AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 5, 1998
Registration No. 333-62955
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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ADVANCED TISSUE SCIENCES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 14-1701513
(State or other jurisdiction (I.R.S. Employer
or incorporation) Identification Number)
10933 NORTH TORREY PINES ROAD
LA JOLLA, CALIFORNIA 92037
(619) 450-5730
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
-------------------
ARTHUR J. BENVENUTO
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
ADVANCED TISSUE SCIENCES, INC.
10933 NORTH TORREY PINES ROAD
LA JOLLA, CALIFORNIA 92037
(619) 450-5730
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
RICHARD A. FINK, ESQ.
Brobeck, Phleger & Harrison LLP
38 Technology Drive
Irvine, California 92618
(949) 790-6300
--------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: FROM TIME
TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION
8(A), MAY DETERMINE.
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
PROSPECTUS
(SUBJECT TO COMPLETION, DATED NOVEMBER ____, 1998)
ADVANCED TISSUE SCIENCES, INC.
11,324,262 SHARES
COMMON STOCK
________________
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 6 FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
________________
THESE SECURITIES HAVE NOT BEEN APPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
________________
This Prospectus relates to the resale from time to time by certain
stockholders of the Company or by pledgees, donees, transferees or other
successors in interest that receive such shares as a gift, partnership
distribution or other non-sale related transfer (the "Selling Stockholders") of
up to 11,324,262 shares of Common Stock, par value $0.01 per share (the "Common
Stock"), of Advanced Tissue Sciences, Inc. (the "Company"), as may be issuable
by the Company upon conversion of the shares of the Company's Series B
Convertible Preferred Stock (the "Series B Preferred Stock") held by the Selling
Stockholders and as a form of payment of dividends on the Series B Preferred
Stock. The shares of Common Stock as to which this Prospectus relates are
hereinafter referred to as the "Shares." The Company will receive no part of the
proceeds of sales of the Shares by the Selling Stockholders. The Shares are
being registered by the Company pursuant to registration rights granted to the
Selling Stockholders.
On July 10, 1998, pursuant to a Securities Purchase Agreement dated as of
that date (the "Purchase Agreement"), the Company sold 500 shares of the Series
B Preferred Stock for an aggregate purchase price of $25,000,000 in a private
placement to a group of accredited investors in a transaction exempt from the
registration requirements of the Securities Act. The shares of Series B
Preferred Stock are convertible into shares of Common Stock. Each share of
Series B Preferred Stock is convertible into that number of shares of Common
Stock equal to (i) such share's stated value of $50,000 plus any accrued and
unpaid dividends divided by (ii) an initial conversion price of $4.774. The
conversion price is subject to adjustment as follows: the conversion price will
be increased by one-half the amount by which the average of the 15 lowest
average daily trading prices (as defined pursuant to the provisions of the
Series B Preferred Stock) of the Common Stock during the 45 trading days prior
to the date of conversion (the "Trading Price") exceeds $7.956 per share;
conversely, should the Trading Price (as defined) prior to a conversion be equal
to or below $3.58 per share, the conversion price will be such Trading Price.
Notwithstanding the foregoing, if the Company consummates certain types of
equity financings, including, without limitation, a drawdown under its existing
$50 million equity line, thereafter the conversion price will be subject to
adjustment as follows: the conversion price will be increased by one-half the
amount by which the Trading Price exceeds $7.956 per share; conversely, (i)
should the Trading Price prior to a conversion be less than $7.956 per share but
greater than $4.774 per share, the conversion price will be $4.774 per share and
(ii) if the Trading Price prior to a conversion is equal to or below $4.774 per
share, the conversion price will be such Trading Price. Based on the Trading
Price as of November 3, 1998, 11,324,262 shares of Common Stock, representing
approximately 28.8% of the shares of Common Stock outstanding on such date,
would be issuable upon conversion of the Series B Preferred Stock and as
dividends on such shares of Series B Preferred Stock as of such date.
Pursuant to the terms of the Series B Preferred Stock, any holder of Series
B Preferred Stock will not be permitted at any time to convert an amount of
Series B Preferred Stock which would result in such holder beneficially owning
(other than shares of Common Stock beneficially owned through ownership of
Series B Preferred Stock) more than 4.99% of the then outstanding capital stock
of the Company absent 61 day prior written waiver by such holder. Such
restriction relates to the convertibility of the Series B Preferred Stock and
applies to the initial purchasers thereof and to any subsequent purchasers or
transferees of the Series B Preferred Stock but not to any subsequent
purchasers or transferees of the Comon Stock issued or issuable upon
conversion of the Series B Preferred Stock. Subject to certain conditions,
including the Common Stock trading above $9.548 per share, the Company may
elect any time after one year from the issue date to require
<PAGE> 3
conversion of some or all of the Series B Preferred Stock. Any outstanding
balance of Series B Preferred Stock is subject to mandatory conversion or, at
the option of the Company, redemption three years from the date of issuance,
subject to extension upon certain events. Each share of the Series B Preferred
Stock bears cumulative dividends at the rate of 5% (i.e., $2,500) per annum
payable on the first day of each calendar quarter beginning on the earlier of
(i) the first day of the calendar quarter immediately following the date of this
Prospectus or (ii) January 1, 1999. Dividends are payable in shares of Common
Stock (at the then prevailing market price) or, at the option of the Company, in
cash. Subject to certain conditions, the Company has a right beginning in
January 1999 to require the holders of the Series B Preferred Stock to purchase
up to an additional 500 shares of Series B Preferred Stock at a purchase price
of $50,000 per share. This prospectusdoes not relate to the issuance or resale
of any shares of Common Stock issuable by the Company upon conversion of the
additional shares of Series B Preferred Stock which may be issued in
January 1999.
Issuance by the Company of shares of Common Stock upon conversion of the
Series B Preferred Stock equal to or in excess of an aggregate of 7,864,834
shares (20% of the number of shares of Common Stock outstanding on the date of
issuance of the Series B Preferred Stock) is subject to the Company's compliance
with Rule 4460(i) of The Nasdaq Stock Market, which would require approval of
the Company's stockholders prior to such issuance.
The Selling Stockholders have not advised the Company of any specific plans
for the distribution of the Shares covered by this Prospectus. It is
anticipated, however, that the Shares may be offered by the Selling Stockholders
from time to time in one or more transactions on The Nasdaq National Market, in
privately negotiated transactions at such prices as may be agreed upon, or in a
combination of such methods of sale. The Selling Stockholders may effect such
transactions by selling the Shares to or through broker-dealers and such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Stockholders or the purchasers of the Shares for
whom such broker-dealers may act as agent or to whom they sell as principal or
both (which compensation to a particular broker-dealer might be in excess of
customary commissions). The price at which any of the Shares may be sold, and
the commissions, if any, paid in connection with any such sale, are unknown and
may vary from transaction to transaction. The Company will pay all expenses
incident to the offering and sale of the Shares to the public other than any
commission and discounts of underwriters, dealers or agents and any transfer
taxes. See "Selling Stockholders" and "Plan of Distribution."
The Common Stock is listed on The Nasdaq National Market under the symbol
"ATIS." On November 3, 1998 the last sale price of the Common Stock was 2.9375
per share.
The Securities and Exchange Commission (the "Commission") may take the view
that, under certain circumstances, the Selling Stockholders and any
broker-dealers or agents that participate with the Selling Stockholders in the
sale of the Shares may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"). Commissions,
discounts or concessions received by any such broker-dealer or agent may be
deemed to be underwriting commissions under the Securities Act. The Company and
the Selling Stockholders have agreed to certain indemnification arrangements.
See "Plan of Distribution."
THE DATE OF THIS PROSPECTUS IS NOVEMBER __, 1998.
<PAGE> 4
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE BY THIS
PROSPECTUS TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED
IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING
STOCKHOLDER OR BY ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SHARES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE OF OR OFFER TO SELL THE SHARES MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
________________
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements and other information
with the Commission. Such reports, proxy and information statements and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
NW, Washington, D.C. 20549, and at the following Regional Offices of the
Commission: New York Regional Office, Seven World Trade Center, Suite 1300, New
York, New York 10048 and Chicago Regional Office, Northwest Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may be obtained by mail at prescribed rates from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, NW, Washington,
D.C. 20549. The Commission maintains a web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the site is
http://www.sec.gov. The Common Stock of the Company is listed on The Nasdaq
National Market, and such reports, proxy and information statements and other
information concerning the Company may be inspected at the offices of Nasdaq
Operations, 1735 K Street, NW, Washington, D.C., 20006.
ADDITIONAL INFORMATION
This Prospectus constitutes a part of a Registration Statement on Form S-3
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") filed by the Company with the Commission under the
Securities Act. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, with respect to the Company and the shares of Common Stock offered
hereby, reference is hereby made to the Registration Statement. The Registration
Statement may be inspected at the public reference facilities maintained by the
Commission at the addresses set forth in the preceding paragraph. Statements
contained herein concerning any document filed as an exhibit are not necessarily
complete and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement. Each such statement is
qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Company (File No.
0-016607) pursuant to the Exchange Act are hereby incorporated by reference in
this Prospectus:
(1) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
(2) The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1998 and June 30, 1998;
(3) The Amended Quarterly Report on Form 10-Q/A for the quarter ended March
31, 1998, filed with the Commission on August 27, 1998;
(4) The definitive Proxy Statement for the Company's 1998 Annual Meeting of
Stockholders filed with the Commission on April 17, 1998 pursuant to Regulation
14A;
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(5) The Company's Current Report on Form 8-K filed with the Commission on
July 16, 1998;
(6) The Company's Registration Statement on Form 8-A dated July 28, 1992;
(7) The Company's Registration Statement on Form 8-A dated January 6, 1995;
and
(8) All other reports filed by the Company pursuant to Sections 13(a) or
15(d) of the Exchange Act since December 31, 1997.
All reports and other documents subsequently filed by the Company pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of this offering shall be deemed to be
incorporated by reference into this Prospectus, to the extent required, and to
be a part of this Prospectus from the date of filing of such reports and
documents.
Any statement contained in a document incorporated by reference into this
Prospectus shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus has been
delivered, upon written and oral request of such person, a copy of any or all of
the foregoing documents incorporated by reference into this Prospectus (other
than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into such documents). Requests for such documents
should be submitted in writing to Investor Relations, Advanced Tissue Sciences,
Inc., 10933 North Torrey Pines Road, La Jolla, CA 92037, or by telephone at
(619) 450-5730.
