<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
COHESION TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3274368
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2500 FABER PLACE, PALO ALTO, CALIFORNIA 94303
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code (650) 354-4300
Securities to be registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
------------------- ------------------------------
<S> <C>
None
- -------------------------------------------- --------------------------------------------
- -------------------------------------------- --------------------------------------------
</TABLE>
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
(Title of Class)
================================================================================
<PAGE> 2
COHESION TECHNOLOGIES, INC.
INFORMATION REQUIRED IN REGISTRATION STATEMENT
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
<TABLE>
<CAPTION>
ITEM NO. CAPTION LOCATION
- -------- ------- --------
<S> <C> <C>
Item 1. Business SUMMARY; RISK FACTORS; SELECTED HISTORICAL AND UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL DATA; RELATIONSHIP
BETWEEN THE COMPANY AND COLLAGEN AFTER THE DISTRIBU-
TION; MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS; BUSINESS; FINANCIAL
STATEMENTS
Item 2. Financial Information SUMMARY; RISK FACTORS; SELECTED HISTORICAL AND UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL DATA; MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS; FINANCIAL STATEMENTS
Item 3. Properties RELATIONSHIP BETWEEN THE COMPANY AND COLLAGEN AFTER THE
DISTRIBUTION; BUSINESS
Item 4. Security Ownership of Cer- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
tain Beneficial Owners and MANAGEMENT
Management
Item 5. Directors and Executive MANAGEMENT
Officers
Item 6. Executive Compensation MANAGEMENT
Item 7. Certain Relationships and SUMMARY; RISK FACTORS; RELATIONSHIP BETWEEN THE COMPANY
Related Transactions AND COLLAGEN AFTER THE DISTRIBUTION; THE DISTRIBUTION;
MANAGEMENT; CERTAIN TRANSACTIONS
Item 8. Legal Proceedings BUSINESS
Item 9. Market Price of and Divi- RISK FACTORS; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
dends on the Registrant's OWNERS AND MANAGEMENT; DESCRIPTION OF CAPITAL STOCK
Common Equity and Re-
lated Stockholder Matters
Item 10. Recent Sales of Unregis- DESCRIPTION OF CAPITAL STOCK
tered Securities
Item 11. Description of DESCRIPTION OF CAPITAL STOCK
Registrant's Securities to
be Registered
Item 12. Indemnification of LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Directors and Officers
Item 13. Financial Statements and SUMMARY; SELECTED HISTORICAL AND UNAUDITED PRO FORMA
Supplementary Data CONSOLIDATED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERA-
TIONS; FINANCIAL STATEMENTS
Item 14. Changes in and Disagree- NOT APPLICABLE
ments with Accountants on
Accounting and Financial
Disclosure
Item 15. Financial Statements and FINANCIAL STATEMENTS; EXHIBITS
Exhibits
</TABLE>
<PAGE> 3
PRELIMINARY INFORMATION STATEMENT
COHESION TECHNOLOGIES, INC.
LOGO
COMMON STOCK
PAR VALUE $0.001 PER SHARE
This Preliminary Information Statement ("Information Statement") is being
furnished in connection with the distribution (the "Distribution") by Collagen
Corporation ("Collagen"), to the holders of record (the "Collagen Holders") of
Collagen's common stock, par value, $0.01 per share (the "Collagen Common
Stock") at the close of business on , 1998 (the "Record
Date"), of one share of the common stock, par value $0.001 per share (the
"Common Stock"), of Cohesion Technologies, Inc. (the "Company") for every one
share of Collagen Common Stock held by the Collagen Holders on the Record Date.
As of March 31, 1998, there were 8,951,227 shares of Collagen Common Stock
outstanding. The Distribution will result in the distribution of 100% of the
outstanding shares of the Company to the Collagen Holders on a prorata basis. It
is currently anticipated that the Distribution will be effective on
(the "Distribution Date"), and the Common Stock will be distributed to Collagen
Holders on or about that same date.
No consideration will be paid by the Collagen Holders for the distributed
Common Stock, and there is currently no public trading market for such stock. It
is expected that a "when-issued" trading market will develop on or about the
Distribution Date; however, the Company can make no assurance to that effect.
The Company has applied to have the Common Stock quoted on the Nasdaq National
Market under the symbol "CSON."
As more fully described herein, in addition to the shares being
distributed, on or shortly after the Distribution Date the Company anticipates
having outstanding options to purchase an aggregate of approximately 2,477,000
shares of Common Stock under its stock option plans as a result of (i) new
option grants to employees and directors of the Company, (ii) the restructure
and exchange of options to purchase shares of Collagen Common Stock held by
former employees and directors of Collagen and (iii) offers the Company may make
to exchange options held by former employees and directors of Cohesion
Corporation, a 99% owned subsidiary of the Company ("Cohesion Corporation"), for
options to purchase Common Stock.
As a result of certain transfers made to the Company by Collagen in
connection with the Distribution and pursuant to the Intercompany Agreements (as
defined), the Company owns substantially all of the businesses and assets of,
and is responsible for substantially all of the liabilities relating to
Collagen's activities in hemostatic devices, biosealants, adhesion prevention
barriers, orthopedic products and programs and the development of recombinant
human collagen and thrombin as more fully described herein.
IN REVIEWING THIS INFORMATION STATEMENT, MATTERS DESCRIBED UNDER THE CAPTION
"RISK FACTORS," COMMENCING ON PAGE 9 SHOULD BE CAREFULLY CONSIDERED.
NO VOTE OF THE STOCKHOLDERS OF COLLAGEN IS REQUIRED IN CONNECTION WITH THE
DISTRIBUTION. NOTWITHSTANDING THIS, COLLAGEN IS SEEKING THE VOTE OF THE COLLAGEN
HOLDERS TO APPROVE THE DISTRIBUTION. THE COMPANY IS NOT SOLICITING THE COLLAGEN
HOLDERS OR ANY OTHER PERSONS FOR A PROXY AND REQUESTS THAT NO PROXIES BE SENT TO
IT.
THE COMMON STOCK HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Preliminary Information Statement is April 27, 1998.
<PAGE> 4
SUMMARY
The following is a summary of certain information contained elsewhere in
this Information Statement. Reference is made to, and this summary is qualified
by, the more detailed information set forth in this Information Statement, which
should be read in its entirety. Unless the context otherwise requires,
references in this Information Statement (i) to Collagen include Collagen and
its subsidiaries and (ii) to the Company prior to the Distribution Date refer to
the Transferred Businesses (as defined). Additionally, unless otherwise
indicated, all information contained in this Information Statement assumes: (i)
completion of the distribution (as defined) to be effected on the distribution
date, and (ii) conversion of all outstanding shares of preferred stock into
shares of common stock prior to completion of the Distribution. With the
exception of the historical information contained herein, this Information
Statement contains forward-looking statements that involve risks and
uncertainties. The Company's actual results and the results of and effect of the
Distribution could differ materially from those described herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business."
THE COMPANY
Cohesion Technologies, Inc. (the "Company") is focused on developing and
commercializing proprietary surgical products, including bioresorbable
hemostatic devices and biosealants for tissue repair and regeneration, which
increase the effectiveness of and minimize complications following open and
minimally invasive surgeries. CoStasis(TM) atraumatic hemostat ("CoStasis"), the
Company's lead hemostatic product candidate, designed for use initially in
cardiothoracic indications, is currently in a multi-site, randomized, pivotal
clinical trial in Europe. In 1998, the Company expects to complete the trial and
file for CE Mark. The Company has received an Investigational Device Exemption
(an "IDE") from the United States Food and Drug Administration (the "FDA") and
has commenced U.S. pivotal trials of CoStasis, targeting cardiac, hepatic,
orthopedic and general surgery indications. CoSeal(TM) surgical sealant
("CoSeal"), the Company's lead biosealant product candidate, designed for
sealing organs and other tissues resulting from surgical wounds and incisions,
is expected to commence European clinical trials by the end of 1998. Industry
experts estimate that the potential worldwide market for fibrin sealants and
surgical adhesives is $850 million annually. Industry experts also estimate that
the potential surgical sealant marketplace is $650 million annually. The Company
believes its surgical products will provide several distinct advantages over
currently available technologies, including ease of preparation and use, novel
delivery systems, improved safety profiles and clinical effectiveness. The
Company also sells Collagraft(R) implant ("Collagraft"), an orthopedic product,
and has research and development programs in other orthopedic areas and in
recombinant human collagen and thrombin. The Company's products and programs are
based on a platform of proprietary technologies centered around collagen and
hydrophilic polymers that quickly polymerize in vivo and bind to tissue.
Hemostatic Devices. The current U.S. market for hemostatic devices, which
are used during surgery to stop diffuse bleeding and seal wounds, is served by a
limited range of collagen-based sponge and powder products which, although
widely used, have limited effectiveness and can be difficult to apply. Outside
of the United States, a broader range of autologous and homologous fibrin
sealant products are used, but are time-consuming to prepare, difficult to use,
and provide less effective tissue adherence than needed in diverse clinical
settings. Fibrin sealants provide a liquid, atraumatic hemostat which flows
across tissue surfaces and provides a fibrin matrix. The Company believes that
CoStasis, a collagen based hemostatic sealant, can offer distinct advantages
over fibrin sealants and currently available products in the United States,
including faster hemostasis, greater mechanical strength, enhanced product
safety and improved preparation, handling and performance characteristics. In
Europe, the Company is conducting a multi-site, randomized, pivotal clinical
trial with CoStasis in open heart surgeries with approximately 100 patients. The
Company plans to complete these trials and file for CE Mark by the end of 1998.
The Company has received approval for its IDE from the FDA and has commenced
U.S. pivotal clinical trials of CoStasis targeting cardiac, hepatic, orthopedic
and general surgery indications.
2
<PAGE> 5
Biosealants. Biosealants are used to seal organs to prevent leakage of
bodily fluids through wounds or incisions from surgery. Predominant applications
include sealing the sutured closure (anastomoses) of blood vessels, intestines,
and fallopian tubes, as well as organ incisions in cardiovascular surgery,
abdominal and pelvic surgery, neurosurgery and urology. Although industry
experts estimate the worldwide market for surgical wound closure products to be
over $2.0 billion annually, a relatively small number of biosealants are being
widely commercialized due to limitations inherent in the underlying technology.
Industry experts have estimated that 1.5 million surgeries in the United States
each year are sealant candidates. The Company is developing CoSeal, a biosealant
based on the Company's proprietary reactive polyethylene-glycol ("PEG") polymer
technology, which the Company believes can offer distinct advantages over
current procedures, including complete resorbability, improved elasticity,
sealing strength, general tissue adherence and greater ease of application. The
Company is conducting preclinical studies with CoSeal and has developed a series
of prototypes. It plans to commence European clinical trials by the end of 1998.
Orthopedics. The Company's commercialized Collagraft implant product is a
collagen-based bone graft substitute designed to provide a scaffolding around
which new bone can grow, thereby eliminating the need for painful autograft
procedures. Pursuant to the terms of certain intercompany agreements between the
Company and Collagen, the Company has agreed to assume Collagen's relationship
with the marketing partner for Collagraft, Zimmer, Inc. ("Zimmer"), a subsidiary
of the Bristol-Myers Squibb Company. The Company is also developing a
collagen-based bone anchor product with Innovasive Devices, Inc. ("Innovasive").
Additionally, the Company is conducting research and development activities in
the treatment of osteoarthritis, the most prevalent form of arthritis in the
United States, and has completed a European feasibility study involving 30
patients in 1997.
Other Development Programs. The Company is conducting preclinical studies
with an adhesion prevention barrier product, CoStop(TM), based on its
proprietary PEG-polymer technology, designed to prevent the formation of
debilitating or painful internal tissue adhesions after surgery. According to
Medical Data International, an estimated 4.5 million U.S. surgeries each year
are at risk for adhesion formation, including most abdominal and gynecological
surgeries, as well as many cardiothoracic and orthopedic surgeries. The Company
also is conducting preclinical studies with a resorbable sealant for use in
vascular catheterization procedures to prevent post-operative bleeding. The
Company is also developing recombinant human collagen and thrombin to serve as
an alternative to bovine collagen and bovine thrombin in its products in an
effort to develop a wider range of innovative surgical products.
Objectives and Strategy. The Company's objective is to develop, manufacture
and commercialize innovative tissue repair and regeneration products, with the
initial goal of rapidly exploiting its proprietary technology in the areas of
surgical hemostats and sealants. The Company's strategy consists of the
following key elements:
- Initial Focus on Large Markets. The Company is focusing its near-term
resources initially on the commercial development of hemostatic and sealant
products for cardiothoracic and other surgical procedures. The Company estimates
that there are approximately 9.3 million open and minimally invasive
cardiovascular, hepatic, orthopedic and general surgeries performed each year in
the United States in which hemostatic products may be used and approximately 1.4
million such surgeries performed each year in the United States in which sealant
products may be used. The Company believes that hemostatic and sealant products
with cardiothoracic and cardiovascular surgery indications will represent the
largest segment worldwide.
- Leverage Competitive Advantages. The Company is conducting a 100-patient,
multi-center, randomized clinical trial of CoStasis in Europe, controlled
against conventional medical practices, including fibrin sealants, and expects
to differentiate its products through ease of preparation, novel delivery
systems, clinical effectiveness and safety. CoStasis uses autologous plasma
(derived from the patient), as opposed to homologous plasma (derived from pooled
blood sources), thereby eliminating the potential infectious disease risks
inherent in the use of pooled blood-derived products. The Company anticipates
finishing its European clinical trial of CoStasis and filing for CE Mark by the
end of 1998. The Company has received an IDE from the FDA and expects to
complete U.S. pivotal trials of CoStasis in cardiac, hepatic, orthopedic and
general surgery indications by the end of 1998.
3
<PAGE> 6
- Rapid Commercialization; Focused Marketing. The Company believes that
CoStasis and CoSeal will be classified as medical devices in Europe and the
United States, generally requiring less onerous, less costly and shorter
regulatory approval processes than if classified as biological agents or drugs.
Initial distribution in Europe is planned through geographically focused,
specialty cardiovascular distributors with existing customer relationships and
established sales infrastructures. In the United States, the Company plans to
target the concentrated cardiovascular surgery segment with a direct sales force
to maximize operating margins and plans to consider additional distribution
arrangements for other surgical specialties such as general surgery, gynecology
and orthopedics.
- Expand into Other Surgical Markets. The Company believes that its
technology and initial product formulations may also be applied to additional,
non-cardiac, high-volume procedures. The Company is developing hemostatic and
sealant indications in colon-rectal (e.g., colon resections), hepatic (e.g.,
liver transplants) and orthopedic (e.g., bone grafts) surgeries, including both
open and minimally invasive surgical techniques. The Company believes that its
technology platform is highly scaleable and will enable it to expand into
additional markets over time.
- Capitalize on Intellectual Property Portfolio. The Company believes it
has substantial design, manufacturing and applications engineering expertise in
the development of biomaterials and delivery systems that, when combined with
its intellectual property portfolio, will enable it to expand into additional
markets by cost-effectively addressing unmet surgical needs for ease of
preparation, ease of use, efficacy and safety.
- Develop and Maintain Close Relationships with Leading Professionals
Worldwide. The Company strives to maintain close relationships with leading
scientists, surgeons and other healthcare professionals worldwide who are
dedicated to expanding the use of biomaterials for hemostatic and sealant
applications, and to identify unmet surgical needs. The Company plans to
actively assist and support educational and training programs to meet customer
needs on the use of hemostats and sealants worldwide, as well as research
efforts into new products.
------------------------
Cohesion Corporation was founded in December 1993 as Otogen Corporation
("Otogen"), by Rodney Perkins, M.D., and Collagen to focus on the development of
medical devices in the fields of otology and neurosurgery. In January 1996, this
focus was shifted primarily to the fields of hemostasis, biosealants and
adhesion prevention devices, and Otogen's name was changed to Cohesion
Corporation. In December 1997, Collagen increased its interest in Cohesion
Corporation to approximately 99%. Effective January 1, 1998, Collagen
transferred to the Company certain assets and liabilities, including its
interest in Cohesion Corporation, as described below. Collagen is in the process
of seeking stockholder approval of the Distribution, and the Distribution is
contingent upon prior receipt of a ruling from the Internal Revenue Service that
the Distribution will not result in recognition of taxable income or taxable
gain to Collagen or its stockholders. The Company's headquarters are located at
2500 Faber Place, Palo Alto, California 94303 and its telephone number is (650)
354-4300.
For additional information regarding the Distribution, please refer to the
Collagen 1998 Proxy Statement. The Company's Registrar, Transfer Agent and
Distribution Agent may be contacted at the Bank of New York, N.A. at (212)
815-6955.
CoStasis, CoSeal and CoStop are trademarks of the Company. This Information
Statement also includes trade names and trademarks of companies other than the
Company. The use of any such third party trade name or trademark herein is
editorial only, and to the benefit of the owner thereof, with no intention of
commercial use or infringement of such trade name or trademark.
------------------------
4
<PAGE> 7
THE DISTRIBUTION
<TABLE>
<S> <C>
Common Stock to be outstanding after the Distribution....... 8,951,227 shares(1)
Nasdaq NMS Symbol........................................... CSON
</TABLE>
- ---------------
(1) Represents 8,951,227 shares being distributed in connection with the
Distribution. Excludes approximately 2,477,000 shares of Common Stock
issuable upon exercise of options which the Company may issue under the
Company's stock option plans on or shortly after the Distribution Date.
DISTRIBUTING CORPORATION...... Collagen Corporation, a Delaware corporation.
DISTRIBUTED CORPORATION....... Collagen transferred to the Company, effective
January 1, 1998, pursuant to the Intercompany
Agreements (as defined) substantially all of
the assets of, and responsibility for
substantially all of the liabilities associated
with Collagen's activities in hemostatic
devices, biosealants, orthopedic products and
programs, adhesion prevention barriers and the
development of recombinant human collagen and
thrombin, as more fully described herein, as
well as certain other equity interests,
including interests in Boston Scientific
Corporation ("Boston Scientific") and
Innovasive, which had an aggregate market value
of $83.9 million, at March 31, 1998.
Collectively, the assets transferred pursuant
to the Intercompany Agreements are referred to
herein as the "Transferred Businesses."
RETAINED BUSINESSES........... Collagen will retain all of the businesses (the
"Retained Businesses"), other than the
Transferred Businesses. Following the
Distribution, Collagen plans to change its name
to Collagen Aesthetics, Inc.
PRIMARY PURPOSES OF THE
DISTRIBUTION.................. To separate the Transferred Businesses so that
the Company and Collagen will be in an improved
position (i) to adopt strategies and pursue
objectives appropriate to specific businesses
and industries and thereby achieve, among other
things, potential cost savings, (ii) to
implement more focused incentive compensation
arrangements that are tied more directly to
results of operations, (iii) to be recognized
by the financial community as separate and
distinct businesses, and (iv) to facilitate
raising additional capital in the private and
public markets. See "The Distribution."
SHARES TO BE DISTRIBUTED AND
OUTSTANDING................... Approximately 8,951,227 shares of Common Stock.
In addition to the 8,951,227 shares being
distributed on or shortly after the
Distribution Date, the Company anticipates
having outstanding options to purchase an
aggregate of approximately 2,477,000 shares of
Common Stock under its stock option plans, as a
result of (i) new option grants to employees
and directors of the Company, (ii) the
restructure and exchange of options to purchase
Collagen Common Stock held by former employees
and directors of Collagen and (iii) offers the
Company may make to exchange options held by
former employees and directors of Cohesion
Corporation for options to purchase Common
Stock. See "Description of Capital Stock."
DISTRIBUTION RATIO............ Each Collagen Holder will receive one share of
Common Stock of the Company for every one share
of Collagen Common Stock held on the Record
Date. On March 31, 1998, there were 8,951,227
shares of Collagen Common Stock outstanding.
QUOTATION AND TRADING
MARKET........................ The Company has applied to have the Common
Stock quoted on the Nasdaq National Market
under the symbol "CSON."
RECORD DATE................... The close of business on ,
1998.
5
<PAGE> 8
DISTRIBUTION DATE............. The Distribution Agent will distribute on or
shortly after , the
Distribution Date certificates representing the
Company Common Stock to the Collagen Holders.
DISTRIBUTION AGENT............ The Bank of New York, N.A. (the "Distribution
Agent").
TAX CONSEQUENCES.............. It is a condition for the completion of the
Distribution that a ruling be obtained from the
Internal Revenue Service that the Distribution
will not result in recognition of taxable
income or gain to Collagen or its stockholders
under Section 355 and Section 368 of the
Internal Revenue Code of 1986, as amended (the
"Code"). In the event that such ruling is not
obtained, the Distribution will not be
effected. See "The Distribution." See also The
Collagen 1998 Proxy Statement, "The
Spinoff -- Certain Federal Income Tax
Consequences of the Spinoff."
DIVIDEND POLICY............... The Company has never paid any cash dividends
and does not anticipate paying cash dividends
in the foreseeable future.
RELATIONSHIP WITH COLLAGEN
POST-DISTRIBUTION............. Following the Distribution, Collagen and the
Company will be independent public companies
and their relationship will be governed solely
by the terms of the Intercompany Agreements (as
defined). See "Relationship Between the Company
and Collagen After the Distribution."
RISK FACTORS.................. The matters discussed under "Risk Factors"
commencing on page 9 of this Information
Statement should be carefully considered.
6
<PAGE> 9
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA(1)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
---------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1996 1997
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue -- product sales........... $ 1,198 $ 4,302 $ 3,546 $ 3,612 $ 2,527 $ 1,357 $ 1,234
Costs and expenses:
Cost of sales.................... 539 1,991 1,961 2,404 2,105 1,077 692
Research and development......... 2,957 3,284 3,416 4,268 9,627 6,071 7,402
General and administrative....... 2,627 2,815 2,726 3,120 7,153 1,871 2,591
Purchased in-process research and
development.................... -- -- -- 3,000 -- -- 10,530
-------- -------- -------- -------- -------- -------- --------
Total costs and
expenses................ 6,123 8,090 8,103 12,792 18,885 9,019 21,215
-------- -------- -------- -------- -------- -------- --------
Loss from operations............... (4,925) (3,788) (4,557) (9,180) (16,358) (7,662) (19,981)
Other income (expense), net........ 19,077 (592) 4,209 79,545 23,834 8,779 9,002
Provision for income taxes,
minority interest and, in 1993,
cumulative effect of change in
accounting for income taxes...... 6,963 (475) 553 31,691 2,495 245 --
-------- -------- -------- -------- -------- -------- --------
Net income (loss).................. $ 7,189 $ (3,905) $ (901) $ 38,674 $ 4,981 $ 872 $(10,979)
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 1,832
Working capital............................................. 2,695
Investment in Boston Scientific(2).......................... 66,815
Total assets................................................ 87,449
Long-term liabilities....................................... 28,023
Total stockholder's and parent company equity............... 55,306
</TABLE>
- ---------------
(1) The summary historical consolidated financial data of the Company has been
prepared from the audited consolidated financial statements of the Company
for each of the three years in the period ended June 30, 1997 and the
unaudited consolidated financial statements as of December 31, 1997 and for
the six months ended December 31, 1996 and 1997 included herein. Financial
information for each of the two years in the period ended June 30, 1994, has
been prepared from unaudited consolidated financial statements not included
herein. The financial information may not reflect the Company's future
performance or the future financial position or results of operations of the
Company, nor does it provide or reflect data as if the Company had actually
operated as a separate, stand-alone entity during the periods covered. Per
share data has not been presented as no common shares are outstanding and
such information would not be meaningful. The summary financial data should
be read in conjunction with the consolidated financial statements and
related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," included elsewhere in this Information
Statement. In the opinion of the Company's and Collagen's management, the
unaudited consolidated financial statements as of December 31, 1997, for the
years ended June 30, 1993 and 1994 and for the six months ended December 31,
1996 and 1997 contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position and results
of operations for these periods.
(2) Includes $11,404 receivable from the Company's equity collar investment.
7
<PAGE> 10
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, 1997 DECEMBER 31, 1997
------------------------------------ ------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue -- product sales............... $ 2,527 $ -- $ 2,527 $ 1,234 $ -- $ 1,234
Costs and expenses:
Cost of sales........................ 2,105 (589) 1,516 692 48 740
Research and development............. 9,627 (1,313) 8,314 7,402 (1,015) 6,387
General and administrative........... 7,153 -- 7,153 2,591 -- 2,591
Purchased in-process research and
development........................ -- -- -- 10,530 -- 10,530
-------- ------- -------- -------- ------- --------
Total costs and expenses...... 18,885 (1,902) 16,983 21,215 (967) 20,248
-------- ------- -------- -------- ------- --------
Loss from operations................... (16,358) 1,902 (14,456) (19,981) 967 (19,014)
Other income (expense), net............ 23,834 -- 23,834 9,002 -- 9,002
Provision for income taxes and minority
interest............................. 2,495 723 3,218 -- -- --
-------- ------- -------- -------- ------- --------
Net income (loss)............. $ 4,981 $ 1,179 $ 6,160 $(10,979) $ 967 $(10,012)
======== ======= ======== ======== ======= ========
Basic net income (loss) per share(2)... $ 0.70 $ (1.13)
======== ========
Diluted net income (loss) per
share(2)............................. $ 0.69 $ (1.13)
======== ========
Shares used in computing basic net
income (loss) per share(2)........... 8,804 8,857
======== ========
Shares used in computing diluted net
income (loss) per share(2)........... 8,930 8,857
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 1,832
Working capital............................................. 2,695
Investment in Boston Scientific(3).......................... 66,815
Total assets................................................ 87,449
Long-term liabilities....................................... 28,023
Total stockholder's and parent company equity............... 55,306
</TABLE>
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(1) The summary unaudited pro forma consolidated financial data presented is
theoretical in nature and not necessarily indicative of the future results
of operations or financial position of the Company or the results of
operations and financial position which would have resulted had the Company
been a stand-alone company during the periods presented. The pro forma
financial data reflects the effects of the January 1, 1998 contribution by
Collagen to the Company under the terms of the Intercompany Agreements and
includes certain additions and adjustments to the historical results related
to (i) transfer price arrangements under the Company's supply agreements
with Collagen, and (ii) research and development expenses associated with
the reimbursement of costs under the Company's development arrangements with
Collagen. The pro forma statement of operations data assumes that the
Distribution occurred prior to July 1, 1996. The pro forma balance sheet
data assumes that the Distribution occurred on December 31, 1997. This
information has been prepared from the unaudited pro forma consolidated
financial information of the Company included elsewhere in this Information
Statement. The summary pro forma financial data should be read in
conjunction with the unaudited pro forma consolidated financial information
and related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Information
Statement.
(2) See Note 5 of Notes to Unaudited Pro Forma Consolidated Financial
Information for a description of the basis of determining net income (loss)
per share information.
(3) Includes $11,404 receivable from the Company's equity collar investment.
8
<PAGE> 11
RISK FACTORS
The following Risk Factors should be considered carefully, in addition to
the other information contained in this Information Statement. When used in this
Information Statement, the words "expects," "anticipates," "intends," "plans,"
"estimates" and similar expressions are intended to identify forward looking
statements. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially from those projected. These risks and
uncertainties include, but are not limited to, those risks discussed below and
elsewhere in this Information Statement. Actual results could differ materially
from those projected in the forward looking statements as a result of the risk
factors discussed below and elsewhere in this Information Statement.
ABSENCE OF HISTORY AS AN INDEPENDENT COMPANY
Prior to being contributed to the Company by Collagen, the Transferred
Businesses were part of an operating group at Collagen, the Collagen
Technologies Group. The Company does not have an operating history as an
independent company. As is the case with many distributions, the preparation and
completion of the Distribution may result in some temporary dislocation of, and
inefficiencies in the business, operations, organization and personnel structure
of the Company. Collagen is not required to provide assistance or services to
the Company, except as described in the Intercompany Agreements, and, it is
incumbent upon the Company to establish an identity separate from Collagen.
Although the Company intends to invest substantial resources in the future to
increase capital market and industry awareness of its activities, there can be
no assurance that such investment will actually increase such awareness, and
failure to achieve such awareness could have a material adverse effect on the
Company. The Company has not operated as a public company, and following the
Distribution it will continue to incur increasing costs and expenses associated
with being a public company. See "-- No Prior Public Market; Volatility of
Common Stock Price;" "-- History of Operating Losses; Uncertainty of Future
Profitability;" "-- Intense Competition;" "Business;" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company's historical results of operations discussed in this
Information Statement and contained in the financial statements and related
notes, included in this Information Statement, reflect the historical operations
of the Transferred Businesses contributed by Collagen to the Company. The
financial statements of the Company included herein may not necessarily reflect
the results of operations, financial position and cash flows of the Transferred
Businesses had the Company been operated as an independent entity during the
periods presented. The Company has incurred operating losses in each of the past
five years, including operating losses of $4.6 million, $9.2 million, $16.4
million and $20.0 million in fiscal 1995, 1996, 1997 and for the six-month
period ended December 31, 1997, respectively. The Company's operating losses
have resulted primarily from expenses incurred in connection with the Company's
research and development activities, including preclinical and clinical trials,
development of manufacturing processes and general and administrative expenses
and the Company expects that such expenses will continue to increase for the
foreseeable future. The Company's ability to achieve and sustain operating
profitability is highly dependent upon obtaining in a timely and efficient
fashion, regulatory approval for and successfully commercializing its products
in development, particularly the CoStasis atraumatic hemostatic device and the
CoSeal surgical sealant and developing sales and marketing capabilities for its
products, both in Europe, the United States and other markets. There can be no
assurance that the Company will obtain required regulatory approvals in a timely
fashion, if at all, or successfully develop, manufacture, commercialize and
market products or that the Company will ever record significant product
revenues or achieve operating profitability. Operating profitability, if
achieved, may not be sustained. See "-- Absence of History as an Independent
Company;" "-- Dependence on Boston Scientific Stock;" "-- No Prior Public
Market; Volatility of Common Stock Price;" "-- Uncertainties Related to Early
Stage of Commercialization and Development;" "-- Government Regulation;"
"-- Intense Competition;" "Management's Discussion and Analysis of Financial
Condition and Results of Operations;" and "Business."
9
<PAGE> 12
UNCERTAINTIES RELATED TO COMMERCIALIZATION AND DEVELOPMENT
Except for Collagraft, the Company's orthopedic implant product, which is
currently marketed by Zimmer, and the Company's Vitrogen, Cell Prime, Zygen,
Angiostat and other bulk collagen products (collectively the "Intermediate
Products"), all of the Company's products are in research or preclinical or
clinical development. The Company has not received marketing approval for any of
its products from the FDA or any other international regulatory body. The
development and commercialization of new products are highly uncertain, as is
the timing associated with these activities. Among other things, potential
products that may appear to the Company to be promising may not reach the market
for a number of reasons, including the possibilities that the potential products
will be found to be ineffective or to cause harmful side effects during
preclinical testing or clinical trials, will fail to receive necessary
regulatory approvals, will be difficult to manufacture on a commercial scale,
will be uneconomical, will fail to achieve market acceptance or will be
precluded from commercialization by the proprietary rights of third parties. No
assurance can be made that any of the Company's development programs will be
successfully completed, that clinical trials will generate anticipated results
or will commence or be completed as planned. Additionally, there can be no
assurance that the Company will be able to obtain CE Mark in Europe, on a timely
basis, if at all, or that any premarket approval ("PMA") application will be
accepted or ultimately approved by the FDA on a timely basis, if at all, or that
any products for which approval is obtained will be commercially successful. If
any of the Company's development programs are not successfully completed in a
timely fashion, required regulatory approvals are not obtained in a timely
fashion, or products for which approvals are obtained are not commercially
successful, the Company's business, financial condition and results of
operations will be materially and adversely affected. See "-- Early Stage of
Clinical Trials and Lack of Extensive Clinical Data;" "-- Uncertainty of Market
Acceptance;" "-- Government Regulation; No Assurance of Regulatory Approvals"
and "Business."
UNCERTAINTIES RELATED TO CLINICAL TRIALS AND LACK OF EXTENSIVE CLINICAL DATA
Although the Company's lead product candidate, CoStasis, is in clinical
trials in Europe and the United States, clinical data obtained to date has been
insufficient to demonstrate its safety and efficacy under applicable FDA
regulatory guidelines. Although the Company is currently conducting a
100-patient, multi-site, randomized, pivotal human clinical trial in Europe
using CoStasis in cardiothoracic surgery indications and expects that the
results of this trial will be sufficient to form the basis for an application
for CE Mark in Europe, significant additional clinical data will be required
prior to submission of a PMA application in the United States. There can be no
assurance that any of the Company's product candidates will receive CE Mark in
Europe or marketing approval from the FDA in a timely fashion, if at all.
Additionally, clinical trials may identify significant technical or other
obstacles that must be overcome prior to obtaining necessary regulatory or
international approvals. Such obstacles could delay progress in the development
and commercialization of the Company's current product candidates. Adverse
events related to the use of the Company's product candidates may occur during
clinical trials, and any such events may require suspension or termination of
clinical trials, and the filing of reports with the FDA and other applicable
U.S. and international regulatory authorities. Such events could negatively
impact the Company's ability to achieve successful development and
commercialization of its products. If the Company's products under development
do not prove to be safe and effective in clinical trials, or if the Company is
otherwise unable to commercialize these products successfully, the Company's
business, financial condition and results of operations will be materially and
adversely affected. See "Business" and "-- Government Regulation; No Assurance
of Regulatory Approvals."
UNCERTAINTY OF MARKET ACCEPTANCE
The Company's CoStasis atraumatic hemostat is a device designed to control
diffuse capillary and small vein bleeding, and the Company's CoSeal biosealant
is a device designed to seal anastomoses and sites of incision, in connection
with surgery. There can be no assurance that either of these products will gain
commercial acceptance among physicians, patients and health care payors, even if
necessary international and U.S. marketing approvals are obtained. The Company
believes that recommendations and endorsements by physicians will be essential
for market acceptance of its surgical products, and there can be no assurance
that any such recommendations or endorsements will be obtained. The Company
believes that surgeons will not
10
<PAGE> 13
use the Company's products unless they determine, based on clinical data and
other factors, that the products are an effective means of controlling bleeding
and sealing anastomoses and sites of incision, and that the clinical benefits to
the patient and cost savings achieved through use of these systems outweigh
their cost. Acceptance among physicians may also depend upon the Company's
ability to train surgeons and other potential users of the Company's products in
the application of sprayable surgical products, which they typically have not
used, and the willingness of such users to learn these new techniques.
Additional factors in achieving market acceptance may include the Company's
ability to address competition from U.S. and international medical device,
pharmaceutical and biopharmaceutical companies, to develop a marketing and sales
force, to form strategic partnerships and to manufacture price- and
cost-effective products. Failure of the Company's products to achieve
significant market acceptance will have a material adverse effect on the
Company's business, financial condition and results of operations. See
"-- Intense Competition;" "-- Lack of Marketing and Sales Capabilities;" and
"Business -- Products."
DEPENDENCE ON BOSTON SCIENTIFIC STOCK
Historically, Collagen has used sales of Boston Scientific stock to fund
operations and investments, and, in connection with the activities surrounding
the Distribution, Collagen transferred to the Company, effective January 1,
1998, all of its equity interest in Boston Scientific. As of March 31, 1998, the
Company owned approximately 1.1 million shares of Boston Scientific common
stock, valued at $75.5 million, based on a market price of $67.50 per share on
such date as reported on the New York Stock Exchange. The Company has
implemented a "protect" strategy based on purchases of put options and sales of
call options in combination, commonly known as an "equity collar," covering
650,000 shares of its Boston Scientific holdings. While the strategy is designed
to minimize downside risk of loss should the stock price decline below
approximately $63.00 and allow for limited upside participation should the stock
price rise above approximately $98.00, there can be no assurance that the
Company will be able to sell the remaining unhedged shares of Boston Scientific
common stock at attractive prices if, when and as needed. Failure to achieve
such sales could jeopardize the Company's ability to fund its operations and
require it to engage in additional financing alternatives, some of which might
be dilutive. The market price of Boston Scientific common stock is highly
volatile and, as a medical device manufacturer, the Company believes that Boston
Scientific is subject to a number of the same factors affecting its operations
as the Company. Readers are encouraged to review the Boston Scientific reports
Boston Scientific files with the Securities Exchange Commission for a detailed
description of the nature of Boston Scientific's business and the risks and
uncertainties associated with it. Any significant downward fluctuation in the
market price for Boston Scientific common stock could adversely impact the
Company's earnings due to lower amounts realized on any sales by the Company of
such stock and would decrease the value of the Company's total assets as stated
on its balance sheet resulting from a lower carrying value for the Boston
Scientific investment, which as of March 31, 1998, represented approximately 79%
of the value of the Company's total assets. See "-- Uncertainty of Access to
Capital;" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
NO PRIOR PUBLIC MARKET; VOLATILITY OF COMMON STOCK PRICE
Prior to the Distribution, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop or
be sustained after the Distribution, that sufficient market support will be
obtained or sustained or that the market price of the Common Stock will not
decline below the price on the Distribution Date or shortly thereafter. In
recent years, the stock market in general, and the stock prices of medical
device and life sciences companies in particular, have experienced extreme price
fluctuations, sometimes without regard to the operating performance of
particular companies. The market price of the Common Stock is likely to be
highly volatile and may be significantly affected by factors such as actual or
anticipated fluctuations in the Company's operating results, announcements of
technological innovations, new products, clinical trial results, announcements
regarding strategic alliances, domestic and international government regulation,
developments in patent or other proprietary rights, public concern as to the
safety of products developed by the Company or its competitors or other parties.
Additionally, changes in U.S. and international healthcare policies, future
sales of substantial amounts of Common Stock by existing stockholders, changes
in estimates of and comments by securities analysts and general market and
economic
11
<PAGE> 14
conditions may have an adverse effect on the market price of the Common Stock.
In addition, the realization of any of the risks described herein in "Risk
Factors" could have a dramatic and material adverse impact on the market price
of the Common Stock. Following a fluctuation in the market price of a
corporation's securities, securities class action litigation has often resulted.
There can be no assurance that such litigation will not occur in the future with
respect to the Company. Such litigation could result in substantial costs and a
diversion of management's attention and resources, which could have a material
adverse impact on the Company's business, financial condition and results of
operations. See "-- No Prior Public Market; Volatility of Common Stock Price;"
"-- Absence of History as an Independent Company;" "History of Operating Losses;
Accumulated Deficit;" "Uncertainty of Future Profitability;" "-- Dilutive Impact
of Future Equity Issuances;" and "Business."
INTENSE COMPETITION
The Company anticipates that it will compete with many domestic and foreign
medical device, pharmaceutical and biopharmaceutical companies and organizations
across each of its product categories and areas in which it is conducting
research and development activities. In the hemostatic and biosealant areas, the
Company believes in the United States that it will face strong competition from
existing methodologies for controlling bleeding and sealing wounds resulting
from surgery, such as hemostatic powders and sponges, collagen-based hemostats
and traditional sutures and staples marketed by companies such as Johnson &
Johnson, United States Surgical Corporation and American Home Products
Corporation. In addition, the Company believes that it will face competition
from more recent products and technologies, such as those developed by Focal,
Inc. ("Focal") and Fusion Medical Technologies, Inc. ("Fusion"). Outside of the
United States, other competitive products currently being marketed include
fibrin sealants, sold in Europe and the Pacific Rim countries by Immuno AG and
Centeon L.L.C. In addition, in the United States, there are several fibrin
sealants under development including those by the American Red Cross, Baxter
Healthcare Corporation, Convatec, a subsidiary of the Bristol-Myers Squibb
Company, Haemacure Corporation and V.I. Technologies, Inc. (Vitex). In addition
to conventional fibrin sealants, there are a number of other products in
late-stage development using either collagen or polymer technologies, made by
Focal and Fusion, as well as another class of sealants called cyanoacrylates. In
the orthopedics area, the Company's Collagraft bone graft products face
competition from synthetic bone graft substitutes from Interpore International,
and Osteotech, Inc. Additionally, several companies and institutions are engaged
in the development of collagen-based materials, techniques, procedures and
products for use in medical applications the Company anticipates addressing with
its current and proposed products and research programs.
Also, other recently developed technologies or procedures are, or may in
the future be, the basis of competitive products. There can be no assurance that
the Company's current competitors or other parties will not succeed in
developing alternative technologies and products that are more effective, easier
to use or more economical than those which have been or are being developed by
the Company or that would render the Company's technology and products obsolete
and uncompetitive in these fields. In such event, the Company's business,
financial condition and results of operations would be materially and adversely
affected.
Many of the Company's current and potential competitors, including, but not
limited to those listed above, have substantially greater financial,
technological, research and development, regulatory and clinical, marketing and
sales and personnel resources than the Company. These competitors may also have
greater experience in developing products, conducting clinical trials, obtaining
regulatory approvals, and manufacturing and marketing such products. Certain of
these competitors may obtain approval or clearance by the FDA or foreign
countries, achieve product commercialization or obtain patent protection earlier
than the Company. Any of these circumstances could materially and adversely
affect the Company. Also, to the extent the Company commences manufacturing
activities, it will also face competition with respect to manufacturing
efficiency and marketing capabilities, areas in which it currently has limited
experience. Failure of the Company to address competition in this area could
have a material adverse impact on the Company, its financial condition and
results of operations. See "Business -- Competition;"
"Business -- Manufacturing."
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<PAGE> 15
UNCERTAINTIES RELATED TO INTELLECTUAL PROPERTY
The Company's success will depend on its ability to obtain patent
protection for its products, preserve its trade secrets, prevent third parties
from infringing upon its proprietary rights, and operate without infringing upon
the proprietary rights of others, both in the United States and internationally.
There can be no assurance that the Company's pending or future patent
applications will issue, or that the claims of the Company's issued patents, or
any patents that may issue in the future, will provide any competitive
advantages for the Company's products or that they will not be successfully
challenged, narrowed, invalidated or circumvented in the future. Moreover,
litigation and interference or opposition proceedings associated with obtaining,
enforcing or defending patents or trade secrets is expensive and can divert the
efforts of technical and management personnel. The Company has filed patent
applications in certain foreign countries corresponding to certain patent
applications that it has filed in the United States and may file additional
patent applications inside and outside the United States. The Company believes
that obtaining foreign patents may be more difficult than obtaining domestic
patents because of differences in patent laws and believes the protection
afforded by foreign patents or any other foreign intellectual property
protection, if obtained, may be more limited than that provided domestically. In
addition, there can be no assurance that competitors will not seek to apply for
and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use, offer for sale, sell and import its products. The Company
is aware that certain medical device, pharmaceutical and other companies,
universities and research institutions have filed patent applications or have
issued patents relating to compositions and methods for wound closure and
adhesion prevention. In addition, the medical device and pharmaceutical
industries have been characterized by litigation regarding patents and other
intellectual property rights, and many companies in the medical device industry
have employed intellectual property litigation to gain a competitive advantage.
There can be no assurance that litigation will not be brought against the
Company by third parties in the future challenging the Company's patent rights
or claiming infringement by the Company of patents held by the third parties.
Because of the substantial length of time and expense associated with
bringing new products through the development and regulatory approval processes
in order to reach the marketplace, the medical products industry places
considerable importance on obtaining patent and trade secret protection for new
technologies, products and processes. While the Company intends to seek patent
protection for its proprietary technology, products and processes, there can be
no assurance as to the success or timeliness in obtaining any such patents, that
the breadth of claims obtained, if any, will provide adequate protection of the
Company's proprietary technologies, products and processes, or that the Company
will be able to adequately enforce any such claims to protect its proprietary
technology, products and processes. Because patent applications in the United
States are confidential until the patents issue, and publication of discoveries
in the scientific and patent literature tends to lag behind actual discoveries
by several months, the Company cannot be certain that Company inventors or
licensors were the first to conceive of inventions covered by pending patent
applications or that the Company was the first to file patent applications for
such inventions. The Company may desire or may be required to obtain licenses to
patents or proprietary rights of others. No assurance can be given that any
licenses required under any patents or proprietary rights of third parties would
be made available on terms acceptable to the Company, or at all. If the Company
does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design around or otherwise avoid such
patents, or it could find that the development, manufacture or sale of products
requiring such licenses is foreclosed.
Litigation may be necessary to defend against or assert claims of patent
infringement or invalidity, to enforce or defend patents issued to the Company,
to protect trade secrets or know-how owned by the Company, or to determine the
scope and validity of the proprietary rights of others. In addition,
interference proceedings in the U.S. Patent and Trademark Office, or opposition
proceedings in a foreign patent office, may be necessary to determine the
priority of inventions with respect to patent applications of the Company or its
licensors. Litigation, interference or opposition proceedings could result in
substantial costs to and diversion of effort by the Company, and adverse
determinations in any such proceedings could prevent the Company from
manufacturing, marketing or selling its products and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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<PAGE> 16
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with collaborative partners, vendors, suppliers,
employees and consultants. The Company also has invention or patent assignment
agreements with its employees and certain, but not all, commercial partners and
consultants. There can be no assurance that relevant inventions will not be
developed by a person not bound by an invention assignment agreement. There can
be no assurance that binding agreements will not be breached, that the Company
would have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently discovered by competitors.
