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 EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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: (858) 713-7300
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 10, 1999 was 56,599,210.
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
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Part I - Financial Information
- ------------------------------
Page
----
Item 1 - Financial Statements
Introduction to the Financial Statements 1
Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 2
Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 1999 and 1998 3
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998 4
Consolidated Statement of Stockholders' Equity -
Nine Months Ended September 30, 1999 5
Notes to the Consolidated Financial Statements 6-12
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-18
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 18
Part II - Other Information
- ----------------------------
Item 2 - Changes in Securities 19
Item 5 - Other Information 19-26
Item 6 - Exhibits and Reports on Form 8-K 27
Signatures 28
<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, as amended, for the year ended
December 31, 1998 and Quarterly Reports on Form 10-Q for the quarter ended March
31, 1999 and Form 10-Q, as amended, for the quarter ended June 30, 1999.
The financial information presented in this Quarterly Report on Form 10-Q
reflects all adjustments, consisting only of normal recurring adjustments, which
are, in the opinion of management, necessary for a fair statement of the results
for the interim periods presented. The results for the interim periods are not
necessarily indicative of results to be expected for the full year.
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<PAGE>
ADVANCED TISSUE SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,604 $ 16,551
Short-term investments 4,505 6,503
Inventory 4,502 3,364
Other current assets 1,671 2,412
------------- ------------
Total current assets 28,282 28,830
Property - net 17,576 20,624
Patent costs - net 2,089 1,846
Other assets 2,885 2,685
------------- ------------
Total assets $ 50,832 $ 53,985
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 679 $ 894
Accrued expenses 6,173 4,805
Current portion of long-term debt
and capital lease obligations 9,611 2,689
Deferred revenue 5,334 --
------------- ------------
Total current liabilities 21,797 8,388
Long-term debt and capital lease obligations 9,635 27,260
Other long-term liabilities 203 558
Minority interest in consolidated subsidiary 138 252
------------- ------------
Total liabilities 31,773 36,458
------------- ------------
Redeemable Convertible Series B Preferred
Stock, $.01 par value; 1,000 shares
authorized; 100.8 shares issued and
outstanding at September 30, 1999 and
100 shares at December 31, 1998
(aggregate redemption value of $5,358
and $5,119 at September 30, 1999 and
December 31, 1998, respectively, and
liquidation value of $5,104 and $5,119
at September 30, 1999 and December 31,
1998, respectively) 5,040 5,000
------------- ------------
Stockholders' Equity:
Convertible Series B Preferred Stock,
$.01 par value; no shares issued and
outstanding at September 30, 1999 and
350 shares at December 31, 1998
(aggregate liquidation value of $17,917
at December 31, 1998) -- --
Accrued cumulative preferred stock dividends 64 536
Common Stock, $.01 par value; 125,000,000
shares authorized; issued and outstanding,
52,748,512 shares at September 30, 1999
and 40,353,524 shares at December 31, 1998 527 403
Additional paid-in capital 247,214 230,963
Accumulated deficit (231,626) (218,456)
------------ ------------
16,179 13,446
Less note received in connection with sale
of Common Stock and deferred compensation
applicable to Common Stock (2,160) (919)
------------- ------------
Total stockholders' equity 14,019 12,527
------------- ------------
Total liabilities and stockholders'
equity $ 50,832 $ 53,985
============= =============
</TABLE>
See accompanying notes to the consolidated financial statements.
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<PAGE>
ADVANCED TISSUE SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Product sales -
Related parties $ 3,496 $ 2,207 $ 10,184 $ 6,685
Others -- 515 -- 1,035
Contracts and fees -
Related parties 8,204 1,565 23,165 6,078
Others 211 171 554 399
--------- --------- --------- ----------
Total revenues 11,911 4,458 33,903 14,197
--------- --------- --------- ----------
Costs and expenses:
Research and development 4,165 4,025 12,292 11,790
Selling, general and administrative 2,457 3,947 8,628 12,163
Cost of goods sold 3,496 4,135 10,184 11,095
--------- --------- --------- ----------
Total costs and expenses 10,118 12,107 31,104 35,048
--------- --------- --------- ----------
Income (loss) from operations before
equity in losses of joint ventures 1,793 (7,649) 2,799 (20,851)
Equity in losses of joint ventures (4,894) (3,817) (15,349) (12,706)
--------- --------- --------- ----------
Loss from operations (3,101) (11,466) (12,550) (33,557)
Other income (expense):
Interest income and other 505 422 809 722
Interest expense (342) (608) (1,429) (1,759)
--------- --------- --------- ----------
Net loss (2,938) (11,652) (13,170) (34,594)
Dividends on preferred stock (63) (281) (494) (281)
--------- --------- --------- ----------
Net loss applicable to common stock $ (3,001) $ (11,933) $ (13,664) $ (34,875)
========= ========= ========= ==========
Basic and diluted loss per common share $ (.06) $ (.30) $ (.29) $ (.89)
========= ========= ========= ==========
Weighted average number of common
shares used in computation of basic
and diluted loss per share 52,451 39,324 46,352 39,194
========= ========= ========= ==========
</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,
-------------------------------------
1999 1998
---------------- -----------------
(Unaudited)
<S> <C> <C>
Operating activities:
Net loss $ (13,170) $ (34,594)
Adjustments to reconcile net
loss to cash used in
operating activities:
Depreciation and amortization 3,582 3,506
Compensation for services paid in
stock, options or warrants 183 914
Equity in losses of joint ventures 15,349 12,706
Other adjustments to net loss 497 311
Deferred revenue 5,334 --
Change in assets and liabilities:
Inventory (1,138) 870
Other current assets 741 (1,085)
Accounts payable (215) 562
Accrued expenses 1,368 (1,252)
---------- ----------
Net cash provided by (used
in) operating activities 12,531 (18,062)
---------- ----------
Investing activities:
Purchases of short-term investments (9,009) (10,943)
Maturities and sales of short-term
investments 11,007 5,949
Acquisition of property (714) (3,575)
Investment in joint ventures (19,218) (16,769)
Distribution from joint ventures 3,406 3,139
Patent application costs (289) (207)
Other long-term assets (69) 2,246
---------- ----------
Net cash used in investing
activities (14,886) (20,160)
---------- ----------
Financing activities:
Proceeds from borrowings 1,340 3,659
Payments of borrowings (2,043) (1,444)
Net proceeds from sale of Preferred
Stock -- 24,917
Net proceeds from sale of Common Stock 4,498 20,000
Repurchase of Common Stock (457) --
Options and warrants exercised 5 852
Other long-term obligations 65 234
---------- ----------
Net cash provided by
financing activities 3,408 48,218
---------- ----------
Net increase in cash and cash
equivalents 1,053 9,996
Cash and cash equivalents at beginning
of period 16,551 15,086
---------- ----------
Cash and cash equivalents at end
of period $ 17,604 $ 25,082
========== ==========
</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>
Preferred Stock Common Stock
--------------------- ------------------------
Shares Amount Shares Amount
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 350 $ -- 40,353,524 $ 403
Sale of Common Stock 702,149 7
Issuance of Common Stock for
debt and accrued interest 2,800,595 28
Conversion of Preferred Stock (309) 7,865,798 79
Transfer of Preferred Stock to
Redeemable Preferred Stock (41)
Repurchase of Common Stock (463,154) (5)
Preferred Stock dividends 413,000 4
Restricted Common Stock
awarded for services 300,000 3
Options exercised 776,600 8
Other
Net loss -------- --------- ---------- ----------
Balance, September 30, 1999 -- $ -- 52,748,512 $ 527
======== ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Accrued
Dividends/
Note Total
Additional Receivable/ Stock-
Paid-In Accumulated Deferred holders'
Capital Deficit Compensation Equity
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 $ 230,963 $ (218,456) $ (383) $ 12,527
Sale of Common Stock 4,493 4,500
Issuance of Common Stock for
debt and accrued interest 10,776 10,804
Conversion of Preferred Stock 1,926 2,005
Transfer of Preferred Stock to
Redeemable Preferred Stock (2,045) (2,045)
Repurchase of Common Stock (1,762) (1,767)
Preferred Stock dividends 468 (472) --
Restricted Common Stock
awarded for services 1,122 (945) 180
Options exercised 1,307 1,315
Other (34) (296) (330)
Net loss (13,170) (13,170)
----------- ----------- ----------
Balance, September 30, 1999 $ 247,214 $ (231,626) $ (2,096) $ 14,019
=========== =========== ========== ==========
</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. Both products are being commercialized 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.
DermEquip is a special purpose entity established to finance an expansion of the
Company's manufacturing facility. 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).
Revenue Recognition - Revenues from product sales to third parties are
recognized when products are shipped, the risk of ownership has passed to the
purchaser, and the Company has no further specified performance obligations.
Revenues from product sales to related parties are recognized at such time as
the related party is contractually obligated to purchase the product, generally
upon the completion of manufacture. Such product sales to the Dermagraft Joint
Venture are equal to the Company's cost (see Note 11). Revenues under
collaborative research and licensing agreements, including nonrefundable
up-front fees and milestone payments where the Company has continuing financial
commitments, are recognized as costs are incurred over the related period of the
agreement. Revenues from government grants are recognized based on the
performance requirements of the grant or as the grant expenditures are incurred.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
related disclosures at the date of the financial statements, and the amounts of
revenues and expenses reported during the period. Actual results could differ
from those estimates.
Dependence on Certain Suppliers - The mesh frameworks used by the Company in its
therapeutic products are sourced from single manufacturers. Any significant
supply interruption would adversely affect the Company's product manufacturing.
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 its products.
Reclassification - Certain reclassifications have been made to prior year
amounts to conform to the presentation for the three and nine months ended
September 30, 1999.
NOTE 2 - STRATEGIC ALLIANCES
Smith & Nephew Joint Ventures
- -----------------------------
In April 1996, the Company entered into an agreement with Smith & Nephew to form
a fifty-fifty joint venture for the worldwide commercialization of
Dermagraft[R], the Company's tissue engineered dermal skin replacement, for
the treatment of diabetic foot ulcers (the "Dermagraft Joint Venture"). 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], a temporary covering for severe 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
-6-
<PAGE>
further expanded the Dermagraft Joint Venture to include exclusive rights
to TransCyte for severe 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 also received an additional $15
million as consideration for expanding the joint venture in January 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. The $15 million payment is being recognized into revenue as the
related financial commitments are met. In the three and nine months ended
September 30, 1999, the Company recognized revenues of $4,257,000 and
$13,624,000, respectively, related to such payment. This amount is included in
contract revenues for each of the respective periods.
In the expanded joint venture, the Company and Smith & Nephew 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. As of
September 30, 1999 and December 31, 1998, the accompanying balance sheets
include obligations to the Dermagraft Joint Venture of $2,106,000 and
$1,316,000, respectively, related to the above costs. See Note 11 with respect
to related party transactions with the Dermagraft Joint Venture.
In 1994, Smith & Nephew and the Company entered into a separate joint venture
for the development of tissue engineered cartilage for orthopedic applications
(the "Cartilage Joint Venture"). Under the Cartilage Joint Venture, Smith &
Nephew contributed the first $10 million in funding and the Company contributed
certain technology licenses. The Cartilage Joint Venture's total funding since
inception reached $10 million in January 1997 and, as provided in the joint
venture agreement, the Company and Smith & Nephew are sharing equally in
Cartilage Joint Venture revenues and expenditures. See Note 11 with respect to
related party transactions with the Cartilage Joint Venture.
The results of operations of the joint ventures for the three and nine months
ended September 30, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Dermagraft Joint Venture
- ------------------------
Net sales* $ 875 $ 104 $ 1,903 $ 230
Cost of goods sold 2,740 2,347 10,309 7,318
Other costs and expenses 5,119 4,435 14,543 15,210
Net loss 6,984 6,678 22,949 22,298
Cartilage Joint Venture
- -----------------------
Costs and expenses $ 1,423 $ 1,090 $ 3,898 $ 3,564
Net loss 1,423 1,090 3,898 3,564
</TABLE>
__________
* Includes sales of TransCyte in the United States for burns beginning in
October 1998.
Inamed Agreements
- -----------------
In May 1999, Advanced Tissue Sciences, Inc. and Inamed Corporation ("Inamed")
entered into a binding letter of intent for a strategic alliance for the
development and marketing of several of Advanced Tissue Sciences' human-based,
tissue-engineered products for aesthetic and certain reconstructive
applications. Specifically, Inamed
-7-
<PAGE>
licensed rights to further develop, manufacture and sell tissue engineered
products for use in cosmetic surgery, cartilage for plastic and reconstructive
surgery, and extracellular matrix for use in breast reconstruction. In
addition, Inamed also received an option to license rights to use
extracellular matrix, including human collagen, from Advanced Tissue Sciences'
three-dimensional culture system for soft tissue augmentation (wrinkles and
cosmetic correction) and as a bulking agent for the treatment of urinary
incontinence. Inamed is a global surgical and medical device company engaged
in the development, manufacturing and marketing of medical products for
aesthetic medicine, plastic and reconstructive surgery and the treatment of
obesity.
Under the agreement between the parties, in exchange for worldwide licensing
rights, Inamed agreed to pay Advanced Tissue Sciences a series of payments
totaling $6 million, including $3 million to purchase Advanced Tissue Sciences'
common stock. As provided under the agreement, the Company has received $5
million of such payments through September 1999. The final payment was received
and stock purchase completed in November 1999 (see Note 12). Inamed will also
receive five-year warrants to purchase up to 300,000 shares of common stock (see
Note 6). In addition to royalties on product sales, Advanced Tissue Sciences
may potentially receive up to a total of $6 million in milestones based on
product approvals in the United States.
In September 1999, Inamed exercised its option to license the use of
extracellular matrix from Advanced Tissue Sciences' three-dimensional culture
system for soft tissue augmentation and as a bulking agent for the treatment of
urinary incontinence. As a result, Advanced Tissue Sciences received another $4
million, including $2 million for licensing rights, and $2 million for the
purchase of Advanced Tissue Sciences' common stock. With this expansion of the
licensing agreement, Inamed received an additional five-year warrant to purchase
up to 200,000 shares of Advanced Tissue Sciences' common stock (see Note 6). In
addition, Advanced Tissue Sciences could potentially receive up to a total of $4
million in milestones based on product approvals in the United States.
