UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER: 0-016607
ADVANCED TISSUE SCIENCES, INC.
(Exact name of registrant as specified in charter)
---------
Delaware 14-1701513
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10933 North Torrey Pines Road, La Jolla, California 92037
- ---------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 450-5730
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares of the Registrant's Common Stock, par value $.01 per share,
outstanding at November 2, 1998 was 39,324,173.
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
-----
Part I - Financial Information
- ------------------------------
Page
----
Item 1 - Financial Statements
Introduction to the Financial Statements................... 1
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997................. 2
Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 1998 and 1997.. 3
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997............ 4
Consolidated Statement of Stockholders' Equity -
Nine Months Ended September 30, 1998..................... 5
Notes to the Consolidated Financial Statements............. 6-10
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 11-15
Part II - Other Information
- ----------------------------
Item 1 - Legal Proceedings......................................... 16
Item 2 - Changes in Securities..................................... 16
Item 5 - Other Information......................................... 16-17
Item 6 - Exhibits and Reports on Form 8-K.......................... 17
Signatures............................................................ 17
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1 - FINANCIAL STATEMENTS
INTRODUCTION TO THE FINANCIAL STATEMENTS
The financial statements have been prepared by Advanced Tissue Sciences, Inc.
(the "Company"), without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes that the
disclosures are adequate to make the information presented not misleading when
read in conjunction with the financial statements and the notes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31, 1997
and Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998 and
June 30, 1998.
The financial information presented in this Quarterly Report on Form 10-Q
reflects all adjustments, consisting only of normal recurring adjustments, which
are, in the opinion of management, necessary for a fair statement of the results
for the interim periods presented. The results for the interim periods are not
necessarily indicative of results to be expected for the full year.
-1-
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 25,082 $ 15,086
Short-term investments 6,994 2,000
Inventory 3,773 4,643
Other current assets 2,480 1,395
-------------- -------------
Total current assets 38,329 23,124
Property - net 23,098 23,190
Patent costs - net 1,781 1,608
Other assets 1,307 2,538
-------------- -------------
Total assets $ 64,515 $ 50,460
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
and capital lease obligations $ 2,740 $ 1,939
Accounts payable 1,520 958
Accrued expenses 5,759 7,011
-------------- -------------
Total current liabilities 10,019 9,908
Long-term debt and capital lease
obligations 27,571 26,157
Other long-term liabilities 479 245
Minority interest in consolidated
subsidiary 300 184
-------------- -------------
Total liabilities 38,369 36,494
-------------- -------------
Redeemable Convertible Series B
Preferred Stock, $.01 par value; 1,000
shares authorized; 100 shares issued
and outstanding at September 30, 1998
and none at December 31, 1997 (aggregate
redemption and liquidation value of
$5,056 at September 30, 1998) 5,000 --
-------------- -------------
Stockholders' Equity:
Convertible Series B Preferred Stock,
$.01 par value; 400 shares issued
and outstanding at September 30, 1998
and none at December 31, 1997
(aggregate liquidation value of
$20,225 at September 30, 1998) -- --
Accrued cumulative preferred stock
dividends 281 --
Common Stock, $.01 par value;
100,000,000 shares authorized; issued
and outstanding, 39,324,173 shares at
September 30, 1998 and 37,673,983 shares
at December 31, 1997 393 377
Additional paid-in capital 231,156 189,679
Accumulated deficit (209,765) (175,171)
------------ ------------
22,065 14,885
Less note received in connection with
sale of Common Stock (919) (919)
------------- ------------
Total stockholders' equity 21,146 13,966
------------- ------------
Total liabilities and stockholders'
equity $ 64,515 $ 50,460
============= ============
</TABLE>
See accompanying notes to the consolidated financial statements.
-2-
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Product sales -
Related parties $ 2,207 $ 723 $ 6,685 $ 945
Others 515 173 1,035 623
Contracts and fees -
Related parties 1,565 2,372 6,078 7,958
Others 171 -- 399 10
----------- ----------- ----------- -----------
Total revenues 4,458 3,268 14,197 9,536
----------- ----------- ----------- -----------
Costs and expenses:
Research and development 3,613 4,212 11,270 13,677
Selling, general and administrative 3,585 3,702 10,965 10,463
Cost of goods sold 4,114 1,090 11,066 1,798
Professional and consulting 795 671 1,747 2,023
----------- ----------- ----------- -----------
Total costs and expenses 12,107 9,675 35,048 27,961
----------- ----------- ----------- -----------
Loss from operations before equity in
losses of joint ventures (7,649) (6,407) (20,851) (18,425)
Equity in losses of joint ventures (3,817) (2,571) (12,706) (6,920)
----------- ----------- ----------- -----------
Loss from operations (11,466) (8,978) (33,557) (25,345)
Other income (expense):
Interest income and other 422 289 722 1,267
Interest expense (608) (299) (1,759) (555)
----------- ----------- ----------- -----------
Net loss (11,652) (8,988) (34,594) (24,633)
Dividends on preferred stock (281) -- (281) --
----------- ----------- ----------- -----------
Net loss applicable to common stock $ (11,933) $ (8,988) $ (34,875) $ (24,633)
=========== =========== =========== ===========
Basic and diluted loss per common share $ (.30) $ (.24) $ (.89) $ (.66)
=========== =========== =========== ===========
Weighted average number of common
shares used in computation of basic
and diluted loss per share 39,324 37,568 39,194 37,525
=========== =========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
-3-
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1998 1997
-------------- -------------
(Unaudited)
<S> <C> <C>
Operating activities:
Net loss $ (34,594) $ (24,633)
Adjustments to reconcile net loss to cash used in
operating activities:
Equity in losses of joint ventures 12,706 6,920
Depreciation and amortization 3,506 1,567
Compensation for services paid in stock, stock
options or warrants 914 328
Other adjustments to net loss 311 148
Change in assets and liabilities:
Inventory 870 (2,671)
Other current assets (1,085) 203
Accounts payable 562 (713)
Accrued expenses (1,252) 280
------------- ------------
Net cash used in operating activities (18,062) (18,571)
------------- ------------
Investing activities:
Purchases of short-term investments (10,943) (4,250)
Maturities and sales of short-term investments 5,949 10,810
Acquisition of property (3,575) (11,297)
Distribution from joint ventures 3,139 --
Equity investment in joint ventures (16,769) (7,440)
Patent application costs (207) (179)
Other assets 2,246 (2,947)
------------- ------------
Net cash used in investing activities (20,160) (15,303)
------------- ------------
Financing activities:
Proceeds from borrowings 3,659 25,364
Payments of borrowings (1,444) (34)
Net proceeds from sale of preferred stock 24,917 --
Net proceeds from sale of common stock 20,000 --
Options and warrants exercised 852 947
Other long-term obligations 234 --
------------- ------------
Net cash provided by financing activities 48,218 26,277
------------- ------------
Net increase (decrease) in cash and cash equivalents 9,996 (7,597)
Cash and cash equivalents at beginning of period 15,086 27,907
------------- ------------
Cash and cash equivalents at end of period $ 25,082 $ 20,310
============= ============
</TABLE>
See accompanying notes to the consolidated financial statements.