See "-- Competition;" "Business -- Intellectual Property."
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVALS
The Company's existing and proposed products, its research and development
and planned commercialization activities are subject to regulation by numerous
governmental authorities, principally the FDA and corresponding state and
foreign regulatory agencies. The Federal Food, Drug and Cosmetic Act (the "FDC
Act"), as amended, the regulations promulgated thereunder, and other federal and
state statutes and regulations, govern, among other things, the preclinical and
clinical testing, manufacturing conditions, device safety, efficacy, labeling
and storage, record keeping, advertising and the promotion of medical devices
and drugs. Product development and approval within this regulatory framework
take a number of years and involve the expenditure of substantial resources.
Additionally, in order for the Company to market its products in Europe and
other foreign countries, the Company and/or its partners, if any, must obtain
required regulatory approvals and comply with extensive regulations governing
safety, quality and manufacturing processes. These regulations vary
significantly from country to country. The time required to obtain approval to
market the Company's products outside the United States may be longer or shorter
than that required in the United States. In order to market the products being
developed by the Company in the member countries of the European Union, the
Company will be required to obtain CE Mark certification. CE Mark certification
is an international symbol of adherence to quality assurance standards and
compliance with applicable European medical device directives. In the first half
of 1998, the Company completed a successful quality systems audit to the ISO
9001/EN46001 and Medical Devices Directive requirements, which is one of the
principal steps in the CE Mark process. The remainder of the CE Mark process
consists primarily of review by the approving body of additional documentation
submitted by the Company to document each product's clinical safety and
performance. Although a quality system audit has been completed, there can be no
assurance that the Company will be successful in completing the remainder of the
CE Mark certification process or obtaining CE Mark certification, in a timely
manner, if at all.
In the United States, medical devices are classified into three different
classes (Class I, Class II and Class III) on the basis of controls deemed
necessary to reasonably ensure the safety and effectiveness of the device. Class
I devices are subject to general controls (relating to labeling, premarket
notification and adherence to FDA's good manufacturing practices ("GMPs"),
recently codified in the quality system regulation (the "QSR")). Class II
devices are subject to general and special controls (relating to performance
standards, postmarket surveillance, patient registries, and FDA guidelines).
Class III devices are those which must receive premarket approval by the FDA to
ensure their safety and effectiveness. Class III devices are generally
life-sustaining, life-supporting and implantable devices, or new devices which
have been found not to be substantially equivalent to legally marketed devices.
Before a new medical device can be marketed, marketing clearance must be
obtained through a premarket notification under Section 510(k) of the FDC Act or
a premarket approval ("PMA") application under Section 515 of the FDC Act. A
510(k) clearance will typically be granted by the FDA if it can be established
that the device is substantially equivalent to a "predicate device," which is a
legally marketed Class I or Class II device or a preamendment Class III device
(i.e., one that has been marketed since a date prior to May 28, 1976) for which
the FDA has not called for PMAs. The FDA has been requiring an increasingly
rigorous demonstration of substantial equivalence and this may include a
requirement to submit human clinical trial data. It generally takes four to
twelve months from the date of a 510(k) submission to obtain clearance, but it
may take longer. The FDA may determine
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<PAGE> 17
that a medical device is not substantially equivalent to a predicate device, or
that additional information is needed before a substantial equivalence
determination can be made. A "not substantially equivalent" determination, or a
request for additional information, could prevent or delay the market
introduction of new products that fall into this category. For any devices that
are cleared through the 510(k) process, modifications or enhancements that could
significantly affect the safety or effectiveness, or that constitute a major
change in the intended use of the device, will require new 510(k) submissions.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a
preamendment Class III device for which the FDA has called for PMAs. A PMA
application must be supported by valid scientific evidence to demonstrate the
safety and effectiveness of the device, typically including the results of
clinical trials, bench tests, and laboratory and animal studies. The PMA must
also contain a complete description of the device and its components, and a
detailed description of the methods, facilities and controls used to manufacture
the device. In addition, the submission includes the proposed labeling,
advertising literature, and any training materials. The PMA can be expensive,
uncertain and lengthy, and a number of devices for which FDA approval has been
sought by other companies have never been approved for marketing. Upon receipt
of a PMA application, the FDA makes a threshold determination as to whether the
application is sufficiently complete to permit a substantive review. If the FDA
determines that the PMA application is sufficiently complete to permit a
substantive review, the FDA will accept the application for filing. Once the
submission is accepted for filing, the FDA begins an in-depth review of the PMA.
The FDA review of a PMA application generally takes one to three years from the
date the PMA is accepted for filing, but may take significantly longer. The
review time is often significantly extended by the FDA asking for more
information or clarification of information already provided in the submission.
During the review period, an advisory committee, typically a panel of clinicians
and others knowledgeable in the applicable field, may be convened to review and
evaluate the application and provide a recommendation to the FDA as to whether
the device should be approved. The FDA accords substantial weight to the
recommendation but is not bound by it. Toward the end of the PMA review process,
the FDA generally will conduct an inspection of the manufacturer's facilities to
ensure compliance with applicable QSR requirements, which include extensive
requirements relating to product design, manufacturing processes, testing,
control documentation and other quality assurance procedures.
If the FDA evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA may issue either an approval letter or an
approvable letter, which usually contains a number of conditions that must be
met in order to secure final approval of the PMA. When, and if, those conditions
have been fulfilled to the satisfaction of the FDA, the FDA will issue a PMA
approval letter, authorizing marketing of the device for certain indications. If
the FDA's evaluation of the PMA application or manufacturing facilities is not
favorable, the FDA will deny approval of the PMA application or issue a
"non-approvable" letter. The FDA may determine that additional clinical trials
are necessary, in which case the PMA may be delayed for one or more years while
additional clinical trials are conducted and submitted in an amendment to the
PMA. Modifications to a device that is the subject of an approved PMA, its
labeling or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to a PMA often require the submission of
the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered by the original PMA.
If human clinical trials of a device are required, either for a 510(k)
premarket notification or a PMA application, and the device presents a
"significant risk," the sponsor of the trial must file an investigational device
exemption ("IDE") application prior to commencing human clinical trials. The IDE
application must be supported by data, typically including the results of animal
and laboratory testing. If the IDE application is approved by the FDA and one or
more appropriate Institutional Review Boards ("IRBs"), human clinical trials may
begin at a specific number of investigational sites with a specific number of
patients, as approved by the FDA. If the device presents a "nonsignificant risk"
to the patient, a sponsor may begin the clinical trial after obtaining approval
for the study by one or more appropriate IRBs, without the need for FDA review.
Submission of an IDE provides no assurance that the FDA will approve the IDE.
Even if the IDE is approved, there can be no assurance that the FDA will
determine that the data derived from the studies support the
15
<PAGE> 18
safety and efficacy of the device or warrant the continuation of clinical
studies. Sponsors of clinical trials are permitted to sell investigational
devices distributed in the course of the study, provided such compensation does
not exceed recovery of the costs of manufacture, research, development and
handling. An IDE supplement must be submitted to and approved by the FDA before
a sponsor or investigator may make a change to the investigational plan that may
affect its scientific soundness or the rights, safety or welfare of human
subjects.
The Company anticipates that its products in development will be regulated
as Class III medical devices and will require PMA approval prior to being
marketed in the United States. If this is the case, the Company will need to
obtain for each of its products an IDE in order to conduct clinical trials in
the United States. There can be no assurance that the Company will receive Class
III medical device designation for its products or that it will be able to
obtain IDEs for each of its planned products or that data from such clinical
studies if and when commenced will demonstrate the safety and effectiveness of
the Company's product or will adequately support a PMA application.
If clearance or approval for a given product of the Company is obtained,
such product will be subject to pervasive and continuing regulation by the FDA.
For example, the Company will be subject to routine inspection by the FDA and
will have to comply with the host of regulatory requirements that usually apply
to medical devices marketed in the United States, such as labeling regulations,
applicable QSR requirements, the Medical Device Reporting ("MDR") regulations
(which require a manufacturer to report to the FDA certain types of adverse
events involving its products), and the FDA prohibitions against promoting
products for unapproved or "off-label" uses. Any failure by the Company to
comply with applicable regulatory requirements could result in the detention or
seizure of products, issuance of an enjoinment of future product activities and
the assessment of civil and criminal penalties against the Company, its officers
and its employees. Failure to comply with the regulatory requirements could have
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, regulations regarding the manufacture and
sale of the Company's products are subject to change. The Company cannot predict
the effect, if any, that such changes might have on its prospects, business,
financial condition or results of operations.
In November 1997, the President of the United States signed into law the
FDA Modernization Act of 1997. This legislation makes changes to the device
provisions of the FDC Act and other provisions in the FDC Act affecting the
regulation of devices. Among other things, the changes will affect the IDE,
510(k) and PMA processes, and also will affect device standards and data
requirements, procedures relating to humanitarian and breakthrough devices,
tracking and postmarket surveillance, accredited third party review, and the
dissemination of off label information. The Company cannot predict how or when
these changes will be implemented or what effect the changes will have on the
regulation of the Company's products.
Although the Company anticipates that its products in development will be
classified by the FDA as medical devices, in the event that a given product is
classified by the FDA as a drug, it will require FDA approval of a new drug
application ("NDA") prior to commercialization in the United States. The NDA
process is generally more onerous, costly and lengthy than the PMA process,
often requiring more extensive preclinical and clinical testing. Many products
for which NDAs have been submitted by other companies have never been approved
for marketing. Before clinical studies of a new drug can begin, an
investigational new drug ("IND") application must be submitted to the FDA. FDA
regulations provide that human clinical trials may begin thirty days following
submission of an IND application, unless the FDA advises otherwise or requests
additional information, clarification or additional time to review the
application. An IND application contains extensive preclinical data and
information about the drug. There can be no assurance that the Company will
develop sufficient data and information to submit an IND for its products or
that such data and information if submitted, would be sufficient for the
purposes of commencing clinical studies of the products. Delays in the receipt
of or failure to obtain FDA authorization to begin or continue clinical trials
could have a material adverse effect on the Company's business, financial
condition or results of operations.
The FDA regulates the manufacturing, product testing, and marketing of both
medical devices and drugs. Manufacturers of drugs are required to comply with
applicable GMP and, in the case of medical devices, QSR
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requirements, which include requirements relating to product design,
manufacturing processes, product testing, and quality assurance, as well as the
corresponding maintenance of records and documentation. There is no assurance
that the Company will be able to comply with the applicable QSR requirements. In
addition, the Company is required to provide information to the FDA on death or
serious injuries alleged to have been associated with the use of its medical
devices, as well as product malfunctions that would likely cause or contribute
to death or serious injury if the malfunction were to recur. Failure of the
Company to comply with the QSR regulation, or other FDA regulatory requirements,
could have a material adverse effect on the Company's business, financial
conditions, or results of operations.
CoStasis contains thrombin, which is a FDA-licensed biological drug.
Consequently, the FDA considers CoStasis to be a combination product subject to
jurisdiction by the Center for Biologics Evaluation and Research ("CBER") and
the Center for Devices and Radiological Health ("CDRH"). The FDA has assigned
lead review responsibility to CDRH following a "Request for Designation"
determination by the FDA in September 1996. The Company believes that this
decision was significant, as fibrin sealants containing human plasma are
regulated as biological drugs, which may substantially increase the duration and
complexity of their regulatory approval processes compared to that of CoStasis.
The collagen used in the Company's products is derived from the cow hides
of U.S. cattle. Bovine Spongiform Encephalopathy ("BSE") is a disease, initially
reported in cattle in the United Kingdom, characterized by degenerative lesions
of the central nervous system. The source of infections in animals derives from
eating infected sheep-derived feed. While the disease has been reported in
European countries, the Company is not aware of any reports of BSE in U.S.
cattle to date and, currently, the Company relies on a "closed herd" of U.S.
cattle to provide its bovine collagen-based products. There can be no assurance
that the various foreign or domestic regulatory authorities will not raise
issues regarding BSE or other matters which may adversely affect the Company's
ability to manufacture, market or sell its bovine collagen-based products, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
THIRD PARTY REIMBURSEMENT
Reimbursement and health care payment systems in international markets vary
significantly by country. In connection with international product
introductions, the Company and any future strategic marketing partners may be
required to seek international reimbursement approvals. If required, there can
be no assurance that any such approvals will be obtained in a timely manner, or
at all, and failure to receive such international reimbursement approvals could
have an adverse effect on market acceptance of the Company's products in the
international markets in which such approvals are sought.
In the United States, health care providers, such as hospitals and
physicians, that purchase medical devices similar to the Company's products,
generally rely on third-party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or part of the
cost of surgical procedures. The Company anticipates that in a prospective
payment system, such as the DRG system utilized by Medicare, and in many managed
care systems used by private health care payors, there will be no separate,
additional reimbursement for the Company's products. Accordingly, the Company
believes that there will be no procedure-specific reimbursement codes for the
Company's products and therefore no assurance that reimbursement for the
Company's products will be available in the United States or in international
markets under either governmental or private reimbursement systems. Furthermore,
the Company could be adversely affected by changes in reimbursement policies of
governmental or private health care payors. Failure by physicians, hospitals and
other users of the Company's products to obtain sufficient reimbursement from
health care payors for procedures in which the Company's products are used or
adverse changes in governmental and private third party payors' policies toward
reimbursement for such procedures would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
business may also be materially and adversely affected by the continuing efforts
of government and third-party payors to contain or reduce the costs of health
care through various means. See "Business -- Third Party Reimbursement."
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DILUTIVE IMPACT OF FUTURE EQUITY ISSUANCES
Holders of Common Stock will experience dilution to the extent that
additional shares of Common Stock are issued by the Company and to the extent
that options to purchase Common Stock are exercised. Currently, the Company has
authorized (i) options to purchase 2,607,000 shares of Common Stock under the
1998 Stock Option Plan, of which it anticipates options to purchase
approximately 2,447,000 shares of Common Stock will be issued and outstanding on
or shortly after the Distribution Date; (ii) options to purchase 268,000 shares
of Common Stock under the Directors' Plan, of which it anticipates options to
purchase 30,000 shares of Common Stock will be issued and outstanding on or
shortly after the Distribution Date; and (iii) 250,000 shares of Common Stock
reserved for issuance under the Company's Employee Stock Purchase Plan, none of
which have been issued.
LIMITED MANUFACTURING CAPACITY
The Company anticipates that it will manufacture and package its final
products and that it will use outside contractors for other functions, such as
non-proprietary, high volume processes. There can be no assurance that the
Company will be able to attract, train and retain the required personnel or will
be able to increase its manufacturing capability to manufacture commercial
quantities of its planned products in a timely manner, or at all. Manufacturers
often encounter difficulties in scaling up production of their products,
including problems involving production yields, quality control and assurance,
component supply and shortages of qualified personnel and the Company may
encounter similar problems. The Company can make no assurance that its
manufacturing scale-up efforts will be successful, or, that if needed,
high-volume manufacturing can be established or maintained at commercially
reasonable costs on a timely basis, if at all. Any of these factors could have
an material adverse effect on the Company's ability to develop and commercialize
its products, which in turn would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company purchases raw materials used in its products from various
suppliers. For example, the Company purchases all of its requirements for
collagen materials from Collagen, pursuant to the terms of the Intercompany
Agreements. These materials have generally been readily available in the
marketplace and have not been the subject of shortages. There can, however, be
no assurance that the Company or its suppliers or contract manufacturers will
not experience materials shortages in the future. In addition, Collagen relies
on a "closed herd" of cattle in order to produce its bovine collagen-based
products. In the event of any material diminution in the size of the herd for
any reason, including accident or disease, Collagen's ability to quickly
increase the supply of acceptable cattle is quite limited. Any such diminution
would have a material adverse effect on the Company's ability to sell bovine
collagen-based products and, as a result, the Company's business, financial
condition and results of operations. Any such future shortages of materials or
components could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company is also required to register as a medical device manufacturer
with the FDA and to list its products with the FDA. As such, the Company is
subject to inspections by the FDA for compliance with applicable QSR
requirements, which include elaborate testing, control documentation and other
quality assurance procedures. In addition, prior to international
commercialization, the Company will be required to attain and maintain
compliance with ISO 9001 standards. Failure to either attain or maintain
compliance with the applicable regulatory requirements of various regulatory
agencies would have a material adverse effect on the Company's business,
financial condition and results of operations. Further, the Company and the
third-party manufacturers of its products are required to comply with various
FDA requirements for design, safety, advertising and labeling. The Company has
not yet undergone an FDA QSR inspection and does not anticipate that it will
undergo such an inspection until after submission of its initial PMA application
for its CoStasis hemostat product. See "Business -- Manufacturing."
Complex medical devices, such as the Company's products, can experience
performance problems in the field that require review and possible corrective
action by the manufacturer. There can be no assurance that component failures,
manufacturing errors or design defects that could result in an unsafe condition
or injury to the patient will not occur. If any such failures or defects were
deemed serious, the Company could be required
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to withdraw or recall products, which could result in significant costs to the
Company. There can be no assurance that market withdrawals or product recalls
will not occur in the future. Any future product problems could result in market
withdrawals, recalls of products, or product liability litigation which could
have a material adverse affect on the Company's business, financial condition or
results of operations.
LACK OF MARKETING AND SALES CAPABILITIES
The Company currently has no experience in marketing or selling its
products under development and does not have a significant marketing and sales
staff. In order to achieve commercial success for any product approved by the
FDA, the Company must either develop a marketing and sales force or enter into
arrangements with third parties to market and sell its products. If the Company
develops its own marketing and sales capabilities, it will compete with other
companies that currently have experienced and well-funded marketing and sales
operations. To the extent that the Company enters into co-promotion or other
marketing and sales arrangements with other companies, any revenues to be
received by the Company will be dependent on the efforts of others, and there
can be no assurance that such efforts will be successful. Additional factors in
achieving market acceptance may include the Company's ability to address
competition from domestic and foreign medical device, pharmaceutical and
biopharmaceutical companies, develop a marketing and sales force, form strategic
partnerships and manufacture price- and cost-effective products. See
"Business -- Sales, Marketing and Distribution."
UNCERTAINTY OF ABILITY TO ATTRACT AND RETAIN KEY MANAGEMENT, EMPLOYEES AND
CONSULTANTS
The Company is highly dependent on the principal members of its management
and scientific staff. The loss of services of any of these personnel could
impede the achievement of the Company's development objectives. Furthermore,
recruiting and retaining qualified scientific personnel to perform research and
development work in the future will also be critical to the Company's success.
There can be no assurance that the Company will be able to attract and retain
personnel on acceptable terms given the competition among biotechnology,
pharmaceutical and healthcare companies, universities and non-profit research
institutions for experienced scientists. In addition, the Company relies on
members of its Scientific Advisory Board and Clinical Advisory Board and a
significant number of consultants to assist the Company in formulating its
research and development strategy. All of the Company's consultants and the
members of the Company's Scientific Advisory Board and Clinical Advisory Board
are employed by employers other than the Company, and may have commitments to,
or advisory or consulting agreements with, other entities that may limit their
availability to the Company. See "Management."
UNCERTAINTY OF ACCESS TO CAPITAL
The Company may require substantial additional funding in order to finance
its research and product development programs, including for preclinical testing
and clinical trials of its product candidates, for operating expenses and for
the pursuit of regulatory approvals for its product candidates, and may require
additional funding for establishing manufacturing and marketing capabilities in
the future. The Company currently believes that its existing capital resources,
including its holdings in Boston Scientific and interest income from cash
investments, will be sufficient to satisfy its current and projected funding
requirements. The Company's future capital requirements will depend on many
factors, including continued scientific progress in its research and development
programs, the magnitude of these programs, progress with preclinical testing and
clinical trials, the time and costs involved in obtaining regulatory approvals,
if any, the costs involved in filing and prosecuting patent applications and
enforcing patent claims, the impact of competing technological and market
developments, the establishment of strategic alliances, the cost of
manufacturing and of commercialization activities and the cost of product
in-licensing. There can be no assurance that the Company's cash, cash
equivalents and marketable securities, including its Boston Scientific stock and
interest income earned on cash investments, will be adequate to satisfy its
capital and operating requirements and the Company may need to pursue
opportunities to obtain debt or equity financing. There can be no assurance that
such additional financing will be available on reasonable terms, if at all. Any
additional equity financings would be dilutive to the Company's stockholders. If
adequate funds are not available, the Company may be required to curtail
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significantly one or more of its research and development programs or obtain
funds through arrangements that may require it to relinquish rights to certain
of its technologies or product candidates. See "-- Dependence on Boston
Scientific Stock" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
POTENTIAL PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE COVERAGE
The use of any of the Company's potential products in clinical trials, and
the sale of any approved products, may expose the Company to liability claims
resulting from the use of its products. These claims might be made directly by
consumers, health care providers or by pharmaceutical companies or others
selling such products. The Company has obtained product liability insurance
coverage, subject to certain policy limits, for its clinical trials. The Company
intends to expand its insurance coverage to include the sale of commercial
products if marketing approval is obtained for products in development. However,
insurance coverage is becoming increasingly expensive, and no assurance can be
given that the Company will be able to maintain insurance coverage at a
reasonable cost or in sufficient amounts to protect the Company against losses
due to liability. There can also be no assurance that the Company will be able
to obtain commercially reasonable product liability insurance for any products
approved for marketing. A successful product liability claim or series of claims
brought against the Company could have a material and adverse effect on its
business, financial condition and results of operations. See
"Business -- Product Liability and Insurance."
HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS
The Company's research and development processes involve the controlled use
of hazardous materials. The Company is subject to federal, state and local laws
and regulations governing the use, manufacture, storage, handling and disposal
of such materials and certain waste products. Although the Company believes that
its safety procedures for handling and disposing of such materials comply with
the standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result and any such liability could exceed the resources of the Company.
The Company believes that it is in compliance in all material respects with
applicable environmental laws and regulations. Accordingly, it does not expect
to make material capital expenditures for environmental control facilities in
the near-term. However, there can be no assurance that it will not be required
to incur significant costs to comply with environmental laws and regulations in
the future, or that the operations, business or assets of the Company will not
be materially and adversely affected by the costs of compliance with current or
future environmental laws or regulations.
POTENTIAL ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation does not provide for cumulative
voting in the election of directors. In addition, the Board of Directors of the
Company may issue shares of Preferred Stock without stockholder approval on such
terms as the Board may determine. The Company's Bylaws require advance notice of
matters of business to be brought before meetings of stockholders. The Company's
Certificate of Incorporation prohibits stockholders from acting by written
consent. The rights of the holders of Common Stock will be subject to, and may
be adversely affected by, the rights of the holders of any Preferred Stock that
may be issued in the future. Further, the Company is subject to Section 203 of
the Delaware General Corporation Law which, subject to certain exceptions,
restricts certain transactions and business combinations between a corporation
and a stockholder owning 15% or more of the corporation's outstanding voting
stock (an "interested stockholder") for a period of three years from the date
the stockholder becomes an interested stockholder. See "Description of Capital
Stock."
ABSENCE OF CASH DIVIDENDS
The Company has never paid any cash dividends and does not anticipate
paying cash dividends in the foreseeable future. See "Dividend Policy."
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THE DISTRIBUTION
BACKGROUND AND REASONS FOR THE DISTRIBUTION
The Distribution is designed to separate the aesthetic and reconstructive
cosmetic products business of Collagen from the surgical tissue repair and
regeneration business of the Company. The Distribution will result in the
formation of two publicly traded companies, each of which will pursue an
independent strategic path. Collagen's Board believes the separation will offer
both new entities the opportunity to pursue strategic objectives appropriate to
different business objectives and to create targeted incentives for their
management and key employees. In addition, the Distribution is expected to offer
each entity the financial flexibility to raise capital on a more cost effective
basis. Collagen's Board considered the following in making its decision to
approve the Distribution:
Business and Market Rationale
The Distribution will enable two companies with distinct strategic,
financial, and operating goals to adopt strategies and pursue objectives
appropriate to their respective core businesses. The Distribution will allow
each entity to pursue its corporate objectives independent of the operations and
policies of the other. Following the Distribution, Collagen will continue to
focus on its aesthetic and reconstructive cosmetic business. This business is
expected to be cash flow positive and focused on further product development and
commercialization. Collagen plans to implement a strategy which will maintain
its leadership in the intensely competitive aesthetic and reconstructive product
market. This strategy will focus on extending Collagen's market penetration,
building a development platform and continuing to develop the innovative
products which have been a historical source of Collagen's growth. The Company
in turn will focus on the development, clinical testing and market launch of
bioresorbable hemostatic devices and biosealants for tissue repair and
regeneration in surgical markets, as well as activities relating to the
marketing of Collagraft and the Intermediate Products.
Cost of Equity Capital
Following the Distribution, both Collagen and the Company may elect to
raise additional capital to facilitate growth. As independent publicly traded
entities, Collagen and the Company will each have greater flexibility in their
equity capital raising efforts and will be able to more efficiently pursue their
respective capital raising strategies in both the private and public markets.
Moreover, the Distribution will enable both Collagen and the Company to lower
the effective cost of equity capital borne by current Collagen stockholders.
Management Focus and Employee Incentives
The Distribution will enable both companies to own and focus on their
respective businesses. Collagen's aesthetic and reconstructive products business
and the Company's biocompatible materials business are sufficiently distinct in
terms of technology, stage of product development and commercialization, market
focus and other factors such that it is more advantageous for both to operate
and be managed as separate entities. The Distribution is expected to allow
management and employees of each company to focus on their respective paths of
innovation in product development and marketing, thereby enhancing the ability
of each to optimize productivity and growth. In addition, the Distribution is
intended to allow each company to provide both management and employees with
targeted equity compensation arrangements thereby optimizing the economic
incentives each entity will be able to provide its respective employees.
FAIRNESS OPINION
Opinion of Collagen's Financial Advisor
Lehman Brothers has served as financial advisor to Collagen in connection
with the Distribution and delivered a written opinion (the "Lehman Opinion") to
Collagen's Board dated April 16, 1998, to the effect that, as of the date of the
Lehman Opinion and based on and subject to the assumptions, limitations and
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qualifications set forth therein, from a financial point of view, the
Distribution is fair to the stockholders of Collagen.
THE FULL TEXT OF THE LEHMAN OPINION IS ATTACHED AS APPENDIX A TO THIS
INFORMATION STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. REFERENCE SHOULD
BE MADE TO THE LEHMAN OPINION FOR ASSUMPTIONS MADE, PROCEDURES FOLLOWED AND
OTHER MATTERS CONSIDERED BY LEHMAN BROTHERS. THE SUMMARY OF THE LEHMAN OPINION
SET FORTH HEREIN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
THE LEHMAN OPINION.
No limitations were imposed by Collagen on the scope of Lehman Brothers'
investigation or the procedures to be followed by Lehman Brothers in rendering
its opinion, except that Lehman Brothers was not authorized to solicit, and did
not solicit, any indications of interest from any third party with respect to
the purchase of all or part of Collagen's or the Company's business. In arriving
at its opinion, Lehman Brothers did not ascribe a specific range of values to
Collagen, but rather made its determination as to the fairness of the
Distribution to the Collagen stockholders, from a financial point of view, on
the basis of the financial and comparative analyses described below. The Lehman
Opinion is for the use and benefit of the Collagen Board and was rendered to the
Collagen Board in connection with its consideration of the Distribution. The
Lehman Opinion is not intended to be and does not constitute a recommendation to
any holder of the Collagen Common Stock as to how such stockholder should vote
with respect to the Distribution. Lehman Brothers was not requested to opine as
to, and its opinion does not address, Collagen's underlying business decision to
proceed with or effect the Distribution.
In arriving at its opinion, Lehman Brothers reviewed and analyzed: (1) the
specific terms of the Distribution, (2) the Proxy Statement, Collagen's annual
report on Form 10-K for the year ended June 30, 1997 and such other publicly
available information concerning Collagen that Lehman Brothers believed to be
relevant to its analysis, (3) financial and operating information with respect
to the business, operations and prospects of Collagen and the Company, furnished
to Lehman Brothers by Collagen, (4) a trading history of Collagen Common Stock
and a comparison of that trading history with those of other companies that
Lehman Brothers deemed relevant, (5) a comparison of the historical financial
results and present financial condition of Collagen with those of other
companies that Lehman Brothers deemed relevant, and (6) a comparison of the
historical financial results and present financial condition of the Company with
those of other companies that Lehman Brothers deemed relevant. In addition,
Lehman Brothers had discussions with the management of Collagen concerning the
businesses, operations, assets, financial conditions and prospects of Collagen
and the Company (including on a pro forma basis) and undertook such other
studies, analyses and investigations as it deemed appropriate.
In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of such
information and further relied upon the assurances of management of Collagen
that they were not aware of any facts or circumstances that would make such
information inaccurate or misleading. With respect to the financial projections
of Collagen and the Company following the Distribution, upon advice of Collagen,
Lehman Brothers assumed that such projections were reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
management of Collagen as to the future financial performance of Collagen and
the Company and that Collagen and the Company will perform substantially in
accordance with such projections. In arriving at its opinion, Lehman Brothers
did not conduct physical inspection of the properties and facilities of Collagen
or the Company and did not make or obtain any evaluations or appraisals of the
assets or liabilities of Collagen or the Company. Lehman Brothers has assumed
that the Distribution will be a tax-free transaction to the stockholders of
Collagen. The Lehman Opinion necessarily is based upon market, economic and
other conditions as they exist on, and can be evaluated as of, the date of the
Lehman Opinion.
The process by which securities trading markets establish a market price
for any security is complex, involving the interaction of numerous factors, and
market prices will fluctuate with changes of, among other factors, the financial
condition, business and prospects of the issuer and comparable companies and
economic and financial market conditions. In addition, trading in shares of the
Company will likely be characterized by a period of redistribution among
stockholders of Collagen who receive such shares in the Distribution, which
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may temporarily depress the market price of such shares during such period.
Accordingly, Lehman Brothers expresses no opinion as to the prices at which
shares of Collagen Common Stock or the Company's Common Stock actually will
trade following the consummation of the Distribution. The Lehman Opinion should
not be viewed as providing any assurances that the combined market value of the
shares of Collagen Common Stock after consummation of the Distribution and the
shares of the Company's Common Stock to be received by a stockholder of Collagen
pursuant to the Distribution will be in excess of the market value of the shares
of Collagen Common Stock owned by such stockholder at any time prior to
announcement of consummation of the Distribution.
The following is a summary of certain financial and comparative analyses
performed by Lehman Brothers and presented to the Collagen Board.
Lehman Brothers compiled financial and stock market statistics for a number
of comparable medical technology and healthcare companies for both Collagen and
the Company. For Collagen, these companies were divided into: (i) medical
technology companies: Biomatrix, Inc., EMPI, Inc., Lifecore Biomedical, Inc.,
ReSound Corporation, UroMed Corporation, VISX, Inc. and Vivus, Inc.; (ii)
cosmetic laser companies: Coherent, Inc. and Palomar Medical Technologies, Inc.;
and (iii) medical collagen technology companies: Integra Lifesciences
Corporation, Kensey Nash Corporation and Perclose, Inc. No single company or
group of companies is directly comparable to Collagen's business. Based on
publicly available information and various assumptions and estimates as
published by IBES, Lehman Brothers calculated various arithmetic and statistical
comparisons, including market values, price earnings ratios and price earning
ratios divided by each company's respective 5-year median growth rate.
A separate comparable company analysis was developed for the Company. These
comparable companies were divided into: (i) tissue repair and wound healing
companies: Advanced Tissue Sciences, Inc., Creative Biomolecules, Inc., Genzyme
Corporation (Tissue Repair), Integra Lifescience Corporation, Lifecore
Biomedical, Inc. and Organogenesis, Inc.; (ii) orthopedic related companies:
Innovasive, Orthologic Corporation and Osteotech, Inc.; and (iii) surgical wound
healing and tissue repair companies: Anika Corp., Closure Medical Corporation,
Cryolife, Inc., Focal, Inc., Fusion Medical Technologies, Inc., Gliatech, Inc.
and ThermoGenesis Corporation. Based on publicly available information and
various assumptions and estimates as published by IBES, Lehman Brothers
calculated various arithmetic and statistical comparisons, including market
values, technology values and a comparison of technology platforms.
Lehman Brothers also analyzed Collagen's historical stock price performance
on an absolute basis and compared to its comparable companies and the Standard &
Poor's 400 index. The analysis indicated that the market price of Collagen
Common Stock has underperformed the comparable companies relative to most of the
ratios and comparisons analyzed.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant methods of financial and comparative analysis
and the application of those methods to the particular circumstances and,
therefore, such an opinion is not readily susceptible to summary description.
Furthermore, in arriving at its opinion, Lehman Brothers did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgements as to the significance and relevance of each factor and
analysis. Accordingly, Lehman Brothers believes that its analyses must be
considered as a whole and that considering any portion of such analyses and
factors, without considering all analyses and factors, could create a misleading
or incomplete view of the process underlying its opinion. In its analyses,
Lehman Brothers made numerous assumptions with respect to industry performance,
general business and economic conditions and other matters, many of which are
beyond the control of Collagen. Any estimates contained in these analyses are
not necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than as set forth
therein. In addition, analyses relating to the value of businesses do not
purport to be appraisals or reflect the prices at which businesses actually may
be sold.
Lehman Brothers is an internationally recognized investment banking firm
and, as part of its investment banking activities, is regularly engaged in the
evaluation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. The Collagen Board
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selected Lehman Brothers because of its expertise, reputation and familiarity
with Collagen in particular and the medical technology industry and overall
healthcare industry in general and because its investment banking professionals
have substantial experience in transactions similar to the Distribution.
As compensation for its services in connection with the Distribution,
Lehman Brothers has a signed engagement letter from Collagen which includes a
fee of $350,000 upon the delivery of its fairness opinion, which will be
credited against a success fee of $500,000 based upon the consummation of the
Distribution. In addition, Collagen has agreed to reimburse Lehman Brothers for
its reasonable expenses incurred in connection with its engagement and to
indemnify Lehman Brothers and certain related persons for certain liabilities
that may arise out of its engagement by Collagen and the rendering of the Lehman
Opinion.
In the ordinary course of its business, Lehman Brothers may actively trade
in the equity securities of Collagen for its own account and for the accounts of
Lehman Brothers' customers and, accordingly, may at any time hold a long or
short position in such securities.
MANNER OF EFFECTING THE DISTRIBUTION
In the event that the Collagen stockholders approve the Distribution
Proposal and all other conditions to the Distribution are satisfied, it is
expected that the distribution of shares of the Company's Common Stock will be
made on or shortly after the Distribution Date on a pro rata basis to the
Collagen Holders. Collagen currently intends to use a direct registration system
to implement the distribution of shares of the Company's Common Stock in the
Distribution. On the Distribution Date, a certificate representing all issued
and outstanding shares of the Company's Common Stock will be delivered by
Collagen to the Distribution Agent. As soon as practicable thereafter, an
account statement will be mailed to each stockholder stating the number of
shares of the Company's Common Stock received by such stockholder in the
Distribution. Following the Distribution, Collagen Holders may request physical
certificates for their shares of Common Stock. No fractional shares will be
issued, and stockholders who would be entitled to receive a fractional share
will instead receive a whole share of Collagen. The Collagen Holders will
receive shares of Common Stock on the basis of the distribution ratio of one (1)
share of the Company's Common Stock for every one (1) share of Collagen Common
Stock held on the Record Date. All shares of Common Stock issued in the
Distribution will be fully paid and nonassessable and the Holders thereof will
not be entitled to preemptive rights.
No Collagen Holder will be required to pay any cash or other consideration
for Common Stock received in the Distribution or to surrender or exchange shares
of Collagen Common Stock in order to receive the Common Stock. Certificates
representing outstanding shares of Collagen Common Stock will continue to
represent Collagen Common Stock, as well as rights to purchase shares of
Collagen's Series A Preferred Stock pursuant to the Rights Agreement dated as of
November 28, 1994 between Collagen and The Bank of New York as Rights Agent.
CONDITIONS; TERMINATION
The Distribution is conditioned upon the satisfaction of the following
conditions: (1) approval by the Collagen stockholders of the Distribution; (2)
receipt by Collagen of an IRS ruling that, for U.S. federal income tax purposes,
the Distribution will not result in recognition of taxable income or loss by
Collagen or stockholders of Collagen; (3) receipt of any necessary material
government approvals or third party consents; (4) no pending order, injunction
or decree preventing the consummation of the distribution; and (5) no event
shall have occurred that, in the judgment of Collagen's Board, would result in
the Distribution having a material adverse effect on Collagen, its affiliates or
its stockholders.
The Collagen Board does not intend to waive any of the conditions. If
Collagen does not receive the ruling from the IRS, and the Collagen Board
decides to waive the tax-ruling condition to the Distribution, Collagen will
distribute revised proxy materials and resolicit proxies. Even if all the above
conditions are satisfied, Collagen and the Company may cancel or defer the
Distribution and the related transactions described in the Collagen 1998 Proxy
Statement at any time prior to the Distribution Date. See "Relationship Between
Collagen and the Company After the Distribution."
24
<PAGE> 27
INTERESTS OF CERTAIN PERSONS
As of March 31, 1998, six of the members of the Collagen Board and eight
executive officers of Collagen beneficially held outstanding shares of Collagen
Common Stock. Each such member will therefore benefit from and have a direct or
indirect interest in the approval of the Distribution transactions.
RELATIONSHIP BETWEEN THE COMPANY AND COLLAGEN AFTER THE DISTRIBUTION
Effective January 1, 1998, Collagen contributed its research and
development programs for hemostatic devices, biosealants, orthopedics products
and programs and recombinant human collagen and thrombin to the Company.
Collagen also contributed various equity investments to the Company, including
all of its holdings in Boston Scientific and Innovasive, which had an aggregate
market value of $83.9 million at March 31, 1998. The Company and Collagen have
entered into various agreements to provide for an orderly transition of matters
and to govern certain ongoing matters between the two entities and provide a
mechanism for transitioning license, supply, distribution, research and
development, tax, service and other agreements in connection with the
Distribution. These agreements, (the "Intercompany Agreements"), which are
summarized below are qualified in their entirety by reference to the agreements
as filed.
Separation and Distribution Agreement. The separation and distribution
agreement (the "Distribution Agreement") provides for, among other things, the
principal corporate transactions required to effect the Distribution, the
allocation of the assets and liabilities to the Company and Collagen after the
Distribution and the conditions precedent to the Distribution. Subject to
certain exceptions described below, the Distribution Agreement contains
provisions designed principally to transfer to the Company the assets related to
and the personnel currently involved in the Transferred Businesses and financial
responsibility for known and contingent or unknown liabilities of the
Transferred Businesses. In addition, certain other assets and liabilities of
Collagen were contributed to, or assumed by, the Company which include, among
others, certain fixed assets, cash and cash equivalents, stock in third party
companies, including its security holdings in Boston Scientific which had an
aggregate market value of $75.5 million at March 31, 1998, accounts receivable,
inventories, accounts payable, existing contracts and ongoing and potential
litigation. Pursuant to the Distribution Agreement, Collagen and the Company
will provide each other general indemnities for claims arising from the
activities of Collagen prior to the Distribution and the activities of Collagen
and the Company after the Distribution. The Distribution may be canceled or
certain conditions of the Distribution may be waived at any time prior to the
Distribution. Such conditions include, among others, the receipt by Collagen of
a private letter ruling from the IRS as to the tax-free nature of the
Distribution and that no event or development shall have occurred that in the
judgment of the Collagen Board of Directors would result in the distribution
having a material adverse effect on Collagen or its stockholders.
Supply Agreements. Collagen and the Company have entered into certain
supply agreements, effective January 1, 1998, which provide for the supply by
Collagen to the Company of certain collagen-based products and materials for the
Company's own use and supply to third parties for a limited time prior to the
Company developing its own manufacturing facilities or locating an alternate
manufacturing source. Pursuant to the Collagraft Supply Agreement, Collagen will
supply to the Company its requirements for Collagraft in order for the Company
to fulfill its obligations under its agreement with Zimmer; until the agreement
with Zimmer is terminated. Pursuant to the Collagen Supply Agreement, Collagen
will supply to the Company its requirements for certain collagen-based materials
and products for its own use and for supply to third parties until at least
March 15, 2004.
Assignment And License Agreement. Collagen and the Company have entered
into an assignment and license agreement, effective January 1, 1998 (the
"Assignment and License Agreement"), which, among other things, allocates
Collagen's technology and intellectual property between the Company and
Collagen. Pursuant to the Assignment and License Agreement, all of Collagen's
technology and intellectual property (including patents, copyrights, trademarks
and trade secrets), other than technology relating to the breast implant
technology, has been assigned to the Company, and the Company has granted back
to Collagen an exclusive, worldwide, perpetual, fully-paid up license to such
assigned technology and intellectual property that is used solely in Collagen's
business, which consists of the development, manufacture, use, sale and other
25
<PAGE> 28
commercialization of human aesthetics products, technologies and treatments,
breast implant products and processes, urinary incontinence and treatments and
ostomy products. The Assignment and License Agreement also provides for each of
the Company and Collagen to obtain certain rights to any improvements made by
the other company prior to March 15, 2004 solely as such improvements relate to
its business. In addition, under the Assignment and License Agreement, each of
the Company and Collagen covenant to not compete in each other's business until
March 15, 2004.
Research And Development Agreement. Collagen and the Company have entered
into a research and development agreement, effective January 1, 1998 (the
"Research and Development Agreement"), which provides for the joint development
of human recombinant collagen technology by the Company and Collagen after the
Distribution Date. The Research and Development Agreement allocates the
obligations and responsibilities of the Company and Collagen with respect to
research, development and manufacturing development of the recombinant
technology and provides for the sharing of development costs. Pursuant to the
Research and Development Agreement, the resultant recombinant technology and
related intellectual property shall be owned by the Company but shall be
exclusively licensed to Collagen for uses related to Collagen's business,
subject to the payment of royalties by Collagen to the Company.
Benefits Agreement. Collagen and the Company have entered into a benefits
agreement (the "Benefits Agreement"), effective January 1, 1998, which sets
forth the manner in which assets and liabilities under employee benefit plans
and other employment-related liabilities will be divided between Collagen and
the Company, and ensures a smooth transition for employee benefits in the
Distribution. In general, the Company will be responsible for compensation and
employee benefits relating to its employees and former employees who last worked
in the Transferred Businesses; however, Collagen will provide, at the Company's
expense, continuing health, life, disability and other insurance and retirement
benefits for the Company employees until the Company establishes its own
benefits plans.
The Benefits Agreement also provides for the treatment of outstanding
options to purchase Collagen Common Stock. At the time of the Distribution,
Collagen options will be canceled and replaced by either Company options,
options to purchase Collagen Common Stock or a combination of both, in each
case, with adjustments to the respective exercise prices for the Distribution.
These adjustments will be based upon the relative trading values of Collagen
Common Stock before giving effect to the Distribution, and the Company Common
Stock or Collagen Common Stock after giving effect to the Distribution, as the
case may be. The Company will be responsible for delivering shares of the
Company Common Stock upon exercise of the Company options, and Collagen will be
responsible for the delivery of shares of Collagen Common Stock upon exercise of
the Collagen options.
Tax Allocation Agreement. Collagen and the Company have entered into the
tax allocation and indemnity agreement, effective January 1, 1998 (the "Tax
Agreement"), which sets forth each party's rights and obligations with respect
to payments and refunds, if any, with respect to taxes for periods before and
after the Distribution Date and related matters such as the filing of tax
returns and the conduct of audits or other proceedings involving claims made by
taxing authorities. In general, Collagen will be responsible for filing
consolidated U.S. federal and consolidated, combined U.S. income and franchise
tax returns for periods through the Distribution Date, and for paying the taxes
relating to such returns (including any subsequent adjustments resulting from
the redetermination of such tax liability by the applicable taxing authorities).
The Tax Agreement also allocates liability between Collagen and the Company for
certain other taxes arising prior to the Distribution Date and for taxes which
may arise in connection with separating the Transferred Businesses.