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THE COMPANY
THE FOLLOWING IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION
AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS, INCLUDING THE INFORMATION UNDER
"RISK FACTORS."
Advanced Tissue Sciences, Inc. (the "Company") is a leading tissue
engineering company engaged in the development of human-based tissue products
for therapeutic applications. The Company is currently focusing its efforts
primarily on skin, cartilage and cardiovascular products. Utilizing principles
of cell biology, bioengineering, biochemistry, and polymer and transplant
science, the Company has developed and is applying a proprietary core technology
which permits living human cells to be cultured ex vivo in a manner that allows
the cells to develop and assemble into a functioning three-dimensional tissue.
With this proprietary technology, the Company has successfully replicated a
variety of human tissues. The Company's two skin products, Dermagraft(R) and
TransCyte(TM) (formerly Dermagraft-TC(R)), are currently being sold in certain
markets and the Company has other products in various stages of development.
The Company's objective is to redefine tissue repair and transplantation by
developing, manufacturing and marketing products produced through tissue
engineering. The Company's product strategy is to utilize its patented core
technology to develop multiple products which address unmet therapeutic needs or
offer improved, cost-effective alternatives to current treatment modalities. By
building upon its base of scientific knowledge through the continued application
of its proprietary core technology, the Company believes it will be able to
achieve significant synergies in the development, clinical testing and
manufacture of successive tissue products. In addition, the Company is focusing
its development programs on products which are currently being or are expected
to be regulated as medical devices. Medical devices are generally subject to a
shorter regulatory approval process than biologics or pharmaceuticals.
Leading the Company's product development efforts are its therapeutic skin
products which address the burn and skin ulcer markets. These products are based
on three-dimensional, human tissues designed by the Company as temporary or
permanent replacements for human dermis. These products were developed for
conditions where the dermis (the inner skin layer) has been injured or
destroyed, such as in severe burns and chronic skin ulcers. The dermis is
essential to normal skin function and healing and, unlike epidermis (the outer
skin layer), does not regenerate into normal tissue after injury.
TRANSCYTE (FORMERLY DERMAGRAFT-TC)
In March 1997, the Company received marketing approval from the U.S. Food
and Drug Administration (the "FDA") for its first therapeutic product,
TransCyte, a temporary covering for severe, full-thickness burns. In addition,
in October 1997, the Company received FDA approval to market TransCyte for
partial-thickness burns in the United States. TransCyte is currently being
marketed for burns, and will be marketed for other wound care applications,
under a recently expanded joint venture with Smith & Nephew plc ("Smith &
Nephew"). TransCyte was also approved for sale in Canada for severe and
partial-thickness burns in January 1998.
TransCyte consists of a dermal tissue with an ultra-thin synthetic covering
that acts as a protective cover. In full-thickness burns, TransCyte is designed
to help retain fluids and reduce the risk of infection until a sufficient amount
of the patient's own skin becomes available for grafting. In partial-thickness
burns, TransCyte, as compared to silver sulfadiazine, has been shown to
significantly reduce pain and to heal burns faster and with less scarring.
Of the approximately 1.2 million people who suffer burn injuries annually
in the United States, up to 13,000 are severely burned and require skin grafts.
TransCyte was initially approved to address the approximately 1,500 severely
burned patients with burns exceeding 20% body surface area. Another 30,000 to
40,000 burn victims, often children, suffer the partial to mid-dermal burns also
being addressed by TransCyte. These burns frequently result from household
hazards such as scalds from hot liquids, faulty heating pads or misuse of
ignition fluids.
DERMAGRAFT
Dermagraft for the treatment of diabetic foot ulcers was approved for sale
in Canada in August 1997 and was introduced in the United Kingdom and several
other European countries late in 1997 through the joint venture with Smith &
Nephew. The Company also submitted a Premarket Approval ("PMA") application to
the FDA for approval to market Dermagraft for the treatment of diabetic foot
ulcers in the United States. In January 1998, an FDA advisory panel recommended
approval of Dermagraft with the condition that the Company perform a
post-marketing study to confirm efficacy and provide physician
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training. However, in June 1998, the FDA decided the PMA application was not
approvable without supportive data from an additional controlled clinical
trial. The Company has recently received approval from the FDA allowing it to
begin the requested clinical trial. Based on the clinical plan, the Company
believes the additional data could be available for submission in twelve to
eighteen months after trial initiation, assuming a reasonable rate of patient
enrollment and data consistent with its previous PMA submission.
Dermagraft is a dermal replacement product grown on a bioabsorbable
scaffold. It is designed to provide a healthy, metabolically active dermal
matrix in chronic ulcers to support wound closure. Healing skin ulcers faster
can potentially reduce the risk of infection (and, in the case of diabetic foot
ulcers, the subsequent risk of amputation), the need for skin grafting and
reconstructive procedures. Chronic skin ulcers that may be addressed by
Dermagraft include diabetic foot ulcers, venous ulcers and pressure ulcers.
Approximately 800,000 diabetic foot ulcers are estimated to be treated in the
United States each year, approximately half of which are believed to represent
the target market for Dermagraft. It is estimated that approximately 1.5 million
patients are affected by pressure ulcers and approximately 500,000 patients are
diagnosed with venous ulcers in the United States each year.
Under the joint venture agreement with Smith & Nephew, Advanced Tissue
Sciences has principal responsibility for manufacturing and Smith & Nephew has
primary responsibility for the worldwide sales and marketing of Dermagraft.
Smith & Nephew is a world leader in wound care sales with an established sales
force in over 90 countries. Smith & Nephew is known for its comprehensive
training and customer education programs, and has successfully launched several
advanced wound care products. The joint venture also expects to begin clinical
trials of Dermagraft in the treatment of venous ulcers and pressure ulcers.
ORTHOPEDICS
Through a separate joint venture with Smith & Nephew, the Company is
developing tissue engineered cartilage for orthopedic applications utilizing its
proprietary three-dimensional culture system. Over the past several years, most
of the joint venture's activities have been directed toward the development of a
human tissue engineered articular cartilage product. Tissue engineered articular
cartilage could provide a significant opportunity to treat patients at an
earlier stage of joint degeneration, thereby delaying, or in some cases
eliminating, the need for total joint replacements. The pace of development of a
human-based, tissue engineered articular cartilage slowed during 1997 as a
result of the Company's focus on optimizing the product. Efforts to optimize the
product are continuing in 1998 as the basis for advancing into clinical trials.
The joint venture has also developed prototypes for a tissue engineered meniscus
which it expects to move into preclinical studies during 1998. There are over
1.2 million arthroscopic procedures for repair of the knee, including procedures
involving articular cartilage, meniscus and ligament performed annually in the
United States.
CARDIOVASCULAR
Through the use of its tissue engineering technology, Advanced Tissue
Sciences is working on developing blood vessels which will grow and repair
normally. The Company's tissue engineered products may provide enhanced
biocompatibility and improved patency with a reduced need for the anticoagulant
drugs required with currently available products. In October 1997, Advanced
Tissue Sciences was awarded a $2 million Advanced Technology Program grant from
the National Institute of Standards and Technology. In collaboration with the
Department of Bioengineering at the University of California, San Diego
("UCSD"), the Company is leading a multi-disciplinary effort to design,
construct and evaluate tissue engineered vascular grafts produced from cells
grown on a biocompatible scaffold. The grant is structured to support this
development program over a three-year period. The project will integrate current
advances in cell culture, bioreactor technology, biomaterials and in vivo blood
vessel mechanics to create a unique, living tissue replacement for blood
vessels. The successful integration of these technologies through the
collaboration between the Company and UCSD could lead to the development of
grafts to treat coronary and peripheral artery vascular diseases.
In the United States, over 900,000 people die each year from cardiovascular
disease. More specifically, 14 million people suffer from coronary artery
disease and over 500,000 coronary artery bypass procedures are performed
annually in the United States. Likewise, each year approximately 70,000 patients
undergo surgery for the replacement of peripheral vascular grafts.
SMITH & NEPHEW PLC
In April 1996, the Company entered into an agreement with Smith & Nephew to
form a joint venture for the worldwide commercialization of Dermagraft in the
treatment of diabetic foot ulcers (the "Dermagraft Joint Venture"). Smith &
Nephew is a worldwide healthcare company with extensive sales and distribution
capabilities. It develops, manufactures and markets a wide
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range of tissue repair products, principally addressing the areas of bone,
joints, skin and other soft tissue. In January 1998, Advanced Tissue Sciences
and Smith & Nephew expanded the Dermagraft Joint Venture to include venous
ulcers, pressure ulcers, burns and other skin wounds. At that time, the
Company retained the exclusive right to market TransCyte for full and
partial-thickness burns in the United States, while the Dermagraft Joint
Venture was granted the right to market TransCyte for other skin wounds.
In August 1998, the Company and Smith & Nephew expanded the Dermagraft Joint
Venture to include exclusive rights to TransCyte for full and partial-
thickness burns in the United States effective October 1, 1998.
As consideration for entering into the Dermagraft Joint Venture, Advanced
Tissue Sciences received a $10 million up front fee in 1996 and Smith & Nephew
made a $20 million equity investment in the Company in January 1998. The Company
will also receive an additional $15 million by January 1999 and could receive,
subject to the achievement of certain milestones related to regulatory
approvals, reimbursement and sales levels, additional payments of up to $136
million. Advanced Tissue Sciences and Smith & Nephew are sharing equally in the
revenues and expenses of the Dermagraft Joint Venture, except for $6 million in
clinical and regulatory costs, and certain costs associated with the
commercialization of TransCyte, which are to be funded by Advanced Tissue
Sciences.
In 1994, Smith & Nephew and Advanced Tissue Sciences entered into a
separate joint venture for the worldwide development, manufacture and marketing
of human tissue engineered cartilage for orthopedic applications (the "Cartilage
Joint Venture"). Under the terms of the Cartilage Joint Venture agreement,
Advanced Tissue Sciences will be responsible for supervising the manufacturing
of cartilage tissue products. The Cartilage Joint Venture will execute the
research and development program, develop a worldwide marketing plan, and will
utilize Smith & Nephew's established selling and distribution network to market
the products. Smith & Nephew Endoscopy, a world leader in arthroscopy, is
separately responsible for developing and manufacturing instrumentation that
could be used for the arthroscopic insertion of the joint venture's cartilage
products. As specified in the Cartilage Joint Venture agreement, Smith & Nephew
contributed the first $10 million in Cartilage Joint Venture funding and the
Company contributed certain technology licenses.