-4-
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-In
----------------------- --------------------
Shares Amount Shares Amount Capital
--------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 37,673,983 $ 377 $ 189,679
Sale of Common Stock 1,533,115 15 19,985
Sale of Preferred Stock 400 $ -- 19,917
Options exercised 117,075 1 851
Options and warrants
granted for services 1,005
Accrued dividends on
Preferred Stock (281)
Net loss -------- --------- ---------- ------- ----------
Balance, September 30, 1998 400 $ -- 39,324,173 $ 393 $ 231,156
======== ========= ========== ======= ===========
Accrued Total
Dividends/ Stock-
Accumulated Note Holders'
Deficit Receivable Equity
----------- ---------- -----------
<S> <C> <C> <C>
Balance, December 31, 1997 $ (175,171) $ (919) $ 13,966
Sale of Common Stock 20,000
Sale of Preferred Stock 19,917
Options exercised 852
Options and warrants
granted for services 1,005
Accrued dividends on
Preferred Stock 281 --
Net loss (34,594) (34,594)
---------- ---------- -----------
Balance, September 30, 1998 $ (209,765) $ (638) $ 21,146
========== ========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
-5-
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
Organization - Advanced Tissue Sciences, Inc. (the "Company") is a tissue
engineering company utilizing its proprietary technology to develop and
manufacture human-based tissue products for tissue repair and transplantation.
The Company is focusing on the worldwide commercialization of skin, cartilage
and cardiovascular products. The Company's leading therapeutic products are
tissue engineered skin products for the temporary covering of severe and
partial-thickness burns, which is on the market in the United States, and for
the treatment of diabetic foot ulcers, which is in clinical trials in the United
States and on the market in Canada, the United Kingdom and several other
European countries through a joint venture with Smith & Nephew plc ("Smith &
Nephew").
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company, its wholly owned subsidiaries and DermEquip, L.L.C.
("DermEquip"), a limited liability company owned jointly with Smith & Nephew.
All intercompany accounts and transactions have been eliminated. The Company's
other interests in joint ventures with Smith & Nephew are accounted for under
the equity method (see Note 2).
Reclassification - Certain reclassifications have been made to prior year
amounts to conform to the presentation for the three and nine months ended
September 30, 1998.
NOTE 2 - STRATEGIC ALLIANCES
In April 1996, the Company entered into an agreement with Smith & Nephew to form
a joint venture for the worldwide commercialization of Dermagraft(R), the
Company's tissue engineered dermal skin replacement, for the treatment of
diabetic foot ulcers (the "Dermagraft Joint Venture"). In January 1998, the
Company and Smith & Nephew expanded the Dermagraft Joint Venture to include
venous ulcers, pressure ulcers, burns and other skin tissue wounds. At that
time, the Company retained the exclusive right to market TransCyte(TM)
(formerly Dermagraft-TC(R)), a temporary covering 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 the United
States. 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 1998.
Smith & Nephew is a worldwide healthcare company with extensive sales and
distribution capabilities. It manufactures a wide range of tissue repair
products, principally addressing the areas of bone, joints, skin and other
soft tissue.
As consideration for entering into the Dermagraft Joint Venture, Advanced Tissue
Sciences received a $10 million up front fee in 1996. In addition, as a part of
the agreement to expand the joint venture, Smith & Nephew purchased $20 million,
or 1,533,115 newly-issued shares, of the Company's Common Stock at approximately
$13.05 per share in January 1998. The Company will also receive an additional
$15 million, directly or through the Dermagraft Joint Venture, upon the earlier
of (i) U.S. Food and Drug Administration ("FDA") approval for the marketing of
Dermagraft in the treatment of diabetic foot ulcers or (ii) January 4, 1999, and
could receive, subject to the achievement of certain milestones related to
regulatory approvals, reimbursement and sales levels, further payments of up to
$136 million. Sales of TransCyte will be included in determining whether sales
levels for milestone payments from Smith & Nephew have been achieved.