Advanced Tissue Sciences will be responsible for the funding and development of
the products and the related manufacturing processes while Inamed will be
responsible for clinical and regulatory activities. Advanced Tissue Sciences,
or an affiliate, may elect to manufacture the products developed under the
agreement. Fees for licensing rights and milestone payments will be recognized
into revenues as the related financial commitments for product development and
manufacturing processes are incurred.
NOTE 3 - INVENTORIES
Inventories manufactured for sale to the Dermagraft Joint Venture are stated at
cost, principally standard costs which approximate actual costs on a first-in,
first-out basis reflecting the price at which such goods will be sold to the
joint venture (see Note 11). Inventories consist of the following components as
of September 30, 1999 and December 31, 1998 (in thousands):
September 30, December 31,
1999 1998
-------------- -------------
Raw materials and supplies $ 3,674 $ 2,965
Work-in-process 828 399
--------- ---------
$ 4,502 $ 3,364
========= =========
NOTE 4 - CONTINGENCIES - LEGAL PROCEEDINGS
During 1998, several lawsuits were filed in the United States District Court for
the Southern District of California against the Company and two of its officers.
The lawsuits alleged 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 United States Food and Drug
Administration approval of Dermagraft for the treatment of diabetic foot ulcers.
The lawsuits purported 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. On May 3, 1999, the
class action was voluntarily dismissed by lead plaintiffs' counsel. No payment
was made by the Company and the voluntary dismissal terminates the action.
-8-
<PAGE>
NOTE 5 - LONG-TERM DEBT
In June 1999, a $10 million loan and accrued interest payable to Smith & Nephew
related to the Dermagraft Joint Venture was converted into 2,800,595 shares of
the Company's common stock. As provided under the loan agreement, the Company
had the option to pay the loan in cash or common stock. The loan was due and
payable in less than a year. In addition, during 1999, the Company has borrowed
$1,340,000 from Smith & Nephew pursuant to a commitment under 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
$7 million had been drawn as of September 30, 1999. The loan is due and payable
in June 2000.
Debt and other long-term obligations as of September 30, 1999 and December 31,
1998 were as follows (in thousands):
September 30, December 31,
1999 1998
------------- ------------
Chase Loan $ 12,160 $ 14,080
Smith & Nephew notes:
Dermagraft Joint Venture -- 10,000
Cartilage Joint Venture 7,025 5,685
Capital lease obligations and other 61 184
Less current portion (9,611) (2,689)
---------- ---------
$ 9,635 $ 27,260
========== =========
NOTE 6 - CAPITAL STOCK
In February 1999, the common stockholders of the Company approved an amendment
to the Company's Restated Certificate of Incorporation to increase the number of
authorized shares of common stock from 100,000,000 shares to 125,000,000 shares.
In addition, during the nine months ended September 30, 1999, 309.1 shares of
the Company's Convertible Series B Preferred Stock and 40.1 shares of the
Company's Redeemable Convertible Series B Preferred Stock have been converted
into 7,865,798 shares of common stock at an average price of $2.22 per share.
The Company has also notified the holders of its Series B Preferred Stock of its
election to redeem for cash at 105% of liquidation value any preferred shares
submitted for conversion through December 31, 1999 at a conversion price equal
to or below $3.58 per share. The Company may withdraw the election on five days
advance notice. As a result, all of the Company's Convertible Series B
Preferred stock is reflected as redeemable in the consolidated balance sheet as
of September 30, 1999.
Through September 1999, as part of an agreement between Inamed and the Company,
Inamed has purchased 702,149 shares of the Company's common stock for $4.5
million or at an average price of approximately $6.41 per share. Under the
agreement, Inamed agreed to purchase a total of $5 million of Advanced Tissue
Sciences' common stock at $6 per share, or at an average of the then current
trading price of the common stock plus $3 per share, whichever is higher.
Inamed also will receive five-year warrants to purchase a total of 500,000
shares of common stock at a price per share equal to twice the price per share
paid by Inamed for the $5 million of Advanced Tissue Sciences' common stock.
Inamed has agreed to hold any investment in Advanced Tissue Sciences' common
stock until at least October 2002. See Note 2.
In June 1999, certain officers of the Company exercised employee stock options
for 775,000 shares of common stock. The purchase price of $1.3 million and
withholding taxes of $457,000 was paid by the delivery of 463,154 shares of the
Company's common stock. See Note 8 regarding stock options, warrants and
restricted stock awards.
In May 1995, the Company's Chairman and Chief Executive Officer exercised an
employee stock option. The purchase price was paid with an interest bearing
promissory note. The note receivable and accrued interest of $1,204,000 and
$918,500 as of September 30, 1999 and December 31, 1998, respectively, are
deducted from stockholders' equity in the accompanying balance sheets.
-9-
<PAGE>
NOTE 7 - BASIC AND DILUTED LOSS PER SHARE
Basic earnings per common share are determined based on the weighted average
number of shares outstanding during the period. Diluted earnings per common
share include the weighted average number of shares outstanding and give effect
to potentially dilutive common shares such as options and warrants outstanding.
Both the basic and diluted loss per common share for the three and nine months
ended September 30, 1999 and 1998 are based on the weighted average number of
shares of common stock outstanding during the periods. Potentially dilutive
securities include options and warrants outstanding and debt and preferred stock
convertible into common stock; however, such securities have not been included
in the calculation of the diluted loss per share as their effect is
antidilutive. Since such securities are antidilutive, there is no difference
between basic and diluted loss per common share for the periods presented. The
net loss applicable to common shares used in the calculation of basic and
diluted loss per common share for the three and nine months ended September 30,
1999 includes dividends of $63,000 and $494,000, respectively, and of $281,000
in the three and nine months ended September 30, 1998, accrued or paid on the
Company's Convertible Series B Preferred Stock during such periods.
NOTE 8 - STOCK INCENTIVE PLANS
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, 1999:
<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, 1998 3,897,722 $8.62 1,509,640 $ 7.44
Granted 1,437,950 $2.90 450,000 $12.85
Exercised (776,600) $1.69 -- --
Canceled (187,238) $7.06 -- --
--------- ---------
Outstanding, September 30, 1999 4,371,834 $8.03 1,959,640 $ 8.68
========= =========
</TABLE>
In May 1999, the Company's Chairman and Chief Executive Officer was awarded
300,000 shares of restricted common stock under the 1997 Plan. Subject to
meeting certain requirements including continued service, 50,000 shares will
vest annually and the remaining 150,000 shares will vest at the end of three
years or, if earlier, upon approval of Dermagraft for the treatment of diabetic
foot ulcers in the United States. The difference between the market price at
the grant date and the purchase price is being recognized as compensation
expense by the Company ratably over the restricted periods. During the three
and nine months ended September 30, 1999, the Company charged $104,000 and
$148,000, respectively, to expense for options and stock awards granted to
employees.
NOTE 9 - LEASE COMMITMENTS
In May 1999, the Company terminated a 15-year lease agreement for additional
research and administrative space and consolidated its activities into two
existing facilities substantially reducing its lease commitments for facilities.
The following is a summary of the operating lease commitments as of September
30, 1999 (in thousands):
OPERATING
LEASES
-------------
Year Ending December 31:
1999 $ 2,773
2000 2,476
2001 932
2002 512
----------
Total minimum lease payments $ 6,693
==========
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<PAGE>
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
During 1999, non-cash financing activities have included the repayment of a $10
million loan and accrued interest payable through the issuance of common stock
(see Note 5) and the exercise of stock options by the delivery of common stock
in payment of the exercise price (see Note 6). The Company also issued a
restricted stock award under the 1997 Plan (see Note 8).
NOTE 11 - RELATED PARTY TRANSACTIONS
During the three and nine months ended September 30, 1999 and 1998, the Company
has performed services for its Dermagraft and Cartilage Joint Ventures and has
manufactured products for the Dermagraft Joint Venture to sell to customers or
for use in clinical trials as described below (see Note 2). The Company has a
fifty percent interest in each of the Dermagraft and Cartilage Joint Ventures.
Dermagraft Joint Venture
- ------------------------
During the three and nine-month periods ended September 30, 1999 and 1998, the
Company recognized $6,859,000 and $996,000 in the three-month periods and
$20,523,000 and $4,137,000 in the nine-month periods, respectively, in contract
revenues for research and development activities performed for the Dermagraft
Joint Venture, including $4,257,000 and $13,624,000 in the three and nine-month
periods ended September 30, 1999, respectively, related to the recognition of a
$15 million milestone payment (see Note 2). In addition, during the three and
nine-month periods ended September 30, 1999 and 1998, all product sales to
related parties represent products sold to the Dermagraft Joint Venture.
As a purpose of the Dermagraft Joint Venture is to share the costs of
manufacturing and commercializing the Company's Dermagraft and TransCyte
products between the joint venture's partners, product sales to the Dermagraft
Joint Venture are equal to the Company's cost of goods sold for such products
including period costs (except for the three and nine-month periods ended
September 30, 1998 when the Company also sold TransCyte in the United States
and, therefore, absorbed period costs related to TransCyte). Period costs
reflect overhead costs related to excess production capacity and include rent,
depreciation and quality control, facilities, supplies and other such costs to
support or related to the excess production capacity. Due to costs related to
excess production capacity, the Dermagraft Joint Venture immediately writes the
inventory down to estimated market value at the date of purchase, which is the
net realizable value at which the joint venture believes it will be able to sell
the products to its customers. For the three-month periods ended September 30,
1999 and 1998 such write downs totaled $2,777,000 and $2,227,000, respectively,
and were $8,777,000 and $6,575,000 for the nine-month periods ended September
30, 1999 and 1998, respectively. To the extent the Company does not sell such
products to the Dermagraft Joint Venture, it will be required to write such
inventories down to net realizable value.
Cartilage Joint Venture
- -----------------------
During the three and nine months ended September 30, 1999, the Company
recognized $803,000 and $2,100,000, respectively, in contract revenues for
research and development activities performed for the Cartilage Joint Venture
compared with $569,000 and $1,941,000 during the corresponding periods of 1998.
The Company's share of the above costs incurred by the Company and charged to
the Dermagraft and Cartilage Joint Ventures are reflected in the equity in
losses of joint ventures in the accompanying statement of operations and totaled
$3,543,000 and $1,963,000 in the three months ended September 30, 1999 and 1998,
respectively, and $11,391,000 and $6,722,000 for the nine months ended September
30, 1999 and 1998, respectively.
NOTE 12 - SUBSEQUENT EVENTS
Public Offering
- ---------------
In November 1999, the Company completed a public offering of 3,750,000 units to
the State of Wisconsin Investment Board at $4.00 per unit, resulting in net
proceeds to the Company of $15 million. The State of Wisconsin Investment Board
is the Company's largest shareholder with a beneficial ownership of over 16%.
Upon issuance, the units
-11-
<PAGE>
separated into 3,750,000 shares of the Company's common stock and warrants to
purchase an additional 1,750,000 shares of common stock at $4.00 per share.
The proceeds from the offering are not reflected in the accompanying balance
sheet. In conjunction with the offering, the Company agreed that $5 million
of the proceeds would be reserved for the redemption of any of its Series B
Preferred Stock submitted for conversion at or below $3.58 per share. In
addition, as part of the investment agreement, the Board of Directors amended
the Company's shareholder rights plan to permit the State of Wisconsin
Investment Board to beneficially own up to 19.99% of the Company's common
stock and the Company terminated its equity line agreement with a separate
group of investors prior to its February 2000 expiration date.
Inamed Payment
- --------------
As provided in the agreement between the parties, the Company received an
additional $1 million payment from Inamed in November 1999, bringing the total
payments made under the agreement to $10 million. The $1 million payment is not
reflected in the accompanying balance sheet. See Note 2.
-12-
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q may contain predictions, estimates and
other forward-looking statements that involve a number of risks and
uncertainties, including those discussed under Item 5 below. This outlook
represents our current judgment on the future direction of our business. Such
risks and uncertainties could cause actual results to differ materially from any
future performance suggested below. We undertake no obligation to release
publicly the results of any revisions to these forward-looking statements to
reflect events or circumstances arising after the date of this Quarterly Report.
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] 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 full-thickness, or third degree
burns. In addition, in October 1997, the Company received FDA approval to
market TransCyte for partial-thickness, or second degree, 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 other wound care applications under a joint
venture with Smith & Nephew plc ("Smith & Nephew").
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 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 received approval from the
FDA to begin the clinical trial in August 1998 and is performing the requested
clinical trial.
In October 1998, the FDA approved the Company's application for a Treatment
Investigational Device Exemption (IDE) for Dermagraft, allowing the Company to
make Dermagraft for the treatment of diabetic foot ulcers available to selected
centers in the United States under an approved clinical protocol. The Treatment
IDE is a new regulatory provision for devices that (1) permits companies to make
available promising new products to patients with serious diseases for which
there is no satisfactory alternative, and (2) allows companies to recover the
costs of manufacturing and distributing the product. The Treatment IDE is being
conducted concurrently with the ongoing clinical trial of Dermagraft in the
treatment of diabetic foot ulcers in the United States.
In May 1999, Advanced Tissue Sciences, Inc. and Inamed Corporation ("Inamed")
entered into a strategic alliance for the development and marketing of several
of Advanced Tissue Sciences' human-based, tissue-engineered products for
aesthetic and certain reconstructive applications. Specifically, Inamed
licensed rights to further develop, manufacture and sell tissue engineered
products for use in cosmetic surgery, cartilage for plastic and reconstructive
surgery, and extracellular matrix for use in breast reconstruction. In
addition, Inamed also received an option to license rights to use extracellular
matrix, including human collagen, from Advanced Tissue Sciences'
three-dimensional culture system for soft tissue augmentation (wrinkles and
cosmetic correction) and as a bulking agent for the treatment of urinary
incontinence. In September 1999, Inamed exercised this option and licensed
rights to these two additional product applications. Advanced Tissue Sciences
will be responsible for the development of the products and the related
manufacturing processes while Inamed will be responsible for clinical and
regulatory activities. Advanced Tissue Sciences will have the right to
manufacture the products developed under the agreement. See Note 2 to the
consolidated financial statements.