Advanced Tissue Sciences, Inc. was incorporated under the laws of the State
of Delaware in 1987. The Company maintains its executive offices at 10933 North
Torrey Pines Road, La Jolla, California 92037, and its telephone number at that
address is (619) 450-5730.
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RISK FACTORS
THIS PROSPECTUS AND THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE CONTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISK AND UNCERTAINTIES. THE STATEMENTS
CONTAINED IN THIS PROSPECTUS THAT ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION
21E OF THE EXCHANGE ACT, INCLUDING WITHOUT LIMITATION, STATEMENTS REGARDING THE
COMPANY'S EXPECTATIONS, BELIEFS, ESTIMATES, INTENTIONS AND STRATEGIES ABOUT THE
FUTURE. WORDS SUCH AS "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," "BELIEVES,"
"SEEKS," "ESTIMATES," VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES
AND ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT; THEREFORE, ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE EXPRESSED OR FORECASTED IN ANY SUCH FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN THE
FOLLOWING RISK FACTORS, ELSEWHERE IN THIS PROSPECTUS AND IN THE DOCUMENTS
INCORPORATED HEREIN BY REFERENCE. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE
PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION,
FUTURE EVENTS OR OTHERWISE. POTENTIAL INVESTORS SHOULD CONSIDER CAREFULLY THE
FOLLOWING FACTORS, AS WELL AS THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE
IN THIS PROSPECTUS AND IN THE DOCUMENTS INCORPORATED BY REFERENCE, BEFORE MAKING
A DECISION TO INVEST IN THE SHARES OFFERED HEREBY.
UNCERTAINTY OF MARKET ACCEPTANCE
The Company believes that its growth over the next several years will
depend in large part upon broad market acceptance of Dermagraft for the
treatment of diabetic foot ulcers and, to a lesser extent, of TransCyte in the
United States and key international markets targeted by the Company and Smith &
Nephew. In January 1998, an FDA Advisory Panel recommended approval of the
Company's PMA application for Dermagraft for the treatment of diabetic foot
ulcers subject to certain conditions. However, the FDA elected not to follow the
panel's recommendation and requested that an additional controlled clinical
trial be completed by the Company in support of its PMA application for
Dermagraft in the treatment of diabetic foot ulcers. No assurance can be given
that the Company will successfully complete the clinical trial, the clinical
trial will be completed within any specific timeframe or the Company will obtain
FDA or other regulatory approvals of Dermagraft (or that any such approvals will
be obtained on a timely basis). (See "Government Regulation.") The Company has
received FDA approval to market TransCyte and has been marketing that product
since March 1997. Accordingly, the commercial acceptance of Dermagraft for the
treatment of diabetic foot ulcers has yet to be tested and TransCyte has been
marketed and sold for only a limited period of time.
Each of these products is based on new and innovative technologies and
there can be no assurance that such products will be broadly accepted by either
the medical community or the general population as alternatives to existing
methods of treatment. The acceptance of the Company's products may be adversely
affected by their respective cost, concerns related to efficacy, the
effectiveness of alternative methods of treatment and the insufficiency of
third-party reimbursement. Any future reported adverse events or other
unfavorable publicity involving patient outcomes from use of the Company's
products or FDA enforcement actions could also adversely affect acceptance of
such products. The Company has limited experience marketing or obtaining
third-party reimbursement for its products.
In addition, the Company will have to establish an effective internal sales
and marketing organization and/or rely on Smith & Nephew or on arrangements with
others to market its products domestically and internationally. Moreover, in the
near term, the Company's success in generating market acceptance of Dermagraft
and TransCyte will depend on the marketing efforts of Smith & Nephew. The
Company cannot control the amount and timing of resources Smith & Nephew may
devote to marketing and selling the Dermagraft and TransCyte products, and there
can be no assurance that Smith & Nephew will perform its obligations under the
Dermagraft Joint Venture as expected. The failure of the Company to achieve
broad acceptance of Dermagraft for the treatment of diabetic foot ulcers and, to
a lesser extent, TransCyte would have a material adverse effect on the Company's
business, financial condition and results of operations.
ABSENCE OF PROFITABLE OPERATIONS; NEED FOR ADDITIONAL FUNDS
To date, the Company has experienced significant operating losses in
funding the research, development, testing and marketing of its products and
expects to continue to incur substantial operating losses. The Company has
incurred cumulative
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net operating losses of $198.1 million through June 30, 1998. The Company's
ability to achieve profitability will depend in part upon its ability, either
independently or in collaboration with Smith & Nephew, to successfully
manufacture and market Dermagraft for skin ulcers and TransCyte for burns.
There can be no assurance that the Company will ever achieve a profitable
level of operations or that profitability, if achieved, can be sustained on an
ongoing basis.
The further development of the Company's technology and products as well as
any further development of manufacturing capabilities or the establishment of
any additional sales, marketing and distribution capabilities will require the
commitment of substantial funds. While the Company believes that its existing
working capital, the milestone payments under the expanded Dermagraft Joint
Venture, its borrowing capacity under the Cartilage Joint Venture and its access
to funds under an equity line will be sufficient to meet its present operating
and capital requirements for at least the next twelve months, the Company may
ultimately need to raise additional funds to support its long-term product
development and commercialization programs. The Company could acquire such
additional funding through collaborative arrangements, the extension of existing
arrangements, additional public or private offerings of debt or equity
securities or other means.
There can be no assurance that the Company will satisfy the milestones for
additional funds under the Dermagraft Joint Venture or that adequate funds will
be available under other existing or future arrangements when such funds are
needed or, if available, on terms acceptable to the Company. Insufficient funds
may require the Company to delay, scale back or eliminate certain of its
research and product development programs or to license third parties the right
to commercialize products or technologies that the Company would otherwise
commercialize itself.
UNCERTAINTY OF COLLABORATIVE ARRANGEMENTS AND STRATEGIC ALLIANCES
The Company is particularly dependent on Smith & Nephew with respect to the
Dermagraft and the Cartilage Joint Ventures. Although the Company believes that
Smith & Nephew has a significant economic motivation to succeed in performing
its contractual responsibilities under the Dermagraft and Cartilage Joint
Venture agreements, the amount and timing of resources to be devoted to such
performance are not within the control of the Company, and there can be no
assurance that Smith & Nephew will perform its obligations as expected.
Moreover, the Dermagraft and Cartilage Joint Ventures would be materially and
adversely affected if Smith & Nephew had a strategic shift in its business
focus. In addition, the Dermagraft and Cartilage Joint Venture agreements
provide that they may be terminated prior to their expiration under certain
circumstances that are outside the control of the Company. A termination of such
agreements, or a failure of Smith & Nephew to adequately perform its obligations
thereunder, would have a material adverse effect on the Company's ability to
successfully complete the development and testing of the products covered
thereby and to successfully penetrate the markets for such products. Any such
event could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company continually seeks and considers collaborative arrangements to
obtain funding for the development of its products. Such arrangements may
involve the issuance of additional equity or debt securities and marketing
rights to the funding party. The Company may seek collaborative arrangements and
separate funding for its programs which may include joint ventures, third party
equity investments or other financing structures. There can be no assurance
however that the Company will be able to negotiate additional collaborative
arrangements in the future on acceptable terms, if at all, or that such
collaborative arrangements will be successful. To the extent that the Company
chooses not to or is unable to establish such arrangements, it would experience
increased capital requirements to undertake research, development and marketing
of its proposed products at its own expense. In addition, the Company may
encounter significant delays in introducing its proposed products into certain
markets or find that the development, manufacture or sale of its proposed
products in such markets is adversely affected by the absence of such
collaborative agreements.
STAGE OF PRODUCT DEVELOPMENT
Although TransCyte has been approved for commercial sale and Dermagraft for
the treatment of diabetic ulcers is undergoing an additional controlled clinical
trial in the United States, the remainder of the Company's other products are at
earlier stages of research, development and testing. These products will require
significant additional research and development, including extensive preclinical
and clinical testing, and regulatory approvals prior to commercialization.
All of the Company's products are subject to the risks of failure inherent
in the development of products based on innovative technologies. Such risks
include the possibilities that any or all of these products are found to be
unsafe or ineffective or otherwise fail to receive necessary regulatory
approvals, that the products are uneconomical to market, that third parties may
hold proprietary rights that preclude the Company from marketing its products,
or that the Company's products fail to achieve market acceptance in light of
competing technologies and products. See "Patents and Proprietary Rights."
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UNCERTAINTIES REGARDING HEALTHCARE REIMBURSEMENT AND REFORM
The Company's ability to commercialize products successfully will depend in
part on the extent to which reimbursement for the costs of such products and
related treatments will be available from government health administration
authorities, private health insurers and other organizations. In the United
States, government and other third-party payors are increasingly attempting to
contain healthcare costs by limiting both coverage and the level of
reimbursement for new products approved for marketing by the FDA, and by
refusing, in some cases, to provide any coverage for uses of approved products
for indications for which the FDA has not granted marketing approval.
Initiatives to reduce the federal deficit and to reform healthcare delivery are
increasing these cost containment efforts. As managed care organizations
continue to expand as a means of containing healthcare costs, the Company
believes there may be attempts by such organizations to restrict the use of,
delay authorization to use, or limit coverage and the level of reimbursement
for, new products, such as those being developed and commercialized by the
Company, pending completion of cost/benefit analyses of such products by those
managed care organizations. Internationally, where national healthcare systems
are prevalent, little if any funding may be available for new products, and cost
containment and cost reduction efforts can be more pronounced than in the United
States.
The Company has supported health economics studies and research and has or
is developing cost offset or cost-effectiveness models with respect to its
TransCyte and Dermagraft products in an effort to help obtain appropriate and
adequate third party coverage and reimbursement for these products. However,
these products are novel and as such are subject to inherent uncertainty in the
area of reimbursement. There can be no assurance that adequate government or
private payor coverage or levels of reimbursement will be available for any of
the Company's products or for the Company to maintain price levels sufficient
for the realization of an appropriate return on its investment in such products.