In the expanded joint venture, the Company and Smith & Nephew will continue to
share equally in the expenses and revenues of the Dermagraft Joint Venture,
except the Company will fund the first $6 million of expenses for conducting
clinical trials and for regulatory support of Dermagraft and TransCyte in the
treatment of venous and pressure ulcers. In addition, the Company will fund
certain manufacturing and distribution costs and certain costs related to
post-market studies of TransCyte through December 1999. However, such
manufacturing and distribution costs are to be returned to the Company out of
future gross margin or net profits, if any, from sales of TransCyte for burns in
the United States. Under the expanded joint venture, the Company will continue
to manufacture and Smith & Nephew will continue to market and sell the joint
venture's products.
-6-
<PAGE>
During the three and nine-month periods ended September 30, 1998, the Company
recognized $996,000 and $4,137,000 in contract revenues for research and
development activities performed for the Dermagraft Joint Venture, as compared
to $1,420,000 and $5,057,000 during the corresponding periods of 1997. In
addition, during the three and nine-month periods ended September 30, 1998,
product sales to related parties include products sold to the Dermagraft Joint
Venture of $2,207,000 and $6,685,000, respectively, which compared to sales of
$723,000 and $945,000 for the corresponding three and nine-month periods in
1997. Such product sales to the Dermagraft Joint Venture are equal to the
Company's cost of goods sold for such products.
In 1994, Smith & Nephew and the Company entered into a separate joint venture
for the development of tissue engineered cartilage for orthopedic applications
(the "Cartilage Joint Venture"). Under the Cartilage Joint Venture, Smith &
Nephew contributed the first $10 million in funding and the Company contributed
certain technology licenses. The Cartilage Joint Venture's total funding since
inception reached $10 million in January 1997 and, as provided in the joint
venture agreement, the Company and Smith & Nephew are sharing equally in
Cartilage Joint Venture revenues and expenditures. During the three and nine
months ended September 30, 1998, the Company recognized $569,000 and $1,941,000,
respectively, in contract revenues for research and development activities
performed for the Cartilage Joint Venture, as compared with $952,000 and
$2,901,000 during the corresponding periods of 1997.
The results of operations of the joint ventures for the three and nine months
ended September 30, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Dermagraft Joint Venture
- ------------------------
Sales $ 104 $ -- $ 230 $ --
Cost of goods sold 2,347 -- 7,318 --
Other costs and expenses 4,435 3,695 15,210 9,456
Net loss 6,678 3,695 22,298 9,456
Cartilage Joint Venture
- -----------------------
Costs and expenses $ 1,090 $ 1,604 $ 3,564 $ 5,250
Net loss 1,090 1,604 3,564 5,250
</TABLE>
NOTE 3 - INVENTORIES
Inventories are stated at the lower of cost, principally standard costs which
approximate actual costs on a first-in, first-out basis, or market and consist
of the following components as of September 30, 1998 and December 31, 1997 (in
thousands):
September 30, December 31,
1998 1997
------------- ------------
Raw materials and supplies $ 2,936 $ 3,295
Work-in-process 727 347
Finished goods 110 1,001
--------- ---------
$ 3,773 $ 4,643
========= =========
NOTE 4 - CONTINGENCIES - LEGAL PROCEEDINGS
Since June 1998, several lawsuits have been filed in the United States District
Court for the Southern District of California against the Company and two of its
officers. The lawsuits allege violations of the federal securities laws arising
out of alleged misstatements and alleged failures to disclose certain material
facts concerning the clinical trials and obtaining FDA approval of Dermagraft
for the treatment of diabetic foot ulcers in the United States. The lawsuits
purport to seek damages on behalf of a class of shareholders who purchased
Advanced Tissue Sciences, Inc. Common Stock during the period generally from
January 13, 1997 through September 11, 1998. The
-7-
<PAGE>
complaints in the lawsuits do not specify an amount of claimed damages. The
Company believes that the lawsuits are without merit and intends to defend
against them vigorously. In addition, the Company believes the ultimate
resolution will not have a material adverse effect on the Company's financial
condition, results of operations or liquidity. However, there can be no
assurance that an adverse result would not have a material adverse effect on the
Company.
NOTE 5 - LONG-TERM DEBT
In March 1998, DermEquip borrowed an additional $1.4 million under the term loan
agreement with The Chase Manhattan Bank (the "Chase Loan") bringing borrowings
under the Chase Loan to $16 million, the total amount available under the
facility. During 1998, the Company has borrowed an additional $1,950,000 from
Smith & Nephew pursuant to a commitment as a part of the agreement to form the
Cartilage Joint Venture (see Note 2). Under the terms of that joint venture
agreement, the Company may borrow up to a total of $10 million of which $5.4
million had been drawn as of September 30, 1998. Debt and other long-term
obligations as of September 30, 1998 and December 31, 1997 were as follows (in
thousands):
September 30, December 31,
1998 1997
------------- ------------
Chase Loan $ 14,720 $ 14,600
Smith & Nephew notes:
Dermagraft Joint Venture 10,000 10,000
Cartilage Joint Venture 5,350 3,400
Capital leases and other 241 96
Less current portion (2,740) (1,939)
--------- ---------
$ 27,571 $ 26,157
========= =========
NOTE 6 - CAPITAL STOCK
Series B Convertible Preferred Stock
In July 1998, the Company raised $25 million through a private placement of
Series B Convertible Preferred Stock (the "Series B Preferred Stock") to a group
of investors (the "Investors"). Subject to adjustment in certain events, the
Series B Preferred Stock is convertible into Common Stock of the Company at
$4.77 per share (the "Conversion Price"). The Conversion Price will be
increased by one-half the amount by which the market price of the Common Stock
on the date of conversion exceeds $7.96 per share, if any. Conversely, should
the average daily trading price (as defined in the agreements) prior to a
conversion be equal to or below $3.58 per share, the Conversion Price will be
equal to such average daily trading price. The Series B Preferred Stock
accrues dividends at 5% per annum. Dividends are payable quarterly in Common
Stock or cash at the option of the Company beginning in the first quarter of
1999.