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<PAGE>
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
further 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, fifty-fifty
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.
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 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. The Company will also incur additional costs for the
development of products and manufacturing processes under its strategic alliance
with Inamed; however, such costs are expected to be substantially offset by the
recognition of licensing fees and milestone payments received from Inamed.
Results of Operations
- ---------------------
Product sales totaled $3,496,000 and $10,184,000 for the three and nine months
ended September 30, 1999, respectively, which compared to sales of $2,722,000
and $7,720,000 in the corresponding periods of 1998. During these periods all
product sales were to related parties, except TransCyte sales of $515,000 and
$1,035,000 for the three and nine months ended September 30, 1998, respectively,
made through the Company's direct sales force in the United States to third
party customers. As discussed above, TransCyte sales and marketing activities
were transferred from the Company to the Dermagraft Joint Venture effective
October 1998.
Product sales to related parties reflect sales of Dermagraft and TransCyte to
the Dermagraft Joint Venture at cost (see Note 11 to the consolidated financial
statements). Accordingly, the Company now manufactures Dermagraft and TransCyte
to meet the Dermagraft Joint Venture's forecasted requirements. As a result,
sales to related parties in the three and nine-month periods ended September 30,
1999 reflect costs to manufacture Dermagraft and TransCyte including period
costs, while sales to related parties in the three and nine-month periods ended
September 1998 include costs to manufacture Dermagraft and TransCyte but do not
include period costs for TransCyte. As the Company sold TransCyte to third
parties in 1998, TransCyte sales to the joint venture were at a price negotiated
between the Company and the Dermagraft Joint Venture rather than total product
costs, including period costs, as in the 1999 periods. Growth in sales in 1999
and beyond will continue to be sensitive to the Dermagraft Joint Venture's
success in obtaining regulatory approvals and product reimbursement from both
national healthcare systems and private insurers.
Revenues from contracts and fees were $8,415,000 and $23,719,000 for the three
and nine months ended September 30, 1999, respectively, compared to $1,736,000
and $6,477,000 for the corresponding periods of 1998. The increase in 1999 over
the prior year periods primarily reflects the recognition of revenue related to
a $15 million payment received in January 1999 associated with the expansion of
the Dermagraft Joint Venture. In the three and nine month periods ended
September 30, 1999, $4,257,000 and $13,624,000, respectively, of this payment
have been recognized into
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<PAGE>
revenue as related financial commitments have been met. Similarly, $542,000
of the $4,500,000 in payments received for the licensing of certain product
applications to Inamed have been recognized as revenue during the three and
nine-month periods ended September 30, 1999. The balance of the $15 million
payment is expected to be recognized by the end of 1999. Other contract and
fee revenues are principally for research and development activities
performed for the Dermagraft and Cartilage Joint Ventures. The 1999 periods
also reflect higher revenues for conducting clinical trials for Dermagraft
and TransCyte of $1,058,000 and $2,554,000, respectively, in the three and
nine-month periods ended September 30, 1999. See Notes 1 and 2 to the
consolidated financial statements.
Cost of goods sold of $3,496,000 and $10,184,000, respectively, for the three
and nine months ended September 30, 1999 compares to $4,135,000 and $11,095,000
in the corresponding periods in 1998. Cost of goods sold represents the cost of
TransCyte and Dermagraft sold to the Dermagraft Joint Venture and, in 1998, to
third parties. Less overhead was capitalized into inventory in 1998 reflecting
higher forecasted production levels in anticipation of, and preparation for, the
expected launch of Dermagraft for the treatment of diabetic foot ulcers in the
United States. However, costs and volume were subsequently scaled back based on
the FDA's request for an additional clinical trial as discussed above, and,
therefore, more overhead is being capitalized into inventory in 1999. 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 in 1999. Due to costs related to excess production
capacity, the Dermagraft Joint Venture immediately writes the inventory down to
estimated market value at the date of purchase, which is the net realizable
value at which the joint venture believes it will be able to sell the products
to its customers. For the three-month periods ended September 30, 1999 and 1998
such write downs totaled $2,777,000 and $2,227,000, respectively, and were
$8,777,000 and $6,575,000 for the nine-month periods ended September 30, 1999
and 1998, respectively. To the extent the Company does not sell such products
to the Dermagraft Joint Venture, it will be required to write such inventories
down to net realizable value.
Research and development expenditures increased to $4,165,000 and $12,292,000 in
the three and nine months ended September 30, 1999, respectively, as compared to
$4,025,000 and $11,790,000 in the corresponding periods of 1998. The increase
in research and development costs primarily reflects higher costs for clinical
trials of $961,000 and $2,237,000 in the three and nine month periods ended
September 30, 1999, respectively. Facility costs in the nine month period ended
September 30, 1999 were also $281,000 higher than the same period in 1998.
These increases were partially offset by lower product development costs of
$459,000 and $1,450,000 in the three and nine month periods ended September 30,
1999. During the three months ended September 30, 1999, facility costs also
decreased $149,000 from the same period in the prior year (see Note 9 to the
consolidated financial statements).
Selling, general and administrative costs were $2,457,000 and $8,628,000 for the
three and nine months ended September 30, 1999, respectively, as compared to
$3,947,000 and $12,163,000 in the corresponding periods of the prior year. The
decrease primarily reflects lower selling and marketing costs of $1,011,000 and
$3,575,000 in the three and nine month periods ended September 30, 1999,
respectively, as a result of the transfer of the TransCyte sales and marketing
activities in the United States to the Dermagraft Joint Venture in October 1998.
In addition, recruiting costs for the three and nine month periods ended
September 30, 1999 declined from the prior year by $279,000 and $510,000,
respectively. The impact of these decreases was partially offset by higher
facility costs of $87,000 and $849,000 in the three and nine-month periods ended
September 30, 1999, respectively (see Note 9 to the consolidated financial
statements).
Equity in losses of joint ventures were $4,894,000 and $15,349,000 for the three
and nine months ended September 30, 1999, respectively, compared to $3,817,000
and $12,706,000 for the corresponding periods of 1998. These amounts represent
the Company's share of losses of the Dermagraft and Cartilage Joint Ventures and
include costs incurred by the Company and charged to the Dermagraft and
Cartilage Joint Ventures totaling $3,543,000 and $1,963,000 for the three months
ended September 30, 1999 and 1998, respectively, and $11,391,000 and $6,722,000
for the nine-month periods ended September 30, 1999 and 1998, respectively (see
Note 11 to the consolidated financial statements). The increase in 1999 losses
principally reflects manufacturing and distribution costs associated with the
transfer of sales and marketing of TransCyte in the United States to the
Dermagraft Joint Venture, as well as support for clinical trials for Dermagraft
in the treatment of diabetic and venous ulcers, as discussed above.
-15-
<PAGE>
Interest income and other represented $505,000 and $809,000 of income in the
three and nine months ended September 30, 1999, respectively, as compared to
$422,000 and $722,000 of income in the corresponding periods of 1998. The
nine-month period ended September 30, 1999 is net of fees related to the early
termination of a long-term facility lease of approximately $400,000 (see Note 9
to the consolidated financial statements). The three and nine months ended
September 30, 1998 are net of amortization of commitment fees associated with an
equity line of $104,000 and $313,000, respectively. The 1999 amounts also
reflect a decline in Smith & Nephew's share of the earnings of a jointly-owned,
consolidated subsidiary (see Note 1 to the consolidated financial statements).
Interest expense was $342,000 and $1,429,000 in the three and nine month periods
ended September 30, 1999, respectively, as compared to $608,000 and $1,759,000
in the corresponding periods of 1998. The decrease reflects the repayment of a
$10 million loan from Smith & Nephew in June 1999 (see Note 5 to the
consolidated financial statements).
Liquidity and Capital Resources
- -------------------------------
As of September 30, 1999, the Company had available working capital of $6.5
million, a decrease of $14 million from December 31, 1998. The decrease
reflects the transfer of a loan from Smith & Nephew from long-term to current in
June 1999 (see Note 5 to the consolidated financial statements), the use of $7.7
million of working capital to support operations and the net investment in the
Company's joint ventures with Smith & Nephew of $15.8 million, partially offset
by the $15 million payment received in January 1999 associated with the
expansion of the Dermagraft Joint Venture and $9 million of payments received
under the Inamed licensing agreement in May 1999 (see Note 2 to the consolidated
financial statements). Capital expenditures and patent application costs were
$714,000 and $289,000, respectively, during the nine months ended September 30,
1999.
The Company expects to continue to use working capital as it incurs substantial
research and development expenses; additional costs in support of clinical
trials; general and administrative costs in support of product
commercialization; expenditures for capital equipment and patents, and in
support of the Dermagraft and Cartilage Joint Ventures and its strategic
alliance with Inamed. These uses of working capital are expected to be only
partially offset by revenues received from the Dermagraft and Cartilage Joint
Ventures with Smith & Nephew and from the Inamed alliance. If, for any reason,
Smith & Nephew were to terminate the Dermagraft Joint Venture or, to a lesser
extent, the Cartilage Joint Venture, the Company would experience a substantial
increase in the need for and use of its working capital to support the
commercialization and manufacture of its Dermagraft and TransCyte products or
the development of its orthopedic cartilage products.
In November 1999, the Company completed a public offering of 3,750,000 units to
the State of Wisconsin Investment Board at $4.00 per unit resulting in net
proceeds to the Company of $15 million. The State of Wisconsin Investment Board
is the Company's largest shareholder with a beneficial ownership of over 16%.
Upon issuance, the units separated into 3,750,000 shares of the Company's common
stock and warrants to purchase an additional 1,750,000 shares of common stock at
$4.00 per share. In conjunction with the offering, the Company agreed that $5
million of the proceeds would be reserved for the redemption of any of its
Series B Preferred Stock submitted for conversion at or below $3.58 per share.
In addition, the Company terminated its equity line agreement with a separate
group of investors prior to its February 2000 expiration date. See Note 12 to
the consolidated financial statements.
The Company currently believes it has sufficient funds, including those
available from the offering completed in November 1999, from available
borrowings and through its strategic alliances, to support its operations to
approximately June 2000. The Company has notified the holders of its
Convertible Series B Preferred Stock that it will redeem for cash at 105% of
liquidation value any preferred share submitted for conversion at a conversion
price at or below $3.58 per share through December 31, 1999 (see Note 6 to the
consolidated financial statements). If all of the outstanding shares of Series
B Preferred Stock were submitted for conversion during this period, the Company
could be required to use approximately $5.4 million of its existing funds to
redeem such shares. Further sources of funds which the Company may pursue
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 that funds from these sources or those outlined above will be
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<PAGE>
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, 1999
increased by approximately $1 million as compared to December 31, 1998
principally reflecting proceeds from the $15 million payment in January 1999
associated with the expansion of the Dermagraft Joint Venture and the $9 million
in payments received from Inamed for license fees and the purchase of common
stock (see Note 2 to the consolidated financial statements), which was
substantially offset by the use of funds for operations, $15.8 million to
support the Dermagraft and Cartilage Joint Ventures, and $1.7 million for net
payments of debt, capital expenditures and patents. Accrued expenses at
September 30, 1999 increased by $1.4 million from year end 1998 as a result of
higher accruals for salaries and benefits and an increase in obligations due to
the Dermagraft Joint Venture. The current portion of long-term debt at
September 30, 1999 has increased by $6.9 million from December 31, 1998
reflecting the fact that the Cartilage loan from Smith & Nephew is due and
payable in June 2000 (see Note 5 to the consolidated financial statements).
Deferred revenue of $5.4 million as of September 30, 1999 reflects the portion
of the $15 million payment related to the expansion of the Dermagraft Joint
Venture and the $4.5 million in payments related to the Inamed licensing
agreement yet to be recognized (see Notes 1 and 2 to the consolidated financial
statements). Long-term debt has decreased by $17.7 million in 1999 primarily as
the $10 million Dermagraft loan from Smith & Nephew was converted to equity and
the Cartilage loan discussed above has been transferred to current liabilities
(see Note 5 to the consolidated financial statements). Preferred stock as of
September 30, 1999 reflects the private placement of the Convertible Series B
Preferred Stock in July 1998 less conversions (see Note 6 to the consolidated
financial statements).
Year 2000 Compliance
- --------------------
The Year 2000 ("Y2K") issue is a situation which results from computer systems
and software products being coded using two digits rather than four to define
the applicable years. The Company's computer systems and software products
utilize embedded technology that is time-sensitive and may recognize a date as
the year 1900 rather than the year 2000 which could cause computer system
failures and errors leading to a disruption in business operations. The Y2K
issue could affect not only the Company's operations but also the operations of
its business partners, customers, suppliers and regulatory agencies among
others.
In response to the risks presented by the Y2K issue, the Company developed and
has implemented a Y2K compliance plan. The Company approached the Y2K issue in
two specific phases. Phase I involved the review and analysis of computer
systems, software products, equipment and vendor relationships considered
critical to the Company's operations. Phase II involved the review and analysis
of computer systems, software products, equipment and vendor relationships not
considered critical to the Company's operations. In both phases, qualified
independent consultants were utilized to achieve compliance goals. The Company
currently estimates that the cost of Phase I and II activities will be less than
$200,000, exclusive of internal manpower costs. These costs are primarily for
consulting services and equipment upgrades and are not material to the Company's
financial condition or results of operations.
With respect to Phase I, all required system modifications have been made to
computer servers, operating systems and telecommunication network equipment.