Failure to obtain sufficient coverage and reimbursement levels for uses of the
Company's products could have a material adverse effect on the market acceptance
of such products and the Company's business, financial condition and results of
operations.
PRODUCT LIABILITY CLAIMS AND INSURANCE
The use of any of the Company's products, whether for commercial
applications or during clinical trials, exposes the Company to an inherent risk
of product liability claims in the event such products cause injury, disease or
result in adverse effects. Such liability might result from claims made directly
by healthcare institutions, contract laboratories or others selling or using
such products. The Company and the Dermagraft Joint Venture currently maintain
product liability insurance coverage; however, there can be no assurance that
the level or breadth of any insurance coverage will be sufficient to fully cover
potential claims. Such insurance can be expensive and difficult to obtain. There
can be no assurance that adequate insurance coverage will be available in the
future at an acceptable cost, if at all, or in sufficient amounts to protect the
Company against such liability. The obligation to pay any product liability
claim in excess of whatever insurance the Company or the Dermagraft Joint
Venture are able to acquire could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's tissue repair and transplantation products are complex and
must be manufactured under well-controlled and sterile conditions, in addition
to meeting strict product release criteria. Any manufacturing errors or defects,
or uncorrected impurity or variation in a raw material, either unknown or
undetected by the Company, could affect the quality and safety of the Company's
products. If any of the defects were material, the Company could be required to
undertake a market withdrawal or recall of the affected products. There can be
no assurance a product recall will not occur in the future. The cost of a market
withdrawal or product recall could be significant and could have a material
adverse effect on the Company's business, financial condition and results of
operations. See - "Government Regulation."
TECHNOLOGICAL CHANGE AND COMPETITION
The biomedical technology industry is subject to rapid, unpredictable and
significant technological change. Competition from universities, research
institutions and pharmaceutical, chemical and biotechnology companies is
intense. Many competitors or potential competitors have greater financial
resources, research and development capabilities and manufacturing and marketing
experience than the Company. In general, the first biomedical product to be
commercialized for a particular therapeutic indication is often at a significant
competitive advantage relative to later entrants to the market. Accordingly, the
relative speed with which the Company can develop products, complete clinical
trials, obtain regulatory approvals and develop commercial manufacturing
capability may be determinative factors in establishing the Company's
competitive position. The Company's ability to attract and retain qualified
scientific, manufacturing, marketing and other personnel, obtain and maintain
patent protection and secure funding are also expected to be key competitive
factors for the Company.
In the field of tissue engineering and the treatment of damaged or diseased
tissue, the Company competes with several companies which are developing various
tissue replacement products, including skin substitutes and cultured cartilage.
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In addition, the Company is aware of a number of biotechnology, pharmaceutical,
medical device and chemical companies that are developing other types of
products as alternatives to tissue replacement for a variety of indications,
including burns and chronic skin ulcers. These treatments employ a variety of
approaches such as growth factors, tri-peptides and completely synthetic
materials.
In the area of burns, the Company competes primarily with cadaver skin or
porcine tissue. The Company is also aware of several companies that have
developed technologies involving processed cadaver skin used as a dermal
replacement (LifeCell Corporation), or sheets of epidermis grown from the
patient's own skin (Genzyme Tissue Repair and Cell Culture Technology). These
products have not required FDA approval and are, therefore, currently available
on the market for the treatment of severe burns. Integra Life Sciences
("Integra") is marketing Integra Artificial Skin, consisting of a bovine
collagen and glycosaminoglycan matrix with a synthetic polymer covering, for the
treatment of burn wounds. In addition, the Company is aware that Ortec
International, Inc. is currently in clinical trials with its composite cultured
skin product, consisting of fibroblasts and keratinocytes on a bovine collagen
sponge, for the treatment of burn wounds. Several other companies are also
developing or plan to develop growth factors as a treatment for partial
thickness or small full-thickness wounds.
In the area of diabetic foot ulcers, Chiron Corporation and the
Ortho-McNeil division of Johnson & Johnson, have received FDA approval and
recently began marketing a platelet-derived growth factor ("PDGF") for the
treatment of diabetic foot ulcers. In addition, Organogenesis, Inc.
("Organogenesis") has begun clinical trials for the use of Apligraf, a product
using cultured human cells seeded onto a bovine collagen matrix, for the
treatment of diabetic foot ulcers. Organogenesis has already received regulatory
approval to market Apligraf for the treatment of venous ulcers in the United
States and Canada. Organogenesis has entered into an alliance with Novartis
Pharma AG for the marketing of Apligraf.
With respect to cartilage repair, Genzyme Tissue Repair is currently
selling a service to process a patient's own cartilage cells as a treatment for
articular defects in the knee. The Company is aware that Integra and Osiris
Therapeutics, Inc. are also engaged in research on cultured cartilage products.
The Company is not aware of any competitor that is developing an off-the-shelf,
human cartilage tissue that can be arthroscopically inserted.
For all of its products, the Company expects to compete primarily on the
uniqueness of its technology and product features, on the quality and
cost-effectiveness of its products and, in some cases, on the timing of
commercial introduction. The Company believes that its tissue engineered
products may have many attributes that differentiate it from other competitors,
including the fact that the Company's products are human-based tissue products
designed to be available "off-the-shelf" to the end-users. However, other
factors such as its ability to secure regulatory approval for its products, to
implement production and marketing plans and to secure adequate capital
resources, will also impact its competitive position. There can be no assurance
that the Company will have the resources to compete successfully with the
above-mentioned companies or other companies or that competition generally will
not adversely affect the Company's results of operations or ability to
successfully market its products.
PATENTS AND PROPRIETARY RIGHTS
The Company's ability to compete effectively will depend, in part, on its
ability to maintain the proprietary nature of its technology and manufacturing
processes. The Company relies on patents, trade secrets and know-how to maintain
its competitive position. To date, the Company owns 23 issued and nine allowed
patents in the United States. In addition, 20 foreign counterparts to some of
the United States patents have issued in several foreign countries. The United
States patents expire at various times between 2005 and 2016. The Company has
additional United States and foreign patent applications relating to its tissue
engineering technology. The Company has certain licensing rights to United
States and foreign patents and patent applications filed by the Massachusetts
Institute of Technology related to cell growth and organ regeneration and
repair, and biodegradable polymers, subject to certain limitations as to
applicable tissues and fields of use, and by the University of Florida related
to a stem cell proliferation factor.
There can be no assurance that any applications will result in issued
patents or that any current or future issued or licensed patents, trade secrets
or know-how will afford protection against competitors with similar technologies
or processes, or that any patents issued will not be infringed upon or designed
around by others. In addition, there can be no assurance that others will not
independently develop proprietary technologies or processes which are the same
as or substantially equivalent to those of the Company. The Company could also
incur substantial costs in defending itself in suits brought against it on such
patents or in bringing suits to protect the Company's patents or patents
licensed by the Company against infringement. In addition to patent protection,
the Company relies on trade secrets, proprietary know-how and technological
advances which the Company seeks to protect in part by confidentiality
agreements with its collaborative partners, employees and consultants. There can
be no assurance that these agreements will not be breached, that the Company
will have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or independently discovered by competitors.
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GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the manufacture and marketing of the
Company's present and proposed products and in its ongoing research and product
development activities. The Company's preclinical studies and clinical trials
and the manufacturing and marketing of its products are subject to extensive,
costly and rigorous regulation by various governmental authorities in the United
States and other countries. Many of the Company's proposed products will require
regulatory approval prior to commercialization. In particular, human therapeutic
products are subject to rigorous preclinical and clinical testing as a condition
of approval by the FDA and by similar authorities in foreign countries. The
process of obtaining required regulatory approvals by the FDA and other
regulatory authorities often takes many years, is expensive and can vary
significantly based on the type, complexity and novelty of the product. There
can be no assurance that any products developed by the Company, independently or
in collaboration with others, will meet applicable regulatory criteria to
receive the required approval for manufacturing and marketing.
In the United States, the FDA regulates the clinical testing, manufacture,
distribution and promotion of medical devices and biologics pursuant to the
Federal Food, Drug and Cosmetic Act (the "FDC Act") and regulations promulgated
thereunder. The Company's TransCyte and Dermagraft products and cartilage
products are subject to regulation by the FDA as medical devices. The Company's
other tissue replacement products, currently in various stages of development,
could be regulated either as medical devices or as biologic products.
Legislative and regulatory initiatives concerning the regulation of tissue and
organ transplants are ongoing and could possibly affect the future regulation of
the Company's tissue engineered products. It is not possible at the present time
to predict accurately either the timeframe for such action, or the ultimate
effect that such initiatives could have, if any, on the products under
development by the Company. Unlike PMA submissions for medical devices, the FDA
has no regulatory time limit within which it must review and act upon
submissions treated as biologics. As a result, the time period for final action
often takes several years from submission, usually exceeding that expected for a
PMA application.
The Company's TransCyte and Dermagraft products are regulated by the FDA as
medical devices. To obtain FDA approval to market medical devices, the FDA may
require proof of safety and efficacy in human clinical trials performed under an
Investigational Device Exemption (an "IDE"). An IDE application must contain
preclinical test data demonstrating the safety of the product for human
investigational use, information on manufacturing processes and procedures, and
proposed clinical protocols. If the IDE application is approved, human clinical
trials may begin. The results obtained from these trials, if satisfactory, are
accumulated and submitted to the FDA in support of a PMA application. Premarket
approval from the FDA is required before commercial distribution of devices
similar to those under development by the Company is permitted in the United
States.
A PMA application must be supported by extensive data, including
preclinical and human clinical trial data, to prove the safety and efficacy of
the device, and information about the device and its components including, among
other things, manufacturing, labeling and promotion. By regulation, the FDA has
180 days to review a PMA application and during that time an advisory committee
may evaluate the application and provide recommendations to the FDA. While the
FDA has responded to PMA applications within the allotted time period, reviews
more often occur over a significantly protracted period, usually twelve to
thirty-six months, and a number of devices for which a PMA application was
submitted by other companies have never been approved for marketing. The review
time is often significantly exceeded as the FDA may need additional information
or clarification of information provided. The FDA may also make a determination
that, based on deficiencies in the application or its interpretation of the
information provided, additional clinical trials are required. This process is
lengthy and expensive and there can never be assurance that FDA approval will be
obtained.