To the extent not previously converted, the Series B Preferred Stock is, at
the election of the Company, redeemable at $50,000 per share plus accrued
dividends or convertible into Common Stock three years from the date of
issuance subject to extension in certain circumstances. Twenty percent
of the Series B Preferred Stock is redeemable at 125% of liquidation value at
the option of the holders upon the occurrence of certain events such as a change
in control or suspension or delisting from The Nasdaq National Market, or at the
Conversion Price plus accrued dividends on a failure to have adequate shares
authorized, registered and available for conversion of the Series B Preferred
Stock. Accordingly, $5 million of the Series B Preferred Stock has been
reflected as redeemable preferred stock in the accompanying balance sheet.
Subsequent to September 30, 1998, in November, fifty shares of the
Convertible Series B Preferred Stock plus accrued dividends were converted
into 1,012,394 shares of Common Stock at an average price of $2.47 per share.
Under the terms of the private placement and subject to certain conditions, the
Company has the option to sell an additional $25 million of the Series B
Preferred Stock in the first quarter of 1999 to the Investors. Conditions to
the Company's option include, but are not limited to, registering the Common
Stock issuable on conversion under the Securities Act of 1933 and a minimum
trading price for the Common Stock of $5.50 per share, among others.
-8-
<PAGE>
Equity Line Extension
In July 1998, the Company extended an Investment Agreement (the "Investment
Agreement") under which the Company may access up to $50 million through an
equity line until February 2000. The Company originally entered into the
Investment Agreement for a two-year period in February 1996. The decision to
draw any funds under the Investment Agreement and the timing of any such draw
are solely at the Company's discretion.
The Investment Agreement provides that the Company can obtain up to $15 million
at any one time through the sale of its Common Stock to the investment group.
Any sales against the equity line will be at a five percent discount to the
average low sales prices of the Company's Common Stock over a specified period
of time as determined by market volume at the time of the draw. The Company's
ability to draw under the Investment Agreement is subject to certain conditions
including, but not limited to, registration of the shares, a minimum trading
price of $2.00 per share, and certain limitations on the number of shares of
Common Stock held by the investment group at any point in time.
NOTE 7 - BASIC AND DILUTED LOSS PER SHARE
As required, the Company adopted Financial Accounting Standards Board Statement
No. 128, "Earnings Per Share," ("FAS No. 128") for the year ended December 31,
1997. FAS No. 128 changes the method used to calculate earnings per share and
requires the restatement of all prior periods reported. Under FAS No. 128, the
Company is required to present basic and diluted earnings per common share if
applicable. Basic earnings per common share are determined based on the
weighted average number of shares outstanding during the period. Diluted
earnings per common share includes the weighted average number of common shares
outstanding and gives effect to potentially dilutive common shares such as
options and warrants outstanding.
The net loss applicable to common stockholders used in the calculation of basic
and diluted loss per common share for the three and nine months ended September
30, 1998 includes dividends of $281,000 accrued on the Company's Series B
Preferred Stock (see Note 6) during such periods. Both the basic and diluted
loss per common share for the three and nine months ended September 30, 1998 and
1997 are based on the weighted average number of shares of Common Stock
outstanding during the periods.
Potentially dilutive securities include options and warrants outstanding, debt
convertible into Common Stock and convertible preferred stock; however, such
securities have not been included in the calculation of the diluted loss per
common share as their effect is antidilutive. In addition, as such securities
are antidilutive, there is no difference between basic and diluted loss per
common share for the periods presented and there was no change in the loss per
share for the three and nine-month periods ended September 30, 1997 related to
the adoption of FAS 128.
NOTE 8 - STOCK OPTIONS
The following table summarizes activity under the Company's 1997 Stock Incentive
Plan (the "1997 Plan") and for other options and warrants for Common Stock for
the nine months ended September 30, 1998:
<TABLE>
<CAPTION>
1997 Plan Other Options and Warrants
--------------------------- ---------------------------
Weighted Weighted
Number Average Price Number Average Price
of Shares Per Share of Shares Per Share
----------- --------------- --------- ---------------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1997 4,115,150 $ 10.26 1,459,640 $ 7.21
Granted 941,679 $ 6.70 50,000 $ 14.00
Exercised (117,075) $ 7.28 -- --
Canceled (971,456) $ 12.66 -- --
--------- ---------
Outstanding, September 30, 1998 3,968,298 $ 8.91 1,509,640 $ 7.44
========= =========
</TABLE>
-9-
<PAGE>
In August 1998, the Board of Directors approved a plan whereby each employee
option holder under the 1997 Plan, excluding officers and directors of the
Company, could exchange all of their current vested and unvested options with an
exercise price in excess of $7.00 per share for new options priced at market
value as of August 6, 1998. Specifically, existing options with exercise prices
between $7.01 and $11.00 per share were exchangeable three shares for two and
existing options priced above $11.00 were exchangeable two shares for one. A
total of 649,210 existing option shares at an average price of $12.68 were
exchanged for 360,534 replacement option shares with an exercise price of $3.34.
These replacement options vest on the same basis as the replaced options but
require that the employee continue their employment with the Company for a
minimum of one year from the date of grant in order for any of the shares to
vest. The replacement options are included as both grants and cancellations
in the above summary of stock option activity.