Pursuant to the Tax Agreement, the Company is required to indemnify
Collagen for any taxes incurred by it as a result of the Distribution being
treated as a taxable event to Collagen due to the Company engaging in certain
transactions for two years following the Distribution Date, unless the Company
shall first provide to Collagen a ruling from the IRS, or an opinion of counsel
in a form reasonably acceptable to Collagen, that the transaction will not
adversely affect the tax consequences of the Distribution. Transactions subject
to the foregoing indemnity obligations include, among other things, acquisition
of 50% or more of the stock of the Company in a transaction described under
Section 355(e)(2) of the Code, certain repurchases or issuances of
26
<PAGE> 29
the Company Common Stock, sale, distribution or other disposition of certain
assets or stock and the discontinuance of certain businesses. Collagen and the
Company have agreed that, in general, they will indemnify each other against any
tax liability resulting from either Collagen's or the Company's breach of any
covenant or representations contained in the Tax Agreement. The Tax Agreement
also provides for cooperation with respect to certain tax matters, allocation of
certain Collagen tax liabilities arising prior to the formation of the Company
and, the exchange of information and the retention of records which may affect
the income tax liability of either party. Though valid as between the parties
thereto, the Tax Agreement is not binding on the IRS and does not affect the
several liability of Collagen, the Company and any respective subsidiaries to
the IRS for all U.S. federal taxes of the consolidated group relating to periods
prior to the Distribution Date.
Services Agreement. Collagen and the Company have entered into a services
agreement, effective January 1, 1998 (the "Services Agreement"), pursuant to
which (a) Collagen will provide the Company with financial and tax, human
resources, legal, administrative, regulatory, quality assurance, medical
affairs, and manufacturing and related services and (b) the Company will provide
Collagen with facilities, administrative, equipment, research and development,
and clinical and regulatory services (each a "Service" and collectively the
"Services"); in each case such Services to be provided until June 30, 1999. The
Services Agreement provides that up to and including the last day of the
calendar quarter in which the Distribution is effected, the user of a Service
(the "Service User") will pay to the provider of such Service (the "Service
Provider") the actual costs for rendering such Service; and thereafter, the
Service User will pay the Service Provider 120% of the salary and related costs
for personnel time spent in providing such Service and 100% of all other costs
and expenses incurred in providing such Service. Either Collagen or the Company
may terminate the purchase of any Service upon six months prior written notice,
and the Services Agreement may be extended with respect to one or more Services
by mutual written agreement of Collagen and the Company. The Services Agreement
provides that the Service Agreement shall automatically terminate if, prior to
the Distribution, a person or organization (other than Collagen) or series of
related persons or organizations acquires more than 20% of the voting securities
of the Company without the consent of the Collagen Board of Directors.
27
<PAGE> 30
COHESION TECHNOLOGIES, INC.
SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The tables below set forth selected historical financial data of the
Company. This information has been prepared from the audited consolidated
financial statements of the Company as of June 30, 1996 and 1997 and for each of
the three years in the period ended June 30, 1997 and the unaudited consolidated
financial statements as of December 31, 1997 and for the six months ended
December 31, 1996 and 1997 included herein. Financial information as of June 30,
1993, 1994, 1995 and for each of the two years in the period ended June 30,
1994, has been prepared from unaudited consolidated financial statements not
included herein. During these periods, the Company has been wholly owned by
Collagen. The historical financial information may not reflect the Company's
future performance or the future financial position or results of operations of
the Company, nor does it provide or reflect data as if the Company had actually
operated as a separate, stand-alone entity during the periods covered. Per share
data has not been presented as no common shares are outstanding and such
information would not be meaningful.
The selected historical financial data should be read in conjunction with
the consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
included elsewhere in this Information Statement. In the opinion of the
Company's and Collagen's management, the unaudited consolidated financial
statements as of June 30, 1993, 1994 and 1995 and as of December 31, 1997, for
the years ended June 30, 1993 and 1994 and for the six months ended December 31,
1996 and 1997, contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position and results of
operations for these periods.
28
<PAGE> 31
COHESION TECHNOLOGIES, INC.
SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL DATA (CONTINUED)
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
------------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1996 1997
----------- ----------- ----------- -------- -------- -------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue -- product sales.............. $ 1,198 $ 4,302 $ 3,546 $ 3,612 $ 2,527 $ 1,357 $ 1,234
Costs and expenses:
Cost of sales....................... 539 1,991 1,961 2,404 2,105 1,077 692
Research and development............ 2,957 3,284 3,416 4,268 9,627 6,071 7,402
General and administrative.......... 2,627 2,815 2,726 3,120 7,153 1,871 2,591
Purchased in-process research and
development....................... -- -- -- 3,000 -- -- 10,530
-------- -------- -------- -------- -------- -------- -----------
Total costs and expenses..... 6,123 8,090 8,103 12,792 18,885 9,019 21,215
-------- -------- -------- -------- -------- -------- -----------
Loss from operations.................. (4,925) (3,788) (4,557) (9,180) (16,358) (7,662) (19,981)
Other income (expense):
Net gain on investments, principally
Boston Scientific (Target
Therapeutics, Inc. ("Target")
prior to April 1997).............. 20,323 -- 5,110 82,093 9,063 9,222 8,775
Net gain on sale of investment in
Prograft Medical, Inc............. -- -- -- -- 15,395 -- --
Equity in earnings of Target(1)..... 1,455 1,675 2,417 1,430 -- -- --
Equity in losses of other
affiliates........................ (83) (762) (1,230) (1,824) (813) (598) (9)
Interest income..................... 29 25 25 378 566 343 236
Interest expense.................... (2,647) (1,530) (2,113) (2,532) (377) (188) --
-------- -------- -------- -------- -------- -------- -----------
Income (loss) before provision for
income taxes, minority interest and
cumulative effect of change in
accounting for income taxes......... 14,152 (4,380) (348) 70,365 7,476 1,117 (10,979)
Provision for income taxes............ 6,004 (475) 553 31,718 3,162 480 --
Minority interest..................... -- -- -- (27) (667) (235) --
Cumulative effect of change in
accounting for income taxes......... 959 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -----------
Net income (loss)..................... $ 7,189 $ (3,905) $ (901) $ 38,674 $ 4,981 $ 872 $ (10,979)
======== ======== ======== ======== ======== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997
----------- ----------- ----------- -------- -------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments......................... $ 575 $ 497 $ 491 $ 11,074 $ 13,798 $ 1,832
Working capital (deficiency).......... (19,803) (25,802) (30,530) 8,463 12,033 2,695
Investment in Boston Scientific
(Target prior to 1997)(1)(2)........ 15,823 17,499 17,570 65,841 83,874 66,815
Total assets.......................... 27,979 30,328 32,915 97,916 114,604 87,449
Long-term liabilities................. 6,859 7,413 8,206 27,260 35,131 28,023
Total stockholder's and parent company
equity (net capital deficiency)..... (750) (5,732) (8,560) 59,545 74,005 55,306
</TABLE>
- ---------------
(1) The first five months in fiscal 1996 and the 1993, 1994 and 1995 financial
information is presented with Target accounted for under the equity method.
(2) Includes $11,404 receivable from the Company's equity collar investment at
December 31, 1997.
29
<PAGE> 32
COHESION TECHNOLOGIES, INC.
SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL DATA (CONTINUED)
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The tables below set forth selected unaudited pro forma consolidated
financial data of the Company. The pro forma information presented is
theoretical in nature and not necessarily indicative of the future results of
operations or financial position of the Company or the results of operations and
financial position which would have resulted had the Company been a stand-alone
company during the periods presented. The pro forma financial data reflects the
effects of the January 1, 1998 contribution by Collagen to the Company under the
terms of the Intercompany Agreements and includes certain additions and
adjustments to the historical results related to (i) transfer price arrangements
under the Company's supply agreements with Collagen, and (ii) research and
development expenses associated with the reimbursement of costs under the
Company's development arrangements with Collagen. The pro forma statement of
operations data assumes that the Distribution occurred prior to July 1, 1996.
The pro forma balance sheet data assumes that the Distribution occurred on
December 31, 1997. This information has been prepared from the unaudited pro
forma consolidated financial information of the Company included elsewhere in
this Information Statement.
The pro forma financial data should be read in conjunction with the
unaudited pro forma consolidated financial information and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Information Statement.
30
<PAGE> 33
COHESION TECHNOLOGIES, INC.
SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL DATA (CONTINUED)
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, 1997 DECEMBER 31, 1997
------------------------------------ ------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue -- product sales............... $ 2,527 $ -- $ 2,527 $ 1,234 $ -- $ 1,234
Costs and expenses:
Cost of sales........................ 2,105 (589) 1,516 692 48 740
Research and development............. 9,627 (1,313) 8,314 7,402 (1,015) 6,387
General and administrative........... 7,153 -- 7,153 2,591 -- 2,591
Purchased in-process research and
development........................ -- -- -- 10,530 -- 10,530
-------- ------- -------- -------- ------- --------
Total costs and expenses...... 18,885 (1,902) 16,983 21,215 (967) 20,248
-------- ------- -------- -------- ------- --------
Loss from operations................... (16,358) 1,902 (14,456) (19,981) 967 (19,014)
Other income (expense):
Net gain on investments, principally
Boston Scientific.................. 9,063 -- 9,063 8,775 -- 8,775
Net gain on sale of investment in
Prograft Medical, Inc.............. 15,395 -- 15,395 -- -- --
Equity in losses of other
affiliates......................... (813) -- (813) (9) -- (9)
Interest income...................... 566 -- 566 236 -- 236
Interest expense..................... (377) -- (377) -- -- --
-------- ------- -------- -------- ------- --------
Income (loss) before provision for
income taxes and minority interest... 7,476 1,902 9,378 (10,979) 967 (10,012)
Provision for income taxes............. 3,162 723 3,885 -- -- --
Minority interest...................... (667) -- (667) -- -- --
-------- ------- -------- -------- ------- --------
Net income (loss)............. $ 4,981 $ 1,179 $ 6,160 $(10,979) $ 967 $(10,012)
======== ======= ======== ======== ======= ========
Basic net income (loss) per share(1)... $ 0.70 $ (1.13)
======== ========
Diluted net income (loss) per
share(1)............................. $ 0.69 $ (1.13)
======== ========
Shares used in computing basic net
income (loss) per share(1)........... 8,804 8,857
======== ========
Shares used in computing diluted net
income (loss) per share(1)........... 8,930 8,857
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 1,832
Working capital............................................. 2,695
Investment in Boston Scientific(2).......................... 66,815
Total assets................................................ 87,449
Long-term liabilities....................................... 28,023
Total stockholder's and parent company equity............... 55,306
</TABLE>
- ---------------
(1) See Note 5 of Notes to Unaudited Pro Forma Consolidated Financial
Information for a description of the basis of determining net income (loss)
per share information.
(2) Includes $11,404 receivable from the Company's equity collar investment.
31
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the related notes and the other
information included elsewhere in this Information Statement. Certain statements
in this "Management's Discussion and Analysis of Financial Condition and Results
of Operations" are forward-looking. The forward-looking statements contained
herein are based on current expectations and entail various risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward-looking statements. For a more detailed discussion of
these and other business risks, see "Risk Factors."
The Company is focused on developing and commercializing proprietary
surgical products, including bioresorbable hemostatic devices and biosealants
for tissue repair and regeneration, to increase the effectiveness of and
minimize complications following open and minimally invasive surgeries.
CoStasis(TM) atraumatic hemostat, the Company's lead hemostatic product,
designed for use initially in cardiothoracic indications, is currently in a
multi-site, randomized, pivotal clinical trial in Europe. In 1998, the Company
expects to complete the trial and file for CE Mark. The Company has received an
IDE from the FDA and has commenced U.S. pivotal trials targeting cardiac,
hepatic, orthopedic and general surgery indications. CoSeal(TM) surgical
sealant, the Company's lead biosealant product designed for sealing organs and
other tissues resulting from surgical wounds and incisions, is expected to
commence European clinical trials by the end of 1998. Industry experts estimate
that the annual potential worldwide market for fibrin sealants and surgical
adhesives is $850 million. Industry experts also estimate the annual potential
surgical sealant marketplace is $650 million. The Company believes its surgical
products will provide several distinct advantages over currently available
technologies, including ease of preparation and use, novel delivery systems,
improved safety profiles and clinical effectiveness. The Company also sells
Collagraft implant, an orthopedic product, and has research and development
programs in other orthopedic areas and in recombinant human collagen and
thrombin. The Company's products and programs are based on a platform of
proprietary technologies centered around collagen and hydrophilic polymers that
quickly polymerize in vivo and bind to tissue.
Prior to the Distribution, the Company has been a wholly-owned subsidiary
of Collagen. In October 1997, Collagen announced that it would proceed to
separate its Aesthetic Technologies Group and its Collagen Technologies Group
into two independent, publicly-traded companies. The Distribution is designed to
separate two distinct businesses with significant differences in their markets,
products, research needs, investment needs, employee retention and compensation
plans and plans for growth. Collagen's Board believes the separation into two
independent companies will enhance the ability of each to focus on strategic
initiatives and new business opportunities, improve cost structures and
operating efficiencies and create incentives that are more attractive and
appropriate for the recruitment and retention of key employees. As a
consequence, Collagen believes that investors will be able to evaluate better
the merits of the two groups of businesses and their future prospects. In
December 1997, Collagen purchased substantially all of the remaining outstanding
shares of Cohesion Corporation. Effective January 1, 1998, Collagen contributed
the Transferred Businesses to the Company pursuant to the terms of the
Intercompany Agreements. A description of the assets and liabilities contributed
by Collagen to the Company is contained in Note 1 of Notes to Consolidated
Financial Statements.
The Company's historical financial position and results of operations
discussed in this Information Statement and the financial statements and related
notes included in this Information Statement reflect the historical operations
of the Transferred Businesses contributed by Collagen to the Company. Prior to
being contributed to the Company by Collagen, the Transferred Businesses were
part of the Collagen Technologies Group. In particular, this Management's
Discussion and Analysis of Financial Condition and Results of Operations
reflects the historical results of that operating group for all years presented
as if the contribution of the Transferred Businesses by Collagen to the Company
had occurred on July 1, 1992. (See Note 1 of Notes to Consolidated Financial
Statements).
32
<PAGE> 35
RESULTS OF OPERATIONS
Six Months Ended December 31, 1996 and 1997
Revenues were $1.4 million and $1.2 million for the six months ended
December 31, 1996 and 1997, respectively. Sales of Collagraft bone graft
products were $1.0 million and $952,000 for the six months ended December 31,
1996 and 1997, respectively. The decreases were attributed to lower sales of
Collagraft by Zimmer, and therefore, lower sales from the Company to Zimmer. The
Company expects sales of Collagraft in fiscal 1998 to be at similar levels to
fiscal 1997.
A number of uncertainties exist surrounding the marketing and distribution
of Collagraft bone graft products. The Company's primary means of distribution
for the products is through a third party firm, Zimmer. The Company's business
and financial results could be adversely affected in the event that Zimmer is
unable to market the product effectively, anticipate customer demand accurately,
or effectively manage industry-wide pricing and cost containment pressures in
health care.
Cost of sales was 79% and 56% of sales for the six months ended December
31, 1996 and 1997, respectively. The decrease in cost of sales as a percentage
of sales primarily was due to lower unit costs.
Research and development ("R&D") spending represents program-specific costs
and other indirect R&D costs related to the Transferred Businesses and allocated
to the Company. The allocation of indirect costs is based on headcount
associated with specific R&D programs and specific identifiable costs. R&D
spending was $6.1 million and $7.4 million for the six months ended December 31,
1996 and 1997, respectively. The increase in R&D spending primarily was due to
increased activity in the tissue adhesive and biosealant programs, and the
recombinant human collagen program. The Company expects R&D spending in fiscal
1998 to be at levels higher than fiscal 1997 as a result of increased activities
in these programs.
General and administrative ("G&A") expenses were $1.9 million and $2.6
million for the six months ended December 31, 1996 and 1997, respectively. G&A
costs represent an allocation of Collagen's expenses to the Company derived
primarily as a function of headcount and specific identifiable costs. The
increase in spending was due to non-recurring costs associated with the
Distribution. Future levels of G&A spending will depend on various factors,
including the level of product sales.
The charge for purchased in-process research and development ("in-process
R&D") of $10.5 million in the six months ended December 31, 1997 was a
non-recurring charge related to the purchase of substantially all of the
remaining shares in Cohesion Corporation, including compensation expense
associated with the purchase of certain vested employee stock options.
Gains on sales of investments were $9.2 million and $8.8 million for the
six months ended December 31, 1996 and 1997, respectively, primarily resulting
from the sale of 330,000 and 157,340 shares of Target Therapeutics, Inc.
("Target") and Boston Scientific common stock, respectively. In April 1997,
Target was acquired by Boston Scientific and, as a result, Collagen received
approximately 1,365,200 shares of Boston Scientific common stock. The Company
may defer further sales of Boston Scientific common stock over the next few
quarters in an effort to optimize tax planning in connection with the
Distribution, although decisions concerning prospective Boston Scientific common
stock sales will also be affected by the then-current market price of Boston
Scientific common stock.
Interest income was approximately $343,000 and $236,000 for the six months
ended December 31, 1996 and 1997, respectively. The decrease in interest income
primarily was due to lower average cash, cash equivalent, and short-term
investment balances.
The effective tax rate for the six months ended December 31, 1996 was 43%
which considers the tax effects of nondeductible expenses such as equity losses
in affiliates. The Company recorded no provision or benefit for income taxes on
an $11.0 million loss before taxes for the six months ended December 31, 1997
based upon the Company's anticipated pre-tax operating loss for the year and
excluding nondeductible expenses, such as equity losses in affiliates and
in-process R&D charges related to the increase in ownership of Cohesion
Corporation.
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Following the Distribution and approval by the Company's Board of
Directors, the Company anticipates offering to exchange or substitute the
outstanding options of Cohesion Corporation for options to acquire approximately
620,000 shares of Common Stock. The new options are expected to have an exercise
price substantially less than the fair market value of the Company's shares at
the time of such exchange, based on an assumed exchange ratio of 1.67 to 1 as
anticipated and to be determined by the Company's Board of Directors. Assuming
such offers are accepted by the Cohesion Corporation option holders and assuming
an expected fair value of $10.00 per share at the date of the exchange, the
Company expects to record a non-cash compensation expense of approximately $1.5
million at the date of the exchange in connection with vested options and an
additional $4.5 million of deferred compensation to be amortized during the next
three fiscal years.
Fiscal Years Ended June 30, 1995, 1996 and 1997
Revenues were $3.5 million, $3.6 million and $2.5 million for fiscal years
1995, 1996 and 1997, respectively. Sales of Collagraft bone graft products in
fiscal 1996 increased $100,000 from fiscal 1995 sales of $3.0 million. Sales of
Collagraft in fiscal 1997 were $1.9 million, a decrease of $1.2 million or 39%
from fiscal 1996 sales of $3.1 million. The $1.2 million decrease in fiscal 1997
over fiscal 1996 was due to lower sales of Collagraft by Zimmer and the
consequent decrease in sales from the Company to Zimmer.
Cost of sales as a percentage of sales was 55%, 67%, and 83% for fiscal
years 1995, 1996 and 1997, respectively. The increase in cost of sales as a
percentage of sales in fiscal 1996 over 1995 and fiscal 1997 over 1996 was due
primarily to higher unit costs.
R&D expenses increased by $852,000 or 25% in fiscal 1996 over fiscal 1995
primarily due to increased spending in the recombinant human collagen program.
R&D spending was $9.6 million in fiscal 1997, compared with $4.3 million in
fiscal 1996, an increase of $5.3 million or 126%. This increase was primarily
attributable to the inclusion of a full year of R&D expenses for the tissue
adhesive and biosealant programs as a result of Collagen increasing its
ownership percentage in Cohesion Corporation to 81% in May 1996, and, to a
lesser extent, efforts in the recombinant human collagen and orthopedic programs
in fiscal 1997.
G&A expenses were $2.7 million, $3.1 million and $7.2 million in fiscal
1995, 1996, and 1997, respectively. G&A expenses increased $394,000 or 14% from
fiscal 1995 to fiscal 1996, due primarily to the Matrix lawsuit legal fees and
the addition of a Chief Operating Officer. G&A expenses increased $4.1 million
or 129%, from fiscal 1996 to fiscal 1997, due primarily to payments made to
Collagen's former Chief Executive Officer, Howard Palefsky, in accordance with
Mr. Palefsky's separation agreement and costs associated with existing loans to
Mr. Palefsky, which payments were allocated to the Company pursuant to the
Intercompany Agreements. By agreement, Mr. Palefsky will continue to serve as a
consultant to the Company during the next two years, and as a result, the
Company will make cash payments to Mr. Palefsky during fiscal 1998 and 1999
totaling $575,000 and $233,000, respectively. The Company has agreed to forgive
all indebtedness owed by Mr. Palefsky to Collagen (and assigned to the Company
effective January 1, 1998) subject to certain conditions. (See Note 1 of Notes
to Consolidated Financial Statements.) The increase in fiscal 1997 spending was
also attributed to legal expenses incurred in connection with a lawsuit with
Matrix Pharmaceuticals, Inc. ("Matrix"). In May 1997, Collagen settled its
lawsuit with Matrix, which had been pending since December 1994. The lawsuit
involved Collagen's claims of trade secret misappropriation against Matrix and
two former Collagen employees hired by Matrix in 1992, as well as
cross-complaints against Collagen by Matrix and the two employees for defamation
and violation of state unfair competition law. Collagen granted Matrix a
nonexclusive license to certain intellectual property (which was transferred to
the Company effective January 1, 1998) for certain nonmonetary consideration.
The lawsuit was settled and dismissed with prejudice. All claims by and against
all parties have been released. G&A expenses are expected to remain relatively
constant in fiscal 1998 due to reductions in costs associated with the
Distribution, and expenses associated with Mr. Palefsky, offset by anticipated
increased expenses associated with operating as a public company.
The charge for purchased in-process R&D of $3.0 million in fiscal 1996
related to the increase in ownership in Cohesion Corporation from approximately
40% to 81%.
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Gains on sales of investments were $5.1 million, $82.1 million and $24.5
million in fiscal 1995, 1996 and 1997, respectively. In fiscal 1995, the Company
sold 245,000 shares of common stock of Target and recorded a net pre-tax gain on
investments of $5.1 million (after the recording of a $925,000 reduction in the
carrying value of certain equity investments due to a decline in value
determined to be other than temporary.) In fiscal 1996, the Company recorded a
net pre-tax gain on investments of $82.1 million (after the recording of a $4.0
million reduction in the carrying value of certain equity investments due to a
decline in value determined to be other than temporary), resulting primarily
from the sale of 1,792,000 shares of Target common stock. In fiscal 1997, the
Company's net pre-tax gain on investments of $24.5 million, primarily resulted
from the sale of 330,000 shares of Target common stock and the sale of the
Company's holdings in Prograft Medical, Inc. ("Prograft") to W.L. Gore and
Associates, Inc.
Equity in earnings of Target were $1.4 million in fiscal 1996 compared to
$2.4 million in fiscal 1995. Equity in Target's earnings decreased in fiscal
1996 over fiscal 1995 due to Collagen's ownership percentage falling from
approximately 29% at June 30, 1995 to approximately 11% in June 30, 1996. In
December 1995, when Collagen's ownership interest fell below 20%, Collagen
changed from the equity to the cost method of accounting for its investment in
Target.
Equity in losses of other affiliate companies were $1.2 million, $1.8
million and $813,000 for fiscal 1995, 1996 and 1997, respectively. Equity losses
in other affiliate companies increased in fiscal 1996 over fiscal 1995 due to
higher Cohesion Corporation losses. The decrease in equity losses in fiscal 1997
was due to the elimination of equity losses from Cohesion Corporation as a
result of Collagen increasing its ownership percentage to 81% in May 1996 and
such losses being consolidated thereafter.
Interest income was $25,000, $378,000 and $566,000 in fiscal 1995, 1996 and
1997, respectively. The increases were due primarily to higher average cash,
cash equivalent, and short-term investment balances and higher interest rates.
Interest expense was $2.1 million, $2.5 million, and $377,000 in fiscal
1995, 1996 and 1997, respectively. Interest expense in fiscal 1995 represents
interest on parent company borrowings. Interest expense in fiscal 1996 related
primarily to borrowings under Collagen's $15.0 million revolving credit
facility, which was paid in full and canceled in June 1997, and interest on
parent company borrowings. Interest expense in fiscal 1997 related only to
borrowings under Collagen's $15.0 million revolving credit facility. The
revolving line of credit was allocated to the Company because the credit
facility was secured by shares of Target Common Stock, which were also allocated
to the Company.
The Company recorded an income tax provision of $0.6 million for fiscal
1995 on a pretax loss of $0.3 million. The provision for income taxes relates
primarily to equity losses in affiliates which are not deductible for tax
purposes. The Company's effective income tax rate was approximately 42% for
fiscal 1997 compared to 45% for fiscal 1996. The higher effective tax rate in
fiscal 1996 primarily was due to the impact of non-deductible items such as
equity losses in affiliates and in-process research and development charges
related to the increase in ownership of Cohesion Corporation.
LIQUIDITY AND CAPITAL RESOURCES
On January 1, 1998, Collagen contributed to the Company, cash, cash
equivalents and short-term investments of $1.8 million, certain equity
investments, including Boston Scientific common stock and Innovasive common
stock, as well as the agreement with Zimmer regarding the distribution of
Collagraft. The Company expects to rely upon proceeds from the sale of these
investments, as well as revenues from the sale of Collagraft, for future working
capital, capital expenditures and other corporate purposes. The Company had a
$5.0 million loan outstanding on a $15.0 million revolving credit facility
during fiscal 1996 and 1997, however, the balance was paid in full and canceled
in June 1997.
For the six months ended December 31, 1997, cash used in investing
activities primarily related to the acquisition of substantially all of the
remaining outstanding shares of Cohesion Corporation totaling $10.5 million,
capital expenditures and investments in and loans to affiliates of $866,000, and
the purchases of short-term investments of $3.6 million, partially offset by
proceeds of $9.4 million (net of taxes paid) from the
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sale of 157,340 shares of common stock of Boston Scientific, proceeds of $4.6
million received from the sale of short-term investments, and proceeds of
approximately $704,000 from the sale of shares in affiliates. Subsequent to
December 31, 1997 and through March 31, 1998, the Company sold 90,000 shares of
Boston Scientific stock which provided cash proceeds of $5.4 million.
At June 30, 1997, cash, cash equivalents and short-term investments were
$13.8 million compared to $11.1 million at June 30, 1996. Net cash used in
operating activities was $6.5 million and $6.1 million for fiscal 1996 and
fiscal 1997, respectively.
For fiscal 1997, the $6.1 million used in operating activities was mainly
attributable to a $7.3 million net loss after adjusting for depreciation and
amortization expense, equity in losses of affiliate companies, and gain on
investments (net of taxes paid), partially offset by a $1.6 million decrease in
receivables primarily related to the sales of Target common stock. The principal
sources of cash for investing and financing activities in fiscal 1997 were the
proceeds of $5.6 million (net of taxes paid) from the sale of 330,000 shares of
Target common stock and proceeds of $9.8 million from the sale of holdings in
Prograft, partially offset by the repayment of the line of credit of
approximately $5.0 million and capital and intangible asset expenditures and
additional investments in and loans to affiliates of approximately $1.6 million.
The Company anticipates capital expenditures, equity investments in, and loans
to affiliate companies to be approximately $4.0 million in fiscal 1998.
The Company's principal sources of liquidity include sales of Boston
Scientific stock, and its cash, cash equivalents and short-term investments.
During fiscal 1995, 1996 and 1997, the Company sold an aggregate of 3,312,500
shares of Target common stock (adjusted for a two-for-one stock split) for an
aggregate pre-tax gain of approximately $101.1 million ($116.6 million proceeds
less cost basis of $15.5 million). As a result of the acquisition of Target by
Boston Scientific in April 1997, Collagen received approximately 1,365,200
shares of Boston Scientific common stock in exchange for Collagen's 1,275,888
shares of Target common stock. The Company anticipates that stock sales will be
made from time to time, with the objective of generating cash for, among other
things, further investments in both current and new affiliate companies. The
Company may defer further sales of Boston Scientific common stock during fiscal
1998 for tax planning purposes, although decisions concerning prospective Boston
Scientific common stock sales will also be affected by the then-current market
price of Boston Scientific common stock. As another source of financing, the
Company may establish a credit facility in the future, although there can be no
assurance that a line of credit will be available to the Company on acceptable
terms, if at all.
The Company's capital requirements will depend on numerous factors,
including the progress of the Company's clinical research and product
development programs, the extent to which the Company enters into collaborative
relationships with third parties and the scope of the Company's obligations in
such relationships, the receipt of, and the time required to obtain, regulatory
clearances and approvals, the resources required to protect the Company's
intellectual property and other factors. The timing and amount of such capital
requirements cannot be accurately predicted.
The Company believes that its current sources of liquidity should be
adequate to fund its anticipated capital requirements through at least the next
two years. However, during this period and thereafter, the Company may require
additional financing. The Company does not anticipate significant capital
expenditures in the near term, however, it may make investments in businesses
and technologies that are necessary to support its objectives. There can be no
assurance that additional financing will be available to the Company on
acceptable terms, if at all.
INVESTMENTS, ACQUISITIONS AND LICENSING AGREEMENTS
Collagen increased its ownership position in Cohesion Corporation from
approximately 40% to 81% in May 1996 and from 81% to approximately 99% in
December 1997. In connection with Collagen's May 1996 and December 1997
investments and purchases of Cohesion Corporation shares, $3.0 million and $10.5
million, respectively, of the purchase prices were allocated to in-process
research and development, which was expensed at the time of the purchases,
including compensation amounts associated with the purchase of employee stock
options in December 1997.
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The Company determined the amounts to be allocated to in-process technology
for Cohesion Corporation based on whether technological feasibility had been
achieved and whether there was any alternative future use for the technology.
The Company concluded that the in-process technology had no alternative future
use after taking into consideration the potential for both usage of the
technology in different products and for resale of the technology. Such studies
are still preliminary and are subject to revision.
Seeking to capitalize on technical success in expressing recombinant
collagen in mouse milk, in February 1996, Collagen made an additional equity
investment of approximately $4.5 million in Pharming B.V. of The Netherlands
("Pharming"), which brought Collagen's ownership percentage in Pharming to
approximately 12%. At December 31, 1997 Collagen's ownership position in
Pharming was approximately 10%, which included an additional $500,000 invested
during the quarter ended December 31, 1997. Pharming is dedicated to the
development and worldwide commercialization of human health care products
produced in transgenic animals. The Company and Pharming will attempt to produce
collagen in the milk of transgenic cattle.
In October 1995, Collagen purchased approximately 844,000 shares of common
stock, representing approximately 9% of the outstanding capital stock of
Innovasive for $4.1 million and entered into a collaborative product development
agreement. Innovasive develops, manufactures and markets tissue and bone
reattachment systems that are particularly relevant to the sports medicine and
arthroscopy segments of the orthopedic surgery market. The Company, pursuant to
the Intercompany Agreements, assumed Collagen's relationship and obligations
with Innovasive. The Company and Innovasive are collaborating to develop certain
resorbable mechanical tissue-fixation devices utilizing collagen-based
biomaterials for applications in orthopedic tissue repairs. The Company is
performing development activities in accordance with a project plan and
Innovasive is reimbursing the Company for such activities in accordance with the
project budget. Accordingly, over the next several years, the collaboration will
require the Company's expertise with collagen-based biomaterials and a small
percentage of the Company's R&D expenditures. In the event that marketable
products are developed as a result of this collaboration, the Company will have
the right but not the obligation to manufacture such products.
In June 1997, the Company sold its 21% investment in Prograft, a privately
held affiliate, to W.L. Gore and Associates, Inc. and recorded a pre-tax gain of
$15.4 million. Prograft was formed in July 1993 by Collagen, Target and Celtrix
Pharmaceuticals, Inc. to develop vascular prostheses, including stents, grafts,
and stent-grafts for the treatment of diseased and damaged blood vessels.
YEAR 2000
Under the Services Agreement, the Company will use Collagen's computer
systems until June 30, 1999. Subsequent to June 30, 1999, the Company may extend
the terms of the Services Agreement or elect to purchase its own computer
systems. Some of Collagen's older computer programs were written using two
digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar business activity.
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BUSINESS
OVERVIEW
The Company is focused on developing and commercializing proprietary
surgical products, including bioresorbable hemostatic devices and biosealants
for tissue repair and regeneration, which increase the effectiveness of and
minimize complications following open and minimally invasive surgeries.
CoStasis(TM) atraumatic hemostat ("CoStasis"), the Company's lead hemostatic
product candidate, designed for use initially in cardiothoracic indications, is
currently in a multi-site, randomized, pivotal clinical trial in Europe. In
1998, the Company expects to complete the trial and file for CE Mark. The
Company has received an Investigational Device Exemption (an "IDE") from the
United States Food and Drug Administration (the "FDA") and has commenced U.S.
pivotal trials of CoStasis, targeting cardiac, hepatic, orthopedic and general
surgery indications. CoSeal(TM) surgical sealant ("CoSeal"), the Company's lead
biosealant product candidate designed for sealing organs and other tissues
resulting from surgical wounds and incisions, is expected to commence European
clinical trials by the end of 1998. Industry experts estimate that the potential
worldwide market for fibrin sealants and surgical adhesives is $850 million
annually. Industry analysts also estimate that the potential surgical sealant
marketplace is $650 million annually. The Company believes its surgical products
will provide several distinct advantages over currently available technologies,
including ease of preparation and use, novel delivery systems, improved safety
profiles and clinical effectiveness. The Company also sells Collagraft(R)
implant ("Collagraft"), an orthopedic product, and has research and development
programs in other orthopedic areas and in recombinant human collagen and
thrombin. The Company's products and programs are based on a platform of
proprietary technologies centered around collagen and hydrophilic polymers that
quickly polymerize in vivo and bind to tissue.
BACKGROUND
The market for wound treatment includes two significant segments:
hemostatic products, used to control bleeding, and surgical sealants, used to
seal organs and tissues compromised by surgery or other trauma. The Company
estimates that there are approximately 9.3 million cardiovascular, hepatic,
orthopedic and general surgeries performed each year in the United States during
which hemostatic products may be used, and approximately 1.4 million such
surgeries performed each year in the United States in which sealant products may
be used. During most surgical procedures, which entail damage to the vasculature
and the compromise of normal tissue barriers, bleeding is inevitable, but the
degree to which bleeding constitutes a threat to the well-being of the patient
depends on the degree of intervention and the tissues involved. The ability to
control bleeding and the subsequent repair of tissues and systems containing
fluids, such as the vasculature, heart, bladder and bowel, however, are
essential, as the consequences of uncontrolled bleeding and fluid leakage can be
catastrophic. In a typical cardiovascular surgical procedure, for example, the
surgeon first attempts to control bleeding from major blood vessels, and the
attendant pulsating blood loss, by tying off or cauterizing the vessels.
However, it is typically more difficult to control diffuse bleeding from
multiple veins and capillaries, which are too numerous to close individually.
This diffuse bleeding is time-consuming to control with currently available
products and limits the surgeon's ability to close the patient at the end of a
procedure. Surgeons must also close wounds created by the trauma of surgery and
seal the surgical site to prevent the leakage of fluids, air or waste. Effective
sealing of organs and tissue during surgery is a critical factor in the ultimate
success of a surgical procedure. Ineffective sealing can result in
life-threatening complications such as blood loss and leakage of air or waste,
higher levels of pain, prolonged hospitalization and a higher mortality rate. As
a result of these considerations, surgeons have increasingly sought improved
technologies for both bleeding control and wound closure.
EXISTING PRODUCTS FOR BLEEDING CONTROL
Currently, surgeons have a variety of tools to stop bleeding (hemostasis)
during surgery. To treat bleeding, surgeons have traditionally identified large
bleeding vessels, accessed them and tied them off to stop bleeding. Recently,
this technique has been supplemented by the use of heat-induced coagulation
using cauterization or lasers. In the absence of excessive damage to the
vascular system, these techniques are usually
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effective in addressing the surgical problems associated with such bleeding. To
treat diffuse capillary bleeding, however, surgeons have limited alternatives,
including simply applying pressure at the bleeding site. Pressure alone,
however, is often insufficient to achieve hemostasis and the surgeon typically
uses additional devices to assist in the application of pressure to the bleeding
tissue.
Traditional Hemostatic Products. Traditional hemostatic products include
powders, sponges and bone wax; however, each of these products has inherent
limitations. Sponges and powders composed of oxidized cellulose, bovine collagen
or bovine thrombin represent a first-line approach to controlling bleeding.
Oxidized cellulose sponges or powders are regularly used to control bleeding,
however because these products are solids, they do not readily conform to the
bleeding tissue surface and often require the use of pressure, or tamponade, to
hold them in place until coagulation is achieved. Bovine collagen sponges or
powders contain collagen surface material which assists in the activation of
platelets and contributes to fibrin clot formation, however they too are solid
materials and suffer from the same limitations as oxidized cellulose sponges or
powders. Additionally, both are difficult to use in minimally invasive
procedures, such as laparoscopic and endoscopic surgery. Bovine thrombin has
also been frequently used in the control of bleeding, but with severe
limitations in effectiveness. Bovine thrombin powders must be mixed and prepared
in a multi-step process during surgery to form a solution which, when applied to
the surgical site, is designed to function in the same manner as natural
thrombin by facilitating the formation of a hemostatic fibrin clot. Its utility
as a hemostatic device, however, is severely limited because the bovine thrombin
solution often washes away from the bleeding site as it is applied. Surgeons
often attempt to address this problem by applying the bovine thrombin solution
on a collagen sponge, however this technique suffers from the same limitations
inherent in the use of sponges. Finally, a nonresorbable wax, called bone wax,
is commonly used in certain surgical applications, such as orthopedic or
cardiothorasic surgery, which involves the cutting of bone. Bone wax is
frequently applied to cut bone surfaces to aid in the control of diffuse
bleeding, however it seals the cut bone surfaces, thereby impeding the repair
and regeneration of the bone. In addition, because bone wax is not resorbed by
the body, surgeons often use cauterization to control bleeding, which results in
the destruction of bone and tissue. While the use of hemostatic devices in
surgery is critical, the Company believes that the limited effectiveness of
these traditional devices has generated demand for new approaches and
technologies.
First Generation Fibrin Sealants. In the last few decades, fibrin sealant
technology has been developed and represents a significant, albeit limited, step
in the evolution of hemostatic products. Fibrin sealants are liquid products
composed of blood-derived fibrinogen and thrombin that are mixed and delivered
to the bleeding site, forming a fibrin clot (gel) that adheres to bleeding
surfaces and induces coagulation. The resulting fibrin matrix acts as a
scaffolding to promote tissue repair and regeneration. While the clinical use of
fibrin and thrombin was pioneered at the turn of the century, the widespread use
of fibrinogen and thrombin as a surgical adhesive for hemostasis did not occur
until the 1970s, with the advent of first generation, non-commercial fibrin
sealants otherwise known as "home-brews". Home-brewed fibrin sealants have not
been approved by the FDA and are typically created by surgeons using informal,
disparate techniques and divergent materials. The typical home-brew fibrin
sealant product is composed of bovine thrombin from the pharmacy and fibrinogen
from an autologous (derived from the patient) or homologous (derived from other
donors) source, requiring significant advance preparation, time and effort.
Because home-brewed products are generally not of commercial grade consistency,
their purity and concentration is uneven and their performance and efficacy is
often difficult to predict. Home-brews were used widely until commercial fibrin
sealant products derived from pooled human plasma became available throughout
Europe, Japan and Canada in the 1980s.
Commercial Fibrin Sealants. Commercial fibrin sealants were developed to
standardize the purity and concentration of fibrinogen and thrombin combinations
using pooled blood sources, providing a more consistent and effective product.
While the resultant improved hemostatic performance of these products led to
their adoption in many surgical applications, their usefulness in surgery is
limited. The preparation of fibrin sealants requires multiple mixing steps,
often taking between 15 and 30 minutes. Once prepared, fibrin sealants are used
with delivery systems which routinely occlude and must be discarded during
surgery due to clogging of the fibrin clot in the delivery system or applicator
tip. Even following application to the site, fibrin sealants have limited
utility on certain surfaces, such as bone, due to weak adherence to the tissue
surface, and
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require a relatively bloodless field due to their limited hemostatic capacity.
In addition, there has been concern related to the use of proteins obtained from
pooled blood sources, as a result of the potential to transmit infectious
disease. In 1978, the FDA revoked clearance for commercial fibrinogen
concentrates, an essential element of fibrin sealants, due to reported high
rates of hepatitis infection among patients. These concerns led to the
development of several alternative fibrin sealants, using the patient's own
blood as a source of fibrinogen, which are being marketed and sold outside the
United States. These solutions suffer from a number of significant drawbacks in
that a large amount of the patient's blood is required, the time to prepare the
solution is significant and the limited concentration of fibrinogen results in a
relatively weak adhesive fibrin gel at the treated site.
Sales of fibrin sealants outside the United States are estimated to total
approximately $250 million annually and the FDA has not yet granted clearance
for the distribution of fibrin sealant products in the United States. Several
fibrin sealant products are currently in development in the United States and
industry experts estimate that annual sales of such products, assuming
regulatory clearance is obtained, will reach $350 million in the United States
by 2001. The number of procedures using fibrin sealants in the year 2001 is
projected to be more than 1.5 million, with cardiovascular surgeries
constituting more than 700,000 of such procedures.
Unmet Clinical Need. Currently, the control of diffuse bleeding in surgery
contributes to wasted time in the operating room and increased patient morbidity
and mortality rates. The Company believes that there is an unmet clinical need
for hemostatic devices that are easy to prepare and implement in the operating
room environment and useful in both open and minimally invasive procedures. The
Company believes that ideally, such a device should be liquid-based, provide
intimate contouring to tissue surfaces to more readily stop bleeding,
sufficiently adhesive and elastic to form a fluid-tight barrier to leakage until
the patient's tissue can repair, and be prepared using fibrinogen derived from
the patient's blood in order to address risks inherent in the use of pooled
blood products.
EXISTING PRODUCTS FOR SEALING ANASTOMOSES AND SURGICAL INCISIONS
The wound closure market includes a variety of devices, such as sutures and
staples, fibrin sealants and hydrogels, that are used by the surgeon to prevent
the leakage of fluids, gas and solids by sealing the interface of surgical
grafts and incisions into tissue barriers in the body ("anastomoses"), such as
the vasculature, heart, bladder and bowel. Historically, the most common method
of wound closure has been the use of sutures and/or surgical stapling, both of
which have limited effectiveness in many applications. The ability of the
surgeon to effect a fluid-tight seal using sutures or staples alone, without any
supplemental sealant product, is highly dependent on the skill of the surgeon in
completing fluid-tight suturing at the sites of surgical intervention or trauma.
Sutures and staples not only lack inherent sealing capabilities, but they are
also difficult to place, especially in minimally invasive surgery, and may tear
tissue, increasing the risk of post-surgical complications. Nonetheless, sutures
and staples are the principal products comprising the international wound
closure market, which industry experts estimate is more than $2 billion per
year.
Fibrin Sealants and Hydrogels. A variety of products are used to supplement
sutures and staples to enhance the effectiveness of the surgical closure of
tissue. In addition to their use as hemostatic agents, fibrin sealants are
frequently used as a complement to sutures and staples to facilitate the
completion of a fluid-tight seal. However, fibrin sealants are unable to bind
securely to host tissue and have poor handling qualities, which limits their
utility as a sealant in surgery and as a barrier to fluid loss. Polymer-based
hydrogels are an alternative to fibrin sealants for providing a fluid-tight seal
or barrier at the sites of surgical incisions and anastomoses, and hydrogel
technology has been approved for use in Europe to seal air leaks in lung surgery
and is currently being tested in other fields of use such as cardiovascular
surgery. Although hydrogels are polymerizing liquids which have the ability to
contour readily to the tissue surface, they are unable to covalently cross-link
directly to the tissue surface at the surgical site. Instead, the surgeon must
apply multiple layers of liquid sealant to the surface to be treated and then
apply light to activate a polymerization process which forms an elastic matrix
to seal the surgical site of application. Not only is this process cumbersome,
but it requires time, the necessary equipment for light activation and
sufficient space in the operating field to accommodate the procedure.
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Unmet Clinical Need. The Company believes that there is an unmet clinical
need for a self-polymerizing, liquid sealant product that can effectively
supplement the surgeon's use of sutures or staples, facilitate quicker closure
and assist in reducing the surgical complications from post-operational leakage.
While the flow of the contents of certain body systems is controlled during
surgery, such as through the use of bypass in cardiovascular procedures, these
barriers must be tightly sealed at the conclusion of surgical repair to avoid
significant complications. In order to meet existing clinical needs, the Company
believes that such a product should be easy to prepare and use, effective in a
single application, able to bind tightly to the patient's tissue and devoid of
human blood products or animal proteins.