The Company has identified several pieces of manufacturing and laboratory
equipment and facility access control systems that are being upgraded. The cost
of these upgrades is included in the cost estimate presented above. The Company
believes that all significant Y2K problems relating to
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<PAGE>
computer systems, product software and vendor relationships considered critical
to the Company's operations have been identified and specific plans are in
place to assure Y2K compliance thus reducing the risk of a critical Y2K failure
or error.
In Phase II, the Company has identified approximately 150 non-critical items to
be tested for Y2K compliance, and is assessing approximately 260 vendor
relationships. While these systems and relationships are not considered
critical to the Company's business operations, every reasonable effort has been
made to identify and correct those that are not Y2K compliant. The Company is
in the process of completing its review of these vendors.
The Company expects to complete a formal contingency plan relative to undetected
Y2K problems prior to December 1999. At the current time, there does not
appear to be any critical piece of equipment for which backup cannot be
provided. The worst case scenario would likely involve adding additional
short-term labor to perform repetitive manufacturing tasks. There could also be
some incremental costs of replacing current testing capabilities if the
Company's on-site test equipment should fail. While these extra costs have not
yet been estimated, they would not be expected to have a material impact on the
Company's financial condition or operating results.
The foregoing Y2K discussion contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, including, without limitation, estimated costs and timelines to
complete certain actions, are based on management's best current estimates,
which were derived utilizing numerous assumptions about future events, including
the continued availability of certain resources, representations received from
third parties and other factors. However, there can be no guarantee that these
estimates will be achieved, and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the ability to identify and remediate all
relevant Y2K issues, results of Y2K testing, adequate resolution of Y2K issues
by third-party vendors and suppliers of goods and services to the Company,
unanticipated system costs, the adequacy of and ability to develop and implement
contingency plans and similar uncertainties. In addition, there can be no
assurance the Company will identify all the Y2K issues or that, once identified,
the actions undertaken by the Company will be adequate to resolve the issues.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily from its long-term
debt arrangements and, secondarily, its investments in certain securities.
Under its current policies, the Company does not use interest rate derivative
instruments to manage exposure to interest rate changes. The Company believes
that a hypothetical 100 basis point adverse move in interest rates along the
entire interest rate yield curve would not materially affect the fair value of
the Company's interest sensitive financial instruments at September 30, 1999.
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PART II - OTHER INFORMATION
---------------------------
ITEM 2 - CHANGE IN SECURITIES AND USE OF PROCEEDS
On July 15, 1999 and September 17, 1999, as part of an agreement between the
Company and Inamed Corporation, the Company sold 219,864 and 316,310 shares,
respectively, of Advanced Tissue Sciences' common stock to Inamed for $3.5
million or at an average price of approximately $6.53 per share. As part of
this stock purchase, Inamed Corporation also received five-year warrants to
purchase up to 350,000 shares of common stock at an average price of
approximately $13.06 per share. All of these securities were issued to Inamed
pursuant to Regulation D of the Securities Act of 1933.
ITEM 5 - OTHER INFORMATION
(a) Public Offering
On November 10, 1999, the Company completed a public offering of units
from which the Company received gross proceeds of $15 million. The units were
sold directly by the Company under Registration Statement No. 333-82683 on
Form S-3. The offering resulted in the sale of an aggregate of 3,750,000
units to the State of Wisconsin Investment Board at a purchase price of
$4.00 per unit. Immediately upon issuance, each unit separated into one share
of the Company's common stock and one warrant to purchase 0.46666666 shares
of common stock, resulting in the issuance and sale of an aggregate of
(i) 3,750,000 shares of common stock and (ii) warrants to purchase
1,750,000 shares of common stock at a purchase price of $4.00 per share.
The warrants are exercisable at any time over the next three years.
In connection with the offering, the Company entered into a Securities
Purchase Agreement with the State of Wisconsin Investment Board (the
"Securities Purchase Agreement"), pursuant to which the Company agreed to
reserve up to $5 million of the proceeds for the redemption of any of its
Series B Convertible Preferred Stock, submitted for conversion at or below
$3.58 per share. The remaining $10 million of the proceeds will be used to
fund existing operations. In addition, pursuant to the terms of the
Securities Purchase Agreement, the Company terminated its $50 million equity
line with Hatteras Partners, L.P. and amended its Rights Agreement with
ChaseMellon Shareholder Services, L.L.C. (the "Rights Agreement"). The
Rights Agreement has been amended to exclude the State of Wisconsin Investment
Board ownership interest in the Company from triggering the exercise of
rights under the Rights Agreement, so long as its interest does not exceed
19.99% and securities are acquired in the ordinary course of business and
not for the purpose of changing or influencing control.
This description of the Securities Purchase Agreement does not purport
to be complete and is qualified in its entirety by reference to the full text
of the Securities Purchase Agreement, and the related warrants, the
amendment to the Rights Agreement and the press release filed or incorporated
by reference in this Quarterly Report on Form 10-Q as Exhibits 4.1, 4.2, 4.3,
10.1 and 99.1. These documents are incorporated herein by this reference.
(b) Factors That May Effect Future Results
The following is a summary description of some of the many risks we face in
our business. You should carefully review these risks in evaluating our business
and the businesses of our subsidiaries. You should also consider the other
information described in this report.
RISKS RELATED TO OUR BUSINESS
- -----------------------------
WE HAVE A HISTORY OF LOSSES AND MAY NOT BECOME PROFITABLE.
To date, we have experienced significant operating losses in funding the
research, development, testing and marketing of our products and expect to
continue to incur substantial operating losses. To September 30, 1999, we had
incurred cumulative net operating losses of $231.6 million. Our ability to
achieve profitability depends in part
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upon our ability to successfully manufacture and market Dermagraft and
TransCyte for skin ulcers and burns. We may never achieve a profitable level
of operations or even if we achieve profitability, we may not be able to
sustain it on an ongoing basis.
IF OUR PRODUCTS FAIL IN CLINICAL STUDIES, WE WILL BE UNABLE TO OBTAIN FDA
APPROVAL AND WILL NOT BE ABLE TO SELL THOSE PRODUCTS.
In order to sell our products that are under development, and our existing
products for additional applications, we must receive regulatory approval for
our products. To obtain those approvals, we must conduct clinical studies
demonstrating that our products are safe and effective. If we cannot obtain FDA
approval for a product or any additional application of a product, that product
cannot be sold and revenues will suffer.
Early in 1998, an FDA Advisory Panel recommended the FDA approve Dermagraft
for marketing in the United States for the treatment of diabetic foot ulcers.
The Advisory Panel's recommendation included certain conditions we would have
needed to satisfy after the commercial introduction of Dermagraft. However, in
June 1998, the FDA requested we complete an additional controlled clinical trial
to support our application for approval to market Dermagraft for the treatment
of diabetic foot ulcers. We are currently conducting this additional pivotal
clinical trial. Commercial introduction within the United States is subject to
successful completion of the additional clinical trial and FDA approval.
Although Dermagraft appears promising based on clinical studies to date, it
may not be successful in this additional clinical trial or other future clinical
trials. Our ongoing clinical study of Dermagraft, and clinical studies of our
other products, may be delayed or halted for various reasons, including:
- the product is not effective, or physicians think that it is not
effective;
- patients experience severe side effects during treatment;
- patients do not enroll in the study at the rate we expect, or
- product supplies are not sufficient to treat the patients in the study.
In addition, the FDA and foreign regulatory authorities have substantial
discretion in the approval process. The FDA and foreign regulatory authorities
may not agree that we have demonstrated that Dermagraft, or any of our other
products, are safe and effective after we complete clinical trials.
WE WILL NEED ADDITIONAL FUNDS TO SUPPORT OPERATIONS. IF WE ARE UNABLE TO OBTAIN
THEM, WE WOULD BE UNABLE TO COMPLETE OUR PRODUCT DEVELOPMENT PROGRAMS AND WOULD
HAVE TO REDUCE OR CEASE OPERATIONS, OR ATTEMPT TO SELL SOME OR ALL OF OPERATIONS
OR TO MERGE WITH ANOTHER ENTITY.
The further development of our technology and products as well as any
further development of manufacturing capabilities or the establishment of
additional sales, marketing and distribution capabilities will require the
commitment of substantial funds. Our existing working capital will not be
sufficient to meet our needs. Potential sources of additional funds include
payments from our alliances with Smith & Nephew and Inamed Corporation, and our
borrowing capacity under the cartilage joint venture with Smith & Nephew. If,
for any reason, Smith & Nephew were to terminate the Dermagraft Joint Venture
or, to a lesser extent, the cartilage joint venture, we would experience a
substantial increase in the need for and use of our working capital to support
the commercialization and manufacture of our Dermagraft and TransCyte products
or the development of our orthopedic cartilage products. We may pursue
additional public or private offerings of debt or equity securities or other
means. We could also acquire additional funding through collaborative
arrangements or the extension of existing arrangements, which could require the
issuance of additional equity interests in us.
To the extent that we choose not to or are unable to establish such
arrangements, we would experience increased capital requirements to undertake
research, development and marketing of our proposed products at our own expense.
If we are not able to meet these expenses we may be unable to continue our
operations.
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We may not satisfy the milestones for additional funds under the joint
ventures with Smith & Nephew or the Inamed alliance. We also may not be able to
obtain adequate funds under other existing or future arrangements when such
funds are needed or, if available, on terms acceptable to us.
Insufficient funds may require us to delay, scale back or eliminate certain
of our research and product development programs or that we license third
parties the right to commercialize products or technologies that we would
otherwise commercialize ourselves or that we attempt to merge with another
entity.
OUR PRODUCTS MAY NOT BE ACCEPTED BY THE MARKET AND MAY NOT BE SUCCESSFULLY
COMMERCIALIZED BECAUSE PHYSICIANS AND PATIENTS MAY NOT PURCHASE OR USE THEM.
Our products are based on new and innovative technologies and the medical
community or the general population may not broadly purchase or use our products
as alternatives to existing methods of treatment. Sales of our 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 negative events or other unfavorable publicity involving the use
of our products could also adversely affect acceptance of our products. Both we
and Smith & Nephew have limited direct experience marketing or obtaining
third-party reimbursement for these types of products.
Additionally, TransCyte has only been marketed and sold in the United
States for a limited period of time and may not achieve commercial acceptance in
the United States. Similarly, Dermagraft has only been sold internationally and
may never achieve commercial acceptance in the United States even if it receives
FDA approval.
WE RELY ON THIRD PARTIES TO MARKET, DEVELOP AND SELL OUR PRODUCTS AND THOSE
THIRD PARTIES MAY NOT PERFORM SUCCESSFULLY. OUR DEPENDENCE ON THIRD PARTIES AND
OUR LACK OF SALES AND MARKETING PERSONNEL COULD LIMIT OUR ABILITY TO DEVELOP OUR
PRODUCTS OR TO GENERATE REVENUES FROM PRODUCT SALES.
We are particularly dependent on Smith & Nephew with respect to the
Dermagraft and the cartilage joint ventures. The amount and timing of resources
to be devoted by Smith & Nephew is not within our control. 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 our control. If Smith & Nephew does not perform its obligations as
expected or if Smith & Nephew has a strategic shift in its business focus, it
would be difficult for us to successfully complete the development efforts of
the Dermagraft and cartilage joint ventures. We are relying on Smith & Nephew
and others to market our products both domestically and internationally. Our
success in generating market acceptance of Dermagraft and TransCyte will depend
on the marketing efforts of Smith & Nephew. We cannot control the amount and
timing of resources that Smith & Nephew or others may devote to marketing and
selling our products. Smith & Nephew may not perform its obligations under the
Dermagraft Joint Venture as expected. Our failure to achieve broad use of
Dermagraft for the treatment of diabetic foot ulcers and, to a lesser extent,
TransCyte for burn care, would hurt our ability to generate revenues and any
future profits.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WE MAY BE UNABLE TO
PREVENT OTHER COMPANIES FROM USING OUR TECHNOLOGY IN COMPETITIVE PRODUCTS. IF
WE INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WE MAY BE PREVENTED FROM
DEVELOPING OR MARKETING OUR PRODUCTS.
Our ability to compete effectively will depend, in part, on our ability to
maintain the proprietary nature of our technology and manufacturing processes.
Our competitors may develop products that are the same as our products and
market those products after our patents expire, or may design around our
existing patents. If this happens, sales of our products would suffer and our
ability to generate revenues will be severely impacted. Furthermore, patents
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may be issued to others that prevent the manufacture or sale of our products.
We may have to pay significant fees or royalties to license those patents in
order to continue marketing our products. This would cause any future profits
on sales of our products to decline.
Our dependence upon having exclusive rights to the technology covered under
our patent applications and licensed patent applications is subject to the
following risks:
- applications may not result in issued patents;
- current or future issued or licensed patents, trade secrets or know-
how may not afford protection against competitors with similar
technologies or processes,
- any patents issued may be infringed upon or designed around by others;
or
- others may independently develop technologies or processes that are
the same as or substantially equivalent to ours.
In addition to patent protection, we also rely on trade secrets, know-how
and technology advances. We enter into confidentiality agreements with our
employees and others, but these agreements may not be effective in protecting
our proprietary information. Others may independently develop substantially
equivalent information or obtain access to our know-how.
Litigation, which is very expensive, may be necessary to enforce or defend
our patents or rights and may not end favorably for us. Any of our licenses,
patents or other intellectual property may be challenged, invalidated, canceled,
infringed or circumvented and may not provide any competitive advantage to us.
IF THE THIRD-PARTY SUPPLIERS THAT SUPPLY THE MATERIALS NECESSARY TO MANUFACTURE
OUR PRODUCTS DO NOT SUPPLY QUALITY MATERIALS IN A TIMELY MANNER, IT MAY DELAY OR
IMPAIR OUR ABILITY TO DEVELOP AND COMMERCIALIZE PRODUCTS ON A TIMELY AND
COMPETITIVE BASIS OR ADVERSELY AFFECT OUR POTENTIAL FUTURE PROFITABILITY.
Although most of the raw materials used in the manufacture of our
Dermagraft and TransCyte products are available from more than one supplier,
changes in certain critical components could cause the FDA to require us to
prove equivalency of the materials or potentially to modify or perform
additional clinical trials for our Dermagraft and TransCyte products, which
could have the effect of restricting our ability to commercialize our products.