During the nine months ended September 30, 1998, the Company issued a warrant
exercisable for Common Stock as a commitment fee for extending an equity line.
The warrants have been valued at $418,000 representing the amount of the
commitment fee as negotiated between the parties.
-10-
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Advanced Tissue Sciences, Inc. (the "Company" or "Advanced Tissue Sciences") is
engaged in the development and manufacture of human-based tissue products for
tissue repair and transplantation using its proprietary tissue engineering
technology. The Company's leading therapeutic products are tissue engineered
skin products, TransCyte(TM) (formerly Dermagraft-TC(R)) for the temporary
covering of severe and partial-thickness burns and Dermagraft(R) for the
treatment of severe skin ulcers. In addition to its TransCyte and Dermagraft
skin products, the Company is focusing its resources on the development of
tissue engineered cartilage and cardiovascular products.
In March 1997, the Company received marketing approval in the United States from
the U.S. Food and Drug Administration (the "FDA") for its first therapeutic
product, TransCyte, as 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. Through September
1998, TransCyte was marketed for burns by Advanced Tissue Sciences through a
direct sales force in the United States. As of October 1998, TransCyte is being
marketed in the United States and throughout the rest of the world for burn and
wound care applications under a recently expanded joint venture with Smith &
Nephew plc ("Smith & Nephew").
Dermagraft 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. 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 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 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.
In April 1996, the Company entered into an agreement with Smith & Nephew to form
a joint venture (the "Dermagraft Joint Venture") for the worldwide
commercialization of Dermagraft in the treatment of diabetic foot ulcers. Under
the joint venture agreement, all expenses and revenues associated with the
development and commercialization of Dermagraft for diabetic foot ulcers from
January 1997 are shared equally by the joint venture partners. In January 1998,
Advanced Tissue Sciences and Smith & Nephew expanded the Dermagraft Joint
Venture to include additional technology for the treatment of skin tissue wounds
and applications such as venous ulcers, pressure ulcers and burns. 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 1998. Under the expanded joint venture,
Advanced Tissue Sciences and Smith & Nephew will continue to share equally in
the expenses and revenues of the Dermagraft Joint Venture, except the Company
will fund the first $6 million in expense for conducting clinical trials and
regulatory support of Dermagraft and TransCyte in the treatment of venous ulcers
and pressure ulcers. In addition, the Company will fund certain manufacturing
and distribution costs and certain costs related to post-market studies of
TransCyte through December 1999. See Note 2 to the consolidated financial
statements.
In May 1994, the Company and Smith & Nephew entered into a separate, joint
venture (the "Cartilage Joint Venture") for the worldwide development,
manufacture and marketing of human tissue engineered cartilage for orthopedic
applications. In January 1997, the joint venture partners began sharing equally
in the Cartilage Joint Venture's expenses. See Note 2 to the consolidated
financial statements.
In October 1997, the Company was awarded a $2 million Advanced Technology
Program grant from the National Institute of Standards and Technology to fund
collaborative cardiovascular research with the University of California, San
Diego over a three-year period. Funding under the grant began in 1998. From
1993 through 1997, the Company sponsored at least $1 million in early stage
research programs at the Massachusetts Institute of
-11-
<PAGE>
Technology ("MIT") and Children's Hospital in Boston ("Children's Hospital")
directed toward the tissue engineering of cartilage, liver and numerous other
tissues and several polymer technologies. The Company has substantially reduced
its commitment to MIT and Children's Hospital in 1998; however, additional
research is being sponsored at several other academic institutions.
The Company has incurred, and expects to continue to incur, substantial
expenditures in support of the commercialization, development and clinical
trials of its TransCyte and Dermagraft products for burn and skin ulcer
applications, for manufacturing systems and in advancing other applications of
the Company's core technology. In particular, the Company will incur, either
directly or through the Dermagraft Joint Venture, substantial and increasing
costs for the additional clinical trial of Dermagraft in the treatment of
diabetic foot ulcers and in support of clinical trials and post-market studies
of Dermagraft and TransCyte in venous, pressure and diabetic foot ulcers and for
full and partial-thickness burns.
Results of Operations
- ---------------------
Product sales totaled $2,722,000 and $7,720,000 for the three and nine months
ended September 30, 1998, respectively, which compared to sales of $896,000 and
$1,568,000 in the corresponding periods of 1997. Product sales to related
parties reflect sales of Dermagraft and TransCyte to the Dermagraft Joint
Venture at cost. See Note 2 to the consolidated financial statements. The
Company manufactures Dermagraft and TransCyte to meet the Dermagraft Joint
Venture's forecasted requirements for sales, marketing and clinical trials.
Increased product sales to the Dermagraft Joint Venture in 1998 reflect
increased manufacturing costs as discussed with respect to cost of goods sold
below. In addition, commercial sales to the Dermagraft Joint Venture did not
begin until the second quarter of 1997. In addition to product attributes and
competition, growth in sales in 1998 and beyond will be sensitive to the
Dermagraft Joint Venture's success in obtaining product reimbursement from both
national healthcare systems and private insurers.
Sales of TransCyte to outside customers in the United States were $515,000 and
$1,035,000 in the three and nine months ended September 30, 1998, respectively,
compared to $173,000 and $623,000 for the three and nine months ended September
30, 1997. There were no sales to outside customers in the first quarter of
1997, as TransCyte was first introduced in April 1997 for full-thickness burns
and in October 1997 for partial-thickness burns. As discussed above, effective
October 1998, the Dermagraft Joint is selling TransCyte for burns in the United
States and the Company will no longer have product sales other than to the joint
venture.