If the FDA's evaluation of the PMA application is favorable, the FDA
typically issues a letter requiring the applicant's agreement to specific
conditions (e.g., changes in labeling) or specific additional information to
secure final approval of the PMA application. Once the requirements are
satisfied, the FDA will issue a PMA for the approved indications, which can be
more limited than those originally sought by the manufacturer. The PMA can
include post-approval conditions that the FDA believes necessary to ensure the
safety and effectiveness of the device, such as restrictions on labeling,
promotion, sale and distribution. Failure to comply with the conditions of
approval can result in adverse enforcement action, including the loss or
withdrawal of the approval. Even after approval of a PMA, a new PMA or PMA
supplement is required in the event of a modification to the device, its
labeling or its manufacturing process affecting the safety or effectiveness of
the device.
In addition, FDA regulations obligate a manufacturer to inform the FDA
whenever there is reasonable evidence to suggest that one of its devices may
have caused or contributed to death or serious injury, or where one of its
devices malfunctions and if the malfunction were to recur, the device would be
likely to cause or contribute to a death or serious injury.
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In December 1996, the Company submitted a PMA application requesting
approval of Dermagraft for the treatment of diabetic foot ulcers. In February
1997, the FDA accepted the application for filing. The PMA submission was based
on the results of a pivotal trial from patients receiving Dermagraft within a
therapeutic range identified retrospectively from the clinical trial. Patients
receiving Dermagraft within the therapeutic range represented a majority but not
all the evaluable patients in the trial. The Company believes the data from
patients receiving Dermagraft within the therapeutic range demonstrate a
statistically significant improvement in complete healing at twelve and
thirty-two weeks. For all evaluable patients, although statistical significance
was not seen at twelve weeks in the pivotal clinical trial, a statistically
significant improvement in complete healing as compared to the control treatment
was seen at thirty-two weeks.
In January 1998, the General and Plastic Surgery Devices Panel of the
Medical Devices Advisory Committee to the FDA recommended that the FDA approve
Dermagraft for the treatment of diabetic foot ulcers in the United States, with
the conditions that the Company perform a post-marketing study to confirm
product efficacy at twelve weeks and provide physician training. During the
advisory panel meeting, certain panel members and representatives of the FDA
raised questions and concerns regarding the use and nature of the retrospective
analyses performed by the Company in identifying the therapeutic range.
Nevertheless, the advisory panel recommended approval of the product by a vote
of seven to two (one of the dissenting panel members voted against the
recommendation on the grounds that a post-marketing study was too burdensome).
However, in June 1998, the FDA decided the PMA application was not approvable
without supportive data from an additional controlled clinical trial. The
Company has recently received approval from the FDA allowing it to begin the
requested clinical trial. Based on the clinical plan, the Company believes the
additional data could be available for submission in twelve to eighteen months
after trial initiation, assuming a reasonable rate of patient enrollment and
data consistent with its previous PMA submission. No assurance can be given that
the Company will successfully complete the clinical trial, the clinical trial
will be completed within any specific timeframe or the Company will obtain FDA
or other regulatory approvals of Dermagraft (or that any such approvals will be
obtained on a timely basis).
The Company has constructed a commercial manufacturing facility for its
TransCyte and Dermagraft products. This facility must be registered, inspected,
and licensed by various regulatory authorities, including the California
Department of Health and Human Services, and must comply with FDA's Good
Manufacturing Practices (GMP) requirements, with elaborate testing, control,
documentation and other quality assurance procedures. The manufacturing facility
was initially inspected by the FDA in 1996, prior to the approval of TransCyte
for the treatment of full-thickness burns.
Following another inspection of the manufacturing facility in conjunction
with the Company's PMA application for the approval of Dermagraft for the
treatment of diabetic foot ulcers, the FDA notified the Company of numerous
objectionable observations under a Form FDA 483 letter (the "483 Letter") with
respect to the Company's manufacturing processes and systems for Dermagraft and
TransCyte. On March 26, 1998, the FDA issued a warning letter requiring the
Company to investigate and correct the objections identified by the FDA.
Specifically, the warning letter required the Company to address objectionable
observations with respect to (i) the control of environmental conditions, (ii)
procedures for implementing corrective and preventive actions, (iii) procedures
for the acceptance of products, (iv) investigations of complaints, (v)
compliance with medical device reporting regulations, and (vi) justification of
extended expiration dates. In response to certain issues raised by the FDA
inspection, the Company voluntarily recalled certain lots of Dermagraft and
TransCyte which contained a raw material that was out of specification. All of
the recalled lots complied with finished product specifications. The Company did
not receive any reports of patient injury or complications that it believes are
a result of products in the recalled lots. The Company believes the recall was a
prudent course of action to ensure that patients receive product of the highest
quality.
The Company responded to the 483 Letter and instituted corrective actions
to address the FDA's concerns. The Company's manufacturing facility successfully
completed a reinspection by the FDA in the third quarter of 1998. There can be
no assurance, however, that the Company's ongoing corrective actions will
continue to satisfy the FDA's concerns, that the FDA will not raise additional
issues on subsequent inspections, or that other enforcement actions will not be
taken by the FDA relating to the Company's manufacturing and quality assurance
systems in the future. The Company's manufacturing facility will have to be
inspected again before the FDA will consider approving a PMA application for
Dermagraft in the treatment of diabetic foot ulcers.
In general, if as a result of FDA inspections, adverse event reports or
information derived from any other source, the FDA believes the Company is not
in compliance with laws or regulations or that the Company's products pose any
health risk, the FDA can refuse to approve pending PMA applications; withdraw
previously approved PMA applications; require notification to users regarding
risks; request corrective labeling, promotional or advertising materials; issue
warning letters; require the Company to temporarily suspend marketing or
undertake product recalls; impose civil penalties; or institute legal
proceedings to detain or seize products, enjoin future violations, or seek
criminal penalties against the Company, its officers or employees. Civil
penalties may be imposed for GMP violations if the violations involve a
significant or knowing departure from the requirements of the
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FDC Act or a risk to public health. The FDA provides manufacturers with an
opportunity to be heard prior to the assessment of civil penalties. If civil
penalties are assessed, judicial review is available.
The Company exports, or intends to export, its products to foreign
countries. Exports of products that have market clearance from the FDA in the
United States do not require FDA authorization for export. However, foreign
countries often require, among other things, an FDA certificate for products for
export (a "CPE"). The FDA can refuse to issue a CPE until any outstanding GMP
violations are corrected.
With respect to the manufacture of products for which premarket approval is
granted, the Company will be subject to routine inspection by the FDA and
certain state agencies, including the California Department of Health and Human
Services, for compliance with GMP requirements, adverse event reporting
requirements, and other applicable regulations. In addition, Congress has
approved the Food and Drug Administration Modernization Act of 1997 (the
"Modernization Act"). The Modernization Act makes changes to the device
provisions of the FDC Act and other provisions in the Modernization Act affect
the regulation of devices. Among other things, the changes will affect the IDE
and PMA processes, and also will affect device standards and data requirements,
procedures relating to humanitarian and breakthrough devices, tracking and
post-market surveillance, accredited third party review, and the dissemination
of off label information. The Company cannot predict how or when these changes
will be implemented or what effect the changes will have on the regulation of
the Company's products. There can be no assurance that the Company will not
incur significant costs to comply with laws and regulations in the future or
that laws and regulations will not have a material adverse effect upon the
Company's business, financial condition or results of operations.
Although the FDA has classified TransCyte as a medical device, the State of
California and the State of New York have notified the Company that it must
register as a tissue bank in order to manufacture or distribute TransCyte in
those states. Although many states do not regulate tissue banks, there are
certain other states besides California and New York that do. Such states could
take a position similar to California and New York with regard to the regulatory
status of TransCyte. In June 1997, the Company submitted a request to the FDA
for an advisory opinion that the FDA's regulation of this product as a medical
device preempts New York from regulating it as human tissue under a different
licensing scheme. Both New York and California have provided written submissions
to the FDA urging the agency to deny the Company's request. To date, the FDA has
not ruled. If states are permitted to regulate TransCyte as a human tissue, the
Company and its customers could be subjected to a costly new layer of
regulation. In addition, under the laws of some states that regulate tissue,
including New York and Florida, the sale of human tissues for valuable
consideration is prohibited. The Company is currently distributing TransCyte in
the State of New York under a provisional tissue banking license. Due to the
similarities of the products, regulations applicable to TransCyte are also
expected to apply to the Company's Dermagraft product as well.
Whether regulated by the FDA as a medical device or biologic, or otherwise
by any state or foreign authority, the approval process for any of the Company's
products is expensive and time consuming and no assurance can be given that the
FDA or any regulatory agency will grant its approval. The inability to obtain,
or delays in obtaining, such approval would adversely affect the Company's
ability to commence marketing therapeutic applications of its technology. There
is no assurance that the Company will have sufficient resources to complete the
required testing and regulatory review processes. Furthermore, the Company is
unable to predict the extent of adverse governmental regulation which might
arise from future United States or foreign legislative or administrative action.
In addition, any products distributed by the Company pursuant to the above
authorizations are subject to pervasive and continuing regulation by the FDA.
Labeling and promotional activities are subject to scrutiny by the FDA and, in
certain instances, by the Federal Trade Commission.
The Company's research and development activities and operations involve
the controlled use of small quantities of radioactive compounds, chemical
solvents and other hazardous materials. In addition, the Company's business
involves the growth of human tissues. Although the Company believes that its
safety procedures for handling and disposing of such materials comply with the
standards prescribed by federal, state and local regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result and any liability could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company is also subject to various federal, state and local laws,
regulations and recommendations relating to such matters as safe working
conditions, laboratory and manufacturing practices. Although the Company
believes it is in compliance with these laws and regulations in all material
respects, there can be no assurance that the Company will not be required to
incur significant costs to comply with such laws or regulations in the future.
12
<PAGE> 16
DEPENDENCE ON KEY PERSONNEL
The Company's success will depend in large part upon its ability to attract
and retain qualified scientific, management, marketing and sales personnel as
well as the continued contributions of its existing senior management and
scientific and technical personnel. The Company faces strong competition for
such personnel and there can be no assurance that the Company will be able to
attract or retain such individuals. In particular, the loss of the services of
either Arthur J. Benvenuto, the Company's Chairman and Chief Executive Officer,
or Dr. Gail K. Naughton, its President and Chief Operating Officer, would have a
material adverse effect on the Company.