THE COHESION TECHNOLOGIES SOLUTIONS
CoStasis and CoSeal are self-polymerizing liquid systems designed to be
prepared quickly and easily. CoStasis and CoSeal are designed to be safe,
bioresorbable products, without the risk of transmission of infectious agents,
for use with a variety of delivery systems in repeated applications throughout a
minimally invasive or open surgical procedure. The Company believes, based on
results from its clinical trials, that CoStasis is effective in stopping diffuse
bleeding on all tissue surfaces. CoStasis incorporates collagen, which has
superior hemostatic qualities, thereby enhancing its adhesiveness and
elasticity, enabling the product to bind tightly to a variety of tissue
surfaces, yet remain sufficiently elastic to stay in place, even in bleeding
sites. CoSeal is a completely synthetic hydrogel based on the Company's PEG
polymer technology, which is designed to polymerize at the site of application
and bind tightly by covalently cross-linking directly to the tissue surface. The
Company believes that its CoStasis hemostatic device and CoSeal surgical sealant
represent a major advantage over current products, including:
- Ease of Preparation. CoStasis is designed as an easy to prepare two-part
system which offers significant time advantages over existing products.
The premixed, ready to use collagen/thrombin suspension is supplied in
one syringe and is mixed with autologous plasma from a second syringe at
the time of administration. The Company's proprietary CellPaker(TM)
plasma processing system is designed to enable the patient's own plasma
to be quickly and sterilely separated in the operating room using a small
amount (approximately 20cc) of the patient's blood. Unlike competitive
products, which generally require large amounts of a patient's blood (or
use plasma from a pooled blood source) and have preparation times of up
to 30 minutes, CoStasis is designed to require a small amount of a
patient's blood and have a relatively short preparation time, thereby
permitting the surgeon the flexibility to decide during the procedure
whether or not to administer the product. CoSeal is a synthetic product,
based on the Company's PEG polymer technology, which requires a
relatively short period of time (typically two to four minutes) to
prepare and load into a syringe for use.
- Ease of Use. CoStasis and CoSeal are self-polymerizing liquid systems,
designed to avoid the need for ancillary equipment such as light sources
or heat to be activated and effective. The products are also designed to
be used repeatedly over the length of a surgical procedure and are not
prone to clogging, a limitation of certain current products. Both
CoStasis and CoSeal are being designed to be delivered through a variety
of systems, to avoid clogging, including spray heads, cannulas and
catheters. The Company believes that this will enable their use in a
variety of surgical procedures, including minimally invasive procedures,
that require liquid products with relatively low viscosity.
- Efficacy. CoStasis and CoSeal are designed to be more adherent and
elastic than current products, which the Company believes will enable
them to bind strongly to a variety of tissue surfaces, including bleeding
sites. CoStasis is also being designed for use in a variety of
applications that customarily arise in surgery, including bleeding bone
edges, anastomotic sites and diffuse bleeding organs. CoSeal is designed
to bond strongly and rapidly to the patient's own tissue, covalently
cross-linking directly to the tissue surface to form a secure sealant
matrix over the treated surgical site, preventing leakage of fluids,
solids and gases. As a result, the Company believes that surgeons will be
able to use these products as a replacement for the variety of products
and procedures currently in use for each of these applications.
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- Safety. CoStasis uses the patient's own blood as the source of its
plasma-derived fibrinogen component, eliminating the potential
contamination risks inherent in the use of pooled blood-derived products.
The collagen component of CoStasis is derived from a closed-herd bovine
source, insuring the highest purity of any bovine collagen currently
available and minimizing the potential for allergic reactions. CoSeal is
based on reactive derivatives of PEG, which has a history of safe use in
other medical applications. Because CoSeal is a completely synthetic
product, no human blood products or animal proteins are required.
- Competitive Cost. CoStasis and CoSeal are designed to provide the surgeon
with the flexibility to determine whether to use the product during the
surgical procedure, unlike current products which have lengthy
preparation times and require the surgeon to commit to use of the product
prior to a determination of need, at a cost that the Company believes is
competitive with fibrin sealant products currently on the market.
STRATEGY
The Company's objective is to develop, manufacture and commercialize
innovative tissue repair and regeneration products, with the initial goal of
rapidly exploiting its proprietary technology in the areas of surgical hemostats
and sealants. The Company's strategy consists of the following key elements:
- Initial Focus on Large Markets. The Company is focusing its near-term
resources initially on the commercial development of hemostatic and
sealant products for cardiothoracic and other surgical procedures. The
Company estimates that there are approximately 9.3 million open and
minimally invasive cardiovascular, hepatic, orthopedic and general
surgeries performed each year in the United States in which hemostatic
products may be used and approximately 1.4 million such surgeries
performed each year in the United States in which sealant products may be
used. The Company believes that hemostatic and sealant products with
cardiothoracic and cardiovascular surgery indications will represent the
largest segment worldwide.
- Leverage Product Competitive Advantages. The Company is conducting a
100-patient, multi-center, randomized clinical trial of CoStasis in
Europe, controlled against conventional medical practices, including
fibrin sealants, and expects to differentiate its products through ease
of preparation, novel delivery systems, clinical effectiveness and
safety. CoStasis uses autologous plasma (derived from the patient), as
opposed to homologous plasma (derived from pooled blood sources), thereby
eliminating the potential infectious disease risks inherent in the use of
pooled blood-derived products. The Company anticipates finishing its
European clinical trial of CoStasis and filing for CE Mark by the end of
1998. The Company has received an IDE from the FDA and expects to
complete U.S. pivotal trials of CoStasis in cardiac, hepatic, orthopedic
and general surgery indications by the end of 1998.
- Rapid Commercialization; Focused Marketing. The Company believes that
CoStasis and CoSeal will be classified as medical devices in Europe and
the United States and as a result will be subject to less onerous, less
costly and shorter regulatory approval processes than if classified as
biological agents or drugs. Initial distribution in Europe is planned
through geographically focused, specialty cardiovascular distributors
with existing customer relationships and established sales
infrastructures. In the United States, the Company plans to target the
concentrated cardiovascular surgery segment with a direct sales force to
maximize operating margins and plans to consider additional distribution
arrangements for other surgical specialties such as general surgery,
gynecology and orthopedics.
- Expand into Other Surgical Markets. The Company believes that its
technology and initial product formulations may also be applied to
additional, non-cardiac, high-volume procedures. The Company is
developing hemostatic and sealant indications in colon-rectal (e.g.,
colon resections), hepatic (e.g., liver transplants) and orthopedic
(e.g., bone grafts) surgeries, including both open and minimally invasive
surgical techniques. The Company believes that its technology platform is
highly scaleable and will enable it to expand into additional markets
over time.
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- Capitalize on Intellectual Property Portfolio. The Company believes it
has substantial design, manufacturing and applications engineering
expertise in the development of biomaterials and delivery systems that,
when combined with its intellectual property portfolio, will enable it to
expand into additional markets by cost-effectively addressing unmet
surgical needs for ease of preparation, ease of use, efficacy and safety.
- Develop and Maintain Close Relationships with Leading Professionals
Worldwide. The Company strives to maintain close relationships with
leading scientists, surgeons and other healthcare professionals worldwide
who are dedicated to expanding the use of biomaterials for hemostatic and
sealant applications, and to identify unmet surgical needs. The Company
plans to actively assist and support educational and training programs to
meet customer needs on the use of hemostats and sealants worldwide, as
well as research efforts into new products.
PRODUCTS AND DEVELOPMENT PROGRAMS
The following table summarizes the status of the Company's products and
development programs:
<TABLE>
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
PRIMARY PROGRAM/PRODUCT STATUS(1) PRIMARY APPLICATION
- -------------------------------------------------------------------------------------------------------------------
COSTASIS HEMOSTAT Europe: Pivotal clinical trial Cardiothoracic procedures
ongoing; CE Mark application expected
in 1998
United States: Pivotal clinical trial General, hepatic, orthopedic and
started in April 1998 cardiothoracic procedures
- -------------------------------------------------------------------------------------------------------------------
COSEAL BIOSEALANT European and U.S. clinical trials Cardiovascular and vascular
planned for second half of 1998 procedures
- -------------------------------------------------------------------------------------------------------------------
ORTHOPEDICS
Collagraft Implant Currently marketed; U.S. and Asian Bone grafting applications
distribution through Zimmer, Inc.
Bone Anchor Clinical trial planned for second Soft tissue fixation to bone
half of 1998
Osteoarthritis Clinical feasibility study completed Pain relief from degenerative joint
in Europe in 1997 disease in bones
- -------------------------------------------------------------------------------------------------------------------
OTHER DEVELOPMENT PROGRAMS
Adhesion Prevention Barriers Preclinical studies General, gynecological, orthopedic
and cardiovascular procedures
Resorbable Sealant for Preclinical studies Percutaneous catheterization
Percutaneous Catheter Access procedures
Sites
Recombinant Human Collagen and Research Replacement for bovine collagen and
Thrombin thrombin
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Indicates product development status. "Preclinical" denotes formulation and
efficacy studies in animal models necessary to support an application to
commence human clinical testing. "Research" includes discovery, research,
development of and subsequent identification of a candidate for preclinical
studies. The regulatory approval process requires successful completion of
many steps before a product is approved for commercialization. See "Risk
Factors -- Government Regulation" and "-- Government Regulation."
COSTASIS HEMOSTATIC AGENT
The Company believes that while surgeons have several devices to control
diffuse bleeding during surgery, none may be prepared as quickly and easily, or
work as rapidly and effectively as is needed. While
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traditional sponges and powders are effective hemostatic agents, such devices
are solids, and are therefore unable to flow over tissue surfaces and into
bleeding crevices. In addition, sponges and powders tend to move away from the
bleeding site without application of pressure by the surgeon. Fibrin sealants
overcome some of these limitations, however they are cumbersome to prepare and
use and adhere poorly to bleeding surfaces. Significant concerns regarding the
safety of blood-derived products have also limited the adoption of commercial
fibrin sealants in the United States and other markets. The Company believes
there is a clinical need for a surgical product which can be easily prepared and
used in the operating room to provide rapid and effective treatment of diffuse
capillary bleeding on a spectrum of tissue surfaces.
CoStasis Agent
CoStasis Delivery System
CoStasis is an atraumatic liquid hemostat designed for use in surgical
procedures to control bleeding from capillaries and small veins. Composed of a
sterile suspension of bovine fibrillar collagen and bovine thrombin in calcium
chloride, CoStasis is applied to the bleeding site with the patient's plasma,
incorporating the surgical advantages of collagen, fibrinogen and thrombin. The
pre-mixed, ready-to-use collagen/thrombin suspension is supplied in one syringe
and is mixed with the patient's own plasma from a second syringe at the time of
administration to the bleeding site. The patient's plasma provides the source of
fibrinogen that is cleaved by the thrombin to form a collagen-reinforced fibrin
clot, which is hemostatic and adherent to the bleeding tissue.
The collagen component of CoStasis is derived from Collagen's closed herd
cows, a source available to none of the Company's competitors. The thrombin
component is obtained from commercial sources, and is processed to a high level
of purity. The use of these components minimizes the possibility of allergic
reactions associated with lower-purity bovine collagen or thrombin used in other
products. In addition, both components come from manufacturing processes which
eliminate viruses, providing a further margin of safety. The pre-mixed nature of
the collagen/thrombin components reduces preparation time compared to
lyophilized commercial fibrin sealants, which must be reconstituted before use,
and when compared to other agents, which have complex preparation requirements.
In addition, the Company has developed a patented system, called the
CellPaker, which is designed to quickly and sterilely separate the patient's
blood into plasma in the operating room for use in conjunction with CoStasis.
The CellPaker is a single use device, which the Company plans to package
separately from CoStasis, and which the Company believes will make it easy to
obtain the patient's plasma upon entry into surgery. Unlike competitive
products, which generally require a large amount of a patient's blood (or plasma
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from a pooled blood source) and have lengthy preparation times, CoStasis is
designed to require a small amount of a patient's blood and have a relatively
short preparation time (typically three to five minutes).
CellPaker Device
CellPaker System
When applied to a bleeding surface, the CoStasis/plasma composite is
designed to rapidly form a collagen/fibrin matrix which conforms to the tissue
surface and is able to enter surface cracks and crevices. The hemostatic
capacity of the collagen/fibrin gel is a combination of the effects of collagen,
fibrin and thrombin in activation of the coagulation cascades and in presenting
a physical barrier which exerts pressure on the site to stem blood flow.
Preclinical studies have demonstrated that CoStasis acts significantly faster
than traditional hemostatic sponges and commercial fibrin sealants in the
control of bleeding from a variety of bleeding tissue sites. CoStasis also
proved effective in controlling bleeding in animal models in which coagulation
was compromised using heparin or aspirin. The Company believes that these
preclinical data indicate that CoStasis has the potential to be highly effective
in the rapid control of diffuse bleeding under diverse conditions modeling
clinical use and tissue conditions.
CoStasis has been used to control bleeding in several surgical indications
in clinical trials in the United States and Europe. In March 1997, the Company
received an IDE from the FDA to test CoStasis in feasibility studies in the
control of bleeding at split thickness skin graft donor sites in nine patients
who were undergoing skin grafting due to burns or tissue reconstruction
procedures. CoStasis was effective in the control of bleeding and no adverse
sequelae were reported with its use. Subsequently, in the latter half of 1997,
CoStasis was used in a European feasibility study in 13 subjects undergoing
coronary artery bypass surgery ("CABG"). In this study, CoStasis controlled
bleeding at the sites of grafted vessels joining vessels of the heart
(anastomoses) and the bleeding surface of the heart and chest wall. In January
1998, the Company began a multi-center, randomized, controlled, pivotal clinical
trial of CoStasis in Europe for the control of bleeding in approximately 100
CABG surgery patients. This study is expected to be completed and a CE Mark
dossier is expected to be filed by the end of 1998. The Company has received an
IDE from the FDA to expand clinical trials in the United States in the fields of
cardiothoracic, orthopedic, general and hepatic surgery. These trials were
initiated in April 1998 and are expected to be completed by the end of 1998. The
Company expects to use the data available from these studies in Europe and the
United States to support worldwide submissions for approval to market CoStasis.
CoStasis contains thrombin, which is a FDA-licensed biological drug.
Consequently, the FDA considers CoStasis to be a combination product subject to
jurisdiction by the Center for Biologics Evaluation and Research ("CBER") and
the Center for Devices and Radiological Health ("CDRH"). The FDA has assigned
lead review responsibility to CDRH following a "Request for Designation"
determination by the FDA in September 1996. The Company believes that this
decision was significant, as fibrin sealants containing human plasma are
regulated as biological drugs, which may substantially increase the duration and
complexity of their regulatory approval processes compared to that of CoStasis.
COSEAL BIOSEALANT
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Surgical repair necessitates the opening or puncturing of body cavities and
the compromise of barriers that normally prevent fluid, solids and gas leakage
in the body. This leakage ranges from a minor inconvenience to a
life-threatening event and is especially burdensome in cardiothoracic,
cardiovascular and abdominal surgery procedures. Currently, the surgeon is
dependent on meticulous use of surgical staples and sutures to create a fluid-
or gas-tight seal when repairing these tissues. In some cases, "home-brew" or
commercial fibrin sealants are used to assist in achieving a dependable seal.
While polymer-based hydrogels are an alternative to fibrin sealants, they are
unable to covalently cross-link directly to the tissue surface at the surgical
site and often require cumbersome processes, including light or energy
activation, in order to seal the surgical site of application. The Company
therefore believes that the ideal product is dependable, effective and easy to
prepare and apply to seal surgical sites in all patients, enabling the surgeon
to complete surgery more quickly, knowing that the patient would not suffer
adverse consequences due to subsequent post-surgical leakage. The Company
believes that there is a significant clinical demand in many surgical
applications for biosealants that prevent leakage of fluids, solids or gases
from the surgical or trauma site.
The Company's CoSeal biosealant uses two biocompatible liquids which
polymerize in seconds at the site of application without the need for activating
equipment and are absorbed by the body within weeks after the tissue has
repaired. CoSeal is based on reactive derivatives of polyethylene glycol, which
has a history of safe use in other medical applications. These PEG-polymers are
liquids of low viscosity and flow readily across the surfaces to be sealed. In
seconds, they covalently cross-link with the patient's tissue over the treated
surgical site to form a tightly bound matrix with excellent elasticity and
strength. CoSeal is based on a completely synthetic, PEG-polymer platform
technology, which avoids the need for any blood products or animal proteins,
addressing concerns about transmission of infectious agents.
Some existing products and products in development use light- or
energy-activated polymers that require significant additional equipment in the
surgical field and are difficult to use in minimally invasive surgery. CoSeal is
a self-polymerizing device which does not require activating equipment. In
consultation with its clinical advisers, the Company is also developing a
variety of special delivery devices. These delivery devices complement the
designed flexibility in CoSeal, giving surgeons a variety of tools for diverse
applications.
CoSeal has demonstrated ease of use and clinical effectiveness in sealing
surgical sites in cardiovascular grafting procedures in animal models. Once
CoSeal was applied, vascular grafts did not leak at anastomoses or puncture
sites when treated. The Company expects to begin clinical trials of CoSeal in
cardiovascular surgery procedures in the United States and Europe in the second
half of 1998 and to file a CE Mark dossier for cardiovascular sealing
indications in 1999.
ORTHOPEDICS
The Company is currently marketing Collagraft, its proprietary bone graft
substitute, through its partner Zimmer, and is developing a number of additional
collagen-based biomaterials for use in a variety of orthopedic indications.
Collagraft. The Company's Collagraft implant is a bone graft substitute
which provides a scaffolding around which new bone can grow. A bone graft
substitute eliminates the need for a patient to undergo a painful autograft bone
grafting procedure, which involves harvesting the patient's own bone from
another site, and prevents the transmission of human infectious agents and
inconsistent results from allograft procedures where bone graft supplied through
a bone bank is used. The Company's Collagraft paste and Collagraft strip
products, when used with a patient's own bone marrow, are indicated for use in
acute long bone fractures and traumatic bone defects to provide a matrix for the
repair process of bone. The Collagraft products are a mixture of purified
fibrillar collagen and hydroxyapatite/tricalcium phosphate ceramic ("HA/TCP")
and are supplied sterile in both strip (premixed) and ready-to-mix form.
Hydroxyapatite is a biocompatible substance that is minimally reabsorbed.
Tricalcium phosphate is radiopaque, biocompatible and biodegradable. Its
degradation products can be reconstituted by the body to form new bone mineral,
allowing for bone deposition.
Bone Anchors. The Company is in the process of developing a bone anchor
product with Innovasive, the holder of marketing rights to the product. Bone
anchors are used to anchor soft tissue to bone. The FDA has approved an IDE to
initiate clinical trials of the Company's bone anchor product. The Company
expects to
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commence these trials in the second half of 1998.
Osteoarthritis. Osteoarthritis, also known as degenerative joint disease,
is the most prevalent form of arthritis in the United States. The Centers for
Disease Control and Prevention estimated in 1990 that seven million people in
the United States suffered significant limitations in their daily activities due
to the effects of osteoarthritis. A European feasibility study involving 30
patients was conducted by the Company in 1997 and significant pain reduction was
obtained with a single injection of collagen into the joint space. The Company
expects to conduct additional clinical trials in 1998.
OTHER PRODUCT DEVELOPMENT PROGRAMS
Adhesion Prevention Barriers. The Company is also developing CoStop, an
adhesion-prevention barrier, based on the Company's proprietary PEG-polymer
technology. Adhesion-prevention barriers are used to prevent the formation of
debilitating or painful internal tissue adhesions (or scars) after surgery. The
few products currently on the market suffer serious shortcomings, including low
efficacy, high cost, difficult handling, and ineffectiveness in the presence of
blood. The Company believes CoStop, with its PEG-polymer technology, will offer
superior efficacy, greater ease-of-use and lower cost, relative to products on
the market or known to be under development.
Resorbable Sealant for Percutaneous Access Sites. The Company is
researching the use of its hemostatic and biosealant technology for sealing
sites for percutaneous catheter-based femoral artery cardiovascular procedures.
It is estimated that approximately 2.1 million diagnostic and therapeutic
catheter-based procedures are performed worldwide each year, in applications
including coronary angiography and percutaneous transluminal coronary
angioplasty. Research studies in canine models have indicated that both the
CoStasis and CoSeal technologies can achieve effective, rapid hemostasis in the
sealing of these access sites.
Recombinant Human Collagen and Thrombin. The Company's recombinant program
is focused on the development of recombinant human collagen and thrombin through
transgenic animals and yeast. The Company's objective is to obtain commercially
significant quantities of recombinant human type I collagen and thrombin to
serve as an alternative to bovine collagen and thrombin in its products. The
Company believes that by doing this, it will be able to develop a wider range of
innovative surgical products for tissue repair and regeneration. The Company has
made an equity investment in and is actively collaborating with Pharming, B.V.
of the Netherlands for the purpose of developing recombinant human collagen
through transgenic animals. In addition, the Company has a collaborative
agreement with Genotypes, Inc. of South San Francisco, California, to develop
recombinant human collagen through yeast. The Company is working with Genzyme
Transgenics, Inc. to produce human thrombin through transgenic animals.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are directed at achieving
continuing improvements in surgical products to achieve hemostasis, tissue
sealing and adhesion prevention. It has identified opportunities in using only
synthetic agents and recombinant proteins in product configurations and in
achieving superior sealant properties with advanced hemostatic potential at the
surgical site. In addition, future product development will utilize the
Company's proprietary technology platforms in the generation of tissue
engineering products for tissue repair, regeneration and replacement. Research
and development expenses for the years ended June 30, 1995, 1996, 1997 and for
the six months ended December 31, 1997 were $3.4 million, $4.3 million, $9.6
million and $7.4 million, respectively ($8.3 million and $6.4 million for the
year ended June 30, 1997 and the six months ended December 31, 1997,
respectively, on a pro forma basis reflecting reimbursements from Collagen under
the Research and Development Agreement.)
MANUFACTURING
The Company anticipates that it will manufacture and package its final
products and that it will use outside contractors for other functions such as
non-proprietary, high volume processes. The Company has approximately 12,000
square feet of manufacturing space in Palo Alto, California. There can be no
assurance that the Company will be able to attract, train and retain the
required personnel or will be able to increase its
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manufacturing capability to manufacture commercial quantities of its planned
products in a timely manner, or at all. Manufacturers often encounter
difficulties in scaling up production of their products, including problems
involving production yields, quality control and assurance, component supply and
shortages of qualified personnel, and the Company may encounter similar
problems. The Company can make no assurance that its manufacturing scale-up
efforts will be successful or that high-volume manufacturing, if needed, can be
established or maintained at commercially reasonable costs on a timely basis, if
at all. Any of these factors could have an material adverse effect on the
Company's ability to develop and commercialize its products, which in turn would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Risk Factors -- Intense Competition" and
"Limited Manufacturing Capacity."
The Company purchases raw materials used in its products from various
suppliers. For example, the Company purchases all of its requirements for
collagen materials from Collagen, pursuant to the terms of the Intercompany
Agreements. These materials have generally been readily available in the
marketplace and have not been the subject of shortages. There can, however, be
no assurance that the Company or its suppliers or contract manufacturers will
not experience materials shortages in the future. The source of the collagen
supplied by Collagen is bovine dermis. Collagen uses a patented viral
inactivation process for its collagen-based products to promote both safety and
quality. Since 1987, Collagen has sourced the bovine dermis from a "closed herd"
of cattle in an effort to prevent diseases, such as BSE, from contaminating its
collagen-based products. Maintaining a closed herd requires the physical
separation of the herd from other herds, the tracking of the lineage of each
animal and the maintenance of each animal under a veterinary program. In the
event of any material diminution in the size of the herd for any reason,
including accident or disease, Collagen would have a limited ability to quickly
increase supply of acceptable cattle. Any such diminution would have a material
adverse effect on the Company's ability to sell bovine collagen-based products
and, as a result, the Company's business, financial condition and results of
operations would be materially and adversely affected. Under the Company's
product development and distribution agreement with Zimmer, the Company is
required to purchase HA/TCP (hydroxyapetite/tricalcium phosphate) solely from
Zimmer for the manufacture of the Collagraft implant. Any such future shortages
of materials or components could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company, as well as any third-party manufacturers of its products, will
be subject to inspections by the FDA for compliance with applicable GMP and QSR
requirements, which include requirements relating to manufacturing conditions,
extensive testing, control documentation and other quality assurance procedures.
The facilities the Company uses have undergone an ISO inspection in preparation
for obtaining a CE Mark on its products. Despite these efforts, the Company can
make no assurance as to its ability to obtain all necessary FDA inspections of
its facility in a timely fashion, if at all. See " -- Government Regulation."
SALES, MARKETING AND DISTRIBUTION
The Company's planned core marketing, sales and distribution strategy
includes using a combination of a direct sales force and distributors. Initial
distribution in Europe is planned through geographically-focused, specialty
cardiovascular distributors with existing customer relationships and established
sales infrastructures. In the United States, the Company plans to target the
concentrated cardiovascular surgery segment with a direct sales force in an
effort to maximize operating margins and to consider additional distribution
arrangements for other surgical specialties, such as general surgery,
neurosurgery and orthopedics; however it can make no assurance as to the
effectiveness of such strategy. The Company's sales, marketing and distribution
plans will be dependent in part on the Company's ability to enter into
successful strategic relationships and hire, train and retain specialized
personnel. There can be no assurance that the Company will be able to secure
such strategic relationships or hire, train or retain specialized personnel on
terms that are attractive and acceptable to the Company, if at all.
While sales of Collagraft bone graft products to Zimmer in fiscal years
1997, 1996 and 1995 totaled $1.9 million, $3.1 million and $3.0 million,
respectively, the Company can make no assurance regarding future sales levels.
Collagraft bone graft products are marketed in the United States and Asia. The
Company holds marketing rights for Collagraft bone graft products in Europe,
Canada, Africa and the Middle East. See
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"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and " -- Government Regulation."
COMPETITION
The Company anticipates that it will compete with many domestic and foreign
medical device, pharmaceutical and biopharmaceutical companies and organizations
across each of its product categories and areas in which it is conducting
research and development activities. Many of these companies and organizations
have or will have substantially greater financial, technological, research and
development, regulatory and clinical, marketing, sales and personnel resources
than the Company. The Company's competitors may develop alternative technologies
and products that are more effective, easier to use or more economical than
those which have been or are being developed by the Company or that render the
Company's technology and products obsolete and non-competitive. Certain of these
competitors may obtain approval or clearance by the FDA or foreign regulatory
approval, patent protection, and achieve product commercialization earlier than
the Company. Any of these factors could have a material, adverse effect on the
Company's financial condition and results of operations. There can be no
assurance that any marketing or other strategic partners that the Company may
engage will not pursue parallel development of technologies or products relating
to or competitive with the Company's planned product portfolio. In general,
other recently developed technologies or procedures are, or may in the future
be, the basis for competitive products.
Hemostatic and Biosealant Devices. In the hemostatic and biosealant areas,
the Company believes in the United States it will face strong competition from
existing methodologies for controlling bleeding and sealing wounds resulting
from surgery, such as hemostatic powders and sponges, as well as from
collagen-based hemostats and traditional sutures and staples marketed by
companies such as Johnson & Johnson, United States Surgical Corporation and
American Home Products Corporation. In addition, the Company believes that it
will face competition from more recent products and technologies, such as those
developed by Fusion Medical Technologies, Inc. ("Fusion") and Focal, Inc.
("Focal"). Outside of the United States, other competitive products currently
being marketed include fibrin sealants, sold in Europe and the Pacific Rim
countries by Immuno AG and Centeon L.L.C. In addition, in the United States,
there are several fibrin sealants under development, including those by the
American Red Cross, Baxter Healthcare Corporation, Convatec, a subsidiary of
Bristol-Myers Squibb Company, Haemacure Corporation and V.I. Technologies, Inc.
(Vilex). In addition to conventional fibrin sealants, there are a number of
other products in late-stage development using either collagen or polymer
technologies, made by Fusion and Focal, as well as another class of sealants,
cyanoacrylates.
The Company plans to develop a second-generation, non-fibrinogen dependent
biosealant which eliminates the need to collect and process plasma at the time
of surgery due to the Company's PEG polymer technology and which will offer
surgeons strong, easy-to-apply sealing in sensitive open and endoscopic surgery
situations. The Company plans to ultimately seek additional indications in
general surgery, urology and neurology. The Company believes that the
second-generation biosealants it currently has under development will largely
supersede fibrin sealants in adhesive applications and that patch or membrane
products will likely remain niche products compared to liquid and gel
formulations, since patch products are generally more difficult to handle and
apply than a liquid or gel, especially in minimally invasive surgery. Most
second-generation products under development are still in the pre-clinical stage
in the United States and overseas, with the exception of those being developed
by Focal, which is marketing its FocalSeal photoactivated polymer hydrogel
outside of the United States with Ethicon, Inc., a Johnson & Johnson subsidiary.
Orthopedics. Bone graft substitutes currently are used in a small fraction
of bone grafting procedures. The vast majority of bone grafting procedures
currently use autograft (autologous bone) taken from the patient's own body and
allograft (bone from bone banks taken from deceased donors). Collagraft bone
graft products belong to a new family of products called bone graft substitutes.
The most direct competitor to Collagraft bone graft products is ProOsteon, a
synthetic bone graft substitute made of a coral-like mineral. A less direct
competitor to Collagraft bone graft products is an allograft bone product called
Grafton, which is packaged in a syringe and marketed and priced like a bone
graft substitute. Several companies and institutions
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are engaged in the development of collagen-based and other materials,
techniques, procedures and products for use in medical applications anticipated
to be addressed by Collagraft bone graft products.
INTELLECTUAL PROPERTY
Collagen and the Company have entered into an Assignment and License
Agreement, effective January 1, 1998, which, among other things, allocates
Collagen's technology and intellectual property between the Company and
Collagen. Pursuant to the Assignment and License Agreement, substantially all of
Collagen's technology and intellectual property (including patents, copyrights,
trademarks, trade secrets), other than technology relating to the breast implant
technology, has been assigned to the Company, and the Company has granted back
to Collagen an exclusive, worldwide, perpetual, fully-paid license to such
assigned technology and intellectual property that is used solely in the field
of Collagen's business, which consists of the development, manufacture, use,
sale and other commercialization of human aesthetics products, technologies and
treatments, breast implant products and processes, urinary incontinence products
and treatments and ostomy products. The Assignment and License Agreement
provides that each of the Company and Collagen may obtain certain rights to
improvements made by the other company prior to March 15, 2004, inasmuch as such
improvements, if any, are in the applicable party's field of business. In
addition, under the Assignment and License Agreement, each of the Company and
Collagen have covenanted to not compete with each other's business until March
15, 2004.
As of March 15, 1998, the Company's patent portfolio includes 87 active,
issued U.S. patents, 184 issued foreign patents and over 170 U.S. and non-U.S.
patents pending. These patents to Collagen cover novel compositions of a variety
of biomaterials and uses in various fields of medicine. The patent portfolio has
a strong focus on proprietary technology in the fields of collagen compositions
and hydrophilic polymers used for in situ polymerization. The Company also holds
several registered trademarks in the United States and a number of foreign
countries and pursues the protection of its trademarks and service marks,
whether or not such marks are registered. Notwithstanding these measures, the
Company can make no assurance as to the effectiveness of its efforts.
In addition, the Company also holds an exclusive license covering
composition of matter of novel collagen-based glues and sealants and their uses
as hemostatic agents. The Company has filed patent applications covering tissue
adhesives, biosealants, and adhesion prevention agents; however, it can make no
assurance that any such patents will issue, will provide the Company any
competitive advantages or will not be challenged by third parties.
The Company also relies upon trade secret protection for certain unpatented
aspects of its proprietary technology. There can be no assurance that others
will not independently develop or otherwise acquire substantially equivalent
proprietary information or techniques, that others will not otherwise gain
access to its proprietary technology or disclose such technology, or that the
Company can meaningfully protect its trade secrets. The Company requires its
employees and consultants to execute appropriate confidentiality and proprietary
information agreements upon the commencement of an employment or consulting
relationship with it. These agreements generally provide that all confidential
information developed or made known to the individual by the Company during the
course of the individual's relationship with the Company is to be kept
confidential and not disclosed to third parties, except in specific
circumstances. The agreements also generally provide that all inventions
conceived by the individual in the course of rendering services to the Company
shall be the exclusive property of the Company; however, certain of the
Company's agreements with consultants, who typically are employed on a full-time
basis by academic institutions or hospitals, do not contain assignment of
invention provisions. There can be no assurance that these agreements will
provide meaningful protection or adequate remedies for the Company in the event
of unauthorized use, transfer or disclosure of such information or inventions.
The Company's success will depend on its ability to obtain patent
protection for its products, preserve its trade secrets, prevent third parties
from infringing upon its proprietary rights, and operate without infringing upon
the proprietary rights of others, both in the United States and internationally.
There can be no assurance that the Company's pending or future patent
applications will issue, or that the claims of the Company's
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issued patents, or any patents that may issue in the future, will provide any
competitive advantages for the Company's products or that they will not be
successfully challenged, narrowed, invalidated or circumvented in the future.
Moreover, litigation and interference or opposition proceedings associated with
obtaining, enforcing or defending patents or trade secrets is expensive and can
divert the efforts of technical and management personnel. The Company has filed
patent applications in certain foreign countries corresponding to certain patent
applications that it has filed in the United States and may file additional
patent applications inside and outside the United States. The Company believes
that obtaining foreign patents may be more difficult than obtaining domestic
patents because of differences in patent laws and believes the protection
afforded by foreign patents or any other foreign intellectual property
protection, if obtained, may be more limited than that provided domestically. In
addition, there can be no assurance that competitors will not seek to apply for
and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use, offer for sale, sell and import its products. The Company
is aware that certain medical device, pharmaceutical and other companies,
universities and research institutions have filed patent applications or have
issued patents relating to compositions and methods for wound closure and
adhesion prevention. In addition, the medical device and pharmaceutical
industries have been characterized by litigation regarding patents and other
intellectual property rights, and many companies in the medical device industry
have employed intellectual property litigation to gain a competitive advantage.
There can be no assurance that litigation will not be brought against the
Company by third parties in the future challenging the Company's patent rights
or claiming infringement by the Company of patents held by these or other third
parties.
Because of the substantial length of time and expense associated with
bringing new products through the development and regulatory approval processes
in order to reach the marketplace, the medical products industry places
considerable importance on obtaining patent and trade secret protection for new
technologies, products and processes. While the Company intends to seek patent
protection for its proprietary technology, products and processes, there can be
no assurance as to the success or timeliness in obtaining any such patents, that
the breadth of claims obtained, if any, will provide adequate protection of the
Company's proprietary technologies, products and processes, or that the Company
will be able to adequately enforce any such claims to protect its proprietary
technology, products and processes. Because patent applications in the United
States are confidential until the patents issue, and publication of discoveries
in the scientific and patent literature tends to lag behind actual discoveries
by several months, the Company cannot be certain that covered by pending patent
applications or that the Company was the first to file patent applications for
such inventions. The Company may desire or may be required to obtain licenses to
patents or proprietary rights of others. No assurance can be given that any
licenses required under any patents or proprietary rights of third parties would
be made available on terms acceptable to the Company, or at all. If the Company
does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design around of otherwise avoid such
patents, or it could find that the development, manufacture or sale of products
requiring such licenses is foreclosed.
Litigation may be necessary to defend against or assert claims of patent
infringement or invalidity, to enforce or defend patents issued to the Company,
to protect trade secrets or know-how owned by the Company, or to determine the
scope and validity of the proprietary rights of others. In addition,
interference proceedings in the U.S. Patent and Trademark Office, or opposition
proceedings in a foreign patent office, may be necessary to determine the
priority of inventions with respect to patent applications of the Company or its
licensors. Litigation, interference or opposition proceedings could result in
substantial costs to and diversion of effort by the Company, and adverse
determinations in any such proceedings could prevent the Company from
manufacturing, marketing or selling its products and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with collaborative partners, vendors, suppliers,
employees and consultants. The Company also has invention or patent assignment
agreements with its employees and certain, but not all, commercial partners and
consultants. There can be no assurance that relevant inventions will not be
developed by a person not bound by an invention assignment agreement. There can
be no assurance that
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binding agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets will not otherwise
become known or be independently discovered by competitors. See "Risk
Factors -- Uncertainties Relating to Intellectual Property."
GOVERNMENT REGULATION
The Company's existing and proposed products, its research and development
and planned commercialization activities are subject to regulation by numerous
governmental authorities, principally the FDA and corresponding state and
foreign regulatory agencies. The Federal Food, Drug and Cosmetic Act (the "FDC
Act"), as amended, the regulations promulgated thereunder, and other federal and
state statutes and regulations, govern, among other things, the preclinical and
clinical testing, manufacturing conditions, device safety, efficacy, labeling
and storage, record keeping, advertising and the promotion of medical devices
and drugs. Product development and approval within this regulatory framework
take a number of years and involve the expenditure of substantial resources.
Additionally, in order for the Company to market its products in Europe and
other foreign countries, the Company and/or its partners, if any, must obtain
required regulatory approvals and comply with extensive regulations governing
safety, quality and manufacturing processes. These regulations vary
significantly from country to country. The time required to obtain approval to
market the Company's products outside the United States may be longer or shorter
than that required in the United States. In order to market the products being
developed by the Company in the member countries of the European Union, the
Company will be required to obtain CE Mark certification. CE Mark certification
is an international symbol of adherence to quality assurance standards and
compliance with applicable European medical device directives. In the first half
of 1998, the Company completed a successful quality systems audit to the ISO
9001/EN46001 and Medical Devices Directive requirements, which is one of the
principal steps in the CE Mark process. The remainder of the CE Mark process
consists primarily of review by the approving body of additional documentation
submitted by the Company to document each product's clinical safety and
performance. Although a quality system audit has been completed, there can be no
assurance that the Company will be successful in completing the remainder of the
CE Mark certification process or obtaining CE Mark certification in a timely
manner, if at all.
In the United States, medical devices are classified into three different
classes (Class I, Class II and Class III) on the basis of controls deemed
necessary to reasonably ensure the safety and effectiveness of the device. Class
I devices are subject to general controls (relating to labeling, premarket
notification and adherence to the FDA's good manufacturing practices ("GMPs"),
recently codified in the quality system regulation (the "QSR")). Class II
devices are subject to general and special controls (relating to performance
standards, postmarket surveillance, patient registries, and FDA guidelines).
Class III devices are those which must receive premarket approval by the FDA to
ensure their safety and effectiveness. They generally are life-sustaining,
life-supporting and implantable devices, or new devices which have been found
not to be substantially equivalent to legally marketed devices. Before a new
medical device can be marketed, marketing clearance must be obtained through a
premarket notification under Section 510(k) of the FDC Act or a premarket
approval ("PMA") application under Section 515 of the FDC Act. A 510(k)
clearance will typically be granted by the FDA if it can be established that the
device is substantially equivalent to a "predicate device," which is a legally
marketed Class I or Class II device or a preamendment Class III device (i.e.,
one that has been marketed since a date prior to May 28, 1976) for which the FDA
has not called for PMAs. The FDA has been requiring an increasingly rigorous
demonstration of substantial equivalence and this may include a requirement to
submit human clinical trial data. It generally takes four to twelve months from
the date of a 510(k) submission to obtain clearance, but it may take longer. The
FDA may determine that a medical device is not substantially equivalent to a
predicate device, or that additional information is needed before a substantial
equivalence determination can be made. A "not substantially equivalent"
determination, or a request for additional information, could prevent or delay
the market introduction of new products that fall into this category. For any
devices that are cleared through the 510(k) process, modifications or
enhancements that could significantly affect the safety or effectiveness, or
that constitute a major change in the intended use of the device, will require
new 510(k) submissions.
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A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a
preamendment Class III device for which the FDA has called for PMAs. A PMA
application must be supported by valid scientific evidence to demonstrate the
safety and effectiveness of the device, typically including the results of
clinical trials, bench tests, and laboratory and animal studies. The PMA must
also contain a complete description of the device and its components, and a
detailed description of the methods, facilities and controls used to manufacture
the device. In addition, the submission includes the proposed labeling,
advertising literature, and any training materials. The PMA can be expensive,
uncertain and lengthy, and a number of devices for which FDA approval has been
sought by other companies have never been approved for marketing. Upon receipt
of a PMA application, the FDA makes a threshold determination as to whether the
application is sufficiently complete to permit a substantive review. If the FDA
determines that the PMA application is sufficiently complete to permit a
substantive review, the FDA will accept the application for filing. Once the
submission is accepted for filing, the FDA begins an in-depth review of the PMA.
The FDA review of a PMA application generally takes one to three years from the
date the PMA is accepted for filing, but may take significantly longer. The
review time is often significantly extended by the FDA asking for more
information or clarification of information already provided in the submission.
During the review period, an advisory committee, typically a panel of clinicians
and others knowledgeable in the applicable field, may be convened to review and
evaluate the application and provide a recommendation to the FDA as to whether
the device should be approved. The FDA accords substantial weight to the
recommendation but is not bound by it. Toward the end of the PMA review process,
the FDA generally will conduct an inspection of the manufacturer's facilities to
ensure compliance with applicable QSR requirements, which include extensive
requirements relating to product design, manufacturing processes, testing,
control documentation and other quality assurance procedures.
If the FDA evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA may issue either an approval letter or an
approvable letter, which usually contains a number of conditions that must be
met in order to secure final approval of the PMA. When, and if, those conditions
have been fulfilled to the satisfaction of the FDA, the FDA will issue a PMA
approval letter, authorizing marketing of the device for certain indications. If
the FDA's evaluation of the PMA application or manufacturing facilities is not
favorable, the FDA will deny approval of the PMA application or issue a
"non-approvable" letter. The FDA may determine that additional clinical trials
are necessary, in which case the PMA may be delayed for one or more years while
additional clinical trials are conducted and submitted in an amendment to the
PMA. Modifications to a device that is the subject of an approved PMA, its
labeling or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to a PMA often require the submission of
the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered by the original PMA.
If human clinical trials of a device are required, either for a 510(k)
premarket notification or a PMA application, and the device presents a
"significant risk," the sponsor of the trial must file an investigational device
exemption ("IDE") application prior to commencing human clinical trials. The IDE
application must be supported by data, typically including the results of animal
and laboratory testing. If the IDE application is approved by the FDA and one or
more appropriate Institutional Review Boards ("IRBs"), human clinical trials may
begin at a specific number of investigational sites with a specific number of
patients, as approved by the FDA. If the device presents a "nonsignificant risk"
to the patient, a sponsor may begin the clinical trial after obtaining approval
for the study by one or more appropriate IRBs, without the need for FDA review.
Submission of an IDE provides no assurance that the FDA will approve the IDE.
Even if the IDE is approved, there can be no assurance that the FDA will
determine that the data derived from the studies support the safety and efficacy
of the device or warrant the continuation of clinical studies. Sponsors of
clinical trials are permitted to sell investigational devices distributed in the
course of the study, provided such compensation does not exceed recovery of the
costs of manufacture, research, development and handling. An IDE supplement must
be submitted to and approved by the FDA before a sponsor or investigator may
make a change to the investigational plan that may affect its scientific
soundness or the rights, safety or welfare of human subjects.
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The Company anticipates that its products will be regulated as Class III
medical devices and will require PMA approval prior to being marketed in the
United States. If this is the case, the Company will need to obtain for each of
its products an IDE in order to conduct clinical trials in the United States.
There can be no assurance that the Company will receive Class III medical device
designation for its products or that it will be able to obtain IDEs for each of
its planned products or that data from such clinical studies if and when
commenced will demonstrate the safety and effectiveness of the Company's product
or will adequately support a PMA application.
If clearance or approval for a given product of the Company is obtained,
such product will be subject to pervasive and continuing regulation by the FDA.
For example, the Company will be subject to routine inspection by the FDA and
will have to comply with the host of regulatory requirements that usually apply
to medical devices marketed in the United States, such as labeling regulations,
applicable QSR requirements, the Medical Device Reporting ("MDR") regulations
(which require a manufacturer to report to the FDA certain types of adverse
events involving its products), and the FDA prohibitions against promoting
products for unapproved or "off-label" uses. Any failure by the Company to
comply with applicable regulatory requirements could result in the detention or
seizure of products, issuance of an enjoinment of future product activities and
the assessment of civil and criminal penalties against the Company, its officers
and its employees. Failure to comply with the regulatory requirements could have
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, regulations regarding the manufacture and
sale of the Company's products are subject to change. The Company cannot predict
the effect, if any, that such changes might have on its prospects, business,
financial condition or results of operations.