Revenues from contracts and fees were $1,736,000 and $6,477,000 for the three
and nine months ended September 30, 1998, respectively, compared to $2,372,000
and $7,968,000 for the corresponding periods of 1997. Contract revenues
decreased $636,000 and $1,491,000 in the three and nine months, respectively,
reflecting lower contract revenues recognized for research and development and
clinical activities performed for the Dermagraft and the Cartilage Joint
Ventures and for associated administrative costs. See Note 2 to the
consolidated financial statements. Future contract revenues will include costs
associated with the additional clinical trial of Dermagraft in the treatment of
diabetic foot ulcers.
Cost of goods sold for the three and nine months ended September 30, 1998
represents the cost of the Company's TransCyte product sold domestically and the
cost of TransCyte and Dermagraft sold to the Dermagraft Joint Venture. Cost of
goods sold in 1997 represents costs to manufacture TransCyte since its
introduction in April 1997 and sales to the Dermagraft Joint Venture beginning
in the second quarter of 1997. Products are being sold to the Dermagraft Joint
Venture at cost to manufacture including period costs. The Company initiated
production of Dermagraft in its commercial facility in January 1998 and,
accordingly, cost of goods sold has reflected costs associated with that
facility such as depreciation and overhead since that date. As a result of the
FDA's decision to require additional clinical data for Dermagraft in the
treatment of diabetic foot ulcers, the Company expects to continue to incur
significant costs associated with excess production capacity within its
manufacturing facility.
Research and development expenditures decreased to $3,613,000 and $11,270,000 in
the three and nine months ended September 30, 1998, respectively, as compared to
$4,212,000 and $13,677,000 in the corresponding periods of 1997. The decrease
in research and development costs primarily reflects lower costs for sponsored
research programs, for
-12-
<PAGE>
both clinical trials and production for clinical trials of TransCyte and
Dermagraft and for the development of commercial manufacturing processes.
Research and development costs are expected to increase during the fourth
quarter of the year reflecting clinical trials and post-market studies of
Dermagraft and TransCyte in venous, pressure and diabetic foot ulcers and for
full and partial-thickness burns.
Selling, general and administrative costs were $3,585,000 and $10,965,000 for
the three and nine months ended September 30, 1998, respectively, as compared to
$3,702,000 and $10,463,000 in the corresponding periods of the prior year. The
decrease in selling, general and administrative costs for the third quarter 1998
principally reflects lower expenditures for marketing costs related to the
commercialization of products. The increase in selling, general and
administrative expenses for the 1998 nine-month period principally reflects
higher compensation costs partially offset by lower expenditures for marketing
costs related to the commercialization of products. Selling costs will decrease
in subsequent periods as the sales and marketing of TransCyte for burns has been
transferred to the Dermagraft Joint Venture effective October 1998.
Professional and consulting costs for legal, accounting and other consulting
services incurred in the three and nine months ended September 30, 1998 were
$795,000 and $1,747,000, respectively, as compared to $671,000 and $2,023,000
for the corresponding periods of 1997. The increase in professional and
consulting fees in the third quarter 1998 compared to the third quarter 1997 was
primarily related to preparation for the reinspection of the Company's
manufacturing facility by the FDA in September 1998. The decrease in
professional and consulting fees in the nine months ended September 30, 1998
principally reflects lower legal fees and lower costs for Dermagraft-related
marketing consultants.
Equity in losses of joint ventures were $3,817,000 and $12,706,000 for the three
and nine months ended September 30, 1998, respectively, compared to $2,571,000
and $6,920,000 for the corresponding periods of 1997. These amounts represent
the Company's share of losses of the Dermagraft and Cartilage Joint Ventures.
The increases in 1998 primarily reflect increased manufacturing costs and
selling, general and administrative expenses in the Dermagraft Joint Venture.
As the Company sells products to the Dermagraft Joint Venture at its cost to
manufacture, costs of the commercial facility began to be recognized in cost of
goods sold for the Dermagraft Joint Venture in January 1998. Selling, general
and administrative expenses in the Dermagraft Joint Venture have increased to
support the commercial introduction of Dermagraft in certain markets. The joint
ventures' losses are expected to continue in 1998 and 1999 as Dermagraft and
TransCyte are commercially introduced, in support of clinical trials of
Dermagraft and TransCyte and as orthopedic cartilage research and development
efforts continue.
Interest income and other was $422,000 and $722,000 in the three and nine months
ended September 30, 1998, respectively, as compared to $289,000 and $1,267,000
in the corresponding periods of 1997. The increase for the third quarter 1998
compared to the third quarter 1997 reflects higher cash balances available for
investment in the 1998 quarter due to the $25 million Series B Convertible
Preferred Stock private placement in July 1998. The decrease for the nine-month
period of 1998 primarily represents lower interest income associated with
reduced average balances in cash equivalents and investments during the period
and the effect of Smith & Nephew's minority interest in DermEquip LLC. See Note
1 to the consolidated financial statements.
Interest expense was $608,000 and $1,759,000 in the three and nine months ended
September 30, 1998, respectively, as compared to $299,000 and $555,000 in the
corresponding periods in 1997. The increase principally reflects interest on
notes payable to Smith & Nephew and The Chase Manhattan Bank. See Note 5 to the
consolidated financial statements.
Liquidity and Capital Resources
- -------------------------------
As of September 30, 1998, the Company had available working capital of
$28,310,000, an increase of $15,094,000 from December 31, 1997. The increase in
working capital principally reflects $20 million from the sale of equity (see
Note 2 to the consolidated financial statements), $25 million from a private
placement of Series B Convertible Preferred Stock in July 1998 (see Note 6 to
the consolidated financial statements) and funds received from
-13-
<PAGE>
borrowings (see Note 5 to the consolidated financial statements) substantially
offset by funds used in operations, in support of the Dermagraft and Cartilage
Joint Ventures, for capital expenditures and payments of debt. Capital
expenditures of $3,575,000 in the first nine months of 1998 relate primarily to
the Company's manufacturing facility and related process equipment.