DEPENDENCE ON CERTAIN SUPPLIERS
Although most of the raw materials used in the manufacture of the Company's
Dermagraft products are available from more than one supplier, changes in
certain critical components (such as the polymers used in Dermagraft) could
cause the FDA to require the Company to prove equivalency of the materials or
potentially to modify or perform additional clinical trials for the Dermagraft
products, which could have the effect of restricting product available for sale.
To date, the Company has not experienced difficulty in obtaining necessary raw
materials.
The mesh framework used by the Company in Dermagraft is available under a
supply agreement with only one FDA-approved manufacturing source. Similarly, the
synthetic mesh framework used by the Company in TransCyte is only available
under a supply agreement with a different FDA-approved manufacturing source.
Because the FDA approval process requires manufacturers to specify their
proposed suppliers of active ingredients and certain component parts and
packaging materials in their applications, FDA approval of a new supplier would
be required if these materials become unavailable from the current supplier.
Although the Company has not experienced difficulty acquiring these
materials for the manufacture of its Dermagraft and TransCyte products, no
assurance can be given that interruptions in supplies will not occur in the
future or that the Company would not have to obtain substitute vendors for these
materials. Any significant supply interruption would adversely affect the
Company's clinical trials as well as its product development and marketing
programs. In addition, an uncorrected impurity or supplier's variation in a raw
material, either unknown to the Company or incompatible with the Company's
manufacturing process, could have a material adverse effect on the Company's
ability to manufacture products.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock, like that of the securities
of other biotechnology companies, has fluctuated significantly in recent years
and is likely to fluctuate in the future. From time to time, the market for
securities of biotechnology companies has in fact experienced significant price
and volume fluctuations that are unrelated to the operating performance of such
companies. In addition, announcements by the Company or others regarding
scientific discoveries, technological innovations, commercial products, patents
or proprietary rights, the progress of clinical trials or government regulation,
public concern as to the safety of devices or drugs, the issuance of securities
analysts' reports and general market conditions may all have a significant
effect on the market price of the Common Stock. Fluctuations in financial
performance from period to period also may have a significant impact on the
market price of the Common Stock.
COMPLIANCE WITH NASDAQ LISTING REQUIREMENTS; DISCLOSURE RELATING TO LOW-PRICED
STOCK
The Company's Common Stock is quoted on The Nasdaq National Market.
Pursuant to the terms of the Purchase Agreement, the Company is required to list
the Common Stock issuable upon conversion of the Series B Preferred Stock on The
Nasdaq National Market. However, in order to continue to be included in The
Nasdaq National Market, a company must meet certain maintenance criteria.
Effective February 1998, the maintenance criteria require a minimum bid price of
$1.00 per share, $4,000,000 in net tangible assets (total assets less total
liabilities and goodwill) and $5,000,000 market value of the public float
(excluding shares held directly or indirectly by any officer or director of the
Company and by any person holding beneficially more than 10% of the Company's
outstanding shares). Failure to meet these maintenance criteria may result in
the delisting of the Company's Common Stock from The Nasdaq National Market and
the quotation of the Company's Common Stock on the Nasdaq SmallCap Market (the
"SmallCap Market"), if the requirements for inclusion on the SmallCap Market are
met. As a result of quotation on the SmallCap Market, an investor may find it
more difficult to dispose of the Company's Common Stock. Effective February
1998, a company must have $4,000,000 in net tangible assets or $50,000,000
market capitalization or $750,000 net income in two of the last three years, a
minimum bid price of $4.00 per share and a public float of $5,000,000 for
inclusion in the SmallCap Market, subject to certain exceptions. Failure to meet
The Nasdaq National Market inclusion criteria, or the failure to meet the
SmallCap Market maintenance criteria, may result in the delisting of the
Company's Common Stock.
13
<PAGE> 17
Trading, if any, in the Company's Common Stock would thereafter be conducted
in the over-the-counter market. As a result of such delisting, an investor
may find it more difficult to dispose of, or to obtain accurate quotations
as to the market value of, the Company's Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE; DILUTION
Substantially all of the Shares are eligible for sale in the public market.
The issuance of Common Stock upon conversion of the Series B Preferred Stock, as
well as future sales of such Common Stock by the Company or by its existing
stockholders, or the perception that such sales could occur, could adversely
affect the market price of the Common Stock. The shares of Common Stock issuable
upon conversion of the Series B Preferred Stock are being registered hereunder.
Conversion of the Series B Preferred Stock into shares of Common Stock could
adversely affect the market price of the Common Stock. In addition, investors
could experience substantial dilution upon conversion of the Series B Preferred
Stock into Common Stock as a result of either (i) a decline in the market price
of the Company's Common Stock prior to conversion or (ii) an event triggering
antidilution adjustments to the conversion price of the outstanding shares of
Series B Preferred Stock.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Shares. All proceeds from the sale of the Shares will be for the account of the
Selling Stockholders, as described below. See "Selling Stockholders" and "Plan
of Distribution" described below.
SELLING STOCKHOLDERS
The following table sets forth as of November 3, 1998, the name of each
of the Selling Stockholders, the number of shares of Series B Preferred Stock
owned by each Selling Stockholder, the number of shares of Common Stock that
each such Selling Stockholder beneficially owns and the number of shares of
Common Stock beneficially owned by each Selling Stockholder that may be offered
for sale from time to time by this Prospectus. The information set forth below
is based upon information provided by the Selling Stockholders. Because the
Selling Stockholders may offer all, some or none of their Common Stock, no
definitive estimate as to the number of shares thereof that will be held by the
Selling Stockholders after such offering can be provided. The shares
beneficially owned after the offering assumes that all of the shares being
offered have been sold in the offering.
The Shares being offered by the Selling Stockholders are issuable or were
issued upon conversion of the Series B Preferred Stock acquired from the Company
in a private placement transaction pursuant to the Purchase Agreement.
Pursuant to its obligation under the Purchase Agreement, the Company (i)
filed with the Commission, under the Securities Act, the Registration Statement,
of which this Prospectus forms a part, with respect to the resale of the Shares
from time to time in accordance with the plan of distribution described
elsewhere in this Prospectus, and (ii) has agreed to use its best efforts to
keep such Registration Statement effective until the earlier of (x) the date all
holders may sell all of the Shares freely pursuant to Rule 144(k) without
compliance with the registration requirements of the Securities Act, or (y) the
date all of the shares of Common Stock issued upon conversion of the Series B
Preferred Stock have been sold and no shares of Series B Preferred Stock are
outstanding. See "Plan of Distribution."
Except as indicated, none of the Selling Stockholders has held any position
or office or had a material relationship with the Company or any of its
affiliates within the past three years other than as a result of their
beneficial ownership of the Company's Common Stock. The Company may amend or
supplement this Prospectus from time to time to update the disclosure set forth
herein.
14
<PAGE> 18
<TABLE>
<CAPTION>
SHARES OF SHARES
SERIES B BENEFICIALLY SHARES
PREFERRED STOCK OWNED SHARES BEING BENEFICIALLY
OWNED PRIOR TO PRIOR TO OFFERED OWNED AFTER
SELLING STOCKHOLDER OFFERING (1) OFFERING (2)(3) (4)(5) THE OFFERING
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Themis Partners L.P. (6)(7) 40 905,941 905,941 0
Heracles Fund (6)(7) 100 2,264,852 2,264,852 0
Halifax Fund, L.P. (6)(8) 80 1,811,882 1,811,882 0
Leonardo, L.P. (9) 98 2,219,555 2,219,555 0
Raphael, L.P. (9) 10 226,485 226,485 0
Ramius Fund, Ltd. (9) 24 543,565 543,565 0
GAM Arbitrage
Investments, Inc. (9) 5 113,243 113,243 0
AG Super Fund
International, L.P. (9) 3 67,946 67,946 0
Wingate Capital Ltd. (10) 41 928,589 928,589 0
Fisher Capital Ltd. (10) 77 1,743,936 1,743,936 0
CCG Investment Fund Ltd. (10) 9 203,837 203,837 0
CCG Capital Ltd. (10) 9 203,837 203,837 0
Midway Capital Ltd. (10) 4 90,594 90,594 0
--- ---------- ---------- --
TOTAL 500 11,324,262 11,324,262 0
=== ========== ========== ==
</TABLE>
(1) Each share of Series B Preferred Stock is convertible into that number
of shares of Common Stock equal to (i) the share's stated value of
$50,000 plus accrued and unpaid dividends divided by (ii) a conversion
price of $4.774 which is subject to adjustment as follows: the
conversion price will be increased by one-half the amount by which
the average of the 15 lowest average daily trading prices of the
Common Stock during the 45 trading days prior to the date of
conversion (the "Trading Price") exceeds $7.956 per share; conversely,
should the Trading Price prior to a conversion be equal to or below
$3.58 per share, the conversion price will be such Trading Price.
Notwithstanding the foregoing, if the Company consummates certain
types of equity financings, including, without limitation, a drawdown
under its existing $50 million equity line, thereafter the conversion
price will be subject to adjustment as follows: the conversion price
will be increased by one-half the amount by which the Trading
Price exceeds $7.956 per share; conversely, (i) should the Trading
Price prior to a conversion be less than $7.956 per share but greater
than $4.774 per share, the conversion price will be $4.774 per share
and (ii) if the Trading Price prior to a conversion is equal to or
below $4.774 per share, the conversion price will be such Trading
Price.
(2) Pursuant to the terms of the Series B Preferred Stock, the Series B
Preferred Stock is convertible by any holder only to the extent that
the number of shares of Common Stock thereby issuable, together with
the number of shares of Common Stock owned by such holder and its
affiliates (but not including shares of Common Stock underlying
unconverted Series B Preferred Stock) would not exceed 4.99% of the
then outstanding Common Stock as determined in accordance with
Section 13(a) of the Exchange Act. The number of shares beneficially
owned is determined in accordance with Rule 13d-3 of the Exchange
Act, and the information is not necessarily indicative of beneficial
ownership for any other purpose. Beneficial ownership includes any
shares as to which the individual has sole or shared voting power or
investment power and also any shares which the individual has the
right to acquire within 60 days of the date of this Prospectus
through the exercise of any stock option or other right. Unless
otherwise indicated in the footnotes below, each person has sole voting
and investment power (or shares such powers with his or her spouse)
with respect to the shares shown as beneficially owned.