The mesh framework used by us in the manufacture of Dermagraft is available
under a supply agreement with only one FDA-approved manufacturing source.
Similarly, the synthetic mesh framework used by us in the manufacture of
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.
Interruptions in supplies for the manufacture of our Dermagraft and
TransCyte products may occur in the future and we may have to obtain substitute
vendors for these materials. Any significant supply interruption would delay
our clinical trials as well as our product development and marketing programs.
In addition, an uncorrected impurity or supplier's variation in a raw material,
either unknown to us or incompatible with our manufacturing process, could
prevent or delay our ability to manufacture products.
IF OUR PRODUCTS THAT ARE IN AN EARLY STAGE OF DEVELOPMENT ARE NEVER SUCCESSFULLY
COMMERCIALIZED WE MAY NOT HAVE REVENUES TO CONTINUE OPERATIONS.
We have products that are in an early stage of development. To date only
TransCyte has been approved for commercial sale, and only Dermagraft has
advanced to clinical trials for the treatment of diabetic foot ulcers in the
United States. However, Dermagraft will still require further marketing
approvals from the FDA, and all of our other products are at earlier stages of
research, development and testing. These products, including additional
indications
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for Dermagraft and TransCyte, will require significant additional research
and development, as well as extensive preclinical and clinical testing.
Since our products are based on innovative technologies, there are many
reasons why our products may not advance beyond their early stage of
development. These reasons include the possibilities that:
- any or all of these products will be found to be unsafe or ineffective
or otherwise fail to receive necessary regulatory approvals;
- our products are uneconomical to market;
- third parties may hold legal rights that preclude us from marketing
such products; or
- our products fail to achieve market acceptance in light of competing
technologies and products.
RISKS RELATED TO OUR INDUSTRY
- -----------------------------
IF WE FAIL TO OBTAIN REGULATORY APPROVAL TO COMMERCIALLY MANUFACTURE OR SELL ANY
OF OUR PRODUCTS, OR IF APPROVAL IS DELAYED, IT COULD INCREASE THE COST OF
PRODUCT DEVELOPMENT, OR ULTIMATELY PREVENT OR DELAY OUR ABILITY TO SELL OUR
PRODUCTS AND GENERATE REVENUES.
We and our collaborators are subject to extensive government regulation.
The FDA and other state and foreign regulatory authorities require rigorous
preclinical testing, clinical trials and other product approval procedures for
our products. Numerous regulations also govern the manufacturing, safety,
labeling, storage, record keeping, reporting and marketing of our products. The
process of obtaining these approvals and complying with applicable government
regulations is time consuming and expensive. The FDA and other state or foreign
regulatory authorities have limited experience with our technology and products.
As a result, our products are susceptible to requests for clinical modifications
or additional supportive data, or changes in regulatory policy, which could
substantially extend the test period for our products resulting in delays or
rejections. Even after substantial time and expense, we may not be able to
obtain regulatory product approval by the FDA or any equivalent state or foreign
authorities. If we obtain regulatory product approval, the approval may limit
the uses for which we may market the product.
For example, in June 1998, the FDA indicated that our marketing application
for Dermagraft for the treatment of diabetic foot ulcers was not approvable
without supportive data from an additional clinical trial. We are currently
conducting the additional clinical trial of Dermagraft in the treatment of
diabetic foot ulcers as requested by the FDA. If the trial is not successful or
if we do not receive FDA approval at the conclusion of the clinical trial it
will prevent or at least delay sales of Dermagraft.
In addition, although the FDA has classified TransCyte as a medical device,
the state of California and the state of New York have notified us that we 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, we 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 our request. To date, the FDA has not ruled. If
states are permitted to regulate TransCyte as a human tissue, we and our
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. We
are 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 our Dermagraft
product as well.
After regulatory approval is obtained, our product, its manufacture and
related manufacturing facilities will be subject to continual review and
periodic inspections. Any subsequent discovery of previously unknown problems
with a product, manufacturer or facility may result in restrictions on the
product or manufacturer, including
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withdrawal of the product from the market. For example, after inspecting the
manufacturing facility early in 1998 in conjunction with our application for
the approval of Dermagraft for the treatment of diabetic foot ulcers, the FDA
notified us of numerous objectionable conditions under a Form FDA 483 list of
observations. These observations concerned our manufacturing processes and
systems for Dermagraft and TransCyte. In March 1998, the FDA issued a warning
letter requiring us to investigate and correct the conditions identified by
the FDA. In September 1998, we successfully completed a reinspection by the
FDA of our manufacturing facility and quality systems. However, we must
continue to pass future inspections by the FDA of our manufacturing facility.
Our research and development activities and operations involve the
controlled use of small quantities of radioactive compounds, chemical solvents
and other hazardous materials. In addition, our business involves the growth of
human tissues. In the event of an accident, we could be held liable for any
damages that result. In addition, these research activities and operations are
subject to continual review under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other federal, state or local laws and
regulations which impact our ability to develop and market our products.
HEALTHCARE REFORM MEASURES AND REIMBURSEMENT PROCEDURES MAY PREVENT US FROM
OBTAINING AN ADEQUATE LEVEL OF REIMBURSEMENT FOR OUR PRODUCTS THAT IN TURN WOULD
DECREASE OUR ABILITY TO GENERATE REVENUES.
Our 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. In some cases, such payors may
refuse to provide any coverage for uses of approved products for indications
that the FDA has not granted marketing approval. Initiatives to reform
healthcare delivery are increasing these cost containment efforts. As managed
care organizations continue to expand as a means of containing healthcare costs,
we believe 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 us,
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.
We have supported health economics studies and research and have developed
cost offset or cost-effectiveness models with respect to our 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. Adequate government or private payor coverage or levels of
reimbursement may not be available for any of our products and we may not be
able to maintain price levels sufficient for the realization of an appropriate
return on our investment in such products. Failure to obtain sufficient
coverage and reimbursement levels for uses of our products could decrease the
market acceptance of such products.
DISCOVERIES OR DEVELOPMENT OF NEW TECHNOLOGIES BY OUR COMPETITORS OR OTHERS MAY
MAKE OUR PRODUCTS LESS COMPETITIVE OR MAKE OUR PRODUCTS OBSOLETE.
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 we do. 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 we can develop products, complete clinical trials,
obtain regulatory approvals and develop commercial manufacturing capability may
affect our competitive position.
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In the area of burns, we compete primarily with cadaver skin or porcine
tissue. We are also aware of several companies that have developed technologies
involving processed cadaver skin used as a skin replacement, such as LifeCell
Corporation, or sheets of cells grown from the patient's own skin, such as
Genzyme Tissue Repair and Cell Culture Technology. Integra Life Sciences or
Integra has Integra Artificial Skin consisting of a bovine or animal-derived
matrix with a synthetic covering, for the treatment of burn wounds. In June
1999, Integra announced that Johnson & Johnson Medical obtained worldwide
exclusive marketing and sales rights, excluding Japan, to Integra Artificial
Skin. In addition, we are aware that Ortec International, Inc. has completed a
pilot clinical trial with its composite cultured skin product, consisting of two
types of skin cells, fibroblasts and keratinocytes, on a bovine or
animal-derived collagen sponge, for the treatment of burn wounds. Several other
companies are also developing or plan to develop growth factors as a treatment
for second degree or small first degree burns.
In the area of diabetic foot ulcers, Chiron Corporation and the
Ortho-McNeil division of Johnson & Johnson have received FDA approval and are
marketing a platelet-derived growth factor for the treatment of diabetic foot
ulcers. In addition, Organogenesis, Inc. has completed clinical trials for the
use of Apligraf, a product using cultured human cells seeded onto a bovine or
animal-derived matrix, for the treatment of diabetic foot ulcers. Organogenesis
received FDA approval to market Apligraf in the treatment of venous ulcers or
"leg ulcers" in May 1998. Organogenesis has also entered into an alliance with
Novartis Pharma AG for the marketing of Apligraf. Ortec has also announced
plans to test its cultured skin product in diabetic foot ulcers.
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
defects in the knee. We are also aware that Integra and Osiris Therapeutics,
Inc. are engaged in research on cultured cartilage products.
Other factors such as our ability to secure regulatory approval for our
products, to implement production and marketing plans, and to secure adequate
capital resources will also impact our competitive position. We may not have
the resources to compete successfully.
IF WE ARE NOT ABLE TO ATTRACT KEY PERSONNEL AND ADVISORS OR IF OUR CURRENT
MANAGEMENT AND TECHNICAL PERSONNEL LEAVE THE COMPANY, IT MAY ADVERSELY AFFECT
OUR ABILITY TO OBTAIN FINANCING OR DEVELOP OUR PRODUCTS.
Our success will depend in large part upon our ability to attract and
retain qualified scientific, administrative and management personnel as well as
the continued contributions of our existing senior management and scientific
and technical personnel. We face strong competition for such personnel and we
cannot give any assurance that we will be able to attract or retain such
individuals. In particular, if we lose the services of either Arthur J.
Benvenuto, our Chairman and Chief Executive Officer, or Dr. Gail K. Naughton,
our President and Chief Operating Officer, it will limit our ability to achieve
our business objectives and could make it difficult to raise additional funds or
to attract partners.
WE MAY NOT HAVE ADEQUATE INSURANCE AND IF WE BECOME SUBJECT TO PRODUCT LIABILITY
CLAIMS, IT MAY RESULT IN REDUCED DEMAND FOR OUR PRODUCTS OR DAMAGES THAT EXCEED
OUR INSURANCE LIMITATIONS.
The use of any of our products, whether for commercial applications or
during clinical trials, exposes us 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.
We currently maintain product liability insurance coverage; however, such
insurance coverage might not be sufficient to fully cover any potential claims.
Such insurance can be expensive and difficult to obtain. Adequate insurance
coverage may not be available in the future at an acceptable cost, if at all, or
in sufficient amounts to protect us against any such liability. Any product
liability claim in excess of insurance coverage would have to be paid out of our
cash reserves which would have a detrimental effect on our financial condition.
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DISCOVERY OF PREVIOUSLY UNKNOWN PROBLEMS WITH A PRODUCT, MANUFACTURER, OR
FACILITY, COULD RESULT IN PRODUCT RECALLS OR WITHDRAWALS AND SIGNIFICANTLY
REDUCE OUR RESOURCES.
Our 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 us, could affect the quality and safety of our products. If any
of the defects were material, we could be required to undertake a market
withdrawal or recall of the affected products. The cost of a market withdrawal
or product recall could significantly reduce our resources.
RISKS RELATED TO FINANCING
- --------------------------
OUR STOCK PRICE COULD CONTINUE TO BE VOLATILE AND ANY INVESTMENT COULD SUFFER A
DECLINE IN VALUE, ADVERSELY AFFECTING OUR ABILITY TO RAISE ADDITIONAL CAPITAL
WHICH COULD IN TURN DELAY COMMERCIALIZATION OF OUR PRODUCTS.
The market price of our common stock has fluctuated significantly in recent
years and is likely to fluctuate in the future. For example, from September
1997 to September 1999, our common stock has closed as high as $17.00 per share
and as low as $1.97 per share. Factors contributing to this volatility have
included:
- the results of research or scientific discoveries by us or others;
- progress or the results of preclinical and clinical trials;
- new technological innovations;
- the approval and commercialization of products;
- developments concerning technology rights;
- litigation and related developments; and
- public perception regarding the safety and efficacy of our products.
Fluctuations in our financial performance from period to period, the issuance of
analysts' reports and general industry and market conditions also tend to have a
significant impact on the market price of our common stock.
FUTURE SALES OF OUR SECURITIES IN THE PUBLIC MARKET COULD LOWER OUR STOCK PRICE
AND IMPAIR OUR ABILITY IN NEW STOCK OFFERINGS TO RAISE FUNDS TO CONTINUE
OPERATIONS.
The market price of our securities could drop due to sales of a large
number of our securities or the perception that these sales could occur. Such
sales also might make it more difficult for us to sell equity securities in the
future at a price that we deem appropriate.
OUR CHARTER DOCUMENTS AND STOCKHOLDER RIGHTS PLAN MAY PREVENT US FROM
PARTICIPATING IN TRANSACTIONS THAT COULD BE BENEFICIAL TO STOCKHOLDERS.
Our stockholder rights plan and provisions in our certificate of
incorporation and bylaws may discourage transactions involving an actual or
potential change in our ownership, including transactions in which you might
otherwise receive a premium for your shares over the then-current market prices.
These provisions also may limit our stockholder's ability to approve
transactions that they deem to be in their best interest. In addition, our
Board of Directors may issue shares of preferred stock without any further
action by stockholders. Such issuances may have the effect of delaying or
preventing a change in our ownership.
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Title Method of Filing
------- ----- ----------------
3.1 Restated Certificate of Incorporated by Reference to
Incorporation of Advanced Exhibit 3.1 to the Registrant's
Tissue Sciences, Inc. as in Annual Report on Form 10-K for
effect on February 16, 1999 the Year Ended December 31, 1998
3.2 Restated By-Laws of the Incorporated by Reference to
Registrant Dated September 17, Exhibit 3 to the Registrant's
1991 Form 10-Q for the Quarter Ended
October 31, 1991
3.3 Certificate of Designations, Incorporated by Reference to
Preferences and Rights of Series Exhibit 3.1 to the Registrant's
B Convertible Preferred Stock of Current Report on Form 8-K dated
Advanced Tissue Sciences, Inc. July 10, 1998
4.1 Common Stock Purchase Warrant Filed Herewith
between the State of Wisconsin
Investment Board as Trustee for
the Fixed Retirement Investment
Trust and Advanced Tissue Sciences,
Inc., Dated November 10, 1999
4.2 Common Stock Purchase Warrant Filed Herewith
between the State of Wisconsin
Investment Board as Trustee for
the Variable Retirement Investment
Trust and Advanced Tissue Sciences,
Inc., Dated November 10, 1999
4.3 First Amendment to Rights Incorporated by Reference to
Agreement entered into as of Exhibit 1 for Form 8-A, as
November 8, 1999, between amended, dated November 10, 1999
ChaseMellon Shareholder Services,
L.L.C., as Rights Agent and
Advanced Tissue Sciences, Inc.