The Company expects to use working capital as it continues to incur substantial
research and development expenses; additional costs in support of clinical
trials; selling, general and administrative costs in support of product
commercialization; and additional expenditures for capital equipment and
patents both directly and in support of the Dermagraft and Cartilage Joint
Ventures. These increases are expected to be only partially offset by contract
revenues received from the Dermagraft and Cartilage Joint Ventures with Smith &
Nephew.
In addition to available working capital, the Company has entered into an equity
line which could provide up to $50 million in funding through the sale of Common
Stock. Subject to certain conditions, the equity line is available until
February 2000 (see Note 6 to the consolidated financial statements). Any
decision to draw any funds under the equity line and the timing of any such draw
are solely at the Company's discretion. Under the expanded Dermagraft Joint
Venture, Smith & Nephew agreed to pay the Company $15 million, directly or
through the Dermagraft Joint Venture, upon the earlier of (i) FDA approval for
the marketing of Dermagraft in the treatment of diabetic foot ulcers or (ii)
January 4, 1999. The Company also may have, under the terms of the private
placement and subject to certain conditions, an option to sell an additional $25
million of the Series B Preferred Stock in the first quarter of 1999 (see Note 6
to the consolidated financial statements). Conditions of the Company's option
include having the Common Stock issuable on conversion registered and the Common
Stock must be trading above $5.49 per share, among others.
To the extent necessary, further sources of funds may include existing or future
strategic alliances or other joint venture arrangements which provide funding to
the Company, and additional public or private offerings of debt or equity
securities, among others. There can be no assurance, however, that funds from
these sources or those outlined above will be available when needed or on terms
favorable to the Company, under existing arrangements or otherwise, or that the
Company will be successful in entering into any other strategic alliances or
joint ventures.
The Company continually reviews its product development activities in an effort
to allocate its resources to those products the Company believes have the
greatest commercial potential. Factors considered by the Company in determining
the products to pursue include projected markets and need, potential for
regulatory approval and reimbursement under the existing healthcare system as
well as anticipated healthcare reforms, technical feasibility, expected and
known product attributes and estimated costs to bring the product to market.
Based on these and other factors which the Company considers relevant, the
Company may from time to time reallocate its resources among its product
development activities. Additions to products under development or changes in
products being pursued can substantially and rapidly change the Company's
funding requirements.
Financial Condition
- -------------------
Cash, cash equivalents and short-term investments as of September 30, 1998
increased by $14,990,000 as compared to December 31, 1997 principally reflecting
proceeds from the sale of Common Stock to Smith & Nephew (see Note 2 to the
consolidated financial statements), proceeds from the private placement of $25
million in Series B Convertible Preferred Stock (see Note 6 to the consolidated
financial statements) and funds received from borrowings (see Note 5 to the
consolidated financial statements) offset by the use of cash to fund operations,
in support of the Dermagraft and Cartilage Joint Ventures and for capital
expenditures and the payment of debt. Preferred stock at September 30 1998
reflects the private placement of the Series B Convertible Preferred Stock in
July 1998.
Year 2000 Compliance
- --------------------
Many currently installed computer systems and software products are coded to
accept only two digit entries to represent years. These systems and products
will need to be able to accept four digit entries to distinguish years beginning
with 2000 from prior years. As a result, systems and products that do not
accept four digit year entries
-14-
<PAGE>
will need to be upgraded or replaced to comply with such "Year 2000"
requirements. The Company has begun the process of evaluating its information
systems and has identified equipment and significant vendors that could be
affected by the Year 2000 issue. Although its assessment of its Year 2000
issues is not complete, Advanced Tissue Sciences believes that its internal
systems are Year 2000 compliant or will be replaced in connection with
previously planned upgrades to information systems prior to the need to comply
with Year 2000 requirements. However, a number of the Company's customers and
vendors may be affected by Year 2000 issues that require that they expend
significant resources to modify or replace their existing systems. To date, the
Company has not identified any Year 2000 issues that will require a significant
investment to be made by the Company to resolve; however, it is not possible to
predict with any certainty (i) that the Company will identify all significant
Year 2000 issues which could be material to its operations, (ii) that
significant vendors will not be affected by Year 2000 and therefore may be
unable to meet their commitments to the Company, (iii) that the Company will not
identify Year 2000 issues that result in material costs to the Company, or (iv)
that the Company will be able to adequately resolve or develop satisfactory
contingency plans for identified Year 2000 issues.
-15-
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 1 - LEGAL PROCEEDINGS
Several shareholders have filed lawsuits against the Company and two of its
officers in the United States District Court for the Southern District of
California. The lawsuits allege violations of the federal securities laws, and
purport to seek damages on behalf of a class of shareholders who purchased
Advanced Tissue Sciences, Inc. Common Stock during the period generally from
January 13, 1997 through June 11, 1998. The Company believes that the lawsuits
are without merit and intends to defend against them vigorously.
ITEM 2 - CHANGE IN SECURITIES
The Company's Certificate of Incorporation provides for the issuance of up to
1,000,000 shares of Preferred Stock, $.01 par value. The Board of Directors has
the authority, without any action by the shareholders, to divide the Preferred
Stock into series, to fix the number of shares constituting any series, and to
fix or alter the dividend rights, dividend rate, conversion rights, voting
rights, rights and terms of redemption, the redemption price or prices, and the
liquidation preferences of any wholly unassigned series of Preferred Stock. In
connection with the adoption of the Shareholder Rights Plan in January 1995, the
Company's Board of Directors designated and reserved 500,000 shares of the
Company's authorized Preferred Stock as Series A Junior Participating Preferred
Stock, par value $.01 per share.