(3) The number of Shares shown as beneficially owned prior to the offering
by the Selling Stockholders holding Series B Preferred Stock represents
shares of Common Stock issuable to the Selling Stockholders assuming
conversion, as of November 3, 1998, of all shares of Series B
Preferred Stock issued calculated using an assumed conversion price
of $2.24273 which represents the price at which the Series B
Preferred Stock could have been converted as of November 3, 1998
(which conversion price could fluctuate from time to time based on
changes in the market price of the Common Stock) and shares of Common
Stock issuable as dividends on such shares of Series B Preferred
Stock as of November 3, 1998. As described in note (1) above, the
actual number of shares of Common Stock issuable upon conversion of
the Series B Preferred Stock depends, subject to certain limitations,
on the conversion price on the date of conversion which is subject to
adjustment. Consequently, the actual number of shares of Common Stock
issuable upon conversion of the Series B Preferred Stock may be less
than or greater than the number of shares shown as beneficially owned
by the Selling Stockholders or otherwise covered by this Prospectus.
The number of Shares shown as beneficially owned does not include,
and this Prospectus does not cover, shares of Common Stock issuable
upon the conversion of up to 500 shares of Series B Preferred Stock
which, beginning in January 1999 and subject to certain conditions,
the Company may cause the holders of Series B Preferred Stock to
purchase.
15
<PAGE> 19
(4) The number of shares that will ultimately be issued upon conversion of
the Series B Preferred Stock or as dividends on the Series B Preferred
Stock is dependent, subject to certain limitations, upon trading prices
of the Common Stock prior to conversion as described in note (1)
above and potential antidilution adjustments.
(5) Shares offered pursuant to this Prospectus consist entirely of shares of
the Company's Common Stock issued or issuable upon conversion of the
Series B Preferred Stock and as dividends on the Series B Preferred
Stock.
(6) Is affiliated with the investors who are party to that certain
Investment Agreement dated February 9, 1996 as amended on July 10, 1998,
between the Company and Hatteras Partners, L.P. under which the Company
has been extended a $50 million equity line by such investors.
(7) Promethean Investment Group L.L.C. is the general partner of Themis
Partners L.P. and the investment advisor for Heracles Fund
(collectively, the "Promethean Entities") and consequently has voting
control and investment discretion over securities held by the Promethean
Entities. Promethean Investment Group L.L.C. is indirectly controlled
by Mr. James F. O'Brien, Jr. The ownership for each of the
Promethean Entities does not include the ownership information for
other Promethean Entities. Promethean Investment Group L.L.C. and
each of the Promethean Entities disclaims beneficial ownership of the
Shares held by the other Promethean Entities. Mr. O'Brien disclaims
beneficial ownership of the Shares benefically owned by Promethean
Investment Group L.L.C. and the Promethean Entities.
(8) The Palladin Group, L.P. is the investment manager of Halifax Fund, L.P.
and consequently has voting control and investment discretion over
securities held by Halifax Fund, L.P. The Palladin Group, L.P. is
indirectly controlled by Mr. Jeffrey E. Devers. The Palladin Group,
L.P. and Mr. Devers disclaim beneficial ownership of the Shares held
by Halifax Fund, L.P.
(9) Angelo, Gordon & Co., L.P. is a general partner of Leonardo, L.P., AG
Super Fund International Partners, L.P. and Raphael, L.P., and is
Investment Advisor to GAM Arbitrage Investments, Inc. and the Invest-
ment Managing Member of AG Ramius Partners, L.L.C., the Investment
Advisor of Ramius Fund, Ltd. (collectively, the "Angelo Gordon
Entities"), and consequently has voting control and investment
discretion over securities held by the Angelo Gordon Entities. The
ownership for each of the Angelo Gordon Entities does not include
the ownership information for the other Angelo Gordon Entities. Angelo,
Gordon & Co., L.P. and each of the Angelo Gordon Entities disclaims
beneficial ownership of the Shares held by the other Angelo Gordon
Entities. Mr. John M. Angelo, the Chief Executive Officer of Angelo,
Gordon & Co., L.P., and Mr. Michael R. Gordon, the Chief Operating
Officer of Angelo, Gordon & Co., L.P., are the sole general partners
of AG Partners, L.P., the sole gneeral partner of Angelo, Gordon &
Co., L.P. As such, Mr. Angelo and Mr. Gordon may be considered
beneficial owners of any Shares deemed to be beneficially owned by
Angelo, Gordon & Co., L.P.
(10) Citadel Limited Partnership is the trading manager of Wingate Capital
Ltd., Fisher Capital Ltd., CCG Investment Fund Ltd., CCG Capital Ltd.
and Midway Capital Ltd. (collectively, the "Citadel Entities") and
consequently has voting control and investment discretion over
securities held by the Citadel Entities. Citadel Limited Partnership
is indirectly controlled by Mr. Kenneth C. Griffin. The ownership
for each of the Citadel Entities does not include the ownership
information for other Citadel Entities. Citadel Limited Partnership
and each of the Citadel Entities disclaims beneficial ownership of the
Shares held by the other Citadel Entities. Mr. Griffin disclaims
beneficial ownership of the Shares beneficially owned by Citadel
Limited Partnership and the Citadel Entities.
Pursuant to the terms of the Series B Preferred Stock, unless waived by the
Selling Stockholder upon 61 days prior written notice, no holder of Series B
Preferred Stock may convert the Series B Preferred Stock to the extent that the
shares to be received by such holder upon such conversion would cause such
holder to beneficially own (other than Shares of Common Stock so owned through
ownership of Series B Preferred Stock) more than 4.99% of the outstanding shares
of Common Stock. In addition, pursuant to the regulations of The National
Association of Securities Dealers, Inc., in the absence of stockholder approval,
the aggregate number of shares of Common Stock issuable to the holders of the
Series B Preferred Stock at a discount from market price upon conversion of the
Series B Preferred Stock may not equal or exceed 20% of the outstanding shares
of Common Stock on July 10, 1998 (i.e., approximately 7,864,834 shares). If
stockholder approval is not obtained to issue shares of Common Stock to the
holders of the Series B Preferred Stock in excess of such amount, none of the
holders will be entitled to acquire by conversion more than its proportionate
share of such maximum amount.
PLAN OF DISTRIBUTION
The Shares covered by this Prospectus may be offered and sold from time to
time by the Selling Stockholders, or by donees or transferees of, or other
successors in interest to, the Selling Stockholders. The Selling Stockholders
will act independently of
16
<PAGE> 20
the Company in making decisions with respect to the timing, manner and size
of each sale. The Selling Stockholders may sell the Shares being offered
hereby on The Nasdaq National Market, or otherwise, at prices and under terms
then prevailing or at prices related to the then current market price or at
negotiated prices. The Shares may be sold by one or more of the following
means of distribution: (a) a block trade in which the broker-dealer so
engaged will attempt to sell Shares as agent, but may position and resell a
portion of the block as principal to facilitate the transaction; (b)
purchases by a broker-dealer as principal to facilitate the transaction; (c)
an over-the-counter distribution in accordance with the rules of The Nasdaq
National Market; (d) ordinary brokerage transactions and transactions in which
the broker solicits purchasers; (e) in privately negotiated transactions; (f) to
cover short sales; (g) in other ways not involving market makers or established
trading markets, including direct sales to purchasers or sales effected
through agents; (h) through transactions in options, swaps or other
derivatives (whether exchange-listed or otherwise); and (i) a combination of
any of the foregoing. To the extent required, this Prospectus may be amended
and supplemented from time to time to describe a specific plan of
distribution.
From time to time, one or more of the Selling Stockholders may pledge,
hypothecate or grant a security interest in some or all of the Shares owned by
them, and the pledgees, secured parties or persons to whom such Shares have been
hypothecated shall, upon foreclosure in the event of default, be deemed to be
Selling Stockholders hereunder. The number of Selling Stockholders' shares
beneficially owned by those Selling Stockholders who so transfer, pledge, donate
or assign Selling Stockholders' Shares will decrease as and when they take such
actions. The plan of distribution for Selling Stockholders' Shares sold
hereunder will otherwise remain unchanged, except that the transferees,
pledgees, donees or other successors will be Selling Stockholders hereunder. In
addition, a Selling Stockholder may, from time to time, sell short the Common
Stock and, in such instances, this Prospectus may be delivered in connection
with such short sales and the Shares offered hereby may be used to cover such
short sales.
A Selling Stockholder may enter into hedging transactions with
broker-dealers and the broker-dealers may engage in short sales of the Common
Stock in the course of hedging the positions they assume with such Selling
Stockholder, including, without limitation, in connection with distributions of
the Common Stock by such broker-dealers. A Selling Stockholder may also enter
into option or other transactions with broker-dealers that involve the delivery
of the Shares to the broker-dealers, who may then resell or otherwise transfer
such Shares. A Selling Stockholder may also loan or pledge the Shares to a
broker-dealer and the broker-dealer may sell the Shares so loaned or upon a
default may sell or otherwise transfer the pledged Shares. In addition, any
shares that qualify for sale pursuant to Rule 144 may be sold under Rule 144
rather than pursuant to this Prospectus.
In effecting sales, brokers, dealers or agents engaged by the Selling
Stockholders may arrange for other brokers or dealers to participate. Brokers,
dealers or agents may receive commissions, discounts or concessions from the
Selling Stockholders in amounts to be negotiated prior to the sale. Such brokers
or dealers and any other participating brokers or dealers may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with such
sales, and any such commissions, discounts or concessions may be deemed to be
underwriting discounts or commissions under the Securities Act. The Company will
pay all expenses incident to the offering and sale of the Shares to the public
other than any commissions and discounts of underwriters, dealers or agents and
any transfer taxes.
In order to comply with the securities laws of certain states, if
applicable, the Shares must be sold in such jurisdiction only through registered
or licensed brokers or dealers. In addition, in certain states the Shares may
not be sold unless they have been registered or qualified for sale in the
applicable state or an exemption from the registration or qualification
requirement is available and there has been compliance therewith.
The Company has advised the Selling Stockholders that the anti-manipulation
rules of Regulation M under the Exchange Act may apply to sales of Shares in the
market and to the activities of the Selling Stockholders and their affiliates.
In addition, the Company will make copies of this Prospectus available to the
Selling Stockholders and has informed them of the need for delivery of copies of
this Prospectus to purchasers at or prior to the time of any sale of the Shares
offered hereby.
