownership interest in the
Dermagraft Company. 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 judgment). 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 1% per annum above the LIBOR
Rate, payable quarterly in arrears on the last Business Day of each Quarter,
commencing June 30, 1997, and upon payment in full of the unpaid principal
hereof. In addition, deferred interest ("Deferred Interest") shall accrue on
the unpaid principal amount hereof at a rate equal to 3% per annum, and shall
be payable in U.S. dollars and in immediately available funds, or ATS Common
Stock at ATS' election in accordance with Section 2.3 hereof, on March 31,
2000, or 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 and Deferred Interest shall be payable
upon S&N's demand in U.S. dollars and in immediately available funds, or ATS
Common Stock at ATS' election in accordance with Section 2.3 hereof.
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.
"ATS Common Stock" shall mean common stock, $.01 par value per share, of
ATS.
"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.
"Deferred Interest" shall have the meaning specified in the first
paragraph of this Note.
<PAGE>
"Dermagraft Company" shall mean the "Company' as defined in the
Dermagraft Heads of Agreement.
"Dermagraft Company Formation Agreement" shall mean the agreement, to be
executed by ATS or its Affiliate and S&N or its Affiliate, governing the
formation of the Dermagraft Company.
"Dermagraft Heads of Agreement" shall mean the Heads of Agreement, dated
April 29, 1996, 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.
"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.
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<PAGE>
ARTICLE II
TERMS OF PAYMENT
Section 2.1. 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.
(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 2.2. 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.
Section 2.3. Payment in ATS Common Stock. (a) In lieu of paying any
principal or interest payment hereunder in U.S. dollars, ATS may pay such
payment in shares of ATS Common Stock; provided, that each of the following
conditions is met:
(i) ATS provides S&N with at least thirty (30) days prior written notice
of ATS's election to make such payment in shares of ATS Common Stock;
(ii) each of the shares of ATS Common Stock issued to S&N as payment,
when delivered to S&N, (A) is duly registered under the Securities Act of
1933, as amended, and under any applicable state securities laws, (B) is
listed and freely tradeable on the Nasdaq Stock Market, and (C) is duly
authorized, validly issued, fully paid and nonassessable and free from any
lien (statutory or other), claim, charge, security interest, pledge, right of
first refusal, preemptive right or any other restriction or encumbrance of any
kind; and
(iii) at the time such payment is made, ATS Common Stock is actively
traded on the Nasdaq Stock Market.
(b) In the event that ATS pays any principal or interest payment in
shares of ATS Common Stock in accordance with Section 2.3(a), ATS will deliver
such shares to S&N on the day that the principal or interest is to be paid and
shall only deliver to S&N whole shares of such ATS Common Stock. Such shares
shall be in good and transferable form, shall be registered in the name of S&N
or such other name as S&N shall designate and, at the option of S&N, shall be
delivered by wire transfer or book entry at a depository or clearing house
designated by S&N.
(c) For purposes of determining the number of shares of ATS Common
Stock payable for any principal or interest payment, such shares shall be
valued at the average of the high and low sales prices reported on the Nasdaq
Stock Market for each of the ten (10) trading days immediately preceding the
day such payment is made.
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<PAGE>
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 Dermagraft Heads of Agreement,
the Dermagraft Company Formation Agreement or any other agreement or
instrument relating to the joint venture formed pursuant to the Dermagraft
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
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;
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<PAGE>
(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;
(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, or ATS Common Stock at
ATS' election in accordance with Section 2.3 hereof, 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, or ATS Common Stock at ATS'
election in accordance with Section 2.3 hereof, 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. In addition to the foregoing, upon the occurrence of an Event of
Default, S&N may by written notice to ATS require that, in lieu of U.S.
dollars, ATS pay the unpaid principal amount of and any and all accrued
interest on this Note in ATS Common Stock in accordance with Section 2.3
hereof, provided that ATS has not paid such unpaid principal and accrued
interest either in U.S. dollars and in immediately available funds or in ATS
Common Stock.
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<PAGE>
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 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
any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
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<PAGE>
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:_____________________________
Name: Michael V. Swanson
Title: Vice President, Finance and
Administration
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