In November 1997, the President of the United States signed into law the
FDA Modernization Act of 1997. This legislation makes changes to the device
provisions of the FDC Act and other provisions in the FDC Act affecting the
regulation of devices. Among other things, the changes will affect the IDE,
510(k) and PMA processes, and also will affect device standards and data
requirements, procedures relating to humanitarian and breakthrough devices,
tracking and postmarket surveillance, accredited third party review, and the
dissemination of off label information. The Company cannot predict how or when
these changes will be implemented or what effect the changes will have on the
regulation of the Company's products.
Although the Company anticipates that its products will be classified by
the FDA as medical devices, in the event that a given product is classified by
the FDA as a drug, it will require FDA approval of a new drug application
("NDA") prior to commercialization in the United States. The NDA process is
generally more onerous, costly and lengthy than the PMA process, often requiring
more extensive preclinical and clinical testing. Many products for which NDAs
have been submitted by other companies have never been approved for marketing.
Before clinical studies of a new drug can begin, an investigational new drug
("IND") application must be submitted to the FDA. FDA regulations provide that
human clinical trials may begin thirty days following submission of an IND
application, unless the FDA advises otherwise or requests additional
information, clarification or additional time to review the application. An IND
application contains extensive preclinical data and information about the drug.
There can be no assurance that the Company will develop sufficient data and
information to submit an IND for its products or that such data and information
if submitted, would be sufficient for the purposes of commencing clinical
studies of the products. Delays in the receipt of or failure to obtain FDA
authorization to begin or continue clinical trials could have a material adverse
effect on the Company's business, financial condition or results of operations.
The FDA regulates the manufacturing, product testing, and marketing of both
medical devices and drugs. Manufacturers of drugs are required to comply with
applicable GMP and, in the case of medical devices, QSR requirements, which
include requirements relating to product design, manufacturing processes,
product testing, and quality assurance, as well as the corresponding maintenance
of records and documentation. There is no assurance that the Company will be
able to comply with the applicable QSR requirements. In addition, the Company is
required to provide information to the FDA on death or serious injuries alleged
to have been associated with the use of its medical devices, as well as product
malfunctions that would likely cause or
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contribute to death or serious injury if the malfunction were to recur. Failure
of the Company to comply with QSR regulations, or other FDA regulatory
requirements, could have a material adverse effect on the Company's business,
financial conditions, or results of operations.
CoStasis contains thrombin, which is a FDA-licensed biological drug.
Consequently, the FDA considers CoStasis to be a combination product subject to
jurisdiction by the Center for Biologics Evaluation and Research ("CBER") and
the Center for Devices and Radiological Health ("CDRH"). The FDA has assigned
lead review responsibility to CDRH following a "Request for Designation"
determination by the FDA in September 1996. The Company believes that this
decision was significant, as fibrin sealants containing human plasma are
regulated as biological drugs, which may substantially increase the duration and
complexity of their regulatory approval processes compared to that of CoStasis.
The collagen used in the Company's products is derived from U.S. cattle.
Bovine Spongiform Encephalopathy ("BSE") is a disease, initially reported in
cattle in the United Kingdom, characterized by degenerative lesions of the
central nervous system. The source of infections in animals derives from eating
infected sheep-derived feed. While the disease has been reported in European
countries, the Company is not aware of any reports of BSE in U.S. cattle to
date. There can be no assurance that the various foreign or domestic regulatory
authorities will not raise issues regarding BSE or other matters which may
adversely affect the Company's ability to manufacture, market or sell its bovine
collagen-based products, which could have a material and adverse effect on the
Company's business, financial condition and results of operations.
THIRD PARTY REIMBURSEMENT
Reimbursement and health care payment systems in international markets vary
significantly by country. In connection with international product
introductions, the Company and any future strategic marketing partners may be
required to seek international reimbursement approvals. If required, there can
be no assurance that any such approvals will be obtained in a timely manner, or
at all, and failure to receive such international reimbursement approvals could
have an adverse effect on market acceptance of the Company's products in the
international markets in which such approvals are sought.
In the United States, health care providers, such as hospitals and
physicians, that purchase medical devices such as the Company's products,
generally rely on third-party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or part of the
cost of surgical procedures. The Company anticipates that in a prospective
payment system, such as the DRG system utilized by Medicare, and in many managed
care systems used by private health care payers, there will be no separate,
additional reimbursement for the Company's products and therefore no assurance
that reimbursement for the Company's products will be available in the United
States or in international markets under either governmental or private
reimbursement systems. Furthermore, the Company could be adversely affected by
changes in reimbursement policies of governmental or private health care payors.
Failure by physicians, hospitals and other users of the Company's products to
obtain sufficient reimbursement from health care payors for procedures in which
the Company's products are used or adverse changes in governmental and private
third party payors' policies toward reimbursement for such procedures would have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company's business may be also materially and
adversely affected by the continuing efforts of government and third-party
payors to contain or reduce the costs of health care through various means. See
"Risk Factors -- Third Party Reimbursement."
PRODUCT LIABILITY AND INSURANCE
The development, manufacture and sale of the Company's products may expose
the Company to product liability claims. Although to date no claim has been
asserted against the Company, there can be no assurance that the Company will
not experience losses due to product liability claims in the future. Although
the Company currently has general liability insurance with coverage in the
amount of $1 million per occurrence, subject to a $2 million annual limitation,
and product liability insurance with coverage in the amount of $5 million per
occurrence, subject to a $5 million annual limitation, there can be no assurance
that such
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coverage will be available to the Company in the future on reasonable terms, if
at all. In addition, there can be no assurance that all of the activities
encompassed within the Company's business are or will be covered under the
Company's policies. The Company may require additional product liability
coverage if the Company significantly expands commercialization of its products.
Such additional coverage is expensive, difficult to obtain and may not be
available in the future on acceptable terms, if at all. Any claims or series of
claims against the Company, regardless of their merit or eventual outcome, could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Risk Factors -- Potential Product Liability
Exposure; Limited Insurance Coverage."
FACILITIES
The Company occupies approximately 55,000 square feet of facilities in Palo
Alto, California. The Company has leased these facilities under agreements that
expire between 1999 and 2004 and contain renewal options. The Company believes
that its facilities are adequate to meet its requirements through at least the
end of 1999.
EMPLOYEES
At March 31, 1998, the Company had 69 employees, 39 of whom were engaged
directly in research and new product development, seven in regulatory affairs,
quality assurance and clinical activities, eight in manufacturing, two in sales
and marketing and 13 in finance and administration. The Company maintains
compensation, benefits, equity participation, and work environment policies
intended to assist in attracting and retaining qualified personnel. The Company
believes the success of its business will depend, in significant part, on its
ability to attract and retain such personnel. No employee of the Company is
represented by a collective bargaining agreement, nor has the Company
experienced any work stoppage. The Company considers its relations with its
employees to be good. See "Risk Factors -- Uncertainty of Ability to Attract and
Retain Key Management, Employees and Consultants."
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is certain information as of April 1, 1998 with respect to
the Company's directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David Foster........................... 40 Chief Executive Officer, Director
Frank DeLustro, Ph.D. ................. 49 President and Chief Operating Officer,
Director
Ross Erickson.......................... 52 Vice President, Regulatory Affairs and
Clinical Research
Charles Williams....................... 56 Vice President, Operations
Alan Schempp........................... 46 Vice President, Sales and Marketing
Deborah Webster........................ 38 Vice President and Chief Administrative
Officer
Sharon Kokubun......................... 42 Vice President, Financial Operations
John Daniels, M.D.(1)(2)............... 59 Chairman of the Board
Reid Dennis(1)(2)...................... 71 Director
Craig Johnson.......................... 50 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
David Foster, Chief Executive Officer and Director. Mr. Foster has served
as Chief Executive Officer of the Company since January 1998. From February 1997
to December 1997 he served as Senior Vice President and General Manager,
Collagen Technologies Group. From May 1992 until February 1997, Mr. Foster
served as Chief Financial Officer of Collagen. Mr. Foster serves on the Board of
Directors of Pharming, B.V. and Innovasive Devices, Inc. Mr. Foster has a B.S.
in Mechanical Engineering and an M.B.A. from the University of California at
Berkeley.
Frank DeLustro, Ph.D., President, Chief Operating Officer and Director. Dr.
DeLustro has served as President and Chief Operating Officer of the Company
since December 1997. He served as President and Chief Executive Officer of
Cohesion Corporation from its inception in 1996 until January 1998. Prior to
joining Cohesion Corporation, Dr. DeLustro served at Collagen for 13 years in
positions of increasing responsibility, most recently as Senior Vice President,
Scientific Affairs. Dr. DeLustro has a B.S. in Biology from Fordham University
and a Ph.D. in Immunology/Microbiology from Upstate Medical School, SUNY
(Syracuse). He is the author of over 40 scientific publications and holder of 18
U.S. patents.
Ross Erickson, Vice President, Regulatory Affairs and Clinical
Research. Mr. Erickson has served as Vice President, Regulatory Affairs and
Quality Assurance of the Company since January 1998. He was Vice President of
Regulatory Affairs and Clinical Affairs at Cohesion Corporation from May 1996 to
December 1997. From January 1987 to April 1996, he held various positions with
Collagen and was Vice President of Regulatory Affairs and Quality Assurance from
1991. Mr. Erickson has a B.A. and M.A. from Western Michigan University.
Charles Williams, Vice President, Operations. Mr. Williams has served as
Vice President, Operations of the Company since January 1998. He served as Vice
President, Operations of Cohesion Corporation from March 1997 to December 1997.
Prior to joining Cohesion Corporation, Mr. Williams served as Vice President of
Operations at Collagenesis, Inc., a medical device company from December 1996 to
March 1997, and as Vice President of Operations at Fusion Medical Technologies,
Inc., a medical device company from March 1995 to November 1996. From March 1992
to March 1995, Mr. Williams served as Vice President, Manufacturing Operations
at The Liposome Company, a pharmaceutical company. Mr. Williams has a B.S. in
Chemical Engineering from the University of Tennessee and a M.S. in Biochemical
Engineering from Rutgers University.
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Alan Schempp, Vice President, Sales and Marketing. Mr. Schempp has served
as Vice President, Sales and Marketing of the Company since January 1998. From
November 1997 to December 1997, he served as a Vice President, Marketing and
Business Development of Cohesion Corporation. Prior to that time, he was a
founder and president of Quicksilver Medical, a medical device consulting
company from June 1996 to September 1997, and a director of Endoscopic Imaging
Systems, a medical device company he co-founded from June 1995 to June 1996. Mr.
Schempp was a co-founder of and served as Vice President, Sales and Marketing
for Intramed Laboratories, a medical device company, from 1987 to 1995. Mr.
Schempp has a B.F.A. from the University of Kansas and an M.B.A. from the
University of Phoenix.
Deborah Webster, Vice President and Chief Administrative Officer. Ms.
Webster has served as Vice President and Chief Administrative Officer of the
Company since January 1998. Ms. Webster joined Collagen in 1982 and served in
various human resource and management positions until 1991, when she was
appointed to Vice President Human Resources and Administrative Services. Ms.
Webster has a B.A. from the University of California at Berkeley and completed
the Stanford University Executive Program at the Graduate Business School.
Sharon Kokubun, Vice President, Financial Operations. Ms. Kokubun has
served as Vice President, Financial Operations of the Company since January
1998. Ms. Kokubun joined Collagen in April 1988 as Assistant Controller and was
promoted in February 1994 to Treasurer. Ms. Kokubun is a certified public
accountant and has an M.B.A. in finance from the University of Hawaii.
John Daniels, M.D., Chairman of the Board. Dr. Daniels has been Chairman of
the Company's Board of Directors since January 1998 and has served on the Board
of Directors of Collagen since 1977 and is an Associate Professor of
Medicine/Oncology at the University of Southern California. Dr. Daniels is also
Chairman of the Board and Chief Financial Officer of Balance Pharmaceuticals,
Inc., a pharmaceutical company, and President, Chief Executive Officer and a
director of Regional Therapeutics, Inc. Dr. Daniels has a B.S. in biology and an
M.D. from Stanford University. Dr. Daniels plans to resign from the Board of
Directors of Collagen upon completion of the Distribution.
Reid Dennis, Director. Mr. Dennis has been a director of the Company since
January 1998, and a director of Collagen since 1975. Mr. Dennis served as
President of Collagen from February 1976 to March 1978, as Chairman of the Board
from March 1978 to February 1995, and has served as Chairman Emeritus of
Collagen since February 1995. Mr. Dennis is a General Partner of various
partnerships associated with Institutional Venture Partners. Mr. Dennis has a
B.A. in Electrical Engineering and an M.B.A. from Stanford University. Mr.
Dennis plans to resign from the Board of Directors of Collagen upon completion
of the Distribution.
Craig Johnson, Director. Mr. Johnson has been a director of the Company
since January 1998, and a director of Collagen since 1991. Mr. Johnson has been
a Director of Venture Law Group, A Professional Corporation, principal outside
counsel to the Company, and a partner of its predecessor partnership since
February 1993. From 1980 to February 1993, Mr. Johnson was a member of the law
firm of Wilson, Sonsini, Goodrich & Rosati, Professional Corporation. Mr.
Johnson plans to resign from the Board of Directors of Collagen upon completion
of the Distribution. He also serves on the Board of Directors of Retix, Inc.
The Company currently has authorized a Board of Directors of five. Each
director is elected for a period of one year at the Company's annual meeting of
stockholders and serves until the next annual meeting or until his or her
successor is duly elected and qualified. The executive officers serve at the
discretion of the Board of Directors. There are no family relationships among
any of the directors and/or executive officers of the Company.
DIRECTOR COMPENSATION
The Company does not currently provide cash compensation to directors for
services in such capacity. Each nonemployee director after the Distribution will
be eligible to participate in the Company's 1998 Directors' Stock Option Plan,
pursuant to which nonemployee directors are automatically granted options to
purchase shares of Common Stock on the terms and conditions set forth in such
plan.
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<PAGE> 61
BOARD COMMITTEES
In March 1998, the Board established the Audit Committee and the
Compensation Committee. The Audit Committee recommends engagement of the
Company's independent auditors, reviews the scope of the audit, considers
comments made by the independent auditors with respect to the Company's internal
control structure, including systems, procedures and internal accounting
controls and the consideration given thereto by management, and reviews the
Company's internal control structure, including systems, procedures and internal
accounting controls, with the Company's financial and accounting staff. The
Audit Committee currently consists of directors Mr. Dennis and Dr. Daniels. The
Compensation Committee provides guidance and commentary for all corporate
compensation, benefits, perquisite and employee (and director) equity programs.
It reviews and makes recommendations to the Board regarding such matters as the
Company's compensation of its officers, all employee equity plans and individual
equity grants and bonus plans and bonus payments. The Compensation Committee
currently consists of Mr. Dennis and Dr. Daniels.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Company's Board of
Directors are currently Messrs. Dennis and Daniels, neither of which has in over
ten years been an officer or employee of the Company or Collagen or any
subsidiary of Collagen.
SCIENTIFIC ADVISORY BOARD
The Company is assisted in its research and development activities by its
Scientific Advisory Board (the "SAB"), composed of leading scientists who review
the Company's research and development activities, discuss technological
advances relevant to the Company and its business, and otherwise assist the
Company, as appropriate. The members of the SAB are listed below.
Francis Castellino, Ph.D., is the Kleiderer-Pezold Professor of
Biochemistry and Dean of the College of Arts and Sciences at the University of
Notre Dame in South Bend, Indiana. He has conducted research in the areas of
fibrinolysis and blood coagulation since his arrival at Notre Dame in 1970. His
ongoing efforts to discover and define the structure-function relationships of
coagulation and fibrinolytic enzymes have led him to develop extensive
publications on the expression and identification of proteins and protein
domains. He received his B.S. from the University of Scranton, M.S. and Ph.D. in
Biochemistry from the University of Iowa.
Caroline Damsky, Ph.D., is a Professor at the University of California at
San Francisco, Schools of Dentistry and Medicine. Dr. Damsky conducts research
in many areas, including the areas of cellular adhesion and invasion,
adhesion-related signaling mechanisms and adhesive interactions in the
development of cancer. Dr. Damsky received her B.A. from Stanford University, an
M.A. and a Ph.D. from the University of Pennsylvania, performed post-doctoral
work at the University of Pennsylvania and the Wisar Institute and has authored
over 75 published works.
Jack Lemons, Ph.D., is a Professor in the Department of Biomaterials at the
University of Alabama School of Dentistry and a Professor in the Department of
Surgery at the University of Alabama School of Medicine. He is also a Director
of Orthopedic Laboratory Research, a Professor of Biomedical and Materials
Engineering and a Professor of the Joint Materials Science Program at the
University of Alabama. He is also
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<PAGE> 62
an Adjunct Professor of Prosthodontics at the University of Pittsburg School of
Dental Medicine. He received his B.S., M.S. and Ph.D. from the University of
Florida.
Francesco Ramirez, Ph.D., is Deputy Director at the Brookdale Center for
Developmental and Molecular Biology, Co-Director of the Interdisciplinary
Graduate School Program in Cellular, Molecular and Biological Sciences and the
Dr. Amy and James Elster Professor of Molecular Biology and Professor of
Pediatrics at the Mount Sinai School of Medicine. Dr. Ramirez is the author of
numerous scientific publications and awards. He received his M.A. from Liceo
Classico Garibaldi and a D.Sc. from the Universita degli Studi di Palermo, and
has authored over 120 published works.
Dean Toriumi, M.D., is an Associate Professor in the Department of
Otolaryngology-Head and Neck Surgery at the University of Illinois at Chicago
and is board-certified in otolaryngology and facial plastic and reconstructive
surgery. He is a member of several professional societies, including the
American Academy of Otolaryngology-Head and Neck Surgery, the American Academy
of Facial Plastic and Reconstructive Surgery, and the American College of
Surgeons. Dr. Toriumi is presently the Secretary of the American Academy of
Facial Plastic and Reconstructive Surgery. Dr. Toriumi also serves on the
editorial boards of several journals, including Facial Plastic Surgery,
Otolaryngology-Head & Neck Surgery, Long-Term Effects of Medical Implants and
Operative Techniques in Otolaryngology-Head & Neck Surgery.
CLINICAL ADVISORY BOARD
The Clinical Advisory Board assists the Company in identifying potential
new uses for its product candidates and helps to refine product formulations to
better address problems encountered during product development.
Arthur Hill, M.D., is a board certified thoracic and general surgeon with
expertise in thoracic and cardiac surgery. He is a fellow of both the American
College of Surgeons and the American College of Cardiology. Dr. Hill trained in
thoracic surgery at the Stanford University Medical Center and trained in
General Surgery at the University of California at Los Angeles. Dr. Hill is the
author of numerous scientific articles in the areas of thoracic and cardiac
surgery. Dr. Hill received his medical degree from Tufts University and was a
Post Doctoral Fellow of the Cardiovascular Research Institute at the University
of California, San Francisco.
Gail Lebovic, M.A., M.D., is a board-certified general surgeon with
expertise in breast, laparoscopic and endocrine surgery. She is a Fellow of the
American College of Surgeons and is founder and chairperson of the Bay Area
Breast Center. She practices in Palo Alto, California, and is an attending
surgeon at the Stanford University Medical Center and the Plastic Surgery
Center. Dr. Lebovic received her M.D. from the George Washington University
School of Medicine.
Camran Nezhat, M.D., holds clinical faculty appointments in surgery,
gynecology and obstetrics at the Stanford University School of Medicine and is
director of the Stanford Endoscopy Center for Training and Technology. Dr.
Nezhat was a pioneer in the use of video cameras in laparoscopic surgery and has
authored two books and more than 100 articles on this and other areas of
surgery. He is a member of several professional societies, including the
American College of Obstetrics and Gynecologists and American College of
Surgeons, and has received many awards, including the Society of Laparoscopic
Surgeons Excel Award in 1995. Dr. Nezhat received his M.D. from Tehran
University.
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning the
compensation received for services rendered during the fiscal year ended June
30, 1997 to Collagen Corporation and to Cohesion Corporation, as applicable, by
the Company's Chief Executive Officer, David Foster, and each of Frank DeLustro,
Ph.D., Ross Erickson, Deborah Webster and Charles Williams, the other four most
highly compensated executive officers of the Company (the "Named Executive
Officers"). Each of such person's aggregate compensation during the last fiscal
year exceeded, or would exceed on an annualized basis, $100,000. The services
rendered by the Named Executive Officers to Collagen and the Company, as
applicable, were in capacities not equivalent to those to be provided to the
Company. Therefore, the
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information set forth below may not reflect the compensation to be paid to such
individuals and should not be relied on as being indicative of the Company's
compensation structure and policies.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
----------------------------------------- --------------------------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION(1)($) OPTIONS(2)(#) COMPENSATION($)
--------------------------- --------- -------- ------------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
David J. Foster(3)........... 160,263 47,600 -- 6,000(4) 453(5)
Senior Vice President and
General Manager Collagen
Technologies Group (Collagen)
Frank DeLustro, Ph.D.(6)..... 179,570 -- -- -- 1,081(7)
President and Chief Executive
Officer (Cohesion
Corporation)
Ross Erickson(8)............. 163,212 -- -- -- 1,592(9)
Vice President, Regulatory
Affairs and Clinical Research
(Cohesion Corporation)
Deborah Webster(10).......... 148,187 41,620 -- 6,000(11) 4,608(12)
Vice President, Human
Resources and Administrative
Services (Collagen)
Charles Williams(13)......... 43,075 -- -- 35,000(14) 608(15)
Vice President, Operations
(Cohesion Corporation)
</TABLE>
- ---------------
(1) The value of perquisites or personal benefits is not included in the
amounts disclosed if, in the aggregate for any named individual, it did not
exceed the lesser of $50,000 or ten percent of total salary and bonus
reported for such individual in the Summary Compensation Table.
(2) This table does not reflect options granted subsequent to the close of
fiscal 1997, which may represent grants partially in recognition of fiscal
1997 performance.
(3) Mr. Foster is Chief Executive Officer of the Company.
(4) Represents options to purchase Collagen Common Stock at $16.75 per share.
(5) Represents life insurance premiums of $453 paid on behalf of Mr. Foster.
(6) Dr. DeLustro is President and Chief Operating Officer of the Company.
(7) Represents life insurance premiums of $1,081 paid on Dr. DeLustro's behalf.
(8) Mr. Erickson is Vice President, Regulatory Affairs and Clinical Research of
the Company.
(9) Represents life insurance premiums of $1,592 paid on Mr. Erickson's behalf.
(10) Ms. Webster is Vice President and Chief Administrative Officer of the
Company.
(11) Represents options to purchase Collagen Common Stock at $16.75 per share.
(12) Represents $4,285 paid to Ms. Webster for a 15-year service award and life
insurance premiums of $323 paid on behalf of Ms. Webster.
(13) Mr. Williams is Vice President, Operations of the Company.
(14) Represents 35,000 options to purchase Cohesion Corporation Common Stock at
$0.70 per share.
(15) Represents life insurance premiums paid on Mr. Williams' behalf of $608.
OPTION GRANTS
The following table provides certain summary information regarding stock
options granted to the Named Executive Officers during the fiscal year ended
June 30, 1997. As a result of the Distribution, each option to purchase Collagen
Common Stock granted to the Named Executive Officers listed below will be
replaced with either a new option to purchase shares of Collagen Common Stock, a
new option to purchase shares of the Company Common Stock or new options to
purchase shares of both Collagen Common Stock and the
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<PAGE> 64
Company Common Stock, as provided in the Benefits Agreement. As a result, their
value may depend, in part, on the future value of Collagen Common Stock as well
as the future value of the Company Common Stock. See "Relationship Between
Collagen and the Company After the Distribution." Additionally, following the
Distribution and approval by the Board of Directors, the Company anticipates
offering to exchange or substitute the outstanding options of Cohesion
Corporation for options to acquire the Common Stock of the Company. The services
rendered by the Named Executive Officers to Collagen and the Company, as
applicable, were in capacities not equivalent to those to be provided to the
Company. Therefore, the information set forth below should not be relied on as
being indicative of the Company's compensation structure and policies.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS(1) REALIZABLE VALUE AT
------------------------------------------------------- ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM($)(2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION --------------------
NAME GRANTED(#) FISCAL YEAR(%) ($/SHARE) DATE 5% 10%
---- ----------- -------------- ----------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
David J. Foster.................. 6,000 1.39(3) 16.75 08/09/06 63,204 160,171
Frank DeLustro, Ph.D............. 0 N/A N/A N/A N/A N/A
Ross Erickson.................... 0 N/A N/A N/A N/A N/A
Deborah Webster.................. 6,000 1.39(3) 16.75 08/09/06 63,204 160,171
Charles Williams................. 35,000 26.32(4) 0.70 05/09/07 15,408 39,047
</TABLE>
- ---------------
(1) Consists of stock options granted pursuant to Collagen and Cohesion
Corporation stock option plans. The maximum term of each option granted is
ten years from the date of grant. The exercise price is equal to the fair
market value of the stock on the grant date.
(2) Potential realizable value amounts represent certain assumed rates of
appreciation in stock price for a given exercise price only and assume the
conversion or exchange of all options to purchase Collagen Common Stock and
Cohesion Corporation's Common Stock into options to purchase the Company's
Common Stock. Actual gains, if any, on stock option exercises and holdings
of applicable shares of Collagen Common Stock or Cohesion Corporation Common
Stock or the Company's Common Stock are dependent on the future performance
of the applicable stock. There is no assurance that the amounts reflected
will be realized. The 5% and 10% assumed annual rates of compounded stock
price appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's, Cohesion Corporation's or
Collagen's estimate or projection of future stock prices. There can be no
assurance that the actual stock price appreciation over the ten-year option
term will be at the assumed 5% and 10% levels or at any other defined level.
Unless the market price of the applicable shares of Collagen Common Stock,
Cohesion Corporation's or the Company's Common Stock appreciates over the
option term, no value will be realized from the option grants made to the
Named Executive Officers.
(3) Out of a total of 432,750 options granted during the last fiscal year to
purchase Collagen Common Stock.
(4) Out of a total of 133,000 options granted during the last fiscal year to
purchase Cohesion Corporation Common Stock.
OPTION EXERCISES AND HOLDINGS
The following table provides certain summary information for each Named
Executive Officer with respect to Collagen and Cohesion Corporation option
exercises for the Common Stock of Collagen and Cohesion Corporation, as
applicable, for the year ended June 30, 1997. As a result of the Distribution,
each option granted to the Named Executive Officers in Collagen listed below
will be replaced with either a new option to purchase shares of Collagen Common
Stock, a new option to purchase shares of the Company Common Stock or new
options to purchase shares of both Collagen Common Stock and the Company Common
Stock, as provided in the Benefits Agreement and, as a result, their value may
depend, in part, on the future value of Collagen Common Stock as well as the
future value of the Company Common Stock. See "Relationship Between Collagen and
the Company After the Distribution." Additionally, following the Distribution
and approval by the Board of Directors, the Company anticipates offering to
exchange or
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<PAGE> 65
substitute the outstanding options of Cohesion Corporation for options to
acquire the Common Stock of the Company. The services rendered by the Named
Executive Officers to Collagen and Cohesion Corporation, as applicable, were in
capacities not equivalent to those to be provided to the Company. Therefore, the
information set forth below should not be relied on as being indicative of the
Company's compensation structure and policies.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND OPTION VALUES ON JUNE 30, 1997
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
SHARES YEAR-END(#) AT FISCAL YEAR-END($)(1)(2)(3)
ACQUIRED ON VALUE (EXERCISABLE/ (EXERCISABLE/
NAME EXERCISE(#) REALIZED($)(3) UNEXERCISABLE) UNEXERCISABLE)
---- ----------- -------------- ---------------------- ------------------------------
<S> <C> <C> <C> <C>
David J. Foster(4)........ 0 0 36,340 / 12,460 3,100 / 6,400
Frank DeLustro, Ph.D. .... 3,300(5) 49,500 87,468 / 70,712(6) 24,783 / 48,067
1,000(5) 10,875
Ross Erickson............. 0 0 52,810 / 73,310(8) 25,983 / 28,980
Deborah Webster(7)........ 41 400 41,610 / 11,340 44,491 / 5,840
Charles Williams(9)....... 0 0 0 / 35,000 0 / 24,500
</TABLE>
- ---------------
(1) The fair market value of Collagen's Common Stock as quoted on the Nasdaq
National Stock Market at the close of business on June 30, 1997 was $17.50
per share.
(2) The estimated fair market value for Cohesion Corporation's Common Stock on
June 30, 1997, as determined by Cohesion Corporation's Board of Directors,
was $0.70.
(3) The "Value Realized" or the unrealized "Value of Unexercised In-the-Money
Options at fiscal-year-end" represent the aggregate difference between the
market value on the date of exercise or at June 30, 1997, in the case of the
unrealized values, and the applicable exercise price.
(4) Mr. Foster's options referenced in this table are options to purchase
Collagen Common Stock.
(5) Dr. DeLustro exercised during fiscal year 1997 (i) 3,300 options to purchase
Collagen Common Stock with an exercise price of $7.25 and (ii) 1,000 options
to purchase Collagen Common Stock with an exercise price of $6.3750 per
share. The fair market value of Collagen Common Stock as quoted on the
Nasdaq National Stock Market on these dates was $22.25 and $17.25,
respectively.
(6) Represents 54,135 exercisable and 4,045 unexercisable options to purchase
Collagen Common Stock. The balance represent options to purchase Cohesion
Corporation Common Stock. All Cohesion Corporation options are immediately
exercisable, subject to a right of repurchase by Cohesion Corporation for
the unvested portion.
(7) Ms. Webster's options referenced in this table are options to purchase
Collagen Common Stock.
(8) Represents 32,810 exercisable and 3,310 unexercisable options to purchase
Collagen Common Stock. The balance represent options to purchase Cohesion
Corporation Common Stock. All Cohesion Corporation options are immediately
exercisable, subject to a right of repurchase by Cohesion Corporation for
the unvested portion.
(9) Mr. Williams' options referenced in this table are options to purchase
Collagen Corporation Common Stock.
TREATMENT OF STOCK OPTIONS OUTSTANDING AS OF THE DISTRIBUTION DATE
Options held by Employees and Consultants
Each employee (including officers) and consultant of Collagen or any
subsidiary of Collagen who, immediately prior to the Distribution Date, holds a
vested stock option to purchase shares of Collagen Common Stock will, in
connection with the Distribution, receive two new options in replacement of the
original option, one to acquire shares of Collagen Common Stock and the other to
acquire shares of the Company's Common Stock. Each new option will give the
holder the right to purchase a number of shares equal to the number of shares in
the original option.
Each employee (including officers) and consultant of Collagen or any
subsidiary of Collagen who, immediately prior to the Distribution Date, holds an
unvested stock option to purchase shares of Collagen
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<PAGE> 66
Common Stock will, in connection with the Distribution, receive a new option in
replacement of the original option to acquire the same number of shares of
Common Stock of the entity (the Company or Collagen) by which such optionee
shall be employed or retained as a consultant following the Distribution.
The exercise price of each new option will be determined in accordance with
Emerging Issues Task Force Issue 90-9 as to be agreed upon by Cohesion's Board
and the Collagen Board (or any committee thereof), after consultation with legal
and accounting advisors. The exercise price of each new option received by
employees and consultants is expected to generally preserve any spread between
the exercise price of the replaced option and the fair market value of
Collagen's stock on the Distribution Date. The exercise price, as adjusted in
light of the above considerations, is not intended to result in any compensation
expense to the Company or Collagen. All other terms of the new options other
than the exercise price will be the same as those of the original options
provided, however, that service as an employee or consultant of Cohesion
Corporation or the Company shall be equivalent to providing service as an
employee or consultant of Collagen. At the option of the Collagen Board or the
Company's Board, out-of-the-money options may be treated differently.
Following the Distribution, the Company's Board and the Collagen Board may,
at their discretion, grant additional options to their respective employees
(including officers) and consultants at such time or times and having such terms
as are determined by the respective Board.
Following the Distribution and approval by the Board of Directors, the
Company anticipates offering to exchange or substitute the outstanding options
of its subsidiary Cohesion Corporation for options to acquire the Common Stock
of the Company. The new options are expected to have an exercise price
substantially less than the fair market value of the Company's shares at the
time of such exchange, based on an anticipated exchange ratio of 1.67 to 1 which
ratio will be determined by the Board of Directors. Assuming such offers are
accepted by the Cohesion Corporation option holders and assuming an expected
fair value of $10.00 per share at the date of the exchange, the Company expects
to record compensation expense of approximately $1.5 million at the date of the
exchange in connection with vested options and an additional $4.5 million of
deferred compensation to be amortized during the next three fiscal years.
Options for Non-Employee Directors
Each non-employee director of Collagen or any subsidiary of Collagen who,
immediately prior to the Distribution Date, holds a vested but not exercised
option to purchase shares of Company Common Stock will, in connection with the
Distribution, receive two new options in replacement of the original option, one
to acquire shares of Collagen Common Stock and the other to acquire shares of
Cohesion Common Stock. Each new option will give the holder the right to
purchase a number of shares equal to the number of shares in the original
option. Each non-employee director of Collagen who, immediately prior to the
Distribution Date, holds an unvested stock option to purchase shares of Collagen
Common Stock, will, in connection with the Distribution, receive a new option in
replacement of the original option to acquire the same number of shares of
Common Stock of the entity (Collagen or Cohesion) for which such optionee will
serve as a director following the Distribution.
The exercise price of each new option will be determined in accordance with
Emerging Issues Task Force Issue 90-9 as to be agreed upon by the Collagen Board
and the Cohesion Board (or any committees thereof), after consultation with
legal and accounting advisors. The exercise price of each new option received by
non-employee directors is expected to generally preserve any spread between the
exercise price of the replaced option and the fair market value of Collagen's
stock on the Distribution Date. The exercise price, as adjusted in light of the
above considerations, is not intended to result in any compensation expense to
Collagen or the Company. All other terms of the new options will be the same as
those of the original options; provided, however, that service as a director of
Cohesion Corporation or Cohesion shall be equivalent to providing service as a
director of the Company. At the option of Collagen's Board or the Company's
Board, out-of-the-money options may be treated differently.
Following the Distribution, each non-employee director of Collagen and
Cohesion will be eligible to participate in the 1998 director's stock option
plan adopted by the company for which he or she serves as a director and to
receive automatic annual option grants pursuant to such plan.
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<PAGE> 67
STOCK PLANS
The Company's Board adopted, and Collagen, as the sole stockholder of the
Company in April 1998, approved the Company's 1998 Stock Option Plan, the 1998
Employee Stock Purchase Plan and the Director's Stock Option Plan (collectively,
the "Company Plans") and reserved 2,607,000 shares, 250,000 shares and 268,000
shares of Common Stock, respectively, for issuance under such plans on or after
the Distribution. The principal terms of each of the Company Plans are set forth
below.
1998 Stock Option Plan
The Company's 1998 Stock Option Plan (the "Stock Plan") was adopted by the
Board of Directors and approved by Collagen, as the sole stockholder, in April
1998. A total of 2,607,000 shares of Common Stock have been reserved for
issuance under the Stock Plan; none of which are currently outstanding. The
purposes of the Stock Plan are to attract and retain the best available
personnel to the Company, to provide additional incentives to the Company's
employees and consultants and to promote the success of the Company's business.
The Stock Plan provides for the granting to employees, including officers and
directors, of incentive stock options within the meaning of Section 422 of the
Code and for the granting to employees and consultants including nonemployee
directors of nonstatutory stock options. To the extent an optionee would have
the right in any calendar year to exercise for the first time one or more
incentive stock options for shares having an aggregate fair market value under
all plans of the Company and determined for each share as of the date the option
to purchase the shares was granted in excess of $100,000, any such excess
options shall be treated as nonstatutory stock options. If not terminated
earlier, the Stock Plan will terminate in April 2008.
Options granted under the Stock Plan may be either "incentive stock
options" within the meaning of Section 422 of the Code, or nonstatutory stock
options at the discretion of the Board of Directors and as reflected in the
written terms of the option agreement. The Stock Plan may be administered by the
Board of Directors or a committee of the Board of Directors (the
"Administrator"). The Stock Plan is currently administered by the Compensation
Committee. The Administrator determines the terms of options granted under the
Stock Plan, including the number of shares subject to the option, exercise
price, term and exercisability. In no event, however, may an individual employee
receive option grants for more than 250,000 shares under the Stock Plan in any
fiscal year. Such limitation shall not take effect until the earliest date
required under Section 162(m) of the Code. The exercise price of all incentive
stock options granted under
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the Stock Plan must be at least equal to the fair market value of the Common
Stock of the Company on the date of grant. The exercise price of any incentive
stock option granted to an optionee who owns stock representing more than 10% of
the total combined voting power of all classes of outstanding capital stock of
the Company or any parent or subsidiary corporation of the Company (a "10%
Stockholder") must equal at least 110% of the fair market value of the Common
Stock on the date of grant. The exercise price of all nonstatutory stock options
must equal at least 85% of the fair market value of the Common Stock on the date
of grant; provided, however, that the exercise price of any nonstatutory stock
option granted to a Named Executive Officer must equal at least 100% of the fair
market value of the Common Stock on the date of grant. Payment of the exercise
price may be made in cash or other consideration as determined by the
Administrator.
The Administrator determines the term of options, which may not exceed ten
years, or five years in the case of an incentive stock option granted to a 10%
Stockholder. No option may be transferred by the optionee other than by will or
the laws of descent or distribution. Each option may be exercised during the
lifetime of the optionee only by such optionee. The Administrator determines
when options become exercisable. Options granted under the Stock Plan generally
become exercisable at the rate of 25% of the total number of shares subject to
the options twelve months after the date of grant, and 2% of the total number of
shares subject to the options each month thereafter.
In the event of the sale of all or substantially all of the assets of the
Company, or the merger of the Company with another corporation, then each option
shall be assumed or an equivalent option substituted by the successor
corporation unless the successor corporation does not agree to the assumption or
substitution, in which case each option will terminate upon the consummation of
the merger or sale of assets. The Administrator has the authority to amend or
terminate the Stock Plan as long as such action does not adversely affect any
outstanding option and provided that stockholder approval shall be required for
an amendment to increase the number of shares subject to the Stock Plan, to
change the designation of the class of persons eligible to be granted options,
or to change the limitation on grants to individual employees.
1998 Employee Stock Purchase Plan
The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors and approved by Collagen as the sole
stockholder in April 1998. A total of 250,000 shares of Common Stock have been
reserved for issuance under the Purchase Plan; none of which are currently
issued. The Purchase Plan, which is intended to qualify under Section 423 of the
Code, will be implemented by a series of overlapping offering periods of 24
months' duration, with new offering periods (other than the first offering
period) commencing on January 1 and July 1 of each year. Each offering period
will consist of four consecutive purchase periods of six months' duration. The
initial offering period is expected to commence on the later of July 1, 1998 or
the Distribution Date and end on June 30, 2000; the initial purchase period is
expected to end on December 31, 1998. The Purchase Plan will be administered by
the Compensation Committee (comprised of Dr. Daniels and Mr. Dennis, the outside
directors of the Company who are not eligible to participate in the Purchase
Plan). Employees, including officers and employee directors, of the Company, or
of any majority-owned subsidiary designated by the Board, are eligible to
participate in the Purchase Plan if they are employed by the Company or any such
subsidiary for at least 20 hours per week and more than five months per year.
The Purchase Plan permits eligible employees to purchase Common Stock through
payroll deductions, which may not exceed 15% of an employee's compensation, at a
price equal to the lower of 85% of the fair market value of the Company's Common
Stock at the beginning of each offering period or at the end of each purchase
period. Employees may end their participation in the offering at any time during
the offering period, and participation ends automatically on termination of
employment with the Company. If not terminated earlier, the Purchase Plan will
have a term of 20 years.
The Purchase Plan provides that, in the event of a merger of the Company
with or into another corporation or a sale of all or substantially all of the
Company's assets, each right to purchase stock under the Purchase Plan will be
assumed or an equivalent right substituted by the successor corporation unless
the Board of Directors shortens the offering period so that employees' rights to
purchase stock under the Purchase Plan are exercised prior to the merger or sale
of assets. The Board of Directors has the power to amend or terminate
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<PAGE> 69
the Purchase Plan as long as such action does not adversely affect any
outstanding rights to purchase stock thereunder.
1998 Directors' Stock Option Plan
The Directors' Plan was adopted by the Board of Directors and approved by
Collagen as the sole stockholder in April 1998. A total of 268,000 shares of
Common Stock have been reserved for issuance under the Directors' Plan; none of
which are currently outstanding. The Directors' Plan provides for the grant of
nonstatutory stock options to non-employee directors of the Company. The
Directors' Plan is designed to work automatically without administration;
however, to the extent administration is necessary, it will be performed by the
Board of Directors. To the extent they arise, it is expected that conflicts of
interest will be addressed by abstention of any interested director from both
deliberations and voting regarding matters in which such director has a personal
interest.
The Directors' Plan provides that each person who becomes a non-employee
director of the Company will be granted a nonstatutory stock option to purchase
10,000 shares of Common Stock (the "Initial Option") on the date on which the
optionee first becomes a non-employee director of the Company. On July 1 of each
year, each non-employee director of the Company, including non-employee
directors who did not receive an Initial Option, will be granted an option to
purchase 5,000 shares of Common Stock (an "Annual Option") if, on such date, he
or she has served on the Board of Directors for at least six months. The
Directors' Plan sets neither a maximum nor a minimum number of shares for which
options may be granted to any one non-employee director, but does specify the
number of shares that may be included in any grant and the method of making a
grant. No option granted under the Directors' Plan is transferable by the
optionee other than by will or the laws of descent or distribution or pursuant
to a qualified domestic relations order, and each option is exercisable, during
the lifetime of the optionee, only by such optionee.
The Directors' Plan provides that the Vested Restructured Options and the
Unvested Restructured Options shall be exercisable in accordance with the terms
under which the vested and unvested options to purchase Collagen Common Stock
were issued pursuant to the 1990 Directors' Plan; provided, however that service
as a director of Cohesion Corporation or the Company shall be equivalent to
providing service as a director of Collagen. The Directors' Plan further
provides that the Initial Option shall become exercisable in installments as to
25% of the total number of shares subject to the Initial Option on each of the
first, second, third and fourth anniversaries of the date of grant of the
Initial Option, and each Annual Option shall become exercisable in full on the
first anniversary of the date of grant of that Annual Option. If a non-employee
Director ceases to serve as a Director for any reason other than death or
disability, he or she may, but only within three months after the date he or she
ceases to be a Director of the Company, exercise options granted under the
Directors' Plan to the extent that he or she was entitled to exercise it at the
date of such termination. To the extent that he or she was not entitled to
exercise any such option at the date of such termination, or if he or she does
not exercise such option (which he or she was entitled to exercise) within such
three month period, such option shall terminate.
Options granted under the Directors' Plan have a term of ten years. In the
event of the dissolution or liquidation of the Company, a sale of all or
substantially all of the assets of the Company, the merger of the Company with
or into another corporation or any other reorganization of the Company in which
more than 50% of the shares of the Company entitled to vote are exchanged, each
non-employee director shall have either (a) a reasonable time within which to
exercise the option, including any part of the option that would not otherwise
be exercisable, prior to the effectiveness of such dissolution, liquidation,
sale, merger or reorganization, at the end of which time the option shall
terminate, or (b) the right to exercise the option, including any part that
would not otherwise be exercisable, or receive a substitute option with
comparable terms, as to an equivalent number of shares of stock of the
corporation succeeding the Company or acquiring its business by reason of such
dissolution, liquidation, sale, merger or reorganization. The Board of Directors
may amend or terminate the Directors' Plan; provided, however, that no such
action may adversely affect any outstanding option. If not terminated earlier,
the Directors' Plan will have a term of ten years.
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LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Limitation of Liability of the Directors of the Company
The Company's Certificate of Incorporation provides that a director of the
Company will not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (a) for any breach of the director's duty of loyalty to the Company or
its stockholders, (b) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (c) under Section 174 of
the Delaware General Corporation Law, which concerns unlawful payments of
dividends, stock purchases or redemptions, or (d) for any transaction from which
the director derived an improper personal benefit. While the Company's
Certificate of Incorporation provides directors with protection from awards for
monetary damages for breaches of their duty of care, it does not eliminate such
duty. Accordingly, the Company's Certificate of Incorporation has no effect on
the availability of equitable remedies such as an injunction or rescission based
on a director's breach of his or her duty of care. The provisions of the
Company's Certificate of Incorporation described above apply to an officer of
the Company only if he or she is a director of the Company and is acting in his
or her capacity as director, and do not apply to officers of the Company who are
not directors.