In July 1998, the Board of Directors of the Company designated and reserved
1,000 shares of the Preferred Stock as Series B Convertible Preferred Stock, par
value $.01 per share (the "Series B Preferred Stock"). Subject to adjustment in
certain events, the Series B Preferred Stock is convertible into Common Stock of
the Company at $4.77 per share (the "Conversion Price"). The Conversion Price
will be increased by one-half the amount by which the market price of the Common
Stock on the date of conversion exceeds $7.96 per share. Conversely, should the
average of the fifteen lowest average daily trading prices during the
forty-five trading days prior to the date of conversion be equal to or below
$3.58 per share, the Conversion Price will be equal to such average of such
daily trading prices.
The Series B Preferred Stock accrues dividends at 5% per annum. Dividends are
payable quarterly in Common Stock or cash at the option of the Company beginning
in the first quarter of 1999. To the extent not previously converted, the
Series B Preferred Stock is, at the election of the Company, redeemable at par
value plus accrued dividends or convertible into Common Stock three years from
the date of issuance subject to extension in certain circumstances. The Series
B Preferred Stock is redeemable at the option of the holders upon the occurrence
of certain events.
On July 10, 1998, the Company sold 500 shares of the Series B Preferred Stock
pursuant to Regulation D under the Securities Act of 1933 ("Regulation D") to a
group of investors (as the term is defined under Rule 501(n)(3) of Regulation
D) for $25 million. The names of the investors who purchased the Series B
Preferred Stock were set forth in the Schedule of Buyers to the Securities
Purchase Agreement dated July 10, 1998 filed in Exhibit 10.1 to the Current
Report on Form 8-K dated July 10, 1998.
The foregoing summary is qualified in its entirety by reference to the Company's
Current Report on Form 8-K dated July 10, 1998 and the exhibits attached
thereto.
ITEM 5 - OTHER INFORMATION
This Quarterly Report on Form 10-Q includes a number of forward-looking
statements that involve risks and uncertainties within the meaning of the
Securities Act of 1933 and the Securities Exchange Act of 1934, including,
without limitation, those relating to strategic alliances (including potential
milestone payments and revenues from joint ventures), the use of working
capital, the sufficiency and availability of funds to support operations, and
commercialization of the Company's products.
-16-
<PAGE>
In particular, the Company will need to successfully complete an additional
controlled clinical trial of Dermagraft in the treatment of diabetic foot ulcers
and submit a revised premarket approval application to the FDA. 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). In addition, there can be no
assurance the Company can successfully scale up manufacturing processes, launch
its products within reasonable timeframes, obtain reimbursement for, or
successfully commercialize any such products.
These and other risks are detailed in the Company's publicly available filings
with the Securities and Exchange Commission including the Company's Annual
Report on Form 10-K for the year ended December 31, 1997. Actual results may
differ materially from those currently anticipated as a result of such risks.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated July 10, 1998 under Item 5
reporting the completion of a private placement of $25 million of Series B
Convertible Preferred Stock (the "Series B Preferred Stock") to a group of
investors. The Series B Preferred Stock is convertible into Common Stock of the
Company at conversion prices which can vary based on the market price of the
Company's Common Stock. To the extent not previously converted, the Series B
Preferred Stock is redeemable at the election of the Company at par value plus
accrued dividends or convertible into Common Stock three years from the date of
issuance subject to extension under certain circumstances. The Series B
Preferred Stock is redeemable at the option of the holders upon the occurrence
of certain events. Dividends, which are payable quarterly in cash or Common
Stock at the Company's option, accrue at 5% per annum.
The Company also reported that it had extended the term of its investment
agreement (the "Investment Agreement") with Hatteras Partners, L.P. (formerly
Ramius Hatteras Partners, L.P.) to February 2000. The Investment Agreement
provides for an equity line which allows the Company to access up to $50 million
through sales of its Common Stock. The decision to draw any funds under the
Investment Agreement and the timing of any such draw are solely at the Company's
discretion. Other than extending the term for an additional year, the amendment
did not materially change the Investment Agreement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED TISSUE SCIENCES, INC.
Date: November 12, 1998 /s/ Arthur J. Benvenuto
--------------------- --------------------------------
Arthur J. Benvenuto
Chairman of the Board and Chief
Executive Officer
Date: November 12, 1998 /s/ Michael V. Swanson
--------------------- ---------------------------------
Michael V. Swanson
Vice President, Finance and
Administration
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-Q for the quarter ended September 30, 1998 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 25,082
<SECURITIES> 6,994
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 3,773
<CURRENT-ASSETS> 38,329
<PP&E> 33,946
<DEPRECIATION> 10,848
<TOTAL-ASSETS> 64,515
<CURRENT-LIABILITIES> 10,019
<BONDS> 27,571
5,000
0
<COMMON> 393
<OTHER-SE> 20,753
<TOTAL-LIABILITY-AND-EQUITY> 64,515
<SALES> 7,720
<TOTAL-REVENUES> 14,197
<CGS> 11,066
<TOTAL-COSTS> 11,066
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,759
<INCOME-PRETAX> (34,594)
<INCOME-TAX> 0
<INCOME-CONTINUING> (34,594)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,594)
<EPS-PRIMARY> (.89)
<EPS-DILUTED> (.89)
</TABLE>