10.1 Securities Purchase Agreement Incorporated by Reference to
dated as of November 5, 1999, Exhibit 2 to Form 8-A, as
between the State of Wisconsin amended, dated November 10, 1999
Investment Board and Advanced
Tissue Sciences, Inc.
27 Financial Data Schedule Filed With Electronic Copy Only
99.1 Press Release of the Company Filed Herewith
dated November 10, 1999
(b) Reports on Form 8-K - none
-27-
<PAGE>
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, 1999 /s/ Arthur J. Benvenuto
----------------------- ---------------------------------
Arthur J. Benvenuto
Chairman of the Board and
Chief Executive officer
Date: November 12, 1999 /s/ Michael V. Swanson
----------------------- ---------------------------------
Michael V. Swanson
Senior Vice President and
Chief Financial Officer
EXHIBIT 4.1
November 10, 1999 Right to Purchase Shares of Common Stock
of Advanced Tissue Sciences, Inc.
ADVANCED TISSUE SCIENCES, INC.
Common Stock Purchase Warrant
Advanced Tissue Sciences, Inc., a Delaware corporation (the "Company"),
hereby certifies that for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the State of Wisconsin Investment
Board as Trustee for the Fixed Retirement Investment Trust ("Warrant Holder"),
is entitled on the terms and conditions set forth below, to purchase from the
Company at any time beginning on the date hereof and ending on November 10,
2002, (the "Exercise Period") 1,400,000 fully paid and nonassessable shares of
Common Stock, $.01 par value, of the Company (the "Common Stock"), at a purchase
price per share of $4.00 (the "Purchase Price"), as the same may be adjusted
pursuant to Section 5 herein.
1. Definitions. This Warrant and any Warrant or Warrants subsequently
-----------
issued upon exchange or transfer hereof are hereinafter collectively called the
"Warrant." The term "Warrant Shares" shall mean the shares of Common Stock or
other securities issuable upon exercise of this Warrant.
2. Exercise of Warrant. This Warrant may be exercised by the Warrant
-------------------
Holder, in whole or in part (but not as to fractional shares), at any time and
from time to time during the Exercise Period by surrender of this Warrant,
together with the form of subscription at the end hereof duly executed by
Warrant Holder, to the Company at its principal office. In the event that the
Warrant is not exercised in full, the number of Warrant Shares shall be reduced
by the number of such Warrant Shares for which this Warrant is exercised, and
the Company, at its expense, shall forthwith issue and deliver to or upon the
order of Warrant Holder a new Warrant of like tenor in the name of Warrant
Holder reflecting such adjusted Warrant Shares.
3. Delivery of Stock Certificates.
------------------------------
(a) Subject to the terms and conditions of this Warrant, as soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within five (5) days thereafter, the Company at its expense (including,
without limitation, the payment by it of any applicable issue taxes) will cause
to be issued in the name of and delivered to Warrant Holder, or as Warrant
Holder (upon payment by Warrant Holder of any applicable transfer taxes) may
lawfully direct, a certificate or certificates for the number of fully paid and
non-assessable shares of Common Stock to which Warrant Holder shall be entitled
on such exercise, together with any other stock or other securities or property
(including cash, where applicable) to which Warrant Holder is entitled upon such
exercise.
<PAGE>
(b) This Warrant may not be exercised as to fractional shares of Common
Stock. In the event that the exercise of this Warrant, in full or in part,
would result in the issuance of any fractional share of Common Stock, then in
such event Warrant Holder shall be entitled to cash equal to the fair market
value of such fractional share. For purposes of this Warrant, fair market value
shall equal the closing trading price of the Common Stock on the Nasdaq National
Market, the American Stock Exchange or the New York Stock Exchange, whichever is
the principal trading exchange or market for the Common Stock (the "Principal
Market") on the date of determination or, if the Common Stock is not listed or
admitted to trading on any national securities exchange or quoted in the Nasdaq
national market system, the average of the closing bid and ask prices on the
over-the-counter market as furnished by any New York Stock Exchange member firm
reasonably selected from time to time by the Company for that purpose, or, if
the Common Stock is not listed or admitted to trading on any national securities
exchange or quoted on such national market system and the average price cannot
be determined as contemplated above, the fair market value of the Common Stock
shall be reasonably determined in good faith by the Company's Board of
Directors.
4. Covenants of the Company.
------------------------
(a) The Company shall use its reasonable best efforts to insure that a
registration statement under the Act covering the sale of the Warrant Shares is
and remains effective for the term of this Warrant and for three (3) years
thereafter, unless and until the Warrant Shares may be resold under Rule 144 of
the Act. The Company shall not be obligated to deliver any securities pursuant
to the exercise of this warrant unless such a registration statement under the
Act with respect to such securities is effective or an exemption thereunder is
available. This warrant shall not be exercisable in any state where such
exercise is unlawful.
(b) The Company shall take all necessary action and proceedings as may be
required and permitted by applicable law, rule and regulation, including,
without limitation the notification of Nasdaq, for the legal and valid issuance
of this Warrant and the Warrant Shares to the Warrant Holder under this Warrant.
(c) From the date hereof through the last date on which this Warrant is
exercisable, the Company shall take all steps reasonably necessary to insure
that the Common Stock remains listed on the Principal Market and shall not amend
its Certificate of Incorporation or Bylaws so as to adversely affect any rights
of the Warrant Holder under this Warrant.
(d) The Company shall at all times reserve and keep available, solely for
issuance and delivery as Warrant Shares hereunder, such shares of Common Stock
as shall from time to time be issuable.
2
<PAGE>
(e) The Warrant Shares, when issued in accordance with the terms hereof,
will be duly authorized and, when paid for or issued in accordance with the
terms hereof, shall be validly issued, fully paid and non-assessable. The
Company has authorized and reserved for issuance to Warrant Holder the requisite
number of shares of Common Stock to be issued pursuant to this Warrant.
(f) With a view to making available to Warrant Holder the benefits of Rule
144 promulgated under the Act and any other rule or regulation of the Securities
and Exchange Commission (the "SEC") that may at any time permit Warrant
Holder to sell securities of the Company to the public without registration, the
Company agrees that, for so long as a class of its securities is registered
under Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act"), as
amended, to use its best efforts to:
(i) make and keep public information available, as those terms are
understood and defined in Rule 144, at all times;
(ii) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the Exchange Act; and
(iii) furnish to any Warrant Holder forthwith upon request a written
statement by the Company that it has complied with the reporting
requirements of Rule 144 and the Act and the Exchange Act, a copy of the
most recent annual or quarterly report of the Company, and such other
reports and documents so filed by the Company as may be reasonably
requested in availing any such Warrant Holder to take advantage of any
rule or regulation of the SEC permitting the selling of any such
securities without registration.
5. Adjustment of Exercise Price and Number of Shares. The number of and
-------------------------------------------------
kind of securities purchasable upon exercise of this Warrant and the Purchase
Price shall be subject to adjustment from time to time as follows:
(a) Subdivisions, Combinations and other Issuances. If the Company shall
----------------------------------------------
at any time after the date hereof but prior to the expiration of this Warrant
subdivide its outstanding securities as to which purchase rights under this
Warrant exist, by split-up, spin-off, or otherwise, or combine its outstanding
securities as to which purchase rights under this Warrant exist, the number of
Warrant Shares as to which this Warrant is exercisable as of the date of such
subdivision, split-up, spin-off or combination shall forthwith be
proportionately increased in the case of a subdivision, or proportionately
decreased in the case of a combination. Appropriate adjustments shall also be
made to the purchase price payable per share, but the aggregate purchase price
payable for the total number of Warrant Shares purchasable under this Warrant as
of such date shall remain the same.
3
<PAGE>
(b) Stock Dividend. If at any time after the date hereof the Company
--------------
declares a dividend or other distribution on Common Stock payable in Common
Stock or other securities or rights convertible into Common Stock ("Common Stock
Equivalents") without payment of any consideration by holders of Common
Stock for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon exercise or
conversion thereof), then the number of shares of Common Stock for which this
Warrant may be exercised shall be increased as of the record date (or the date
of such dividend distribution if no record date is set) for determining which
holders of Common Stock shall be entitled to receive such dividends, in
proportion to the increase in the number of outstanding shares (and shares of
Common Stock issuable upon conversion of all securities convertible into Common
Stock) of Common Stock as a result of such dividend, and the Purchase Price
shall be adjusted so that the aggregate amount payable for the purchase of all
the Warrant Shares issuable hereunder immediately after the record date (or on
the date of such distribution, if applicable), for such dividend shall equal the
aggregate amount so payable immediately before such record date (or on the date
of such distribution, if applicable).
(c) Other Distributions. If at any time after the date hereof the Company
-------------------
distributes to holders of its Common Stock, other than as part of its
dissolution, liquidation or the winding up of its affairs, any shares of its
capital stock, any evidence of indebtedness or any of its assets (other than
cash, Common Stock or securities convertible into Common Stock), then the
Company shall decrease the per share Purchase Price of this Warrant by an
appropriate amount based upon the value distributed on each share of Common
Stock as determined in good faith by the Company's Board of Directors.
(d) Merger. If at any time after the date hereof there shall be a merger
------
or consolidation of the Company with or into another corporation then the
Warrant Holder shall thereafter be entitled to receive upon exercise of this
Warrant, during the period specified herein and upon payment of the aggregate
Purchase Price then in effect, the number of shares or other securities or
property of the successor corporation resulting from such merger or
consolidation, which would have been received by Warrant Holder for the shares
of stock subject to this Warrant had this Warrant at such time been exercised.
(e) Reclassification, Etc. If at any time after the date hereof there
---------------------
shall be a reorganization or reclassification of the securities as to which
purchase rights under this Warrant exist into the same or a different number of
securities of any other class or classes, then the Warrant Holder shall
thereafter be entitled to receive upon exercise of this Warrant, during the
period specified herein and upon payment of the Purchase Price then in effect,
the number of shares or other securities or property resulting from such
reorganization or reclassification, which would have been received by the
Warrant Holder for the shares of stock subject to this Warrant had this Warrant
at such time been exercised.
4
<PAGE>
(f) Continuation of Terms. Upon any reorganization, consolidation, merger
---------------------
or transfer (and any dissolution following any transfer) referred to in this
Section 5, this Warrant shall continue in full force and effect and the terms
hereof shall be applicable to the shares of stock and other securities and
property receivable on the exercise of this Warrant after the consummation of
such reorganization, consolidation or merger or the effective date of
dissolution following any such transfer, as the case may be, and shall be
binding upon the issuer of any such stock or other securities, including, in the
case of any such transfer, the person acquiring all or substantially all of
the properties or assets of the Company, whether or not such person shall have
expressly assumed the terms of this Warrant as provided in Section 6.
6. No Impairment. The Company will not, by amendment of its Certificate
-------------
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms of this Warrant, but will at all times in good faith assist in
the carrying out of all such terms and in the taking of all such action as may
be necessary or appropriate in order to protect the rights of the Warrant
Holder against impairment. Without limiting the generality of the foregoing,
the Company (a) will not increase the par value of any Warrant Shares above
the amount payable therefor on such exercise, (b) will take all such action as
may be necessary or appropriate in order that the Company may validly and
legally issue fully paid and nonassessable Warrant Shares on the exercise of
this Warrant and (c) will not transfer all or substantially all of its
properties and assets to any other person (corporate or otherwise), or
consolidate with or merge into any other person or permit any such person to
consolidate with or merge into the Company (if the Company is not the
surviving person), unless such other person shall expressly assume in writing
and will be bound by all the terms of this Warrant.
7. Notice of Adjustments; Notices. Whenever the Purchase Price or number
------------------------------
of Warrant Shares purchasable hereunder shall be adjusted pursuant to Section 5
hereof, the Company shall execute and deliver to the Warrant Holder a
certificate setting forth, in reasonable detail, the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated and the Purchase Price and number of shares purchasable hereunder
after giving effect to such adjustment, and shall cause a copy of such
certificate to be mailed (by first class mail, postage prepaid) to the Warrant
Holder.
8. Rights As Stockholder. Prior to exercise of this Warrant, the Warrant
---------------------
Holder shall not be entitled to any rights as a stockholder of the Company with
respect to the Warrant Shares, including (without limitation) the right to vote
such shares, receive dividends or other distributions thereon or be notified of
stockholder meetings. However, in the event of any taking by the Company of a
record of the holders of any class of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend (other than a cash
dividend) or other distribution, any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the Company shall mail to each Warrant
Holder, at least 10 days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution or right, and the amount and character of such
dividend, distribution or right.
5
<PAGE>
9. Replacement of Warrant. On receipt of evidence reasonably satisfactory
----------------------
to the Company of the loss, theft, destruction or mutilation of the Warrant and,
in the case of any such loss, theft or destruction of the Warrant, on delivery
of an indemnity agreement or security reasonably satisfactory in form and amount
to the Company or, in the case of any such mutilation, on surrender and
cancellation of such Warrant, the Company at its expense will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
10. Specific Enforcement; Consent to Jurisdiction.
---------------------------------------------
(a) The Company and the Warrant Holder acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of this
Warrant were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent or cure breaches of the
provisions of this Warrant and to enforce specifically the terms and provisions
hereof, this being in addition to any other remedy to which either of them may
be entitled by law or equity.
(b) Each of the Company and the Warrant Holder (i) hereby irrevocably
submits to the exclusive jurisdiction of the United States District Court and
other courts of the United States sitting in California for the purposes of any
suit, action or proceeding arising out of or relating to this Warrant and (ii)
hereby waives, and agrees not to assert in any such suit, action or proceeding,
any claim that it is not personally subject to the jurisdiction of such court,
that the suit, action or proceeding is brought in an inconvenient forum or that
the venue of the suit, action or proceeding is improper. Each of the Company
and the Warrant Holder consents to process being served in any such suit, action
or proceeding by mailing a copy thereof to such party at the address in effect
for notices to it under this Warrant and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing
in this paragraph shall affect or limit any right to serve process in any other
manner permitted by law.