Indemnification of Directors and Officers
The Company's Certificate of Incorporation provides that each person who is
or was or has agreed to become a director or officer of the Company, or each
such person who is or was serving or has agreed to serve at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, will be indemnified by
the Company, in accordance with the Company's Bylaws, to the fullest extent
permitted from time to time by the Delaware Law, as the same exists or may
hereafter be amended or any other applicable laws as presently or hereafter in
effect. The Company may be required to indemnify any person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board of Directors or is a proceeding to enforce such person's claim to
indemnification pursuant to the rights granted by the Company's Certificate of
Incorporation or otherwise by the Company. In addition, the Company may enter
into one or more agreements with any person providing for indemnification
greater than or different from that provided in the Company's Certificate of
Incorporation.
The Company's Bylaws provide that each person who was or is made a party or
is threatened to be made a party to or is involved in any action, suit, or
proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he or she or a person of whom he or
she is the legal representative is or was a director, officer or employee of the
Company or any such person who is or was serving at the request of the Company
as a director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such Proceeding is
alleged action in an official capacity as a director, officer or employee or in
any other capacity while serving as a director, officer or employee, will be
indemnified and held harmless by the Company to the fullest extent authorized by
the Delaware Law as the same exists or may in the future be amended against all
expense, liability and loss (including attorneys' fees, judgments, fines,
amounts due under the Employee Retirement Income Security Act of 1974, as
amended, excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith;
provided, however, except as described in the next paragraph with respect to
Proceedings to enforce rights to indemnification, the Company will indemnify any
such person seeking indemnification in connection with a Proceeding (or part
thereof) initiated by such person only if such Proceeding (or part thereof) was
authorized by the Company's Board.
The Company's Bylaws provide that the right to indemnification and the
payment of expenses incurred in defending a Proceeding in advance of its final
disposition conferred in the Company's Bylaws will not be exclusive of any other
right which any person may have or may in the future acquire under any statute,
provision of the Company's Certificate of Incorporation, the Company's Bylaws,
agreement, vote of stockholders or disinterested directors or otherwise.
Pursuant to the Company's Bylaws, if a claim is not paid
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<PAGE> 71
in full by the Company within 30 days after a written claim has been received by
the Company, the claimant may at any time thereafter bring suit against the
Company to recover the unpaid amount of the claim and, if successful in whole or
in part, the claimant will also be entitled to be paid the expense of
prosecuting such claim. The Company's Bylaws provide that it will be a defense
to any such action (other than an action brought to enforce a claim for expenses
incurred in defending any Proceeding in advance of its final disposition where
the required undertaking, if any is required, has been tendered to the Company)
that the claimant has not met the standard of conduct which makes it permissible
under the Delaware Law for the Company to indemnify the claimant for the amount
claimed, but the burden of proving such defense will be on the Company. At
present, the Company is not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent of the Company in
which indemnification would be required or permitted. The Company is not aware
of any threatened litigation or proceeding that might result in a claim for such
indemnification. The Company believes that its charter provisions and
indemnification agreements are necessary to attract and retain qualified persons
as directors and officers.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain expected information regarding the
beneficial ownership of the Company's Common Stock as of the Distribution Date
by (a) each of the Company's directors and Named Executive Officers, (b) all
directors and executive officers as a group, and (c) each person who is known by
the Company to own beneficially more than five percent of the Company's Common
Stock. Based on information as of March 31, 1998, obtained from Collagen's
records, Cohesion Corporation's records and a review of statements filed with
the Securities and Exchange Commission pursuant to Sections 13(d) and 13(g) of
the 1934 Securities Exchange Act, the Company believes that the beneficial
ownership information at the time of the Distribution, will be as set forth
below.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED (1)(2)
--------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT(%)
------------------------------------ --------- -------------
<S> <C> <C>
Wellington Management Company(3)............................ 1,195,500 13.4
75 State Street
Boston, MA 02109
Heartland Advisors, Inc.(4)................................. 1,079,800 12.1
790 North Milwaukee Street
Milwaukee, WI 53202
T. Rowe Price Associates, Inc.(5)........................... 727,400 8.1
100 East Pratt Street
Baltimore, MD 21202
Dimensional Fund Advisors, Inc.(6).......................... 504,050 5.6
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Reid W. Dennis(7)........................................... 700,043 7.8
3000 Sand Hill Road
Building 2, Suite 290
Menlo Park, CA 94025
John R. Daniels, M.D.(8).................................... 145,412 1.6
David J. Foster(9).......................................... 52,170 *
Frank DeLustro, Ph.D.(10)................................... 91,540 1.0
Deborah Webster(11)......................................... 51,356 *
Charles Williams(12)........................................ 17,047 *
Ross Erickson(13)........................................... 46,945 *
Sharon Kokubun(14).......................................... 15,581 *
Alan Schempp................................................ 0 *
Craig W. Johnson(15)........................................ 83,000 *
All directors and executive officers as a group (10 persons)
(16)...................................................... 1,203,095 13.4
</TABLE>
- ---------------
* Less than one percent of the outstanding shares of Common Stock.
(1) It has been assumed that (a) the persons named have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where
applicable and the information contained in the other footnotes to this
table, (b) for every one share of Collagen Common Stock held, Collagen
Holders will receive one share of Common Stock as a dividend, as part of
the Distribution and (c) that (i) all shares of Cohesion Corporation Common
Stock, (ii) all options to purchase Cohesion Corporation Common Stock and
(iii) all options to purchase Collagen Common Stock, will be exchanged or
converted into Company Common Stock or options to purchase such stock, on a
1:67, 1:67 and 1:1 basis, respectively. It should be noted that the
Company, while it may offer to exchange or convert the Cohesion Corporation
shares of Common Stock or options to purchase such stock into shares of the
Company's Common Stock or options to purchase such stock, the Company's
Board of Directors has not yet decided to proceed with such an offer.
(2) Gives effect to the Distribution, as if it had occurred on March 31, 1998
and assumes that (a) as of March 31, 1998, 8,951,227 shares of Collagen
Common Stock were issued and outstanding, exclusive of shares held by
Collagen as treasury stock, and (b) based on that same number in (a) after
the Distribution, 8,951,227 shares of the Company's Common Stock will be
issued and outstanding.
(3) Wellington Management Company ("WMI") is an investment advisor registered
with the Securities and Exchange Commission (the "Commission") under the
Investment Advisors Act of 1940, as amended (the "1940 Act"). WMI may be
deemed to beneficially own the stated shares by virtue of its status as a
registered investment advisor to its various investment advisory clients.
Of such amount, WMI may be deemed to have shared voting power with respect
to 594,400 shares and shared dispositive power with respect to 1,195,500
shares. The information presented is based upon information filed with the
Commission on Schedule 13G by the stockholder.
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<PAGE> 73
(4) Heartland Advisors, Inc., America's Value Investor ("Heartland Advisors")
is an investment advisor registered with the Commission under the 1940 Act.
Heartland Advisors may be deemed to beneficially own the stated shares by
virtue of its status as a registered investment advisor to its various
investment advisory clients. Of such amount, Heartland Advisors may be
deemed to have shared voting power with respect to 1,039,900 shares and
shared dispositive power with respect to 1,050,400 shares. The information
presented is based upon information filed with the Commission on Schedule
13G by the stockholder.
(5) T. Rowe Price Associates, Inc. may be deemed to beneficially own the stated
shares by virtue of its status as a registered investment advisor to its
various investment advisory clients. Of such amount, T. Rowe Price
Associates, Inc. may be deemed to have sole voting power with respect to
245,500 shares and sole dispositive power with respect to 717,000 shares.
The information presented is based upon information provided filed with the
Commission on Schedule 13G by the stockholder.
(6) Dimensional Fund Advisors, Inc. ("DFA") is an investment advisor registered
with the Commission under the 1940 Act. DFA may be deemed to beneficially
own the stated shares by virtue of its status as a registered investment
advisor to various investment advisory clients. Of such amount, DFA may be
deemed to have sole voting power with respect to 339,650 shares and sole
dispositive power with respect to 504,050 shares. The information presented
is based upon information filed with the Commission on Schedule 13G by the
stockholder.
(7) Includes 52,000 shares of Collagen Common Stock issuable upon exercise of
options; excludes 1,500 shares held by Mr. Dennis as trustee for Suzanna
Weaver Dennis, of which he disclaims any beneficial ownership.
(8) Includes 27,000 shares of Collagen Common Stock issuable upon exercise of
Collagen options and 2,086 shares of Cohesion Corporation Common Stock
issuable upon exercise of Cohesion Corporation options (assuming an
exchange factor of 1.67 of the Company options for every one Cohesion
Corporation option held).
(9) Includes 43,550 shares of Collagen Common Stock issuable upon exercise of
options.
(10) Includes 56,110 shares of Collagen Common Stock issuable upon exercise of
Collagen options and 10,416 shares of Cohesion Corporation Common Stock
issuable upon exercise of Cohesion Corporation options (assuming an
exchange factor of 1.67 of the Company options for every one Cohesion
Corporation option held).
(11) Includes 44,310 shares of Collagen Common Stock issuable upon exercise of
Collagen options.
(12) Includes 17,047 shares of Cohesion Corporation Common Stock issuable upon
exercise of Cohesion Corporation options (assuming an exchange factor of
1.67 of the Company options for every one Cohesion Corporation option
held).
(13) Includes 32,420 shares of Collagen Common Stock issuable upon exercise of
Collagen options and 12,525 shares of Cohesion Corporation Common Stock
issuable upon exercise of Cohesion Corporation options (assuming an
exchange factor of 1.67 of the Company options for every one Cohesion
Corporation option held).
(14) Includes 10,490 shares of Collagen Common Stock issuable upon exercise of
Collagen options.
(15) Includes 50,000 shares of Collagen Common Stock, options to purchase 33,000
shares of Collagen Common Stock, 7,257 shares of Cohesion Corporation
Common Stock and 3,243 shares held by VLG Investments ("VLGI"), an
investment fund affiliated with Mr. Johnson. Mr. Johnson disclaims
beneficial ownership of all shares held by VLGI, except to the extent of
his pecuniary interest therein.
(16) Includes an aggregate of 273,880 shares of Collagen Common Stock issuable
upon exercise of Collagen options and an aggregate of 49,053 shares of
Cohesion Corporation Common Stock issuable upon exercise of Cohesion
Corporation options (assuming an exchange factor of 1.67 of the Company
options for every one Cohesion Corporation option held).
LISTING AND TRADING OF THE COMMON STOCK
There is currently no public market for the Common Stock. Prices at which
the Common Stock may trade after the Distribution cannot be predicted and will
be determined by the marketplace and may be influenced by many factors,
including, among others, the depth and liquidity of the market for the Common
Stock, investor perception of the Company and its industry and general economic
and market conditions. See "Risk Factors -- No Prior Public Market; Volatility
of Common Stock Price."
The Company projects that it initially will have approximately 829
stockholders of record, based upon the number of stockholders of record of
Collagen on March 31, 1998. The Common Stock distributed to Collagen's
stockholders in the Distribution will be freely tradeable, except for securities
received by persons who may be deemed to be "affiliates" of the Company or
Collagen under the Securities Act. These persons who may be subject to certain
volume and other trading restrictions. Persons who may be deemed to be
"affiliates" of the Company or Collagen after the Distribution generally include
individuals or entities that control, are controlled by, or are under common
control with, the Company and may include certain officers and directors of the
Company and Collagen as well as principal stockholders of the Company and
Collagen.
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CERTAIN TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 1992, Collagen purchased 800,000 shares of preferred stock of
CollOptics, Inc. ("CollOptics") for an aggregate of $500,000. In addition,
Collagen granted to CollOptics a license to use Collagen's technology in the
field of refractive surgery for long-term vision correction and entered into
certain other technology-related agreements with CollOptics. In September 1995,
Collagen purchased an additional 1,000,000 shares of CollOptics preferred stock
for an aggregate of $500,000. During fiscal 1997, CollOptics made certain
payments to Collagen, primarily for research and development services and the
reimbursement of expenses paid by Collagen, totaling $500,000. As of June 30,
1997, CollOptics owed Collagen $769,981 for research and development services
and the reimbursement of expenses paid by the Company. David J. Foster, Chief
Executive Officer of the Company and Dr. Frank DeLustro, President and Chief
Operating Officer of the Company, are directors of CollOptics. As of June 30,
1997, Collagen held a 47% equity interest in CollOptics. In connection with the
Distribution, all outstanding shares of CollOptics owned by Collagen and all
agreements between Collagen and CollOptics were transferred to the Company
effective January 1, 1998.
In November 1993, Collagen purchased from Cohesion Corporation, for
approximately $65,000, 50,000 shares of Preferred Stock ("Cohesion Corporation
Preferred Stock") and 200,000 shares of Common Stock ("Cohesion Corporation
Common Stock"). In April 1994, Collagen purchased 95,238 shares of Cohesion
Corporation Preferred Stock for approximately $86,000, and in July 1994,
Collagen purchased 104,762 shares of Cohesion Corporation Preferred Stock for
approximately $94,000. Cohesion Corporation was formerly known as Otogen
Corporation ("Otogen") and Dr. Rodney Perkins, a director of Collagen at that
time, was the majority stockholder, Chairman and President. In addition to the
purchase of shares, Collagen granted to Cohesion Corporation a license to use
the Company's technology in the fields of otology and neurosurgical
applications, in return for which Collagen was granted an additional 50,000
shares of Cohesion Corporation Common Stock. Between April 1994 and May 1996,
Collagen made an additional equity investment in Cohesion Corporation of
$180,000 and loaned to Cohesion Corporation an aggregate of approximately
$1,540,000. In May 1996, Collagen purchased an additional aggregate of 875,000
shares of Cohesion Corporation Common Stock and Cohesion Corporation Preferred
Stock from Cohesion Corporation for an aggregate of approximately $5.1 million
(including conversion of Cohesion Corporation's outstanding indebtedness to
Collagen) and purchased 275,000 shares of Cohesion Corporation Common Stock and
Cohesion Corporation Preferred Stock from Dr. Perkins for an aggregate of
$1,452,500. Collagen also granted to Cohesion Corporation a license to use
certain of Collagen's technology in the fields of tissue adhesion and
anti-adhesion technology, excluding ophthalmic applications, in return for which
Collagen was granted an additional 75,000 shares of Cohesion Corporation
Preferred Stock. In addition, Collagen agreed to loan Cohesion Corporation up to
$5,000,000 in the form of convertible debt, which loan drawn upon at the
direction of the President of Cohesion Corporation, bore interest at an annual
rate of the greater of the prime lending rate or 10% and was due and payable
five years after the date of the first disbursement, subject to acceleration
under certain circumstances. In connection with the loan transaction, Dr.
Perkins granted Collagen an option to purchase up to 125,000 additional shares
of Cohesion Corporation Common Stock held by Dr. Perkins, which option became
exercisable as to 25,000 shares for each $1,000,000 of the loan commitment that
was disbursed. In each of May 1997, August 1997 and October 1997 Collagen loaned
$1,000,000 to Cohesion Corporation under the loan commitment and purchased
25,000 shares of Cohesion Corporation Common Stock from Dr. Perkins. In
addition, in connection with this transaction, Collagen agreed to grant Dr.
Perkins an option to purchase up to 77,500 shares of Collagen Common Stock in
connection with his continued participation on the Cohesion Corporation Board of
Directors. In connection with the May 1996 stock purchase transactions, Craig W.
Johnson, a director and Secretary of Collagen, and an investment partnership in
which he holds a beneficial interest purchased an aggregate of 25,000 shares of
Cohesion Corporation Common Stock and Cohesion Corporation Preferred Stock for
an aggregate of $127,750. In June 1996, Dr. John R. Daniels, a director of
Collagen, was appointed to Cohesion Corporation's Board of Directors. As of June
30, 1997, Collagen held an 81% equity interest in Cohesion Corporation, and in
December 1997 increased its ownership position to 99%. Effective January 1,
1998, Collagen contributed all of
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its holdings of Cohesion Corporation capital stock and its research and
development programs for sealant and adhesion barriers to the Company.
In October 1995, Ross Erickson, then an executive officer of Collagen and
currently an executive officer of the Company, borrowed $120,000 from Collagen
pursuant to a secured promissory note. This debt was secured by real property
purchased by Mr. Erickson and all shares of Collagen's stock issued to Mr.
Erickson pursuant to the exercise of stock options. In May 1997, all amounts due
to Collagen under such loan were repaid through the assumption of the loan by
Cohesion Corporation. In October 1997 and December 1997 Ross Erickson repaid to
Cohesion Corporation all amounts owing on such promissory note.
In October 1995, Collagen purchased 844,000 shares of preferred stock of
Innovasive for $4,100,000. In connection with this investment, Collagen entered
into Research and Development, Distribution and Manufacturing and Supply
Agreements with Innovasive with respect to tissue fixation devices manufactured
from collagen-based materials using Collagen's proprietary technology. Shortly
following its investment in Innovasive, Collagen purchased from Howard D.
Palefsky, the former Chairman and Chief Executive Officer of Collagen, all of
his holdings of Innovasive capital stock (30,303 shares) for an aggregate of
$63,552. During fiscal 1997, pursuant to the terms of the Research and
Development Agreement, Innovasive made payments to Collagen totaling $698,665
for research and development services and reimbursement of expenses paid by
Collagen. As of June 30, 1997, Innovasive owed Collagen $289,243 for research
and development services and the reimbursement of expenses paid by Collagen.
Collagen is entitled to elect one member of Innovasive's Board of Directors so
long as it holds five percent of Innovasive's capital stock on a fully diluted
basis. Mr. Foster is Collagen's current designee on the Innovasive Board of
Directors. As of December 31, 1997, Collagen held approximately nine percent of
Innovasive's outstanding capital stock. In connection with the Distribution, all
outstanding shares of Innovasive owned by Collagen and all agreements between
Collagen and Innovasive were transferred to the Company.
Since February 1993, Collagen has retained as its principal outside legal
counsel Venture Law Group, A Professional Corporation, a law firm of which Craig
W. Johnson, a director of Collagen, is a director. Prior to such time, Collagen
had retained Wilson, Sonsini, Goodrich & Rosati, Professional Corporation
("WSG&R"), as its principal outside legal counsel since 1977. From 1980 until
February 1993, Mr. Johnson was a member of WSG&R. In connection with the
Distribution, Mr. Johnson, who has been elected to the Company's Board, will
resign from Collagen's Board.
In August 1994, June 1995 and December 1995, Mr. Palefsky borrowed an
aggregate of $475,000 from Collagen pursuant to promissory notes secured by all
shares of Collagen's capital stock held by Mr. Palefsky while such debt is
outstanding, and bearing an annual interest rate equal to the lesser of 10% or
the prime rate at the close of each quarter for which interest accrues. In
February 1996, Mr. Palefsky borrowed an additional $1,080,000 from Collagen on
an unsecured basis pursuant to a promissory note bearing an annual interest rate
equal to the lesser of 10% or the prime rate at the close of each quarter for
which interest accrues.
In March 1997, Mr. Palefsky entered into an agreement with Collagen in
connection with the severance of his employment relationship with Collagen. At
the same time, Mr. Palefsky entered into a consulting relationship with
Collagen, which has been assigned to the Company pursuant to the Separation and
Distribution Agreement. Under the consulting agreement, Collagen agreed to pay
Mr. Palefsky a consulting fee of $29,167 during each of the first 24 months of
his consultancy. As additional compensation for services during his consultancy
and for Mr. Palefsky's execution and adherence to a noncompetition agreement
with Collagen, Collagen agreed to: (i) pay Mr. Palefsky a bonus of $650,000,
(ii) conditioned on completion of the first year of his consultancy and
noncompetition, pay Mr. Palefsky a bonus of $225,000 on the first anniversary
date of the agreement and forgive $425,000 of the principal and any accrued
interest thereon of outstanding loans totaling $475,000 in principal amount,
made to Mr. Palefsky by Collagen and (iii) conditioned on completion of the
second year of Mr. Palefsky's consultancy, Collagen agreed to forgive the
balance of the principal and any accrued interest thereon of the above loans and
also to forgive the entire principal balance and any accrued interest thereon of
the loan in the principal amount of $1,080,000 made by Collagen in February 1996
to Mr. Palefsky. During his consultancy, Mr. Palefsky is also entitled to
reimbursement for his reasonable expenses incurred in connection with rendering
consulting services to Collagen. Mr. Palefsky's
73
<PAGE> 76
options to purchase stock of Collagen will continue to vest during his period of
consultancy and shall, in any event, be fully vested on conclusion of the
consultancy.
In July 1996, Reid W. Dennis, Chairman Emeritus and a director of Collagen
and a director of the Company, borrowed $1,000,000 from Collagen on an unsecured
basis pursuant to a promissory note bearing an annual interest rate of 8.25%.
Mr. Dennis repaid the entire balance of principal and accrued interest on this
note in September 1996.
In December 1997, Charles Williams, Vice President, Operations of the
Company, borrowed $150,000 from Cohesion Corporation, pursuant to a promissory
note bearing an annual interest rate of 8.5%, secured by certain real property
owned by Mr. Williams and all shares of Cohesion Corporation Common Stock issued
to Mr. Williams upon exercise of stock options currently held or acquired
following the date of the loan by Mr. Williams while the loan amount is
outstanding.
The Company and Collagen entered into certain "change of control"
agreements with certain of the Company's executive officers pursuant to which
all options granted to such executive officers to purchase Collagen Common Stock
shall immediately vest to the extent that such options would have vested during
the 24 months following the termination date, and all options granted to such
executive officers to purchase Common Stock of Cohesion Corporation, a
majority-owned subsidiary of the Company, shall immediately vest to the extent
that such options would have vested during the 24 months following the change of
control, in the event that such officer's employment is involuntarily terminated
without cause within a specified period of time following a change of control of
the Company or Collagen. Events constituting a change of control include (i) any
person acquiring 50% or more of the total voting power represented by the
Company's then outstanding voting securities without the approval of the
Company's Board; (ii) any person acquiring 50% or more of the total voting power
represented by Collagen's then outstanding voting securities without the
approval of Collagen's Board; (iii) any merger, sale of assets or liquidation of
the Company in which the Company's outstanding voting securities prior to the
transaction cease to represent at least 50% of the total voting power
represented by the voting securities of the Company or of the surviving entity
after the transaction; (iv) any merger, sale of assets or liquidation of
Collagen in which Collagen's outstanding voting securities prior to the
transaction cease to represent at least 50% of the total voting power
represented by the voting securities of Collagen or of the surviving entity
after the transaction; (v) replacing a majority of the Company's Board; or (vi)
replacing a majority of Collagen's Board. The change of control agreements will
expire by their own terms on the Distribution Date.
DESCRIPTION OF CAPITAL STOCK
Upon the completion of the Distribution, the authorized capital stock of
the Company will consist of 15,000,000 shares of Common Stock, $0.001 par value,
and 5,000,000 shares of Preferred Stock, $0.001 par value. The description set
forth below is incomplete and qualified by reference to the Company's Amended
and Restated Certificate of Incorporation and Bylaws, filed as exhibits to the
Company's Registration Statement on Form 10.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferential rights with respect to any outstanding Preferred Stock, holders of
Common Stock are entitled to receive ratably such dividends as may be declared
by the Board of Directors out of funds legally available therefor. See
"-- Dividend Policy." In the event of liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities and satisfaction of preferential
rights of any outstanding Preferred Stock. The Common Stock has no preemptive or
conversion rights or other subscription rights. The shares of Common Stock to be
issued upon completion of the Distribution will be fully paid and
non-assessable.
74
<PAGE> 77
PREFERRED STOCK
The Board of Directors is authorized to issue Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or the designation of such series,
without further vote or action by the stockholders. There are currently 10
shares of Preferred Stock outstanding, all of which will be converted into
Common Stock prior to the Distribution.
The issuance of Preferred Stock may have the effect of delaying, deferring
or preventing a change in control of the Company without further action by the
stockholders. The issuance of Preferred Stock with voting and conversion rights
may adversely affect the voting power of the holders of Common Stock, including
voting rights, of the holders of Common Stock. In certain circumstances, such
issuance could have the effect of decreasing the market price of the Common
Stock. The Company currently has no plans to issue any additional shares of
Preferred Stock.
DISTRIBUTION AGENT; TRANSFER AGENT AND REGISTRAR
The Distribution Agent and Transfer Agent and Registrar for the Common
Stock is Bank of New York, N.A. The Distribution Agent and Transfer Agent's
telephone number is (212) 815-6955.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company's Amended and Restated Certificate and its Bylaws after the
Distribution will provide, among other things, that any action required or
permitted to be taken by the stockholders of the Company may be taken only at a
duly called annual or special meeting of the stockholders and may not be
effected by a consent in writing. In addition, special meetings of the
stockholders of the Company may be called only by the Board of Directors, the
Chairman of the Board, the President of the Company or by any person or persons
holding shares representing at least 10% of the outstanding capital stock. The
Bylaws also establish procedures, including advance notice procedures with
regard to the nomination, other than by or at the direction of the Board of
Directors, of candidates for election as directors.
The Company is subject to the provisions of Section 203 of the Delaware
law, an anti-takeover law. In general, the statue prohibits a publicly held
Delaware corporation from entering into a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of Section
203, a "business combination" includes a merger, asset sale or transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
The foregoing provisions could have the effect of making it more difficult
for a third party to effect a change in the control of the Board of Directors.
In addition, these provisions could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from attempting
to acquire, a majority of the outstanding voting stock of the Company. See "Risk
Factors -- Potential Adverse Effect of Anti-Takeover Provisions."
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form 10 (the "Registration Statement,"
which term shall include any amendments thereto) under the Exchange Act. This
Information Statement, which constitutes a part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement,
certain items of which are contained in exhibits to the Registration Statement
as permitted by the rules and regulations of the Commission. For further
information, reference is made to the Registration Statement, including the
exhibits thereto, and the financial statements and notes filed as a part
thereof. Statements made in this Registration
75
<PAGE> 78
Statement concerning the contents of any document referred to herein are not
necessarily complete. With respect to each such document filed with the
Commission as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description of the matter involved. The Registration
Statement, including exhibits thereto and the financial statements and notes
filed as a part thereof, as well as such reports and other information filed
with the Commission, may be inspected without charge at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the Commission located at Seven World
Trade Center, 13th Floor, New York, NY 10048, and the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
all or any part thereof may be obtained from the Commission upon payment of
certain fees prescribed by the Commission. Such reports and other information
may also be inspected without charge at a Web site maintained by the Commission.
The address of such site is http://www.sec.gov.
76
<PAGE> 79
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this amendment to this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
By: /s/ DAVID FOSTER
------------------------------------
David Foster
Chief Executive Officer
Cohesion Technologies, Inc.
Date: May 19, 1998
77
<PAGE> 80
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER NOTES DESCRIPTION
- ------- ------- ------------------------------------------------------------
<C> <S> <C>
2.1 (2)(12) Separation and Distribution Agreement dated January 1, 1998,
between the Company and Collagen Corporation.
3.1 (1) Amended and Restated Certificate of Incorporation of the
Company.
3.2 (1) Bylaws of the Company.
4.1 (1) Specimen Stock Certificate.
10.1 (2)(13) Collagraft Supply Agreement dated January 1, 1998, between
the Company and Collagen Corporation.
10.2 (2)(14) Collagen Supply Agreement dated January 1, 1998, between the
Company and Collagen Corporation.
10.3 (2)(15) Assignment and License Agreement dated January 1, 1998,
between the Company and Collagen Corporation.
10.4 (2)(16) Recombinant Technology Development and License Agreement
dated January 1, 1998, between the Company and Collagen
Corporation.
10.5 (17) Services Agreement dated January 1, 1998, between the
Company and Collagen Corporation.
10.6 (18) Benefits Agreement dated January 1, 1998, between the
Company and Collagen Corporation.
10.7 (19) Tax Allocation and Indemnity Agreement dated January 1,
1998, between the Company and Collagen Corporation.
Intellectual Property and Production Agreement dated August
15, 1996 between Collagen Corporation and Genotypes, Inc.
10.8 (2)(20) Vitrogen International Distribution Agreement dated January
1, 1998, between the Company and Collagen Corporation.
10.9 (2) Letter Agreement dated October 1, 1996 between Collagen
Corporation and Genotypes, Inc.
10.10 (1)(11) Form of Indemnification Agreement between the Company and
each of its Officers and Directors.
10.11 (11) 1998 Stock Option Plan.
10.12 (11) 1998 Employee Stock Purchase Plan.
10.13 (11) 1998 Directors' Stock Option Plan.
10.14 (3) Collaborative Research and Distribution Agreement between
Collagen Corporation and Zimmer, Inc. dated as of June 26,
1985.
10.15 (4) Amendments dated February 16, 1993 and February 18, 1993
respectively, to the Product Development and Distribution
Agreement dated January 18, 1985 by and between Collagen
Corporation and Zimmer, Inc.
10.16 (5) Lease Agreement dated June 1, 1992 by and between Collagen
Corporation and Harbor Investment Partners.
10.17 (6) Lease Renewal for 2500 Faber Place, Palo Alto, dated
December 1, 1992 between Collagen Corporation and Leonard
Ely, Shirley Ely, Carl Carlsen and Mary Carlsen.
10.18 (1) Amended and Restated Research, Lease and Supply Agreement
dated as of February 20, 1996 between Collagen Corporation
and Pharming B.V.
10.19 (1)(2) Research and Development Agreement dated October 17, 1995
between Collagen Corporation and Innovasive Devices, Inc.
10.20 (2) Manufacturing and Supply Agreement dated as of October 17,
1995 between Collagen Corporation and Innovasive Devices,
Inc.
10.21 (2) Distribution Agreement dated as of October 17, 1995 between
Collagen Corporation and Innovasive Devices, Inc.
10.22 (7) Promissory Note between Howard D. Palefsky and the
Registrant dated February 20, 1996.
10.23 (8) Amended and Restated Secured Loan Agreement between Ross R.
Erickson and Collagen Corporation dated December 31, 1995.
10.24 (9) Loan Agreement between Collagen Corporation and Cohesion
Corporation dated May 24, 1996.
10.25 (10) Agreement between Howard D. Palefsky and Collagen
Corporation dated March 15, 1997.
</TABLE>
78
<PAGE> 81
<TABLE>
<CAPTION>
NUMBER NOTES DESCRIPTION
- ------- ------- ------------------------------------------------------------
<C> <S> <C>
10.26 (11) Form of Management Continuity Agreement between certain
officers of the Company and Collagen Corporation dated
February 7, 1997.
10.27 Intellectual Property and Production Agreement between
Genotypes and Collagen Corporation dated August 15, 1996.
21.1 * List of Subsidiaries (none).
27.1 * Financial Data Schedule.
</TABLE>
- ---------------
(1) To be supplied by amendment.
(2) Confidential treatment has been or will be requested as to certain portions
of this Exhibit.
(3) Incorporated by reference to Exhibit 10.24 filed with Collagen
Corporation's Annual Report on Form 10-K for the fiscal year ended June 30,
1985.
(4) Incorporated by reference to Exhibit 10.60 filed with the Collagen
Corporation's Annual Report on Form 10-K for the fiscal year ended June 30,
1993.
(5) Incorporated by reference to Exhibit 10.56 filed with the Collagen
Corporation's Annual Report on Form 10-K for the fiscal year ended June 30,
1992.
(6) Incorporated by reference to Exhibit 10.63 of Collagen Corporation's Annual
Report on Form 10-K for the fiscal year ended June 30, 1994.
(7) Incorporated by reference to Exhibit 10.79 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996.
(8) Incorporated by reference to Exhibit 10.76 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended December 31,
1995.
(9) Incorporated by reference to Exhibit 10.82 of Collagen Corporation's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996.
(10) Incorporated by reference to Exhibit 10.88 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997.
(11) Management contract or compensatory plan or arrangement.
(12) Incorporated by reference to Exhibit 2.1 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(13) Incorporated by reference to Exhibit 10.104 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(14) Incorporated by reference to Exhibit 10.97 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(15) Incorporated by reference to Exhibit 10.103 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(16) Incorporated by reference to Exhibit 10.98 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(17) Incorporated by reference to Exhibit 10.100 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(18) Incorporated by reference to Exhibit 10.101 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(19) Incorporated by reference to Exhibit 10.99 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(20) Incorporated by reference to Exhibit 10.102 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
* Previously filed with the Form 10 Registration Statement on May 12, 1998.
79
<PAGE> 82
APPENDIX A
<PAGE> 83
APPENDIX A
LEHMAN BROTHERS
April 16, 1998
Board of Directors
Collagen Corporation
2500 Faber Place
Palo Alto, California 94303
Members of the Board:
We understand that Collagen Corporation (the "Company") is proposing to
distribute all of the stock of Cohesion Technologies, Inc. ("Cohesion") to the
Company's stockholders on a pro rata basis so that stockholders of the Company
will receive one share of common stock of Cohesion for each share of common
stock of the Company owned by such stockholder (the "Distribution"). The terms
and conditions of the Distribution are set forth in more detail in the Company's
preliminary proxy statement (the "Proxy Statement").
We have been requested by the Board of Directors of the Company to render
our opinion with respect to the fairness, from a financial point of view, to the
Company's stockholders of the Distribution. We have not been requested to opine
as to, and our opinion does not in any manner address, the Company's underlying
business decision to proceed with or effect the Distribution.
In arriving at our opinion, we reviewed and analyzed: (1) the specific
terms of the Distribution, (2) the Proxy Statement, the Company's annual report
on Form 10-K for the year ended June 30, 1997 and such other publicly available
information concerning the Company that we believe to be relevant to our
analysis, (3) financial and operating information with respect to the business,
operations and prospects of the Company and Cohesion furnished to us by the
Company, (4) a trading history of the Company's common stock and a comparison of
that trading history with those of other companies that we deemed relevant, (5)
a comparison of the historical financial results and present financial condition
of the Company with those of other companies that we deemed relevant, and (6) a
comparison of the historical financial results and present financial condition
of Cohesion with those of other companies that we deemed relevant. In addition,
we have had discussions with the management of the Company concerning the
businesses, operations, assets, financial conditions and prospects of the
Company (including on a pro forma basis) and Cohesion and have undertaken such
other studies, analyses and investigations as we deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information and
have further relied upon the assurances of management of the Company that they
are not aware of any facts or circumstances that would make such information
inaccurate or misleading. With respect to the financial projections of the
Company and Cohesion, following the Distribution, upon advice of the Company we
have assumed that such projections have been reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
management of the Company as to the future financial performance of the Company
and Cohesion and that the Company and Cohesion will perform substantially in
accordance with such projections. In arriving at our opinion, we have not
conducted a physical inspection of the properties and facilities of the Company
or Cohesion and have not made or obtained any evaluations or appraisals of the
assets or liabilities of the Company or Cohesion. In addition, you have not
authorized us to solicit, and we have not solicited, any indications of interest
from any third party with respect to the purchase of all or a part of the
business of Cohesion. We have assumed that the Distribution will be a tax-free
transaction to the stockholders of the Company. Our opinion necessarily is based
upon market, economic and other conditions as they exist on, and can be
evaluated as of, the date of this letter.
<PAGE> 84
The process by which securities trading markets establish a market price
for any security is complex, involving the interaction of numerous factors, and
market prices will fluctuate with changes in, among other factors, the financial
condition, business and prospects of the issuer and comparable companies and
economic and financial market conditions. In addition, trading in shares of
Cohesion will likely be characterized by a period of redistribution among
stockholders of the Company who receive such shares in the Distribution, which
may temporarily depress the market price of such shares during such period.
Accordingly, we express no opinion as to the prices at which shares of common
stock of Cohesion or the Company actually will trade following the consummation
of the Distribution. This opinion should not be viewed as providing any
assurances that the combined market value of the shares of common stock of the
Company after consummation of the Distribution and the shares of the common
stock of Cohesion to be received by a stockholder of the Company pursuant to the
Distribution will be in excess of the market value of the shares of common stock
of the Company owned by such stockholder at any time prior to announcement or
consummation of the Distribution.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the Distribution is fair to
such stockholders.
We have acted as financial advisor to the Company in connection with the
Distribution and will receive a fee for our services which is contingent upon
the consummation of the Distribution. In addition, the Company has agreed to
indemnify us for certain liabilities that may arise out of the rendering of this
opinion. We also have performed various investment banking services for the
Company in the past and have received customary fees for such services. In the
ordinary course of our business, we may actively trade in the equity securities
of the Company for our own account and for the accounts of our customers and,
accordingly, may at any time hold a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered to the Board of Directors in connection with its
consideration of the Distribution. This opinion is not intended to be and does
not constitute a recommendation to any stockholder of the Company as to (i) how
such stockholder should vote with respect to the Distribution or (ii) any action
or investment decision which may be taken by such stockholders with respect to
shares of common stock of the company and Cohesion owned or to be received by
them in the Distribution.
Very truly yours,
LEHMAN BROTHERS
By: /s/ TED BRECK
------------------------------------
Managing Director
2
<PAGE> 85
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COHESION TECHNOLOGIES, INC. CONSOLIDATED FINANCIAL
STATEMENTS:
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of June 30, 1996 and 1997 and
December 31, 1997......................................... F-3
Consolidated Statements of Operations for the years ended
June 30, 1995, 1996 and 1997 and the six months ended
December 31, 1996 and 1997................................ F-4
Consolidated Statements of Stockholder's and Parent Company
Equity (Net Capital Deficiency) for the years ended June
30, 1995, 1996 and 1997 and the six months ended December
31, 1997.................................................. F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 1995, 1996 and 1997 and the six months ended
December 31, 1996 and 1997................................ F-6
Notes to Consolidated Financial Statements.................. F-7
COHESION TECHNOLOGIES, INC. UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION:
Description of Unaudited Pro forma Consolidated Financial
Information............................................... F-23
Unaudited Pro forma Consolidated Balance Sheet as of
December 31, 1997......................................... F-24
Unaudited Pro forma Consolidated Statements of Operations
for the year ended June 30, 1997 and the six months ended
December 31, 1997......................................... F-25
Notes to Unaudited Pro forma Consolidated Financial
Information............................................... F-26
</TABLE>
F-1
<PAGE> 86
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Cohesion Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Cohesion
Technologies, Inc. ("Cohesion"), (a wholly-owned subsidiary of Collagen
Corporation), as described in Note 1 to the consolidated financial statements,
as of June 30, 1996 and 1997, and the related consolidated statements of
operations, stockholder's and parent company equity (net capital deficiency) and
cash flows for each of the three years in the period ended June 30, 1997. These
financial statements are the responsibility of Cohesion's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cohesion at
June 30, 1996 and 1997, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended June 30, 1997, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
March 6, 1998
F-2
<PAGE> 87
COHESION TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
------------------- DECEMBER 31,
1996 1997 1997
------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $11,074 $ 13,706 $ 500
Short-term investments.................................... -- 92 1,332
Accounts receivable, less allowance for doubtful accounts
($14 at June 30, 1996, $2 at June 30 and December 31,
1997)................................................... 532 97 311
Inventories............................................... 56 56 30
Current deferred taxes.................................... 3,618 2,608 875
Receivable due from sales of Boston Scientific Corporation
stock................................................... 1,866 -- 3,146
Other current assets...................................... 1,840 942 621
------- -------- -------
Total current assets............................... 18,986 17,501 6,815
Property and equipment, net................................. 1,537 1,566 2,045
Intangible assets, net...................................... 1,850 1,491 1,404
Investment in Boston Scientific Corporation (Target
Therapeutics, Inc. in 1996)............................... 65,841 83,874 55,411
Other investments........................................... 7,771 10,041 8,724
Long-term deferred taxes.................................... 35 33 1,396
Loans to officers and employees............................. 1,807 9 159
Receivable from equity collar investment.................... -- -- 11,404
Other assets................................................ 89 89 91
------- -------- -------
$97,916 $114,604 $87,449
======= ======== =======
LIABILITIES AND STOCKHOLDER'S AND PARENT COMPANY EQUITY
Current liabilities:
Accounts payable.......................................... $ 586 $ 627 $ 145
Accrued compensation...................................... 352 625 536
Accrued liabilities....................................... 2,293 1,516 3,074
Income taxes payable...................................... 2,292 2,700 300
Notes payable............................................. 5,000 -- --
Other current liabilities................................. -- -- 65
------- -------- -------
Total current liabilities.......................... 10,523 5,468 4,120
Long-term liabilities:
Deferred income taxes..................................... 27,091 35,052 27,973
Other long-term liabilities............................... 169 79 50
------- -------- -------
Total long-term liabilities........................ 27,260 35,131 28,023
Commitments and contingencies
Minority interest........................................... 588 -- --
Stockholder's and parent company equity:
Preferred stock, $.001 par value, authorized: 5,000,000
shares, issued and outstanding: 10 shares at June 30 and
December 31, 1997 (no shares at June 30, 1996).......... -- -- --
Common stock, $.001 par value, authorized: 10,000,000
shares, issued and outstanding: no shares at June 30,
1996 and 1997 and December 31, 1997..................... -- -- --
Additional paid-in capital................................ 9,621 9,621 9,621
Parent company equity..................................... 15,375 17,315 8,895
Unrealized gain on available-for-sale investments......... 34,549 47,069 36,790
------- -------- -------
Total stockholder's and parent company equity...... 59,545 74,005 55,306
------- -------- -------
$97,916 $114,604 $87,449
======= ======== =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-3
<PAGE> 88
COHESION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
------------------------------ -------------------
1995 1996 1997 1996 1997
------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue -- product sales............... $ 3,546 $ 3,612 $ 2,527 $ 1,357 $ 1,234
Costs and expenses:
Cost of sales........................ 1,961 2,404 2,105 1,077 692
Research and development............. 3,416 4,268 9,627 6,071 7,402
General and administrative........... 2,726 3,120 7,153 1,871 2,591
Purchased in-process research and
development....................... -- 3,000 -- -- 10,530
------- ------- -------- ------- --------
Total costs and expenses..... 8,103 12,792 18,885 9,019 21,215
------- ------- -------- ------- --------
Loss from operations................... (4,557) (9,180) (16,358) (7,662) (19,981)
Other income (expense):
Net gain on investments, principally
Boston Scientific Corporation
(Target Therapeutics, Inc. in 1995
and 1996)......................... 5,110 82,093 9,063 9,222 8,775
Net gain on sale of investment in
Prograft Medical, Inc............. -- -- 15,395 -- --
Equity in earnings of Target
Therapeutics, Inc................. 2,417 1,430 -- -- --
Equity in losses of other
affiliates........................ (1,230) (1,824) (813) (598) (9)
Interest income...................... 25 378 566 343 236
Interest expense..................... (2,113) (2,532) (377) (188) --
------- ------- -------- ------- --------
Income (loss) before provision for
income taxes and minority interest... (348) 70,365 7,476 1,117 (10,979)
Provision for income taxes............. 553 31,718 3,162 480 --
Minority interest...................... -- (27) (667) (235) --
------- ------- -------- ------- --------
Net income (loss)...................... $ (901) $38,674 $ 4,981 $ 872 $(10,979)
======= ======= ======== ======= ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-4
<PAGE> 89
COHESION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S AND PARENT COMPANY EQUITY (NET CAPITAL
DEFICIENCY)
YEARS ENDED JUNE 30, 1995, 1996, 1997
AND SIX MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
STOCK-
UNREALIZED HOLDER'S AND
GAIN/(LOSS) PARENT
PREFERRED ON COMPANY
AND ADDITIONAL PARENT AVAILABLE- EQUITY
COMMON PAID-IN COMPANY FOR-SALE (NET CAPITAL
STOCK CAPITAL EQUITY INVESTMENTS DEFICIENCY)
--------- ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1994........... $ -- $9,621 $(15,353) $ -- $ (5,732)
Other advances to Collagen
Corporation...................... -- -- (1,927) -- (1,927)
Net loss........................... -- -- (901) -- (901)
------ ------ -------- -------- --------
Balance at June 30, 1995........... -- 9,621 (18,181) -- (8,560)
Other advances to Collagen
Corporation...................... -- -- (5,118) -- (5,118)
Unrealized gain on
available-for-sale securities.... -- -- -- 34,549 34,549
Net income......................... -- -- 38,674 -- 38,674
------ ------ -------- -------- --------
Balance at June 30, 1996........... -- 9,621 15,375 34,549 59,545
Other advances to Collagen
Corporation...................... -- -- (3,041) -- (3,041)
Unrealized gain on
available-for-sale securities.... -- -- -- 12,520 12,520
Net income......................... -- -- 4,981 -- 4,981
------ ------ -------- -------- --------
Balance at June 30, 1997........... -- 9,621 17,315 47,069 74,005
Other advances from Collagen
Corporation (unaudited).......... -- -- 2,559 -- 2,559
Unrealized loss on
available-for-sale securities
(unaudited)...................... -- -- -- (10,279) (10,279)
Net loss (unaudited)............... -- -- (10,979) -- (10,979)
------ ------ -------- -------- --------
Balance at December 31, 1997
(unaudited)...................... $ -- $9,621 $ 8,895 $ 36,790 $ 55,306
====== ====== ======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-5
<PAGE> 90
COHESION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
----------------------------- ------------------
1995 1996 1997 1996 1997
------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $ (901) $ 38,674 $ 4,981 $ 872 $(10,979)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Purchased in-process research
and development........................ -- 3,000 -- -- 10,530
Depreciation and amortization............ 568 801 564 635 341
Equity in (earnings) losses of
affiliates............................. (1,188) 393 813 597 9
Gains on investments, net................ (2,952) (42,547) (13,625) (4,051) (8,775)
Deferred income taxes.................... 844 (7,508) 326 5 561
Decrease (increase) in assets:
Accounts receivable.................... 415 188 435 329 (214)
Inventories............................ (17) (37) -- 23 26
Other.................................. (150) (1,331) 1,166 2,711 (3,002)
Increase (decrease) in liabilities:
Accounts payable, accrued liabilities
and other........................... 577 1,177 (463) (1,244) 1,051
Income taxes payable................... 444 78 408 (1,992) (2,400)
Other long-term liabilities............ (4) 611 (679) (237) (28)
------- -------- -------- ------- --------
Total adjustments........................... (1,463) (45,175) (11,055) (3,224) (1,901)
------- -------- -------- ------- --------
Net cash used in operating activities.... (2,364) (6,501) (6,074) (2,352) (12,880)
------- -------- -------- ------- --------
Cash flows from investing activities:
Net proceeds from sales of Boston Scientific
Corporation/Target Therapeutics, Inc.
stock.................................... 6,221 57,950 5,578 5,578 9,362
Net proceeds from sales of other affiliate
stock.................................... -- 1,447 9,771 -- 704
Proceeds from sales and maturities of
short-term investments................... -- -- -- -- 4,571
Purchases of short-term investments......... -- -- -- -- (3,567)
Expenditures for property and equipment..... (1,311) (678) (532) (139) (366)
Increase in intangible and other assets..... (416) (2,042) (824) (14) --
Equity investments and loans to
affiliates............................... (5,737) (14,337) (287) (251) (500)
Acquisition of shares of Cohesion
Corporation, net of cash balances........ -- (1,256) -- -- (10,530)
------- -------- -------- ------- --------
Net cash provided by (used in) investing
activities............................. (1,243) 41,084 13,706 5,174 (326)
------- -------- -------- ------- --------
Cash flows from financing activities:
Proceeds from (repayments of) bank
borrowings............................... -- 5,000 (5,000) -- --
Proceeds from (repayments of) advances from
Collagen Corporation..................... 3,600 (29,000) -- -- --
------- -------- -------- ------- --------
Net cash provided by (used in) financing
activities............................. 3,600 (24,000) (5,000) -- --
------- -------- -------- ------- --------
Net increase (decrease) in cash and
cash equivalents............................ (7) 10,583 2,632 2,822 (13,206)
Cash and cash equivalents at beginning of
period...................................... 498 491 11,074 11,074 13,706
------- -------- -------- ------- --------
Cash and cash equivalents at end of period.... $ 491 $ 11,074 $ 13,706 $13,896 $ 500
======= ======== ======== ======= ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-6
<PAGE> 91
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Cohesion Technologies, Inc. ("Cohesion") was organized as a Delaware
corporation and a wholly-owned subsidiary of Collagen Corporation ("Collagen")
in June 1997. In October 1997, Collagen announced that it would proceed to
separate its Aesthetic Technologies Group and its Collagen Technologies Group
("CTG") into two independent, publicly-traded companies. In connection with the
separation, Collagen plans to distribute as a dividend to its stockholders, one
share of Cohesion common stock for each share of Collagen common stock
outstanding, (the "Distribution"). The Distribution is designed to separate two
distinct businesses with significant differences in their markets, products,
research needs, investment needs, employee retention and compensation plans and
plans for growth. Collagen's Board believes the separation into two independent
companies will enhance the ability of each to focus on strategic initiatives and
new business opportunities, improve cost structures and operating efficiencies
and create incentives that are more attractive and appropriate for the
recruitment and retention of key employees. As a consequence, Collagen believes
that investors will be able to evaluate better the merits of the two groups of
businesses and their future prospects.