At the time a particular offer of Shares is made, if required, a Prospectus
Supplement will be distributed that will set forth the number of Shares being
offered and the terms of the offering, including the name of any underwriter,
dealer or agent, the purchase price paid by any underwriter, any discount,
commission and other item constituting compensation, any discount, commission or
concession allowed or reallowed or paid to any dealer, and the proposed selling
price to the public.
The sale of Shares by the Selling Stockholders is subject to compliance by
the Selling Stockholders with certain contractual restrictions with the Company.
There can be no assurance that the Selling Stockholders will sell all or any of
the Shares.
17
<PAGE> 21
The Company has agreed to indemnify the Selling Stockholders and any person
controlling a Selling Stockholder against certain liabilities, including
liabilities under the Securities Act. The Selling Stockholders have agreed to
indemnify the Company and certain related persons against certain liabilities,
including liabilities under the Securities Act.
The Company has agreed with certain of the Selling Stockholders to keep the
Registration Statement, of which this Prospectus constitutes a part, effective
until all the shares of Common Stock issued upon conversion of Series B
Preferred Stock are sold by the Selling Stockholders and no shares of the Series
B Preferred Stock remain outstanding or all shares of Common Stock issued upon
conversion of the Series B Preferred Stock are freely tradable subject to
compliance with Rule 144(k) of the Securities Act.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon by Brobeck
Phleger & Harrison LLP, Irvine, California, counsel to the Company.
EXPERTS
The consolidated financial statements of Advanced Tissue Sciences, Inc.
and the combined financial statements of the Dermagraft Joint Venture
appearing in Advanced Tissue Sciences, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 1997, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon included therein
and incorporated herein by reference. Such consolidated financial statements
are incorporated herein by reference in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
18
<PAGE> 22
TABLE OF CONTENTS
AVAILABLE INFORMATION........................................................1
ADDITIONAL INFORMATION.......................................................1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..............................1
THE COMPANY..................................................................3
RISK FACTORS.................................................................6
USE OF PROCEEDS.............................................................14
SELLING STOCKHOLDERS........................................................14
PLAN OF DISTRIBUTION........................................................16
LEGAL MATTERS...............................................................18
EXPERTS.....................................................................18
<PAGE> 23
ADVANCED TISSUE SCIENCES, INC.
11,324,262 SHARES
OF
COMMON STOCK
PROSPECTUS
<PAGE> 24
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company will pay all expenses incident to the offering and sale to the
public of the shares being registered other than any commissions and discounts
of underwriters, dealers or agents and any transfer taxes. Such expenses are set
forth in the following table. All of the amounts shown are estimates except the
Securities and Exchange Commission ("SEC") registration fee.
SEC registration fee.................................. $12,585
Nasdaq National Market listing fee.................... 17,500
Legal fees and expenses............................... 25,000
Accounting fees and expenses.......................... 25,000
Miscellaneous expenses................................ 5,000
-------
Total............................................. $85,085
=======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Restated Certificate of Incorporation ("Certificate")
provides that, except to the extent prohibited by the General Corporation Law of
the State of Delaware ("DGCL"), the Company's directors shall not be personally
liable to the Company or its stockholders for monetary damages for any breach of
fiduciary duty as directors of the Company. Under DGCL, the directors have a
fiduciary duty to the Company which is not eliminated by this provision of the
Certificate and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of nonmonetary relief will remain available. In
addition, each director will continue to be subject to liability under DGCL for
breach of the director's duty of loyalty to the Company, for acts or omissions
which are found by a court of competent jurisdiction to be not in good faith or
which involves intentional misconduct, or knowing violations of law, for actions
leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are prohibited by
DGCL. This provision also does not affect the directors' responsibilities under
any other laws, such as the Federal securities laws or state or Federal
environmental laws. The Company has obtained liability insurance for its
officers and directors.
Section 145 of the DGCL provides that a corporation has the power to
indemnify a director, officer, employee or agent of the corporation and certain
other persons serving at the request of the corporation in related capacities
against amounts paid and expenses incurred in connection with an action or
proceeding to which he or she is or is threatened to be made a party by reason
of such position, if such person has acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of the
corporation, and, in any criminal proceeding, if such person had no reasonable
cause to believe his or her conduct was unlawful; provided that, in the case of
actions brought by or in the right of the corporation, no indemnification may be
made with respect to any matter as to which such person has been adjudged to be
liable to the corporation unless and only to the extent that the adjudicating
court determines that such indemnification is proper under the circumstances.
The Company's by-laws provide that the Company must indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending, or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
Company) by reason of the fact that he or she is or was a director or officer of
the Company, or that such director or officer is or was serving at the request
of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture trust or other enterprise (collectively "Agent"),
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement (if such settlement is approved in advance by the Company, which
approval may not be unreasonably withheld) actually and reasonably incurred by
him or her in connection with such action, suit or proceeding if he or she acted
in good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interests of the Company, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
will not, of itself, create a presumption that the person did not act in good
faith and in a manner which he or she reasonably believed to be in or not
opposed to the best interests of the Company, and with respect to any criminal
action or proceeding, had reasonable cause to believe that his or her conduct
was unlawful.
The Company's by-laws provide further that the Company must indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Company to procure a judgment
<PAGE> 25
in its favor by reason of the fact that he or she is or was an Agent against
expenses (including attorneys' fees) actually and reasonably incurred by him
or her in connection with the defense or settlement of such action or suit if
he or she acted in good faith and in a manner he or she reasonably believed
to be in or not opposed to the best interests of the Company, provided that
no indemnification may be made in respect of any claim, issue or matter as to
which such person has been adjudged to be liable to the Company unless and
only to the extent that the Delaware Court of Chancery or the court in which
such action or suit was brought determines upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Delaware Court of Chancery or such other court deems proper.
Pursuant to its by-laws, the Company has the power to purchase and maintain
a directors and officers liability policy to insure its officers and directors
against certain liabilities.
The Company has entered into indemnification agreements with its directors
and its officers containing provisions that may require the Company, among other
things, to indemnify such directors and officers against certain liabilities
that may arise by reason of their status or service as directors or officers
(other than liabilities arising from willful misconduct of a culpable nature),
to advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified, and to obtain directors' and officers'
liability insurance if maintained for other directors or officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
ITEM 16. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
5.1 Opinion of Brobeck, Phleger & Harrison LLP.*
10.1(1) Securities Purchase Agreement by and among Advanced Tissue
Sciences, Inc. and the Investors dated as of July 10, 1998.
10.2(1) Registration Rights Agreement by and among Advanced Tissue
Sciences, Inc. and the Investors dated as of July 10, 1998.
10.3(1) Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock of Advanced Tissue Sciences, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Counsel (included in Exhibit 5.1).*
24.1 Power of Attorney (included on page II-4).*
__________
* Previously filed.
(1) Incorporated by reference to the Company's Report on Form 8-K filed with
the Commission on July 16, 1998.
<PAGE> 26
ITEM 17. UNDERTAKINGS.
A. UNDERTAKING PURSUANT TO RULE 415.
The undersigned Registrant ("Registrant") hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3)
Securities Act of 1933 (the "Securities Act");
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which has
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus
filed with the SEC pursuant to Rule 424(b), if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
provided, however, that paragraphs A(1)(i) and A(1)(ii) do not apply if the
Registration Statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the Registrant pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934 (the "Exchange Act") that are
incorporated by reference in the Registration Statement;
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
this offering.
B. UNDERTAKING REGARDING FILINGS INCORPORATING SUBSEQUENT EXCHANGE ACT
DOCUMENTS BY REFERENCE.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
C. UNDERTAKING IN RESPECT OF INDEMNIFICATION.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suite or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of San Diego, California, on this 4th day of November,
1998.
ADVANCED TISSUE SCIENCES, INC.
By: /s/ Arthur J. Benvenuto
----------------------------
Arthur J. Benvenuto
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Arthur J. Benvenuto Chairman of the Board and Chief Executive November 4, 1998
- ----------------------------- Officer (Principal Executive Officer)
Arthur J. Benvenuto
/s/ Dr. Gail K. Naughton * Director, President and Chief Operating November 4, 1998
- ----------------------------- Officer
Dr. Gail K. Naughton
/s/ Michael V. Swanson* Vice President, Finance and Administration November 4, 1998
- ----------------------------- (Principal Financial and Accounting Officer)
Michael V. Swanson
/s/ Jerome E. Groopman, M.D.* Director November 4, 1998
- -----------------------------
Jerome E. Groopman, M.D.
/s/ Jack L. Heckel* Director November 4, 1998
- -----------------------------
Jack L. Heckel
/s/ Ronald L. Nelson* Director November 4, 1998
- -----------------------------
Ronald L. Nelson
/s/ Dayton Ogden* Director November 4, 1998
- -----------------------------
Dayton Ogden
/s/ David S. Tappan, Jr.* Director November 4, 1998
- -----------------------------
David S. Tappan, Jr.
* By: /s/ Arthur J. Benvenuto
------------------------
Arthur J. Benvenuto
(Attorney in fact)
</TABLE>
<PAGE> 28
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
10.1(1) Securities Purchase Agreement by and among
Advanced Tissue Sciences, Inc. and the
Investors dated as of July 10, 1998
10.2(1) Registration Rights Agreement by and among
Advanced Tissue Sciences, Inc. and the
Investors dated as of July 10, 1998
10.3(1) Certificate of Designations, Preferences and
Rights of Series B Convertible Preferred Stock
of Advanced Tissue Sciences, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors
__________
(1) Incorporated by reference to the Company's Report on Form 8-K filed with
the Commission on July 16, 1998.
<PAGE> 29
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
Amendement No. 2 to the Registration Statement (Form S-3 No. 333-62955) and
related Prospectus of Advanced Tissue Sciences, Inc. for the registration of
15,000,000 shares of its common stock and to the incorporation by reference
therein of our report dated February 3, 1998, with respect to the
consolidated financial statements of Advanced Tissue Sciences, Inc., and our
report dated February 27, 1998, with respect to the combined financial
statements of the Dermagraft Joint Venture included in the Annual Report
(Form 10-K) of Advanced Tissue Sciences, Inc. for the year ended
December 31, 1997, filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
-----------------------
ERNST & YOUNG LLP
San Diego, California
November 3, 1998