11. Entire Agreement; Amendments. This Warrant, the Exhibits hereto and
----------------------------
the Warrant Shares contain the entire understanding of the parties with respect
to the matters covered hereby and thereby and, except as specifically set forth
herein and therein, neither the Company nor the Warrant Holder makes any
representation, warranty, covenant or undertaking with respect to such matters.
No provision of this Agreement may be waived or amended other than by a written
instrument signed by the party against whom enforcement of any such amendment or
waiver is sought.
12. Restricted Securities. The Warrant Holder understands that unless a
---------------------
registration statement covering the Warrant Shares is effective, this Warrant
and the Warrant Shares purchasable hereunder constitute "restricted securities"
under the federal securities laws and accordingly may not, under such laws and
applicable regulations, be resold or transferred without an applicable exemption
from registration. In this connection, the Warrant Holder acknowledges that
Rule 144 of the Securities and Exchange Commission is not now, and may not in
the future be, available for resale of the Warrant and the Warrant Shares
purchasable hereunder.
6
<PAGE>
13. Notices. Any notice or other communication required or permitted to
-------
be given hereunder shall be in writing and shall be effective (a) upon hand
delivery or delivery by telex (with correct answer back received), telecopy or
facsimile at the address or number designated below (if delivered on a
business day during normal business hours where such notice is to be received),
or the first business day following such delivery (if delivered other than on
a business day during normal business hours where such notice is to be
received) or (b) on the second business day following the date of mailing by
express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses
for such communications shall be:
to the Company:
Advanced Tissue Sciences, Inc.
10933 North Torrey Pines Road
La Jolla, California 92037
Attention: Chief Executive Officer
(858) 713-7300
(858) 713-7910 (facsimile)
with a copy to:
Advanced Tissue Sciences, Inc.
10933 North Torrey Pines Road
La Jolla, California 92037
Attention: Chief Financial Officer
(858) 713-7300
(858) 713-7900 (facsimile)
to the Warrant Holder:
State of Wisconsin Investment Board
121 East Wilson Street
Madison, Wisconsin 53702
Attn: Mr. John Nelson
(608) 266-7232
(608) 266-2436
with a copy to:
State of Wisconsin Investment Board
121 East Wilson Street
Madison, Wisconsin 53702
Attn: Mr. Keith Johnson
(608) 266-8824
(608) 266-2436
7
<PAGE>
Either party hereto may from time to time change its address for notices
under this Section 13 by giving at least 10 days' written notice of such changed
address to the other party hereto.
14. Miscellaneous. This Warrant and any term hereof may be changed,
-------------
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Warrant shall be construed and enforced in accordance with and
governed by the laws of the State of California. The headings in this Warrant
are for purposes of reference only, and shall not limit or otherwise affect any
of the terms hereof. The invalidity or unenforceability of any provision hereof
shall in no way affect the validity or enforceability of any other provision.
15. Expiration. The right to exercise this Warrant shall expire on
----------
November 10, 2002.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
8
<PAGE>
Dated: November 10, 1999 ADVANCED TISSUE SCIENCES, INC.
By: /s/ Arthur J. Benvenuto
------------------------------
Arthur J. Benvenuto
Chairman of the Board and
Chief Executive Officer
[CORPORATE SEAL]
Attest:
By: /s/ Michael V. Swanson
---------------------------
Michael V. Swanson
Senior Vice President and
Chief Financial Officer
WARRANT HOLDER
By: /s/ John F. Nelson
---------------------------
Name: John F. Nelson
-------------------------
Title: Investment Director
------------------------
<PAGE>
FORM OF SUBSCRIPTION
(TO BE SIGNED ONLY ON EXERCISE OF WARRANT)
TO ADVANCED TISSUE SCIENCES, INC.
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise this Warrant for, and to purchase thereunder, ___________
shares of Common Stock of ADVANCED TISSUE SCIENCES, INC., a Delaware corporation
(the "Company"), and herewith makes payment of $____________ therefor, and
requests that the certificates for such shares be issued in the name of, and
delivered to ________________, whose address is _________________.
Dated: __________________________________
(Signature must conform to name of
holder as specified on the face of
the Warrant)
__________________________________
(Address)
__________________________________
(Tax Identification Number)
Signed in the presence of:
__________________________
EXHIBIT 4.2
November 10, 1999 Right to Purchase Shares of Common Stock
of Advanced Tissue Sciences, Inc.
ADVANCED TISSUE SCIENCES, INC.
Common Stock Purchase Warrant
Advanced Tissue Sciences, Inc., a Delaware corporation (the "Company"),
hereby certifies that for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the State of Wisconsin Investment
Board as Trustee for the Variable Retirement Investment Trust ("Warrant
Holder"), is entitled on the terms and conditions set forth below, to purchase
from the Company at any time beginning on the date hereof and ending on November
10, 2002, (the "Exercise Period") 350,000 fully paid and nonassessable shares of
Common Stock, $.01 par value, of the Company (the "Common Stock"), at a purchase
price per share of $4.00 (the "Purchase Price"), as the same may be adjusted
pursuant to Section 5 herein.
1. Definitions. This Warrant and any Warrant or Warrants subsequently
-----------
issued upon exchange or transfer hereof are hereinafter collectively called the
"Warrant." The term "Warrant Shares" shall mean the shares of Common Stock or
other securities issuable upon exercise of this Warrant.
2. Exercise of Warrant. This Warrant may be exercised by the Warrant
-------------------
Holder, in whole or in part (but not as to fractional shares), at any time and
from time to time during the Exercise Period by surrender of this Warrant,
together with the form of subscription at the end hereof duly executed by
Warrant Holder, to the Company at its principal office. In the event that the
Warrant is not exercised in full, the number of Warrant Shares shall be reduced
by the number of such Warrant Shares for which this Warrant is exercised, and
the Company, at its expense, shall forthwith issue and deliver to or upon the
order of Warrant Holder a new Warrant of like tenor in the name of Warrant
Holder reflecting such adjusted Warrant Shares.
3. Delivery of Stock Certificates.
------------------------------
(a) Subject to the terms and conditions of this Warrant, as soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within five (5) days thereafter, the Company at its expense (including,
without limitation, the payment by it of any applicable issue taxes) will cause
to be issued in the name of and delivered to Warrant Holder, or as Warrant
Holder (upon payment by Warrant Holder of any applicable transfer taxes) may
lawfully direct, a certificate or certificates for the number of fully paid and
non-assessable shares of Common Stock to which Warrant Holder shall be entitled
on such exercise, together with any other stock or other securities or property
(including cash, where applicable) to which Warrant Holder is entitled upon such
exercise.
<PAGE>
(b) This Warrant may not be exercised as to fractional shares of Common
Stock. In the event that the exercise of this Warrant, in full or in part,
would result in the issuance of any fractional share of Common Stock, then in
such event Warrant Holder shall be entitled to cash equal to the fair market
value of such fractional share. For purposes of this Warrant, fair market value
shall equal the closing trading price of the Common Stock on the Nasdaq National
Market, the American Stock Exchange or the New York Stock Exchange, whichever is
the principal trading exchange or market for the Common Stock (the "Principal
Market") on the date of determination or, if the Common Stock is not listed or
admitted to trading on any national securities exchange or quoted in the Nasdaq
national market system, the average of the closing bid and ask prices on the
over-the-counter market as furnished by any New York Stock Exchange member firm
reasonably selected from time to time by the Company for that purpose, or, if
the Common Stock is not listed or admitted to trading on any national securities
exchange or quoted on such national market system and the average price cannot
be determined as contemplated above, the fair market value of the Common Stock
shall be reasonably determined in good faith by the Company's Board of
Directors.
4. Covenants of the Company.
------------------------
(a) The Company shall use its reasonable best efforts to insure that a
registration statement under the Act covering the sale of the Warrant Shares is
and remains effective for the term of this Warrant and for three (3) years
thereafter, unless and until the Warrant Shares may be resold under Rule 144 of
the Act. The Company shall not be obligated to deliver any securities pursuant
to the exercise of this warrant unless such a registration statement under the
Act with respect to such securities is effective or an exemption thereunder is
available. This warrant shall not be exercisable in any state where such
exercise is unlawful.
(b) The Company shall take all necessary action and proceedings as may be
required and permitted by applicable law, rule and regulation, including,
without limitation the notification of Nasdaq, for the legal and valid issuance
of this Warrant and the Warrant Shares to the Warrant Holder under this Warrant.
(c) From the date hereof through the last date on which this Warrant is
exercisable, the Company shall take all steps reasonably necessary to insure
that the Common Stock remains listed on the Principal Market and shall not amend
its Certificate of Incorporation or Bylaws so as to adversely affect any rights
of the Warrant Holder under this Warrant.
(d) The Company shall at all times reserve and keep available, solely for
issuance and delivery as Warrant Shares hereunder, such shares of Common Stock
as shall from time to time be issuable.
2
<PAGE>
(e) The Warrant Shares, when issued in accordance with the terms hereof,
will be duly authorized and, when paid for or issued in accordance with the
terms hereof, shall be validly issued, fully paid and non-assessable. The
Company has authorized and reserved for issuance to Warrant Holder the requisite
number of shares of Common Stock to be issued pursuant to this Warrant.
(f) With a view to making available to Warrant Holder the benefits of Rule
144 promulgated under the Act and any other rule or regulation of the Securities
and Exchange Commission (the "SEC") that may at any time permit Warrant
Holder to sell securities of the Company to the public without registration, the
Company agrees that, for so long as a class of its securities is registered
under Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act"), as
amended, to use its best efforts to:
(i) make and keep public information available, as those terms are
understood and defined in Rule 144, at all times;
(ii) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the Exchange Act; and
(iii) furnish to any Warrant Holder forthwith upon request a written
statement by the Company that it has complied with the reporting
requirements of Rule 144 and the Act and the Exchange Act, a copy of the
most recent annual or quarterly report of the Company, and such other
reports and documents so filed by the Company as may be reasonably
requested in availing any such Warrant Holder to take advantage of any
rule or regulation of the SEC permitting the selling of any such
securities without registration.
5. Adjustment of Exercise Price and Number of Shares. The number of and
-------------------------------------------------
kind of securities purchasable upon exercise of this Warrant and the Purchase
Price shall be subject to adjustment from time to time as follows:
(a) Subdivisions, Combinations and other Issuances. If the Company shall
----------------------------------------------
at any time after the date hereof but prior to the expiration of this Warrant
subdivide its outstanding securities as to which purchase rights under this
Warrant exist, by split-up, spin-off, or otherwise, or combine its outstanding
securities as to which purchase rights under this Warrant exist, the number of
Warrant Shares as to which this Warrant is exercisable as of the date of such
subdivision, split-up, spin-off or combination shall forthwith be
proportionately increased in the case of a subdivision, or proportionately
decreased in the case of a combination. Appropriate adjustments shall also be
made to the purchase price payable per share, but the aggregate purchase price
payable for the total number of Warrant Shares purchasable under this Warrant as
of such date shall remain the same.
3
<PAGE>
(b) Stock Dividend. If at any time after the date hereof the Company
--------------
declares a dividend or other distribution on Common Stock payable in Common
Stock or other securities or rights convertible into Common Stock ("Common Stock
Equivalents") without payment of any consideration by holders of Common
Stock for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon exercise or
conversion thereof), then the number of shares of Common Stock for which this
Warrant may be exercised shall be increased as of the record date (or the date
of such dividend distribution if no record date is set) for determining which
holders of Common Stock shall be entitled to receive such dividends, in
proportion to the increase in the number of outstanding shares (and shares of
Common Stock issuable upon conversion of all securities convertible into Common
Stock) of Common Stock as a result of such dividend, and the Purchase Price
shall be adjusted so that the aggregate amount payable for the purchase of all
the Warrant Shares issuable hereunder immediately after the record date (or on
the date of such distribution, if applicable), for such dividend shall equal the
aggregate amount so payable immediately before such record date (or on the date
of such distribution, if applicable).
(c) Other Distributions. If at any time after the date hereof the Company
-------------------
distributes to holders of its Common Stock, other than as part of its
dissolution, liquidation or the winding up of its affairs, any shares of its
capital stock, any evidence of indebtedness or any of its assets (other than
cash, Common Stock or securities convertible into Common Stock), then the
Company shall decrease the per share Purchase Price of this Warrant by an
appropriate amount based upon the value distributed on each share of Common
Stock as determined in good faith by the Company's Board of Directors.
(d) Merger. If at any time after the date hereof there shall be a merger
------
or consolidation of the Company with or into another corporation then the
Warrant Holder shall thereafter be entitled to receive upon exercise of this
Warrant, during the period specified herein and upon payment of the aggregate
Purchase Price then in effect, the number of shares or other securities or
property of the successor corporation resulting from such merger or
consolidation, which would have been received by Warrant Holder for the shares
of stock subject to this Warrant had this Warrant at such time been exercised.
(e) Reclassification, Etc. If at any time after the date hereof there
---------------------
shall be a reorganization or reclassification of the securities as to which
purchase rights under this Warrant exist into the same or a different number of
securities of any other class or classes, then the Warrant Holder shall
thereafter be entitled to receive upon exercise of this Warrant, during the
period specified herein and upon payment of the Purchase Price then in effect,
the number of shares or other securities or property resulting from such
reorganization or reclassification, which would have been received by the
Warrant Holder for the shares of stock subject to this Warrant had this Warrant
at such time been exercised.