In March 1998, the Board of Directors of Collagen approved certain
agreements between Cohesion and Collagen which (i) provided for the transfer,
effective January 1, 1998, of certain assets and liabilities relating to the
businesses previously conducted by Collagen's CTG to Cohesion, and (ii)
established contractual arrangements between Collagen and Cohesion described
below under Note 2. CTG's business activities focused on the design,
development, manufacture and commercialization of innovative resorbable
biomaterials, adhesive technologies, and delivery systems in the fields of
tissue repair and regeneration.
The accompanying consolidated financial statements have been prepared using
Collagen's historical cost basis of the assets and liabilities of the various
division activities that comprise Cohesion. The financial statements of Cohesion
include the operating results of Cohesion Corporation, a developer of
proprietary products for hemostasis and tissue adhesion, biosealants and
adhesion barriers for surgical applications, since the acquisition of Cohesion
Corporation by Collagen in fiscal 1996 (see Note 7, "Acquisitions of Cohesion
Corporation").
The consolidated financial statements reflect the results of operations,
financial condition and cash flows of Cohesion as a component of Collagen and
may not be indicative of the actual results of operations and financial position
of Cohesion under separate ownership. The various assets, liabilities, revenues
and expenses associated with CTG have been allocated to the historical financial
statements of Cohesion in a manner consistent with the Assignment and License
Agreement, and related agreements, discussed below. Management believes that the
consolidated statements of operations include a reasonable allocation of costs
incurred by Collagen which benefit Cohesion. These allocations of corporate
expenses include, in aggregate, approximately 30% to 35% of the general and
administrative expenses of Collagen for the periods presented with the exception
of certain Chief Executive Officer ("CEO") expenses and legal costs related to
Collagen's lawsuit with Matrix Pharmaceutical, Inc. ("Matrix"). (See Notes 1, 8
and 9.) The CEO expenses have been allocated to Cohesion based on the CEO's
level of involvement in Cohesion during each fiscal year presented. All costs
associated with the Matrix lawsuit, which was filed in December 1994 and settled
in May 1997, were allocated based on the focus of the lawsuit during fiscal
1995, 1996 and 1997. Costs and expenses associated with cost of sales and
research and development were generally allocated to Cohesion on a specific
identification basis.
The consolidated financial statements include an allocation of Collagen
corporate debt and interest expense. In connection with the asset transfer
discussed above, $10.9 million of cash, cash equivalents and
F-7
<PAGE> 92
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
short-term investments remained with Collagen and the remaining cash, cash
equivalents and short-term investments were transferred to Cohesion at December
31, 1997. All short-term investments for fiscal years 1997 and prior were
allocated to Collagen. Substantially all investments in affiliates, including
Boston Scientific Corporation of Natick, Massachusetts ("Boston Scientific") and
Innovasive Devices, Inc. of Marlborough, Massachusetts ("Innovasive Devices")
were allocated to Cohesion. Trade receivables, notes receivable, loans to
officers and employees, fixed assets and employee related liabilities were
allocated based on specific identification. All equity accounts, with the
exception of the additional-paid-in-capital related to Target Therapeutics,
Inc., remained with Collagen. For any assets or liabilities where it was not
practical to use the specific identification method, Cohesion was allocated 30%
of these assets and liabilities. The 30% allocation was based on a review of the
characteristics and activity of these assets and liabilities and business
objectives. In those years that Cohesion had negative cash and cash equivalent
balances, a note payable due to Collagen was recorded. Accordingly, interest
expense was accrued annually at 8% and Cohesion was assumed to have repaid the
note payable balance and the accrued interest the following June 30th. The
intercompany receivable/payable balances resulting from Cohesion's participation
in Collagen's central cash management system, after consideration of the
December 31, 1997 contribution of cash, cash equivalents and short-term
investments, is a component of parent company's contributed capital on
Cohesion's balance sheet. The officer separation agreement with Collagen's
former CEO, as described below under Note 8, and the costs associated with the
agreement have been allocated to Cohesion.
Under the terms of the Services and Supply agreements between Cohesion and
Collagen discussed below, Collagen will supply certain products to Cohesion for
a fee. The cost of sales amounts included in the financial statements are based
on historical costs for the periods presented. The intercompany agreements
discussed in Note 2 provide for cost to be determined on a defined formula. If
such prospective arrangements had been in place during the periods presented,
cost of sales would have increased $167,000 in fiscal year 1995, decreased by
$237,000 and $589,000 in fiscal years 1996 and 1997, respectively, and would
have increased by $280,000 and $48,000 in the six months ended December 31, 1996
and 1997, respectively.
Under the terms of the Recombinant Technology and Development License
agreement between Cohesion and Collagen discussed below, Cohesion and Collagen
will collaborate to develop recombinant human collagen and provide for cost
sharing of the project until certain milestones are met. The research and
development ("R&D") expenses included in the financial statements are based on
historical costs for the periods presented. The intercompany agreements
discussed in Note 2 provide for costs to be equally shared. If such prospective
arrangements had been in place during the periods presented, R&D expenses, net
of reimbursements from Collagen, would have decreased by $273,000, $703,000 and
$1.3 million in fiscal years 1995, 1996 and 1997 and $418,000 and $1.0 million
in the six months ended December 31, 1996 and 1997, respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of Cohesion and
its wholly-owned and majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. Cohesion operates in one
industry segment focusing on the development and sale of medical devices.
Investments in unconsolidated subsidiaries, and other equity investments in
which Cohesion has a 20% to 50% interest or otherwise has the ability to
exercise significant influence, are accounted for under the equity method.
F-8
<PAGE> 93
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Interim Financial Information
The financial information at December 31, 1997, and for the six months
ended December 31, 1996 and 1997, is unaudited but includes all adjustments
(consisting only of normal recurring adjustments) which Cohesion considers
necessary for a fair presentation of the financial position at such date and of
the operating results and cash flows for those periods. Results of these periods
are not necessarily indicative of results expected for the entire year.
Use of Estimates in the Preparation of Financial Statements
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, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents, Short-term Investments and Other Investments
Cohesion considers all highly liquid investments with an original maturity
from date of purchase of three months or less to be cash equivalents. Short-term
investments consist principally of bankers acceptances, commercial paper and
master notes and have maturities greater than 90 days, but not exceeding one
year.
Cohesion invests its excess cash in deposits with major banks and in money
market securities of companies with strong credit ratings and from a variety of
industries. These securities are typically short-term in nature and, therefore,
bear minimal risk. Cohesion has not experienced any losses on its money market
investments.
Cohesion determines the appropriate classification of marketable securities
at the time of purchase and re-evaluates such designation as of each balance
sheet date. All of Cohesion's debt and equity securities are classified as
available-for-sale. The carrying value of available-for-sale debt securities
approximates fair value because of the short-term maturity of these investments.
Both realized and unrealized gains and losses on debt securities were immaterial
as of June 30, 1995, 1996 and 1997 and December 31, 1997 and for the years ended
June 30, 1995, 1996 and 1997 and the six months ended December 31, 1996 and
1997. Unrestricted available-for-sale equity securities in which Cohesion has a
less than 20% interest, which includes holdings in Boston Scientific (holdings
in Target Therapeutics, Inc. prior to April 1997) and Innovasive Devices are
carried at fair value with the unrealized gains and losses, net of tax, reported
as a separate component of stockholder's equity. Restricted equity securities in
which Cohesion has less than a 20% interest are carried at cost or estimated
realizable value, if less, and are included in "other investments and assets" in
the accompanying balance sheets. In fiscal 1996, the carrying value of certain
investments were reduced by $4.0 million to estimated net realizable value. The
cost of securities sold is based on the specific identification method.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in interest
income. Interest and dividends on securities classified as available-for-sale
are included in interest income.
F-9
<PAGE> 94
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
Inventories, which are purchased from Collagen, are valued at the lower of
cost, determined on a standard cost basis which approximates average cost, or
market.
Property and Equipment
Depreciation and amortization of property and equipment, which is stated at
cost, are provided on the straight-line method over estimated useful lives as
follows:
<TABLE>
<S> <C>
Machinery and equipment..................................... 3 - 7 years
Leasehold improvements...................................... Term of lease
</TABLE>
Intangible Assets
Intangible assets are amortized using the straight-line method. Patents
acquired prior to October 1996 are amortized over a seventeen year period
beginning with the effective date or over the remainder of such period from the
date acquired and patents purchased thereafter are expensed when acquired.
Trademarks acquired prior to fiscal 1996 are amortized over a twenty year period
beginning with the trademark filing dates and trademarks purchased thereafter
are expensed when acquired. The effect of changes in accounting for patents and
trademarks were not material to the accompanying financial statements.
Loans to Officers and Employees
Principal plus accrued interest due from current and former employees,
totaled approximately $161,000, $1.7 million, and $1.8 million at June 30, 1996,
and 1997, and December 31, 1997, respectively, prior to reserves. Principal plus
accrued interest due from officers totaled approximately $1.6 million, $9,000,
and $159,000 at June 30, 1996 and 1997, and December 31, 1997, respectively.
Included within the amounts due from current and former employees at June
30, 1997 and December 31, 1997, and within the amounts due from officers at June
30, 1996, are four promissory notes totaling $1.6 million, prior to reserves,
due from Collagen's former Chairman and Chief Executive Officer, Howard
Palefsky. All such notes are subject to interest at the lower of 10% per annum
or the prime rate. Two loans totaling $450,000 were forgiven on March 15, 1998
and two loans totaling $1.1 million are to be forgiven on March 15, 1999, but
all notes are repayable immediately if Mr. Palefsky discontinues serving as a
consultant to Cohesion prior to the loan forgiveness dates. Loans to Mr.
Palefsky were fully reserved as of June 30, 1997, and the associated expenses
were recognized in fiscal 1997.
Revenue Recognition
Revenue from product sales is recognized at time of shipment, net of
allowances for estimated future returns.
Earnings per Share
Cohesion computes earnings per share in accordance with Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS 128"). Per share data for each of the three years in
the period ended June 30, 1997 and the six months ended December 31, 1996 and
F-10
<PAGE> 95
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1997 has not been presented as no common shares are outstanding and such
information would not be meaningful.
Concentration of Credit and Other Risk
Cohesion sells its intermediate products (Vitrogen, Cell Prime, Zygen,
Angiostat and other bulk collagen products) to various universities and
institutions and its Collagraft(R) bone graft matrix implant and Collagraft(R)
bone graft matrix strip ("Collagraft bone graft products") to Zimmer, Inc.
("Zimmer"), Cohesion's marketing partner for Collagraft bone graft products.
Cohesion performs ongoing credit evaluations of its customers and generally does
not require collateral. Cohesion maintains reserves for potential credit losses
and such losses have been within management's expectations.
Cohesion allows, on occasion, its customers to return product for credit,
and also allows customers to return defective or damaged product for credit or
replacement. Written authorization from Cohesion is required to return
merchandise. Some domestic and foreign customers are subject to extended payment
terms. These practices have not had a material effect on Cohesion's working
capital.
As of December 31, 1997, Cohesion held 1,207,860 shares of Boston
Scientific common stock, valued at over $55 million (based on a market price of
$45.88 per share on such date). The market price of Boston Scientific's common
stock is highly volatile and, as a medical device manufacturer, Boston
Scientific is subject to a number of the same factors affecting its operations
as Cohesion, as well as additional factors not applicable to Cohesion. Any
significant downward fluctuation in the market price for Boston Scientific
common stock could adversely impact Cohesion's earnings (due to lower returns
per share on sales of such stock) as well as the value of Cohesion's total
assets as stated on its balance sheet (based on a lower carrying value for the
Boston Scientific investment, which as of December 31, 1997, represented
approximately 63% of the value of Cohesion's total assets).
All of Cohesion's research and development activities, its corporate
headquarters, and other critical business functions are located near major
earthquake faults. In addition, all of Cohesion's products are manufactured and
stored at Collagen's manufacturing and warehouse facility with Cohesion
currently maintaining only limited amounts of finished product inventory at
these facilities. Both facilities are located near major earthquake faults.
While Cohesion has some limited protection in the form of disaster recovery
programs and basic insurance coverage, Cohesion's operating results and
financial condition would be materially adversely affected in the event of a
major earthquake, fire or other similar calamity affecting these facilities.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income," and Financial Accounting Standard No. 131 ("SFAS 131"), "Disclosures
About Segments of an Enterprise and Related Information," which will be required
to be adopted by Cohesion in fiscal 1999. Adoption of these statements is not
expected to have a significant impact on Cohesion's consolidated financial
position, results of operations or cash flows.
2. CONTRACTUAL AGREEMENTS WITH COLLAGEN
Cohesion has entered into supply, services, research and development,
benefits, tax allocation, and distribution agreements with Collagen effective
January 1, 1998. Under the Collagraft Supply Agreement,
F-11
<PAGE> 96
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)
2. CONTRACTUAL AGREEMENTS WITH COLLAGEN (CONTINUED)
Collagen will supply Cohesion's requirements of Collagraft necessary for
Cohesion to fulfill its obligations under its agreement with Zimmer at a price
that is the greater of a percentage of the sales price or a defined multiplier
of Collagen's cost. In accordance with the Collagen Supply Agreement, Collagen
will supply Cohesion products, intermediates and finished materials at a price
equal to a multiplier of Collagen's cost. Under the Services Agreement, which is
effective through June 30, 1999, Cohesion shall provide Collagen with services
in the following areas: facilities, telephone, library, investor relations,
research and development services (to the extent not provided for by the
research and development agreement), and clinical and regulatory. Collagen shall
provide Cohesion with certain services in the following areas: financial and tax
services, health and welfare benefits administration and administration of the
401(k) Savings Plan, administrative, legal, regulatory, quality assurance,
medical affairs, and manufacturing services. Under the Services Agreement with
Collagen, Cohesion will use Collagen's computer systems until June 30, 1999.
Subsequent to June 30, 1999, Cohesion may extend its Services Agreement with
Collagen or elect to purchase its own computer systems. In accordance with the
Recombinant Technology and Development License Agreement, Cohesion and Collagen
will collaborate to develop recombinant human collagen and provide for cost
sharing for the project until certain milestones are met. The Benefits Agreement
provides for the continuation or replacement of benefits for the employees
transferred to Cohesion and employees remaining with Collagen. The Tax
Allocation Agreement provides that Collagen will be responsible for all taxes
prior to the Distribution date and Cohesion will be responsible for all of its
tax liabilities subsequent to that date. Under the Vitrogen International
Distribution Agreement, Collagen International, Inc., a subsidiary of Collagen,
shall act as Cohesion's distributor in Germany for Vitrogen.
F-12
<PAGE> 97
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)
3. BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
JUNE 30,
---------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Other current assets:
Receivables from affiliates........................ $1,482 $ 331 $ 353
Other.............................................. 358 611 268
------ ------ ------
$1,840 $ 942 $ 621
====== ====== ======
Property and equipment:
Machinery and equipment............................ $4,031 $4,733 $4,832
Leasehold improvements............................. 3,442 2,551 3,147
------ ------ ------
7,473 7,284 7,979
Less accumulated depreciation and amortization..... (5,936) (5,718) (5,934)
------ ------ ------
$1,537 $1,566 $2,045
====== ====== ======
Intangible assets:
Patents and trademarks............................. $2,887 $2,464 $2,428
Less amortization.................................. (1,037) (973) (1,024)
------ ------ ------
$1,850 $1,491 $1,404
====== ====== ======
Accrued liabilities:
Accrued liabilities -- research and development,
general and administrative and other............ $2,001 $1,283 $2,945
Legal fees......................................... 138 78 --
Employee related liabilities....................... 154 155 129
------ ------ ------
$2,293 $1,516 $3,074
====== ====== ======
</TABLE>
4. SHORT-TERM INVESTMENTS
Available-for-sale debt securities included short-term corporate
obligations of $92,000 and $1.3 million at June 30 and December 31, 1997,
respectively. During the six months ended December 31, 1997, Cohesion sold
short-term investments with a fair value at the dates of sale of $4.6 million.
Both gross realized and unrealized gains and losses on these securities were
insignificant. Cohesion uses amortized cost as the basis for recording gains and
losses from securities transactions. Contractual maturities of the debt
securities do not exceed one year at December 31, 1997.
5. INVESTMENT IN BOSTON SCIENTIFIC CORPORATION (TARGET THERAPEUTICS, INC.)
Cohesion's investment in Target Therapeutics, Inc. of Fremont, California
("Target") was accounted for under the equity method through November 1995.
During December 1995, Cohesion's ownership interest in Target fell below 20%.
Given that Cohesion did not have the ability to exercise significant influence,
Cohesion began accounting for its investment in Target under the cost method
beginning in December 1995. In fiscal 1996, Cohesion sold 1,792,000 shares of
Target common stock for a pre-tax gain of approximately $85.8 million and in
fiscal 1997, Cohesion sold 330,000 shares of Target common stock for a pre-tax
gain of approximately $9.1 million.
On January 20, 1997, Boston Scientific and Target jointly announced the
signing of a definitive agreement to merge in a tax-free stock-for-stock
transaction. On April 8, 1997, the merger was completed and, as a result,
Cohesion received 1,365,200 shares of Boston Scientific common stock in exchange
for Cohesion's
F-13
<PAGE> 98
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)
5. INVESTMENT IN BOSTON SCIENTIFIC CORPORATION (TARGET THERAPEUTICS, INC.)
(CONTINUED)
1,275,888 shares of Target common stock. Pursuant to the merger agreement,
Cohesion was restricted from selling its shares of Boston Scientific common
stock until the expiration of applicable pooling-of-interests restrictions,
which occurred during the first quarter of fiscal 1998. During the six months
ended December 31, 1997, Cohesion sold 157,340 shares of Boston Scientific
common stock for a pre-tax gain of approximately $8.8 million.
Boston Scientific is a leading manufacturer of catheter-based devices that
can be inserted through small body openings and are used in heart surgery and
other operations. Boston Scientific common stock is quoted on the New York Stock
Exchange under the symbol BSX. On December 31, 1997, the closing price of Boston
Scientific common stock was $45.88 per share.
At December 31, 1997, Cohesion's shares of Boston Scientific common stock
are classified as available-for-sale and have been recorded at the estimated
fair value of $55.4 million. The $50.2 million unrealized gain ($55.4 million
estimated fair value less $5.2 million cost) on these available-for-sale
securities has been reported as a separate component of stockholder's equity,
net of tax.
In August 1997, Cohesion entered into certain costless collar instruments
to hedge a portion (650,000 shares) of the Boston Scientific equity securities
against changes in market value. Gains and losses on these instruments are
recorded as an adjustment to unrealized gains and losses on marketable
securities with a corresponding receivable or payable recorded. A costless
collar instrument is a purchased put option and a written call option on a
specific equity security such that the cost of the purchased put and the
proceeds of the written call offset each other; therefore, there is no initial
cost or cash outflow for these instruments.
The fair value of the purchased puts and the written calls were determined
based on quoted market prices at year end. At December 31, 1997, the notional
amount of the put and call options were $41.2 million and $64.1 million,
respectively. The carrying value, which reflects the Company's receivable under
these investments and the fair value of the equity collars at December 31, 1997
were $11.4 million and $10.6 million, respectively.
6. INVESTMENT IN INNOVASIVE DEVICES, INC.
In October 1995, Cohesion purchased approximately 844,000 shares of common
stock, representing approximately 9% of the outstanding capital stock of
Innovasive Devices for $4.1 million and entered into a collaborative product
development agreement (the "Development Agreement"). Innovasive Devices
develops, manufactures and markets tissue and bone reattachment systems which
are particularly relevant to the sports medicine and arthroscopy segments of the
orthopaedic surgery market. Cohesion pursuant to the intercompany agreements,
assumed Collagen's relationship and obligations with Innovasive Devices.
Cohesion and Innovasive Devices are collaborating to develop certain resorbable
mechanical tissue-fixation devices utilizing collagen-based biomaterials for
applications in orthopaedic tissue repairs. Pursuant to the terms of the
Development Agreement, Cohesion is performing development activities in
accordance with a project plan and Innovasive Devices is reimbursing Cohesion
for such activities in accordance with the project budget. Accordingly, over the
next several years, the collaboration will require Cohesion's expertise with
collagen-based biomaterials and a small percentage of Cohesion's research and
development expenditures. In the event that marketable products are developed as
a result of this collaboration, Cohesion will have the right (but no obligation)
to manufacture such products.
Prior to October 1996, Cohesion's 844,000 shares of common stock of
Innovasive Devices were valued at cost or $4.1 million due to restrictions which
prevented the sale of any of Cohesion's shares of common stock
F-14
<PAGE> 99
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)
6. INVESTMENT IN INNOVASIVE DEVICES, INC. (CONTINUED)
of Innovasive Devices. At December 31, 1997, restrictions were no longer
applicable on 93,000 shares of common stock which Cohesion held in Innovasive
Devices. Cohesion carries the portion of its investment in Innovasive Devices
which can be sold within one year, as an available-for-sale investment at market
value, or $848,000 at December 31, 1997, reflecting an unrealized gain of
$401,000 ($848,000 estimated fair value less $447,000 cost), which has been
included in a separate component of stockholder's equity, net of tax. The
remaining 751,000 restricted shares of common stock continue to be valued at
cost. The investment in Innovasive is included in "other investments and assets"
in the accompanying balance sheets.
During fiscal 1996 and 1997 and the six months ended December 31, 1997,
Cohesion did not sell any of its shares of common stock of Innovasive Devices.
Innovasive Devices' common stock is quoted on The Nasdaq Stock Market under the
symbol IDEA. The closing price of Innovasive Devices' common stock at December
31, 1997, was $9.13 per share. At December 31, 1997, Cohesion held approximately
a 9% ownership position in Innovasive Devices.
7. ACQUISITIONS OF COHESION CORPORATION
Collagen increased its ownership position in Cohesion Corporation of Palo
Alto, California from approximately 40% to 81% in May 1996 and from 81% to
approximately 99% in December 1997. Cohesion Corporation is a privately-held
company developing novel biomaterials with superior performance characteristics
in the area of hemostats, biosealants, and adhesion prevention barriers for
surgical applications. In connection with Collagen's May 1996 and December 1997
investments and purchases of Cohesion Corporation shares, $3.0 million and $10.5
million, respectively, of the purchase price was allocated to in-process
research and development, which was expensed at the time of the purchases
including compensation amounts associated with the purchase of employee stock
options in December 1997.
Cohesion determined the amounts to be allocated to in-process technology
for Cohesion Corporation based on whether technological feasibility had been
achieved and whether there was any alternative future use for the technology.
Cohesion concluded that the in-process technology had no alternative future use
after taking into consideration the potential for both usage of the technology
in different products and for resale of the technology. Such studies are still
preliminary and are subject to revision. At December 31, 1997, there were
additional unvested options outstanding providing for the purchase of the
remaining shares of Cohesion Corporation common stock. Cohesion is determining
the future activity, if any, it will take with respect to these options (see
Note 14, "Subsequent Events.")
The unaudited pro forma results of operations of Cohesion assuming the
acquisitions of Cohesion Corporation shares occurred on July 1, 1995, on the
basis described above with all material intercompany transactions eliminated,
are as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
-------------------- ----------------
1996 1997 1996 1997
-------- ------- ----- ------
<S> <C> <C> <C> <C>
Net income (loss)...................................... $41,275 $4,314 $637 $(448)
</TABLE>
The unaudited pro forma net income (loss) amounts above do not include the
charges for in-process research and development aggregating $13.5 million
arising from the acquisitions of shares of Cohesion Corporation. The unaudited
pro forma information is not necessarily indicative of the actual results of
operations had the transaction occurred at the beginning of the periods
indicated, nor should it be used to project Cohesion's results of operations for
any future dates or periods.
F-15
<PAGE> 100
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)
8. COMMITMENTS
Minimum lease payments
Future minimum lease payments under noncancelable operating leases at June
30, 1997 are as follows (in thousands for years ended June 30):
<TABLE>
<S> <C>
1998........................................................ $ 988
1999........................................................ 982
2000........................................................ 560
2001........................................................ 558
2002........................................................ 558
Thereafter.................................................. 1,347
------
Total minimum lease payments...................... $4,993
======
</TABLE>
Rental expense was $833,000, $948,000, $722,000, $356,000 and $474,000 in
fiscal 1995, 1996, and 1997 and for the six months ended December 31, 1996 and
1997, respectively.
Revolving Line of Credit Agreement
In November 1994, Collagen entered into a $7.0 million revolving line of
credit with a bank, secured by shares of Target common stock. The terms of this
facility contained certain financial covenants. In December 1995, the $7 million
revolving line of credit was increased to $15.0 million. During fiscal 1996,
$5.0 million was borrowed under this agreement. In June 1997, Collagen repaid
the outstanding balance and canceled the revolving line of credit agreement
prior to its expiration date of November 15, 1997. Interest associated with this
agreement was, at Collagen's option, based on either the prime rate plus 1/2%
or the Eurodollar rate plus the lesser of 1 1/4% or the Alternate LIBOR
applicable margin. Interest was payable monthly. Additionally, Collagen was
required to pay, on a quarterly basis, a commitment fee of 3/8 of 1% per annum
of the unused portion. The weighted average interest rate was 8.1% on the
outstanding short-term borrowings at June 30, 1996. The revolving line of credit
was allocated to Cohesion because the credit facility was secured by shares of
Target common stock, which were also allocated to Cohesion.
Bonus Agreement
In February 1996, Collagen entered into a cash bonus agreement with
Collagen's Chairman and Chief Executive Officer whereby cash bonuses in the
amounts of $325,000, $305,000, $285,000, $265,000 and $245,000 would be paid to
him on February 13 of each of the following five years beginning in 1997,
providing that he continued to serve Collagen on the applicable payment date. On
February 10, 1997, Mr. Palefsky resigned as Chief Executive Officer and
subsequently resigned as Chairman of the Board of Directors on June 20, 1997,
and as a result, the February 13, 1997 payment and future payments were not
required to be paid under this bonus agreement. The bonus agreement was replaced
by the officer separation agreement. Under the officer separation agreement, Mr.
Palefsky will continue to serve as a consultant to Cohesion during the next two
years and as a result, Cohesion will make payments to Mr. Palefsky during fiscal
1998 and fiscal 1999 totaling $575,000 and $233,000, respectively.
9. LEGAL MATTERS
In May 1997, Collagen settled its lawsuit with Matrix, which had been
pending since December 1994. The lawsuit involved Collagen's claims of trade
secret misappropriation against Matrix and two former
F-16
<PAGE> 101
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)
9. LEGAL MATTERS (CONTINUED)
Collagen employees hired by Matrix in 1992, as well as cross-complaints against
Collagen by Matrix and the two employees for defamation and violation of state
unfair competition law.
Collagen granted Matrix a nonexclusive license to certain intellectual
property (which was transferred to Cohesion effective January 1, 1998) for
certain nonmonetary consideration. The lawsuit was settled and dismissed with
prejudice. All claims by and against all parties have been released.
Cohesion is involved in other legal actions arising in the ordinary course
of business. While the outcome of such matters is currently not determinable, it
is management's opinion that these matters will not have a material adverse
effect on Cohesion's consolidated financial position or results of its
operations.
10. STOCKHOLDER'S AND PARENT COMPANY EQUITY
Preferred Stock
Cohesion has authorized 5,000,000 shares of preferred stock with a par
value of $0.001 per share. Each share of preferred stock is convertible into one
share of common stock at the option of the holder. Additionally, the preferred
shares automatically convert into common stock concurrent with the closing of an
underwritten public offering of common stock under the Securities Act of 1933 in
which Cohesion receives at least $10,000,000 in gross proceeds.
Preferred stockholders are entitled to noncumulative dividends at an annual
rate of $0.10 per share. Dividends will be paid only when declared by the Board
of Directors out of legally available funds. No dividends have been declared as
of December 31, 1997.
Preferred stockholders are entitled to a liquidation preference of $1.00
per share plus all declared and unpaid dividends. If, upon liquidation, the
assets of Cohesion are insufficient to permit the payment to the preferred
stockholders of the full liquidation preference, the assets of Cohesion will be
distributed ratably among the preferred stockholders. If the assets are more
than sufficient to pay the full preferences, then, following the payment of the
full preferences, the remaining assets of Cohesion shall be distributed ratably
to any holders of common stock.
Stock Options
Each employee (including officers), consultant, and non-employee director
of Collagen or any subsidiary of Collagen who, immediately prior to the
Distribution date, holds a vested Collagen stock option will, in connection with
the Distribution, receive two new options in replacement of the original vested
Collagen stock option, one to acquire shares of Collagen's common stock and the
other to acquire shares of Cohesion's common stock. Each new option will give
the holder the right to purchase a number of shares equal to the number of
shares in the original option.
Each employee (including officers), consultant, and non-employee director
of Collagen or any subsidiary of Collagen who, immediately prior to the
Distribution date, holds an unvested Collagen stock option will, in connection
with the Distribution, receive a new option in replacement of the unvested
Collagen stock option to acquire the same number of shares of common stock of
the entity (Collagen or Cohesion) for which such optionee shall be employed or
retained as a consultant or non-employee director following the Distribution.
The exercise price of each new option will be determined in accordance with
Emerging Issues Task Force Issue 90-9 as to be agreed upon by Collagen's Board
and the Cohesion Board (or any committee thereof) after
F-17
<PAGE> 102
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)
10. STOCKHOLDER'S AND PARENT COMPANY EQUITY (CONTINUED)
consultation with legal and accounting advisors. The exercise price of each new
option is expected to generally preserve any spread between the exercise price
of the replaced option and the fair market value of Collagen's stock on the
Distribution date. The exercise price, as adjusted in light of the above
considerations, is not intended to result in any compensation expense to
Collagen or Cohesion. At the option of Collagen's or the Cohesion Board,
out-of-the-money options may be treated differently.
Stock Purchase Plan
The Board of Directors of Collagen has designated Cohesion and each of
Cohesion's subsidiaries as a designated subsidiary under the Collagen Employee
Stock Purchase Plan ("ESPP") as of January 1, 1998. The Collagen ESPP and the
offering period that commenced on January 1, 1998 under the Collagen ESPP will
terminate one week prior to the record date for the Distribution and all
employee contributions through such date will be used to purchase shares of
Collagen common stock. As of that date, Collagen and Cohesion expect to have
adopted new employee stock purchase plans having such terms as are approved by
the respective Board of Directors, and the initial offering periods under each
such plan shall commence on or shortly after the Distribution date (see Note 14,
"Subsequent Events").
Subsidiary Stock Information
Stock Options
In April 1996, the Board of Directors of Cohesion Corporation approved the
adoption of the 1996 Cohesion Corporation Stock Option Plan which authorized the
issuance of 475,000 shares of Cohesion Corporation common stock under the plan.
In May 1997, the Board of Directors of Cohesion Corporation authorized the
issuance of an additional 300,000 shares of Cohesion Corporation stock under the
plan. The Board of Directors of Cohesion Corporation may grant incentive stock
options or non-statutory stock options to officers, directors, key employees and
consultants to purchase Cohesion Corporation's common stock. The options are
granted at no less than the fair market value at the dates of grant and
generally expire after ten years. Incentive stock options have a one-year cliff
period, at which time 25% of the options become vested with monthly vesting
thereafter, not to exceed a four-year vesting period from the vesting
commencement date. Non-statutory stock options become exercisable on a monthly
basis over a three-year period from the date of grant. The shares issued under
the plan are not convertible into shares of Cohesion, and Cohesion does not have
repurchase rights with respect to such shares (see Note 14, "Subsequent
Events").
At December 31, 1997, the total number of shares of common stock reserved
for issuance under Cohesion Corporation's Stock Option Plan was 775,000.
F-18
<PAGE> 103
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)
10. STOCKHOLDER'S AND PARENT COMPANY EQUITY (CONTINUED)
Stock option activities under the Cohesion Corporation Stock Option Plan
were as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE NUMBER
NUMBER OPTION EXERCISE PRICE PRICE PER OF SHARES
OF SHARES RANGE PER SHARE SHARE EXERCISABLE
--------- --------------------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding at May 1, and June 30, 1996........ 307,000 $0.20 - $0.20 $0.20 39,146
Granted........................................ 133,000 0.70 - 0.70 0.70
-------- ------------ -----
Outstanding at June 30, 1997................... 440,000 0.20 - 0.70 0.35 132,174
Granted........................................ 154,000 0.70 - 0.70 0.70
Exercised...................................... (127,410) 0.20 - 0.70 0.25
Forfeitures or expired......................... (38,437) 0.20 - 0.70 0.57
-------- ------------ -----
Outstanding at December 31, 1997............... 428,153 $0.20 - $0.70 $0.49 188,457
======== ============ =====
Available for grant at December 31, 1997....... 219,437
========
</TABLE>
Stock Compensation
Cohesion and Cohesion Corporation have elected to follow Accounting
Principles Board Statement No. 25 ("APB No. 25") and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("SFAS 123") requires the use of option valuation
models that were not developed for use in valuing employees stock options. Under
APB No. 25, because the exercise price of the employee stock options equals the
market price of the underlying stock on the date of the grant, no compensation
expense is generally recognized.
Pro forma information regarding net income is required by SFAS 123 and
determined as if Cohesion and its subsidiaries had accounted for the Cohesion
Corporation employee stock options granted subsequent to Cohesion's acquisition
of a majority ownership in Cohesion Corporation in May 1996 under the fair value
method of that statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model for the multiple-option
approach, with the following weighted-average assumptions for 1996 and 1997:
risk-free interest rate of 5.38% and 6.05%, respectively; volatility factor of
the expected market price of Cohesion Corporation's Common Stock of 0.43 and
0.49, respectively; no dividend payments; and a weighted-average expected life
of the options of 5 years and 5.5 years, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of the employee stock options.
F-19
<PAGE> 104
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)
10. STOCKHOLDER'S AND PARENT COMPANY EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma net income over the options' vesting period.
Cohesion's pro forma information follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------
1996 1997
--------- --------
<S> <C> <C>
Pro forma net income...................................... $38,674 $4,973
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to May
1996, its pro forma effect will not be fully reflected until 1998. In addition,
such information does not include the effects of the options of Cohesion to be
issued in replacement of existing Collagen stock options in connection with the
expected Distribution of Cohesion.
The following table summarizes information about Cohesion Corporation stock
options outstanding at June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------- -------------------------------
WEIGHTED
AVERAGE NUMBER
WEIGHTED REMAINING EXERCISABLE AS WEIGHTED
RANGE OF NUMBER AVERAGE CONTRACTUAL OF JUNE 30, AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE LIFE 1997 EXERCISE PRICE
- --------------- ----------- -------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$0.20 307,000 $0.20 8.76 126,896 $0.20
0.70 133,000 0.70 9.53 5,278 0.70
------- ----- ---- ------- -----
$0.20 - $0.70 440,000 $0.35 9.00 132,174 $0.22
======= ===== ==== ======= =====
</TABLE>
The weighted-average fair value of options granted during the years ended
June 30, 1996 and 1997 were $.10 and $.33 per share, respectively.
11. INTERNATIONAL SALES, MAJOR CUSTOMER, AND PRODUCTS
Export sales, which were in European countries only, were $25,000 in fiscal
1995, $83,000 in fiscal 1996, $124,000 in fiscal 1997 and $102,000 and $51,000
in the six months ended December 31, 1996 and 1997, respectively.
During fiscal years 1995, 1996, 1997 and the six months ended December 31,
1996 and 1997, Cohesion realized product sales from its marketing partner,
Zimmer, of $3.0 million, $3.1 million, $1.9 million, $1.0 million and $1.0
million, respectively, which represented 85%, 86%, 77%, 74% and 77% of product
sales. Zimmer has exclusive marketing rights for Collagraft bone graft products
in the United States and Asia.
12. INCOME TAXES
Cohesion uses the liability method of accounting for income taxes required
by SFAS No. 109. The provision was prepared on the basis that Cohesion filed
separate tax returns in each year.
F-20
<PAGE> 105
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)
12. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Cohesion's deferred tax assets and liabilities as of June 30, 1996 and 1997 are
presented below (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------
1996 1997
------- -------
<S> <C> <C>
Deferred tax liabilities:
Unrealized gain on Boston Scientific (Target) stock....... $23,860 $32,507
Investments............................................... 3,154 2,507
Intangible assets......................................... 64 38
Property, plant & equipment............................... 13 --
------- -------
Total deferred tax liabilities.................... 27,091 35,052
------- -------
Deferred tax assets:
Equity in losses of affiliates............................ 3,336 3,190
State income taxes........................................ 2,523 1,306
Non-deductible accruals................................... 1,000 1,127
Other..................................................... 95 175
Valuation allowance....................................... (3,301) (3,157)
------- -------
Total deferred tax assets......................... 3,653 2,641
------- -------
Net deferred tax liabilities...................... $23,438 $32,411
======= =======
</TABLE>
The valuation allowance increased by $685,000 and $2.1 million in fiscal
1995 and fiscal 1996, respectively and decreased by $144,000 in fiscal 1997.
Significant components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------
1995 1996 1997
----- ------- ------
<S> <C> <C> <C>
Current:
Federal................................................ $(176) $31,085 $1,981
State.................................................. 422 8,141 875
----- ------- ------
Total current.................................. 246 39,226 2,856
----- ------- ------
Deferred:
Federal................................................ -- (6,732) 203
State.................................................. 307 (776) 103
----- ------- ------
Total deferred................................. 307 (7,508) 306
----- ------- ------
$ 553 $31,718 $3,162
===== ======= ======
</TABLE>
F-21
<PAGE> 106
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)
12. INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income before taxes. The sources and
tax effects of the differences are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------
1995 1996 1997
----- ------- ------
<S> <C> <C> <C>
Income (loss) before income taxes......................... $(348) $70,365 $7,476
===== ======= ======
Expected tax at 35% or 34%................................ $(118) $24,628 $2,617
State income tax, net of federal benefit.................. 93 4,002 725
In-process research and development....................... -- 1,050 --
Equity in losses of affiliates............................ 728 1,863 (278)
Benefit from favorable tax settlement..................... (163) -- --
Other..................................................... 13 175 98
----- ------- ------
$ 553 $31,718 $3,162
===== ======= ======
</TABLE>
13. STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
--------------------------- ----------------
1995 1996 1997 1996 1997
------ ------- ------ ------- -----
<S> <C> <C> <C> <C> <C>
Cash paid during the year for:
Interest............................... $2,113 $ 2,532 $ 377 $ 188 $--
Income taxes (net of refunds).......... -- 36,763 2,370 2,350 --
</TABLE>
14. SUBSEQUENT EVENTS (UNAUDITED)
In April 1998, Cohesion's Board adopted, and Collagen, as the sole
stockholder of Cohesion approved, Cohesion's 1998 Stock Option Plan, the 1998
Employee Stock Purchase Plan and the Directors' Stock Option Plan and reserved
2,607,000 shares, 250,000 shares and 268,000 shares of common stock,
respectively, for issuance thereunder.
Following the Distribution and approval by Cohesion's Board of Directors,
Cohesion anticipates offering to exchange or substitute the outstanding options
of Cohesion Corporation for options to acquire approximately 620,000 shares of
the common stock of Cohesion. The new options are expected to have an exercise
price substantially less than the fair market value of Cohesion's shares at the
time of such exchange, based on an assumed exchange ratio of 1.67 to 1 as
anticipated and to be determined by the Board of Directors. Assuming such offers
are accepted by the Cohesion Corporation option holders and assuming an expected
fair value of $10.00 per share at the date of the exchange, Cohesion expects to
record a non-cash compensation expense of approximately $1.5 million at the date
of the exchange in connection with vested options and an additional $4.5 million
of deferred compensation to be amortized during the next three fiscal years.
F-22
<PAGE> 107
COHESION TECHNOLOGIES, INC.
DESCRIPTION OF UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION
The terms of the Distribution are described in "The Distribution -- Manner
of Effecting the Distribution" included elsewhere in this Information Statement.
The unaudited pro forma balance sheet as of December 31, 1997, and the
unaudited pro forma statements of operations for the year ended June 30, 1997,
and the six months ended December 31, 1997, and the related explanatory notes
are presented to show the effects of the Distribution and the January 1, 1998
contribution by Collagen under the Separation and Distribution Agreement and
activities under the Collagraft Supply Agreement and the Research and
Development Agreement on the financial position and results of operations of
Cohesion Technologies, Inc., assuming that the Distribution has already occurred
and that the provisions of these agreements had been in place as of December 31,
1997, for purposes of the balance sheet and as of July 1, 1996, for the purposes
of the statements of operations. The pro forma financial information is not
necessarily indicative of the actual results that would have occurred had the
contribution by Collagen and the Distribution occurred on these dates or of the
future results of operations and financial position of Cohesion Technologies,
Inc.