4
<PAGE>
(f) Continuation of Terms. Upon any reorganization, consolidation, merger
---------------------
or transfer (and any dissolution following any transfer) referred to in this
Section 5, this Warrant shall continue in full force and effect and the terms
hereof shall be applicable to the shares of stock and other securities and
property receivable on the exercise of this Warrant after the consummation of
such reorganization, consolidation or merger or the effective date of
dissolution following any such transfer, as the case may be, and shall be
binding upon the issuer of any such stock or other securities, including, in the
case of any such transfer, the person acquiring all or substantially all of
the properties or assets of the Company, whether or not such person shall have
expressly assumed the terms of this Warrant as provided in Section 6.
6. No Impairment. The Company will not, by amendment of its Certificate
-------------
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms of this Warrant, but will at all times in good faith assist in
the carrying out of all such terms and in the taking of all such action as may
be necessary or appropriate in order to protect the rights of the Warrant
Holder against impairment. Without limiting the generality of the foregoing,
the Company (a) will not increase the par value of any Warrant Shares above
the amount payable therefor on such exercise, (b) will take all such action as
may be necessary or appropriate in order that the Company may validly and
legally issue fully paid and nonassessable Warrant Shares on the exercise of
this Warrant and (c) will not transfer all or substantially all of its
properties and assets to any other person (corporate or otherwise), or
consolidate with or merge into any other person or permit any such person to
consolidate with or merge into the Company (if the Company is not the surviving
person), unless such other person shall expressly assume in writing and will
be bound by all the terms of this Warrant.
7. Notice of Adjustments; Notices. Whenever the Purchase Price or number
------------------------------
of Warrant Shares purchasable hereunder shall be adjusted pursuant to Section 5
hereof, the Company shall execute and deliver to the Warrant Holder a
certificate setting forth, in reasonable detail, the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated and the Purchase Price and number of shares purchasable hereunder
after giving effect to such adjustment, and shall cause a copy of such
certificate to be mailed (by first class mail, postage prepaid) to the Warrant
Holder.
8. Rights As Stockholder. Prior to exercise of this Warrant, the Warrant
---------------------
Holder shall not be entitled to any rights as a stockholder of the Company with
respect to the Warrant Shares, including (without limitation) the right to vote
such shares, receive dividends or other distributions thereon or be notified of
stockholder meetings. However, in the event of any taking by the Company of a
record of the holders of any class of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend (other than a cash
dividend) or other distribution, any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the Company shall mail to each Warrant
Holder, at least 10 days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution or right, and the amount and character of such
dividend, distribution or right.
5
<PAGE>
9. Replacement of Warrant. On receipt of evidence reasonably satisfactory
----------------------
to the Company of the loss, theft, destruction or mutilation of the Warrant and,
in the case of any such loss, theft or destruction of the Warrant, on delivery
of an indemnity agreement or security reasonably satisfactory in form and amount
to the Company or, in the case of any such mutilation, on surrender and
cancellation of such Warrant, the Company at its expense will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
10. Specific Enforcement; Consent to Jurisdiction.
---------------------------------------------
(a) The Company and the Warrant Holder acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of this
Warrant were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent or cure breaches of the
provisions of this Warrant and to enforce specifically the terms and provisions
hereof, this being in addition to any other remedy to which either of them may
be entitled by law or equity.
(b) Each of the Company and the Warrant Holder (i) hereby irrevocably
submits to the exclusive jurisdiction of the United States District Court and
other courts of the United States sitting in California for the purposes of any
suit, action or proceeding arising out of or relating to this Warrant and (ii)
hereby waives, and agrees not to assert in any such suit, action or proceeding,
any claim that it is not personally subject to the jurisdiction of such court,
that the suit, action or proceeding is brought in an inconvenient forum or that
the venue of the suit, action or proceeding is improper. Each of the Company
and the Warrant Holder consents to process being served in any such suit, action
or proceeding by mailing a copy thereof to such party at the address in effect
for notices to it under this Warrant and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing
in this paragraph shall affect or limit any right to serve process in any other
manner permitted by law.
11. Entire Agreement; Amendments. This Warrant, the Exhibits hereto and
----------------------------
the Warrant Shares contain the entire understanding of the parties with respect
to the matters covered hereby and thereby and, except as specifically set forth
herein and therein, neither the Company nor the Warrant Holder makes any
representation, warranty, covenant or undertaking with respect to such matters.
No provision of this Agreement may be waived or amended other than by a written
instrument signed by the party against whom enforcement of any such amendment or
waiver is sought.
12. Restricted Securities. The Warrant Holder understands that unless a
---------------------
registration statement covering the Warrant Shares is effective, this Warrant
and the Warrant Shares purchasable hereunder constitute "restricted securities"
under the federal securities laws and accordingly may not, under such laws and
applicable regulations, be resold or transferred without an applicable exemption
from registration. In this connection, the Warrant Holder acknowledges that
Rule 144 of the Securities and Exchange Commission is not now, and may not in
the future be, available for resale of the Warrant and the Warrant Shares
purchasable hereunder.
6
<PAGE>
13. Notices. Any notice or other communication required or permitted to be
-------
given hereunder shall be in writing and shall be effective (a) upon hand
delivery or delivery by telex (with correct answer back received), telecopy or
facsimile at the address or number designated below (if delivered on a business
day during normal business hours where such notice is to be received), or the
first business day following such delivery (if delivered other than on a
business day during normal business hours where such notice is to be received)
or (b) on the second business day following the date of mailing by express
courier service, fully prepaid, addressed to such address, or upon actual
receipt of such mailing, whichever shall first occur. The addresses for such
communications shall be:
to the Company:
Advanced Tissue Sciences, Inc.
10933 North Torrey Pines Road
La Jolla, California 92037
Attention: Chief Executive Officer
(858) 713-7300
(858) 713-7910 (facsimile)
with a copy to:
Advanced Tissue Sciences, Inc.
10933 North Torrey Pines Road
La Jolla, California 92037
Attention: Chief Financial Officer
(858) 713-7300
(858) 713-7900 (facsimile)
to the Warrant Holder:
State of Wisconsin Investment Board
121 East Wilson Street
Madison, Wisconsin 53702
Attn: Mr. John Nelson
(608) 266-7232
(608) 266-2436
with a copy to:
State of Wisconsin Investment Board
121 East Wilson Street
Madison, Wisconsin 53702
Attn: Mr. Keith Johnson
(608) 266-8824
(608) 266-2436
7
<PAGE>
Either party hereto may from time to time change its address for notices
under this Section 13 by giving at least 10 days' written notice of such changed
address to the other party hereto.
14. Miscellaneous. This Warrant and any term hereof may be changed,
-------------
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Warrant shall be construed and enforced in accordance with and
governed by the laws of the State of California. The headings in this Warrant
are for purposes of reference only, and shall not limit or otherwise affect any
of the terms hereof. The invalidity or unenforceability of any provision hereof
shall in no way affect the validity or enforceability of any other provision.
15. Expiration. The right to exercise this Warrant shall expire on
----------
November 10, 2002.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
8
<PAGE>
Dated: November 10, 1999 ADVANCED TISSUE SCIENCES, INC.
By: /s/ Arthur J. Benvenuto
-----------------------------
Arthur J. Benvenuto
Chairman of the Board and
Chief Executive Officer
[CORPORATE SEAL]
Attest:
By: /s/ Michael V. Swanson
--------------------------
Michael V. Swanson
Senior Vice President and
Chief Financial Officer
WARRANT HOLDER
By: /s/ John F. Nelson
------------------------------
Name: John F. Nelson
----------------------------
Title: Investment Director
---------------------------
<PAGE>
FORM OF SUBSCRIPTION
(TO BE SIGNED ONLY ON EXERCISE OF WARRANT)
TO ADVANCED TISSUE SCIENCES, INC.
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise this Warrant for, and to purchase thereunder, ___________
shares of Common Stock of ADVANCED TISSUE SCIENCES, INC., a Delaware corporation
(the "Company"), and herewith makes payment of $____________ therefor, and
requests that the certificates for such shares be issued in the name of, and
delivered to ________________, whose address is _________________.
Dated: ____________________________________
(Signature must conform to name of
holder as specified on the face of
the Warrant)
____________________________________
(Address)
____________________________________
(Tax Identification Number)
Signed in the presence of:
__________________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-Q for the quarter ended September 30, 1999 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 17,604
<SECURITIES> 4,505
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 4,502
<CURRENT-ASSETS> 28,282
<PP&E> 32,739
<DEPRECIATION> 15,163
<TOTAL-ASSETS> 50,832
<CURRENT-LIABILITIES> 21,797
<BONDS> 9,635
5,040
0
<COMMON> 527
<OTHER-SE> 13,492
<TOTAL-LIABILITY-AND-EQUITY> 50,832
<SALES> 10,184
<TOTAL-REVENUES> 33,903
<CGS> 10,184
<TOTAL-COSTS> 10,184
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,429
<INCOME-PRETAX> (13,170)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,170)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,170)
<EPS-BASIC> (.29)
<EPS-DILUTED> (.29)
</TABLE>
EXHIBIT 99.1
For Information Contact:
Jana Stoudemire
Senior Director, Corporate Communications
(858) 713-7802
FOR IMMEDIATE RELEASE
- ---------------------
ADVANCED TISSUE SCIENCES COMPLETES PUBLIC OFFERING
-ANNOUNCES SALE OF $15 MILLION IN COMMON STOCK AND
WARRANTS TO STATE OF WISCONSIN INVESTMENT BOARD-
La Jolla, Calif., November 10, 1999 --- Advanced Tissue Sciences, Inc. (Nasdaq:
ATIS) today announced the completion of a $15 million public offering of units
sold by the Company to the State of Wisconsin Investment Board. Under the
offering, the State of Wisconsin Investment Board purchased 3,750,000 units at
$4.00 per unit. The units separated immediately upon issuance into 3,750,000
shares of Advanced Tissue Sciences' common stock (one share per unit) and
warrants to purchase an additional 1,750,000 shares of common stock at $4.00 per
share. This investment increases the State of Wisconsin Investment Board's
beneficial ownership to over 16%.
Approximately $10 million of the proceeds will be used to fund existing
operations, while approximately $5 million must be reserved by the Company to
exercise its existing right to redeem the Company's remaining outstanding Series
B Convertible Preferred Stock should such shares be submitted for conversion at
or below $3.58 per share. The warrants are exercisable at any time over the
next three years and could potentially yield up to an additional $7.0 million to
the Company. The Company terminated its $50 million equity line in conjunction
with the sale of the units.
"We are happy to make this additional investment in Advanced Tissue Sciences.
We continue to be impressed with the caliber of people and the research progress
achieved by the Company," said John Nelson, Investment Director for the State of
Wisconsin Investment Board. "This investment provides additional financial
resources for the Company to continue progress in development of its promising
product pipeline." The State of Wisconsin Investment Board manages investments
of over $60 billion on behalf of over 450,000 government employees and retirees.
"We are certainly pleased that the State of Wisconsin Investment Board, our
largest and longest term institutional investor, continues to support the
Company's plans for the future. This investment enables us to further the
commercialization and applications of our Dermagraft[R] and TransCyte[TM]
products," said Arthur J. Benvenuto, Chairman and Chief Executive Officer.
"In addition, we are continuing to advance our human-based core technology
into other product indications, including orthopedic cartilage, cardiovascular,
aesthetic, urological and various reconstructive applications."
<PAGE>
Advanced Tissue Sciences is a tissue engineering company utilizing its
proprietary core technology to develop and manufacture human-based tissue
products for tissue repair and transplantation. The Company has two joint
ventures with Smith & Nephew. The first covers the application of Advanced
Tissue Sciences' tissue engineering technology for skin wounds and includes
Dermagraft[R] for the treatment of diabetic foot ulcers, TransCyte[TM] for the
temporary covering of second and third-degree burns and future developments for
venous ulcers, pressure ulcers, burns and other non-aesthetic wound care
treatments. The second joint venture is developing tissue-engineered orthopedic
cartilage, initially focusing on the repair of cartilage in knee joints. The
Company also has a strategic alliance with Inamed Corporation for the
development and marketing of several of Advanced Tissue Sciences' human-based,
tissue-engineered products for aesthetic and certain reconstructive
applications. In addition, the Company is developing products for
cardiovascular applications.
STATEMENTS IN THIS PRESS RELEASE THAT ARE NOT STRICTLY HISTORICAL MAY BE
"FORWARD-LOOKING" STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. NO
ASSURANCES CAN BE GIVEN THAT THE COMPANY WILL SUCCESSFULLY DEVELOP OR
COMMERCIALIZE ITS PRODUCTS, COMPLETE CLINICAL TRIALS, OBTAIN REGULATORY
APPROVALS (OR THAT ANY SUCH APPROVALS WILL BE OBTAINED ON A TIMELY BASIS), BE
ABLE TO MANUFACTURE OR SUCCESSFULLY COMMERCIALIZE SUCH PRODUCTS. ACTUAL RESULTS
MAY DIFFER FROM THOSE DESCRIBED IN THIS PRESS RELEASE DUE TO RISKS AND
UNCERTAINTIES THAT EXIST IN THE COMPANY'S OPERATIONS, INCLUDING, WITHOUT
LIMITATION, THE ABILITY TO OBTAIN ADDITIONAL FINANCING TO CONTINUE OPERATIONS
WHEN NEEDED, A HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICITS, THE
COMPANY'S RELIANCE ON COLLABORATIVE RELATIONSHIPS, AND UNCERTAINTIES RELATED TO
CLINICAL TRIALS, THE ABILITY TO OBTAIN THE APPROPRIATE REGULATORY APPROVALS,
PATENT PROTECTION, AND MARKET ACCEPTANCE, AS WELL AS OTHER RISKS DETAILED FROM
TIME TO TIME IN PUBLICLY AVAILABLE FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION, INCLUDING WITHOUT LIMITATION, ADVANCED TISSUE SCIENCES' ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND ADVANCED TISSUE
SCIENCES' MOST RECENT REGISTRATION STATEMENT ON FORM S-3 FILED ON JULY 12, 1999,
AS AMENDED. THE COMPANY UNDERTAKES NO OBLIGATION TO RELEASE PUBLICLY THE
RESULTS OF ANY REVISION TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES ARISING AFTER THE DATE HEREOF.