The pro forma financial information gives effect to the adjustments set
forth in the notes thereto. Management believes that the assumptions used in
preparing the pro forma financial information provide a reasonable basis for
presenting all of the significant effects of the Distribution and related
agreements, that the pro forma adjustments give appropriate effect to those
assumptions and that the pro forma adjustments are properly applied in the pro
forma financial information.
This pro forma financial information should be read in conjunction with the
separate historical consolidated financial statements of Cohesion included
elsewhere in this Information Statement.
F-23
<PAGE> 108
COHESION TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................ $ 500 $ -- $ 500
Short-term investments................................... 1,332 -- 1,332
Accounts receivable, less allowance for doubtful accounts
of $2................................................. 311 -- 311
Inventories.............................................. 30 -- 30
Current deferred taxes................................... 875 -- 875
Receivable due from sales of Boston Scientific
Corporation stock..................................... 3,146 -- 3,146
Other current assets..................................... 621 -- 621
------- ------- -------
Total current assets............................. 6,815 -- 6,815
Property and equipment, net................................ 2,045 -- 2,045
Intangible assets, net..................................... 1,404 -- 1,404
Investment in Boston Scientific Corporation................ 55,411 -- 55,411
Other investments.......................................... 8,724 -- 8,724
Long-term deferred taxes................................... 1,396 -- 1,396
Loans to officers and employees............................ 159 -- 159
Receivable from equity collar investment................... 11,404 -- 11,404
Other assets............................................... 91 -- 91
------- ------- -------
$87,449 $ -- $87,449
======= ======= =======
LIABILITIES AND STOCKHOLDER'S AND PARENT COMPANY EQUITY
Current liabilities:
Accounts payable......................................... $ 145 $ -- $ 145
Accrued compensation..................................... 536 -- 536
Accrued liabilities...................................... 3,074 -- 3,074
Income taxes payable..................................... 300 -- 300
Other current liabilities................................ 65 -- 65
------- ------- -------
Total current liabilities........................ 4,120 -- 4,120
Long-term liabilities:
Deferred income taxes.................................... 27,973 -- 27,973
Other long-term liabilities.............................. 50 -- 50
------- ------- -------
Total long-term liabilities...................... 28,023 -- 28,023
Commitments and contingencies
Stockholder's and parent company equity:
Preferred stock; $0.001 par value; 10 shares outstanding
historical and no shares outstanding pro forma........ -- -- --
Common stock; $0.001 par value; no shares outstanding
historical and 8,962,729 shares outstanding pro
forma................................................. -- 9(1) 9
Additional paid-in capital............................... 9,621 8,886(1) 18,507
Parent company equity.................................... 8,895 (8,895)(1) --
Unrealized gain on available-for-sale investments........ 36,790 -- 36,790
------- ------- -------
Total stockholder's and parent company equity.... 55,306 -- 55,306
------- ------- -------
$87,449 $ -- $87,449
======= ======= =======
</TABLE>
The accompanying Notes to Unaudited Pro Forma Consolidated Financial Information
are an integral part of these statements.
F-24
<PAGE> 109
COHESION TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997 SIX MONTHS ENDED DECEMBER 31, 1997
------------------------------------ -------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue -- product sales............ $ 2,527 $ -- $ 2,527 $ 1,234 $ -- $ 1,234
Costs and expenses:
Cost of sales..................... 2,105 (589)(2) 1,516 692 48(2) 740
Research and development.......... 9,627 (1,313)(3) 8,314 7,402 (1,015)(3) 6,387
General and administrative........ 7,153 -- 7,153 2,591 -- 2,591
Purchased in-process research and
development.................... -- -- -- 10,530 -- 10,530
-------- ------- -------- -------- ------- --------
Total costs and expenses....... 18,885 (1,902) 16,983 21,215 (967) 20,248
-------- ------- -------- -------- ------- --------
Loss from operations................ (16,358) 1,902 (14,456) (19,981) 967 (19,014)
Other income (expense):
Net gain on investments,
principally Boston Scientific
Corporation.................... 9,063 -- 9,063 8,775 -- 8,775
Net gain on sale of investment in
Prograft Medical, Inc.......... 15,395 -- 15,395 -- -- --
Equity in losses of other
affiliates..................... (813) -- (813) (9) -- (9)
Interest income................... 566 -- 566 236 -- 236
Interest expense.................. (377) -- (377) -- -- --
-------- ------- -------- -------- ------- --------
Income (loss) before provision for
income taxes and minority
interest.......................... 7,476 1,902 9,378 (10,979) 967 (10,012)
Provision for income taxes.......... 3,162 723(4) 3,885 -- --(4) --
Minority interest................... (667) -- (667) -- -- --
-------- ------- -------- -------- ------- --------
Net income (loss)................... $ 4,981 $ 1,179 $ 6,160 $(10,979) $ 967 $(10,012)
======== ======= ======== ======== ======= ========
Basic net income (loss) per
share(5).......................... $ 0.70 $ (1.13)
======== ========
Diluted net income (loss) per
share(5).......................... $ 0.69 $ (1.13)
======== ========
Shares used in calculating basic net
income (loss) per share(5)........ 8,804 8,857
======== ========
Shares used in calculating diluted
net income (loss) per share(5).... 8,930 8,857
======== ========
</TABLE>
The accompanying Notes to Unaudited Pro Forma Consolidated Financial Information
are an integral part of these statements.
F-25
<PAGE> 110
COHESION TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION
The pro forma information presented is theoretical in nature and not
necessarily indicative of the future results of operations or financial position
of Cohesion Technologies, Inc. ("Cohesion") or the results of operations and
financial position which would have resulted had Cohesion been a stand-alone
company during the periods presented. The pro forma financial information
reflect the effects of the Distribution and the January 1, 1998 contribution by
Collagen under the Separation and Distribution Agreement, the Collagraft Supply
Agreement, and the Research and Development Agreement between Collagen
Corporation and Cohesion.
PRO FORMA BALANCE SHEET ADJUSTMENTS
1. STOCKHOLDER'S EQUITY
These adjustments have been made as if the January 1, 1998 contribution by
Collagen Corporation under the Separation and Distribution Agreement and the
Distribution had occurred as of December 31, 1997. The pro forma number of
shares outstanding assumes a one-for-one share distribution in connection with
the Distribution.
PRO FORMA STATEMENTS OF OPERATIONS ADJUSTMENTS
2. COST OF SALES
This adjustment has been made to cost of sales to reflect the pricing under
the Supply agreements between Cohesion and Collagen as if such prospective
arrangements had been in place during the periods presented.
3. RESEARCH AND DEVELOPMENT
This adjustment has been made to research and development expense to
reflect the reimbursement of project costs under the Recombinant Technology and
Development License agreement between Cohesion and Collagen as if such
prospective arrangements had been in place during the periods presented.
4. INCOME TAXES
This adjustment reflects the necessary change in the income tax provision
that would occur if the Distribution had occurred on July 1, 1996, considering
all pro forma adjustments as described above. Such pro forma change was
insignificant for the six months ended December 31, 1997.
5. NET INCOME (LOSS) PER SHARE
Pro forma share and per share data has been presented for the year ended
June 30, 1997 and the six months ended December 31, 1997 assuming the
distribution of shares of Cohesion common stock to Collagen's stockholders based
on the number of Collagen common shares and common equivalent shares outstanding
for those periods, assuming a one-for-one exchange ratio in the distribution.
F-26
<PAGE> 111
APPENDIX - DESCRIPTION OF GRAPHICS
INSIDE FRONT COVER
DESCRIPTION:
Photo of CoStasis product being administered
Photo of sternal edge with caption "Before Use of CoStasis Hemostat"
Photo of sternal edge with caption "After Use of CoStasis Hemostat"
TEXT:
CoStasis(TM) Hemostatic Device
CoStasis is an atraumatic liquid hemostat that is applied to the
bleeding site with the patient's plasma, incorporating the surgical
advantages of collagen, fibrinogen and thrombin.
CoStasis hemostatic device is designed for use in a variety of
applications that customarily arise in surgery, including bleeding bone
edges, anastomatic sites and diffuse bleeding organs.
CoStasis can offer distinct advantages over fibrin sealants and other
currently available products in the United States, including faster
hemostasis, greater mechanical strength, enhanced product safety and
improved preparation, handling and general performance characteristics.
Preclinical data indicate that CoStasis can be highly effective in the
control of bleeding from a variety of tissue sites. Cohesion
Corporation has received an Investigational Device Exemption from the
FDA and has commenced U.S. pivotal trials of CoStasis.
The Company's product candidates are under development and have not
received FDA approval for sale in the United States. Approval by the
FDA could take several years and there can be no assurance that such
approval will ever be obtained, or if obtained, that any or all of the
Company's product candidates will achieve market acceptance. See "Risk
Factors - Governmental Regulation" and "Business - Government
Regulation."
INSIDE FRONT COVER
(FOLD-OUT)
DESCRIPTION:
Illustrations of CoStasis, CoSeal and CellPaker products
TEXT:
CoStasis Hemostatic Device Method of Use
CoSeal Surgical Sealant Method of Use
Cohesion Corporation utilizes proprietary technology platforms in
developing products for tissue repair, regeneration and replacements,
offering solutions with the following advantages: ease of preparation,
ease of use, efficacy, safety and competitive cost.
PAGE 44
DESCRIPTION:
Illustration of CoStasis application device
TEXT:
CoStasis Delivery System
PAGE 45
DESCRIPTION:
Illustration of CellPaker(TM) plasma processing system
TEXT:
CellPaker System
INSIDE BACK COVER
DESCRIPTION:
Photo of CoSeal product being administered
Photo of suture hole bleeding with caption "Before Use of CoSeal
Surgical Sealant"
Photo of suture hole closed with caption "After Use of CoSeal Surgical
Sealant"
TEXT:
CoSeal(TM) Surgical Sealant
CoSeal surgical sealant is a synthetic hydrogel designed to polymerize
at the site of application.
CoSeal is based on proprietary PEG polymer technology, which is
designed to bond strongly and rapidly to the patient's own tissue to
prevent leakage of fluids, solids or gases from the surgical or trauma
site.
Cohesion Corporation expects to begin clinical trials of CoSeal in
Europe and the United States in the second half of 1998.
CoSeal can offer distinct advantages over current procedures, including
complete resorbability, improved elasticity, sealing strength, general
tissue adherence and greater ease of application.
The Company's product candidates are under development and have not
received FDA approval for sale in the United States. Approval by the
FDA could take several years and there can be no assurance that such
approval will ever be obtained, or if obtained, that any or all of the
Company's product candidates will achieve market acceptance. See "Risk
Factors - Governmental Regulation" and "Business - Government
Regulation."
<PAGE> 112
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER NOTES DESCRIPTION
- ------- ------- ------------------------------------------------------------
<C> <S> <C>
2.1 (2)(12) Separation and Distribution Agreement dated January 1, 1998,
between the Company and Collagen Corporation.
3.1 (1) Amended and Restated Certificate of Incorporation of the
Company.
3.2 (1) Bylaws of the Company.
4.1 (1) Specimen Stock Certificate.
10.1 (2)(13) Collagraft Supply Agreement dated January 1, 1998, between
the Company and Collagen Corporation.
10.2 (2)(14) Collagen Supply Agreement dated January 1, 1998, between the
Company and Collagen Corporation.
10.3 (2)(15) Assignment and License Agreement dated January 1, 1998,
between the Company and Collagen Corporation.
10.4 (2)(16) Recombinant Technology Development and License Agreement
dated January 1, 1998, between the Company and Collagen
Corporation.
10.5 (17) Services Agreement dated January 1, 1998, between the
Company and Collagen Corporation.
10.6 (18) Benefits Agreement dated January 1, 1998, between the
Company and Collagen Corporation.
10.7 (19) Tax Allocation and Indemnity Agreement dated January 1,
1998, between the Company and Collagen Corporation.
Intellectual Property and Production Agreement dated August
15, 1996 between Collagen Corporation and Genotypes, Inc.
10.8 (2)(20) Vitrogen International Distribution Agreement dated January
1, 1998, between the Company and Collagen Corporation.
10.9 (2) Letter Agreement dated October 1, 1996 between Collagen
Corporation and Genotypes, Inc.
10.10 (1)(11) Form of Indemnification Agreement between the Company and
each of its Officers and Directors.
10.11 (11) 1998 Stock Option Plan.
10.12 (11) 1998 Employee Stock Purchase Plan.
10.13 (11) 1998 Directors' Stock Option Plan.
10.14 (3) Collaborative Research and Distribution Agreement between
Collagen Corporation and Zimmer, Inc. dated as of June 26,
1985.
10.15 (4) Amendments dated February 16, 1993 and February 18, 1993
respectively, to the Product Development and Distribution
Agreement dated January 18, 1985 by and between Collagen
Corporation and Zimmer, Inc.
10.16 (5) Lease Agreement dated June 1, 1992 by and between Collagen
Corporation and Harbor Investment Partners.
10.17 (6) Lease Renewal for 2500 Faber Place, Palo Alto, dated
December 1, 1992 between Collagen Corporation and Leonard
Ely, Shirley Ely, Carl Carlsen and Mary Carlsen.
10.18 (1) Amended and Restated Research, Lease and Supply Agreement
dated as of February 20, 1996 between Collagen Corporation
and Pharming B.V.
10.19 (1)(2) Research and Development Agreement dated October 17, 1995
between Collagen Corporation and Innovasive Devices, Inc.
10.20 (2) Manufacturing and Supply Agreement dated as of October 17,
1995 between Collagen Corporation and Innovasive Devices,
Inc.
10.21 (2) Distribution Agreement dated as of October 17, 1995 between
Collagen Corporation and Innovasive Devices, Inc.
10.22 (7) Promissory Note between Howard D. Palefsky and the
Registrant dated February 20, 1996.
10.23 (8) Amended and Restated Secured Loan Agreement between Ross R.
Erickson and Collagen Corporation dated December 31, 1995.
10.24 (9) Loan Agreement between Collagen Corporation and Cohesion
Corporation dated May 24, 1996.
10.25 (10) Agreement between Howard D. Palefsky and Collagen
Corporation dated March 15, 1997.
10.26 (11) Form of Management Continuity Agreement between certain
officers of the Company and Collagen Corporation dated
February 7, 1997.
10.27 Intellectual Property and Production Agreement between
Genotypes and Collagen Corporation dated August 15, 1996.
</TABLE>
<PAGE> 113
<TABLE>
<CAPTION>
NUMBER NOTES DESCRIPTION
- ------- ------- ------------------------------------------------------------
<C> <S> <C>
21.1 * List of Subsidiaries (none).
27.1 * Financial Data Schedule.
</TABLE>
- ---------------
(1) To be supplied by amendment.
(2) Confidential treatment has been or will be requested as to certain portions
of this Exhibit.
(3) Incorporated by reference to Exhibit 10.24 filed with Collagen
Corporation's Annual Report on Form 10-K for the fiscal year ended June 30,
1985.
(4) Incorporated by reference to Exhibit 10.60 filed with the Collagen
Corporation's Annual Report on Form 10-K for the fiscal year ended June 30,
1993.
(5) Incorporated by reference to Exhibit 10.56 filed with the Collagen
Corporation's Annual Report on Form 10-K for the fiscal year ended June 30,
1992.
(6) Incorporated by reference to Exhibit 10.63 of Collagen Corporation's Annual
Report on Form 10-K for the fiscal year ended June 30, 1994.
(7) Incorporated by reference to Exhibit 10.79 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996.
(8) Incorporated by reference to Exhibit 10.76 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended December 31,
1995.
(9) Incorporated by reference to Exhibit 10.82 of Collagen Corporation's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996.
(10) Incorporated by reference to Exhibit 10.88 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997.
(11) Management contract or compensatory plan or arrangement.
(12) Incorporated by reference to Exhibit 2.1 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(13) Incorporated by reference to Exhibit 10.104 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(14) Incorporated by reference to Exhibit 10.97 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(15) Incorporated by reference to Exhibit 10.103 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(16) Incorporated by reference to Exhibit 10.98 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(17) Incorporated by reference to Exhibit 10.100 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(18) Incorporated by reference to Exhibit 10.101 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(19) Incorporated by reference to Exhibit 10.99 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(20) Incorporated by reference to Exhibit 10.102 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
* Previously filed with the Form 10 Registration Statement on May 12, 1998
<PAGE> 1
EXHIBIT 10.9
Application for an order granting
confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange
Act of 1934 has been made. Confidential
portions of this document have been
redacted and marked with an [*] and have
been filed with the Securities and
Exchange Commission separately with such
application.
October 1, 1996
Ronald A. Hitzeman, Ph.D.
President and Research Director
Genotypes, Inc.
61 Airport Boulevard, Suite B
South San Francisco, California 94080
Dear Dr. Hitzeman:
Collagen Corporation and Genotypes, Inc. are parties to an agreement
titled "Genotypes - Collagen Intellectual Property and Production Agreement for
the Production of Collagens Using a Yeast Expression System", effective as of
August 15, 1996 (the "Production Agreement").
This letter is intended as an amendment to the Production Agreement
Collagen desires that an additional trained scientist be identified by
Genotypes, hired by Genotypes and assigned by Genotypes to work on the research
to be conducted under the Production Agreement in order to accelerate, as much
as possible, progress toward achieving the goals of the Production Agreement
including, without limitation, achievement of the milestones set forth in
paragraph 5(a) of the Production Agreement. Genotypes is willing to identify,
hire and assign an additional trained scientist to work on such research so long
as financial support of such scientist is provided to Genotypes by Collagen.
Based upon the above, Collagen agrees to provide support to Genotypes
for one trained scientist under the following terms and conditions:
1. Genotypes will identify the trained scientist in writing and provide
Collagen a copy of such scientist's resume for approval by Collagen, such
approval not to be unreasonably withheld;
[*] Application for an order granting confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934 has been made. Confidential
portions of this document have been redacted and marked with an [*] and have
been filed with the Securities and Exchange Commission separately with such
application.
<PAGE> 2
Ronald A. Hitzeman, Ph.D.
October 1, 1996
Page 2
2. Subject to 3 and 4 below, Collagen will pay [*] dollars ($[*]) per
month to Genotypes for support of trained scientist identified in accordance
with paragraph 1 above, hired by Genotypes and assigned to work full time on
research to be conducted under the Production Agreement, each such payment to be
made on the fifth business day of each month following such hiring and such
assignment for a period of [*] ([*]) months;
3. If such trained scientist at any time for any reason should work less
than full time on research to be conducted under the Production Agreement,
Collagen shall have the right to reduce the level of financial support provided
to Genotypes under 2 above to a level consistent with the percentage of time
that such trained scientist actually worked on such research; and
4. If such trained scientist for any reason should no longer be employed
by Genotypes, Collagen's obligation to make payments for support shall be
suspended until a replacement scientist is identified in accordance with
paragraph 1 above. If Collagen's payments are suspended pursuant to this
paragraph 4, the period of suspension will continue until such replacement
scientist begins work at Genotypes on research to be conducted under the
Production Agreement.
Other than as set forth in this amendment, all terms and conditions of
the Production Agreement shall remain unaltered and in full force and effect.
If you agree with the terms and conditions set forth in this amendment
to the Production Agreement, please indicate by signing below in the designated
place. Two copies of this letter are provided. One signed copy should be
returned to me. The second copy is for Genotypes' records.
We at Collagen look forward to working with Genotypes to achieve the
goals of the Production Agreement.
Sincerely,
/s/ Carol Harner
Carol Harner, Ph.D.
Vice President, Scientific Affairs
Agreed to and accepted.
/s/ Ronald A. Hitzeman
- -------------------------------
Ronald A. Hitzeman, Ph.D.
President and Research Director
[*] Application for an order granting confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934 has been made. Confidential
portions of this document have been redacted and marked with an [*] and have
been filed with the Securities and Exchange Commission separately with such
application.
<PAGE> 1
EXHIBIT 10.11
COHESION TECHNOLOGIES, INC.
1998 STOCK OPTION PLAN
1. PURPOSES OF THE PLAN. The purposes of this Stock Option Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to the Employees and Consultants
of the Company and to promote the success of the Company's business.
Options granted hereunder may be either Incentive Stock Options
(as defined under Section 422 of the Code) or Nonstatutory Stock Options, at the
discretion of the Board and as reflected in the terms of the written option
agreement.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "Administrator" shall mean the Board or any of its Committees
appointed pursuant to Section 4 of the Plan.
(b) "Applicable Laws" shall have the meaning set forth in Section
4(b) below.
(c) "Board" shall mean the Board of Directors of the Company.
(d) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) "Committee" shall mean the Committee appointed by the Board
of Directors in accordance with Section 4(b) of the Plan, if one is appointed.
(f) "Common Stock" shall mean the Common Stock of the Company.
(g) "Company" shall mean Cohesion Technologies, Inc., a Delaware
corporation.
(h) "Consultant" means any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not.
(i) "Continuous Status as an Employee or Consultant" shall mean
the absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of sick leave, military leave, or any other
leave of absence approved by the Administrator; provided that such leave is for
a period of not more than 90 days or reemployment upon the expiration of such
leave is guaranteed by contract or statute. For purposes of this Plan, a change
in status from an Employee to a Consultant or from a Consultant to an Employee
will not constitute a termination of employment.
<PAGE> 2
(j) "Director" shall mean a member of the Board.
(k) "Employee" shall mean any person (including any Named
Executive, Officer or Director) employed by the Company or any Parent or
Subsidiary of the Company. The payment by the Company of a director's fee to a
Director shall not be sufficient to constitute "employment" of such Director by
the Company.
(l) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(m) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales
price for such stock as quoted on such system on the date of determination (if
for a given day no sales were reported, the closing bid on that day shall be
used), as such price is reported in The Wall Street Journal or such other source
as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System
(but not on the National Market thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the bid and asked prices for the Common Stock or;
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Administrator.
(n) "Incentive Stock Option" shall mean an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code, as designated in the applicable written option agreement.
(o) "Named Executive" shall mean any individual who, on the last
day of the Company's fiscal year, is the chief executive officer of the Company
(or is acting in such capacity) or among the four highest compensated officers
of the Company (other than the chief executive officer). Such officer status
shall be determined pursuant to the executive compensation disclosure rules
under the Exchange Act and shall apply only after the date upon which the
Company becomes subject to the Exchange Act.
(p) "Nonstatutory Stock Option" shall mean an Option not intended
to qualify as an Incentive Stock Option, as designated in the applicable written
option agreement.
(q) "Officer" shall mean a person who is an officer of the
Company within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
-2-
<PAGE> 3
(r) "Option" shall mean a stock option granted pursuant to the
Plan.
(s) "Optioned Stock" shall mean the Common Stock subject to an
Option.
(t) "Optionee" shall mean an Employee or Consultant who receives
an Option.
(u) "Parent" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(v) "Plan" shall mean this 1998 Stock Option Plan.
(w) "Rule 16b-3" shall mean Rule 16b-3 promulgated under the
Exchange Act as the same may be amended from time to time, or any successor
provision.
(x) "Share" shall mean a share of the Common Stock, as adjusted
in accordance with Section 14 of the Plan.
(y) "Subsidiary" shall mean a "subsidiary corporation," whether
now or hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 14 of
the Plan, the maximum aggregate number of shares that may be optioned and sold
under the Plan is 2,607,000 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares that were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan. Notwithstanding any other provision of the Plan,
shares issued under the Plan and later repurchased by the Company shall not
become available for future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) INITIAL PLAN PROCEDURE. Prior to the date, if any, upon which
the Company becomes subject to the Exchange Act, the Plan shall be administered
by the Board or a committee appointed by the Board.
(b) PLAN PROCEDURE AFTER THE DATE, IF ANY, UPON WHICH THE COMPANY
BECOMES SUBJECT TO THE EXCHANGE ACT .
(i) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule
16b-3, and by the legal requirements relating to the administration of incentive
stock option plans, if any, of applicable securities laws and the Code
(collectively, the "Applicable Laws"), grants under the Plan may (but need not)
be made by different administrative bodies with respect to Directors, Officers
who are not directors and Employees who are neither Directors nor Officers.
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(ii) ADMINISTRATION WITH RESPECT TO DIRECTORS AND
OFFICERS. With respect to grants of Options to Employees or Consultants who are
also Officers or Directors of the Company, grants under the Plan shall be made
by (A) the Board, if the Board may make grants under the Plan in compliance with
Rule 16b-3 and Section 162(m) of the Code as it applies so as to qualify grants
of Options to Named Executives as performance-based compensation, or (B) a
Committee designated by the Board to make grants under the Plan, which Committee
shall be constituted in such a manner as to permit grants under the Plan to
comply with Rule 16b-3, to qualify grants of Options to Named Executives as
performance-based compensation under Section 162(m) of the Code and otherwise so
as to satisfy the Applicable Laws.
(iii) ADMINISTRATION WITH RESPECT TO OTHER PERSONS. With
respect to grants of Options to Employees or Consultants who are neither
Directors nor Officers of the Company, the Plan shall be administered by (A) the
Board or (B) a Committee designated by the Board, which Committee shall be
constituted in such a manner as to satisfy the Applicable Laws.
(iv) GENERAL. If a Committee has been appointed pursuant
to subsection (ii) or (iii) of this Section 4(b), such Committee shall continue
to serve in its designated capacity until otherwise directed by the Board. From
time to time the Board may increase the size of any Committee and appoint
additional members thereof, remove members (with or without cause) and appoint
new members in substitution therefor, fill vacancies (however caused) and remove
all members of a Committee and thereafter directly administer the Plan, all to
the extent permitted by the Applicable Laws and, in the case of a Committee
appointed under subsection (ii), to the extent permitted by Rule 16b-3, and to
the extent required under Section 162(m) of the Code to qualify grants of
Options to Named Executives as performance-based compensation.
(c) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common
Stock, in accordance with Section 2(m) of the Plan;
(ii) to select the Employees and Consultants to whom
Options may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to determine the number of shares of Common Stock to
be covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
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(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder
(including, but not limited to, the share price and any restriction or
limitation, or any vesting acceleration or waiver of forfeiture restrictions
regarding any Option and/or the shares of Common Stock relating thereto, based
in each case on such factors as the Administrator shall determine, in its sole
discretion);
(vii) to reduce the exercise price of any Option to the
then current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option was
granted.
(d) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all Optionees and any other holders of any Options.
5. ELIGIBILITY.
(a) RECIPIENTS OF GRANTS. Nonstatutory Stock Options may be
granted to Employees and Consultants. Incentive Stock Options may be granted
only to Employees. An Employee or Consultant who has been granted an Option may,
if he or she is otherwise eligible, be granted an additional Option or Options.
(b) TYPE OF OPTION. Each Option shall be designated in the
written option agreement as either an Incentive Stock Option or a Nonstatutory
Stock Option. However, notwithstanding such designations, to the extent that the
aggregate Fair Market Value of Shares with respect to which Incentive Stock
Options are exercisable for the first time by an Optionee during any calendar
year (under all plans of the Company or any Parent or Subsidiary) exceeds
$100,000, such excess Options shall be treated as Nonstatutory Stock Options.
For purposes of this Section 5(b), Incentive Stock Options shall be taken into
account in the order in which they were granted, and the Fair Market Value of
the Shares shall be determined as of the time the Option with respect to such
Shares is granted.
(c) NO EMPLOYMENT RIGHTS. The Plan shall not confer upon any
Optionee any right with respect to continuation of employment or consulting
relationship with the Company, nor shall it interfere in any way with his or her
right or the Company's right to terminate his or her employment or consulting
relationship at any time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board or its approval by the stockholders of the
Company as described in Section 20 of the Plan. It shall continue in effect for
a term of ten (10) years unless sooner terminated under Section 16 of the Plan.
7. TERM OF OPTION. The term of each Option shall be the term stated in
the Option Agreement; provided, however, that in the case of an Incentive Stock
Option, the term shall be no more than ten (10) years from the date of grant
thereof or such shorter term as may be provided in the Option Agreement.
However, in the case of an Option granted to an Optionee who, at the time the
Option is granted, owns stock representing more than ten percent (10%) of
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the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the term of the Option shall be five (5) years from the date of
grant thereof or such shorter term as may be provided in the Option Agreement.
8. LIMITATION ON GRANTS TO EMPLOYEES. Subject to adjustment as provided
in this Plan, the maximum number of Shares which may be subject to options
granted to any one Employee under this Plan for any fiscal year of the Company
shall be 250,000. This Section 8 shall not apply prior to the date upon which
the Company becomes subject to the Exchange Act and following such date, shall
not apply until the (i) earliest of: (A) the first material modification of the
Plan (including any increase to the number of shares reserved for issuance under
the Plan in accordance with Section 3); (B) the issuance of all of the shares of
common stock reserved for issuance under the Plan; (C) the expiration of the
Plan; or (D) the first meeting of shareholders at which directors are to be
elected that occurs after the close of the third calendar year following the
calendar year in which occurred the first registration of any equity security
under Section 12 of the Exchange Act; or (ii) such other date required by
Section 162(m) of the Code and the rules and regulations promulgated thereunder.
9. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The per Share exercise price for the Shares
to be issued pursuant to exercise of an Option shall be such price as is
determined by the Administrator, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the
grant of such Incentive Stock Option, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of grant; or
(B) granted to any other Employee, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a person who, at the time of the
grant of such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the per Share exercise price shall be no less than 110% of the Fair Market Value
per Share on the date of the grant;
(B) granted to a person who, at the time of the
grant of such Option, is a Named Executive of the Company, the per share
Exercise Price shall be no less than 100% of the Fair Market Value on the date
of grant; or
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(C) granted to any person other than a Named
Executive, the per Share exercise price shall be no less than 85% of the Fair
Market Value per Share on the date of grant.
(iii) Notwithstanding anything to the contrary in
subsections 9(a)(i) or 9(a)(ii) above, in the case of an Option granted on or
after the effective date of registration of any class of equity security of the
Company pursuant to Section 12 of the Exchange Act and prior to six months after
the termination of such registration, the per Share exercise price shall be no
less than 100% of the Fair Market Value per Share on the date of grant.
(b) PERMISSIBLE CONSIDERATION. The consideration to be paid for
the Shares to be issued upon exercise of an Option, including the method of
payment, shall be determined by the Administrator (and, in the case of an
Incentive Stock Option, shall be determined at the time of grant) and may
consist entirely of (1) cash, (2) check, (3) other Shares that (x) in the case
of Shares acquired upon exercise of an Option either have been owned by the
Optionee for more than six months on the date of surrender or were not acquired,
directly or indirectly, from the Company, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised, (4) authorization from the Company to
retain from the total number of Shares as to which the Option is exercised that
number of Shares having a Fair Market Value on the date of exercise equal to the
exercise price for the total number of Shares as to which the Option is
exercised, (5) delivery of a properly executed exercise notice together with
irrevocable instructions to a broker to deliver promptly to the Company the
amount of sale or loan proceeds required to pay the exercise price, (6) a
combination of any of the foregoing methods of payment, (7) a combination of any
of the foregoing methods of payment at least equal in value to the stated
capital represented by the Shares to be issued, plus a promissory note for the
balance of the exercise price, or (8) such other consideration and method of
payment for the issuance of Shares to the extent permitted under Applicable
Laws. In making its determination as to the type of consideration to accept, the
Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
10. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan. Until the date upon which the Company becomes subject to the
Exchange Act, each such Option shall become exercisable at the rate of at least
twenty percent (20%) per year over five (5) years from the date the Option is
granted. In the event that any of the Shares issued upon exercise of any Option
should be subject to a right of repurchase in the Company's favor, such
repurchase right shall lapse at the rate of at least twenty percent (20%) per
year over five (5) years from the date the Option is granted. Notwithstanding
the above, in the case of an option granted to an officer, director or
Consultant of the Company or any Parent or Subsidiary of the Company, the option
may become fully exercisable, or a
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<PAGE> 8
repurchase right, if any, in favor of the Company shall lapse, at any time or
during any period established by the Administrator.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 9(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 14 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) TERMINATION OF STATUS AS AN EMPLOYEE OR CONSULTANT. In the
event of termination of an Optionee's Continuous Status as an Employee or
Consultant, such Optionee may, but only within three (3) months (or such other
period of time, not exceeding six (6) months in the case of a Nonstatutory Stock
Option, as is determined by the Administrator, with such determination in the
case of an Incentive Stock Option being made at the time of grant of the Option)
after the date of such termination (but in no event later than the date of
expiration of the term of such Option as set forth in the Option Agreement),
exercise his or her Option to the extent that he or she was entitled to exercise
it at the date of such termination. To the extent that the Optionee was not
entitled to exercise the Option at the date of such termination, or if the
optionee does not exercise such Option (which he or she was entitled to
exercise) within the time specified herein, the Option shall terminate.
(c) DISABILITY OF OPTIONEE. Notwithstanding Section 10(b) above,
in the event of termination of an Optionee's Continuous Status as an Employee or
Consultant as a result of his or her total and permanent disability (as defined
in Section 22(e)(3) of the Code), he or she may, but only within six (6) months
(or such other period of time not exceeding twelve (12) months as is determined
by the Administrator, with such determination in the case of an Incentive Stock
Option being made at the time of grant of the Option) from the date of such
termination (but in no event later than the date of expiration of the term of
such Option as set forth in the Option Agreement), exercise his or her Option to
the extent he or she was entitled to exercise it at the date of such
termination. To the extent that he or she was not entitled to exercise the
Option at the date of termination, or if he does not exercise such Option (which
he was entitled to exercise) within the time specified herein, the Option shall
terminate.
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<PAGE> 9
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee:
(i) during the term of the Option who is at the time of
his death an Employee or Consultant of the Company and who shall have been in
Continuous Status as an Employee or Consultant since the date of grant of the
Option, the Option may be exercised, at any time within six (6) months (or such
other period of time, not exceeding twelve (12) months, as is determined by the
Administrator, with such determination in the case of an Incentive Stock Option
being made at the time of grant of the Option) following the date of death (but
in no event later than the date of expiration of the term of such Option as set
forth in the Option Agreement), by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance but only to
the extent of the right to exercise that had accrued at the date of termination;
or
(ii) within three (3) months after the termination of
Continuous Status as an Employee or Consultant, the Option may be exercised, at
any time within six (6) months following the date of death (but in no event
later than the date of expiration of the term of such Option as set forth in the
Option Agreement), by the Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued at the date of termination.
(e) EXTENSION OF EXERCISE PERIOD. The Administrator shall have
full power and authority to extend the period of time for which an option is to
remain exercisable following termination of an Optionee's Continuous Status as
an Employee or Consultant from the periods set forth in Sections 10(b), 10(c)
and 10(d) above or in the Option Agreement to such greater time as the Board
shall deem appropriate, provided, that in no event shall such option be
exercisable later than the date of expiration of the term of such Option as set
forth in the Option Agreement.
(f) TERMINATION FOR MISCONDUCT. Notwithstanding Sections 10(b),
(c), (d) and (e) above, in the event of termination of an Optionee's Continuous
Status as an Employee or Consultant for Misconduct, all outstanding Options held
by the Optionee shall terminate immediately and cease to be outstanding. For
purposes of this Section 10(f), Misconduct shall mean the commission of any act
of fraud, embezzlement or dishonesty by the Optionee, any unauthorized use or
disclosure by such person of confidential information or trade secrets of the
Company or any Parent or Subsidiary, or any other intentional misconduct by such
person adversely affecting the business or affairs of the Company or any Parent
or Subsidiary in a material manner.
(g) RULE 16B-3. Options granted to persons subject to Section
16(b) of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
11. WITHHOLDING TAXES. As a condition to the exercise of Options granted
hereunder, the Optionee shall make such arrangements as the Administrator may
require for the satisfaction of any federal, state, local or foreign withholding
tax obligations that may arise in connection
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with the exercise, receipt or vesting of such Option. The Company shall not be
required to issue any Shares under the Plan until such obligations are
satisfied.
12. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by one or some combination of the
following methods: (a) by cash payment, or (b) out of Optionee's current
compensation, or (c) if permitted by the Administrator, in its discretion, by
surrendering to the Company Shares that (i) in the case of Shares previously
acquired from the Company, have been owned by the Optionee for more than six
months on the date of surrender, and (ii) have a fair market value on the date
of surrender equal to or less than the applicable taxes on the ordinary income
recognized, or (d) by electing to have the Company withhold from the Shares to
be issued upon exercise of the Option that number of Shares having a fair market
value equal to the amount required to be withheld. For this purpose, the fair
market value of the Shares to be withheld shall be determined on the date that
the amount of tax to be withheld is to be determined (the "Tax Date").
Any surrender by an Officer or Director of previously owned
Shares to satisfy tax withholding obligations arising upon exercise of this
Option must comply with the applicable provisions of Rule 16b-3.
All elections by an Optionee to have Shares withheld to satisfy
tax withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax
Date;
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option as to which the election is made; and
(c) all elections shall be subject to the consent or disapproval
of the Administrator.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option is exercised but such
Optionee shall be unconditionally obligated to tender back to the Company the
proper number of Shares on the Tax Date.
13. NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution. The designation of a beneficiary
by an Optionee will not constitute a transfer. An Option may be exercised,
during the lifetime of the Optionee, only by the Optionee or a transferee
permitted by this Section 13.
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14. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS.
(a) ADJUSTMENT. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, the number of shares of Common Stock that have been
authorized for issuance under the Plan but as to which no Options have yet been
granted or which have been returned to the Plan upon cancellation or expiration
of an Option, the maximum number of shares of Common Stock for which Options may
be granted to any employee under Section 8 of the Plan, and the price per share
of Common Stock covered by each such outstanding Option, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued shares of Common Stock effected
without receipt of consideration by the Company; provided, however, that
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Administrator, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an Option.
(b) CORPORATE TRANSACTIONS. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify the
Optionee at least fifteen (15) days prior to such proposed action. To the extent
it has not been previously exercised, the Option will terminate immediately
prior to the consummation of such proposed action. In the event of a sale of all
or substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, the Option shall be assumed or an equivalent
option shall be substituted by such successor corporation or a parent or
subsidiary of such successor corporation, unless the successor corporation does
not agree to assume the Option or to substitute an equivalent Option, in which
case such Option shall terminate upon the consummation of the merger or sale of
assets.
15. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for
all purposes, be the date on which the Administrator makes the determination
granting such Option or such other date as is determined by the Administrator;
provided however that in the case of any Incentive Stock Option, the grant date
shall be the later of the date on which the Administrator makes the
determination granting such Incentive Stock Option or the date of commencement
of the Optionee's employment relationship with the Company. Notice of the
determination shall be given to each Employee or Consultant to whom an Option is
so granted within a reasonable time after the date of such grant.
16. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may amend or terminate
the Plan from time to time in such respects as the Board may deem advisable;
provided that, the
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following revisions or amendments shall require approval of the stockholders of
the Company in the manner described in Section 20 of the Plan:
(i) any increase in the number of Shares subject to the
Plan, other than an adjustment under Section 14 of the Plan;
(ii) any change in the designation of the class of persons
eligible to be granted Options; or
(iii) any change in the limitation on grants to employees
as described in Section 8 of the Plan or other changes which would require
stockholder approval to qualify options granted hereunder as performance-based
compensation under Section 162(m) of the Code.
(b) STOCKHOLDER APPROVAL. If any amendment requiring stockholder
approval under Section 16(a) of the Plan is made subsequent to the first
registration of any class of equity securities by the Company under Section 12
of the Exchange Act, such stockholder approval shall be solicited as described
in Section 20 of the Plan.
(c) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.
17. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the time
of any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
18. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the Company
to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
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19. OPTION AGREEMENT. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
20. STOCKHOLDER APPROVAL.
(a) Continuance of the Plan shall be subject to approval by the
stockholders of the Company within twelve (12) months before or after the date
the Plan is adopted. Such stockholder approval shall be obtained in the manner
and to the degree required under applicable federal and state law and the rules
of any stock exchange upon which the Shares are listed.
(b) In the event that the Company registers any class of equity
securities pursuant to Section 12 of the Exchange Act, any required approval of
the stockholders of the Company obtained after such registration shall be
solicited substantially in accordance with Section 14(a) of the Exchange Act and
the rules and regulations promulgated thereunder.
(c) If any required approval by the stockholders of the Plan
itself or of any amendment thereto is solicited at any time otherwise than in
the manner described in Section 20(b) hereof, then the Company shall, at or
prior to the first annual meeting of stockholders held subsequent to the later
of (1) the first registration of any class of equity securities of the Company
under Section 12 of the Exchange Act or (2) the granting of an Option hereunder
to an officer or director after such registration, do the following:
(i) furnish in writing to the holders entitled to vote for
the Plan substantially the same information that would be required (if proxies
to be voted with respect to approval or disapproval of the Plan or amendment
were then being solicited) by the rules and regulations in effect under Section
14(a) of the Exchange Act at the time such information is furnished; and
(ii) file with, or mail for filing to, the Securities and
Exchange Commission four copies of the written information referred to in
subsection (i) hereof not later than the date on which such information is first
sent or given to stockholders.
21. INFORMATION AND DOCUMENTS TO OPTIONEES. The Company shall provide
financial statements at least annually to each Optionee during the period such
Optionee has one or more Options outstanding, and in the case of an individual
who acquired Shares pursuant to the Plan, during the period such individual owns
such Shares. The Company shall not be required to provide such information if
the issuance of Options under the Plan is limited to key employees whose duties
in connection with the Company assure their access to equivalent information. In
addition, at the time of issuance of any securities under the Plan, the Company
shall provide to the Optionee a copy of the Plan and a copy of any agreement(s)
pursuant to which securities granted under the Plan are issued.
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EXHIBIT 10.12
COHESION TECHNOLOGIES, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1998 Employee Stock
Purchase Plan of Cohesion Technologies, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company. It is the intention of the Company to have the Plan
qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal
Revenue Code of 1986, as amended. The provisions of the Plan shall, accordingly,
be construed so as to extend and limit participation in a manner consistent with
the requirements of that section of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" shall mean the Common Stock of the Company.
(d) "Company" shall mean Cohesion Technologies, Inc., a Delaware
corporation.
(e) "Compensation" shall mean all regular straight time gross
earnings and bonuses and shall not include overtime, shift premiums, payments
for incentive compensation, incentive payments, commissions and other
compensation.
(f) "Continuous Status as an Employee" shall mean the absence of
any interruption or termination of service as an Employee. Continuous Status as
an Employee shall not be considered interrupted in the case of a leave of
absence agreed to in writing by the Company, provided that such leave is for a
period of not more than 90 days or reemployment upon the expiration of such
leave is guaranteed by contract or statute.
(g) "Contributions" shall mean all amounts credited to the
account of a participant pursuant to the Plan.
(h) "Designated Subsidiaries" shall mean the Subsidiaries which
have been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(i) "Distribution Date" shall mean the date on which Collagen
Corporation ("Collagen") distributes on a pro rata basis to holders of Collagen
Common Stock all of the outstanding shares of the Company owned by Collagen on
such date.
<PAGE> 2
(j) "Employee" shall mean any person, including an Officer, who
is customarily employed for at least twenty (20) hours per week and more than
five (5) months in a calendar year by the Company or one of its Designated
Subsidiaries.
(k) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(l) "Purchase Date" shall mean the last day of each Purchase
Period of the Plan.
(m) "Offering Date" shall mean the first business day of each
Offering Period of the Plan.
(n) "Offering Period" shall mean a period of twenty-four (24)
months commencing on January 1 and July 1 of each year, except for the first
Offering Period as set forth in Section 4(a).
(o) "Officer" shall mean a person who is an officer of the
Company within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(p) "Plan" shall mean this Employee Stock Purchase Plan.
(q) "Purchase Period" shall mean a period of six (6) months
within an Offering Period, except for the first Purchase Period as set forth in
Section 4(b).
(r) "Subsidiary" shall mean a corporation, domestic or foreign,
of which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
3. Eligibility.
(a) Any person who is an Employee as of the Offering Date of a
given Offering Period shall be eligible to participate in such Offering Period
under the Plan, subject to the requirements of Section 5(a) and the limitations
imposed by Section 423(b) of the Code.
(b) Any provisions of the Plan to the contrary notwithstanding,
no Employee shall be granted an option under the Plan (i) if, immediately after
the grant, such Employee (or any other person whose stock would be attributed to
such Employee pursuant to Section 424(d) of the Code) would own stock and/or
hold outstanding options to purchase stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of the
Company or of any subsidiary of the Company, or (ii) if such option would permit
his or her rights to purchase stock under all employee stock purchase plans
(described in Section 423 of the Code) of the Company and its Subsidiaries to
accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) of fair
market value of such stock (determined at the time such option is granted) for
each calendar year in which such option is outstanding at any time.
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<PAGE> 3
4. Offering Periods and Purchase Periods.
(a) Offering Periods. The Plan shall be implemented by a series
of Offering Periods of twenty-four (24) months duration, with new Offering
Periods commencing on or about January 1 and July 1 of each year (or at such
other time or times as may be determined by the Board of Directors). The first
Offering Period shall commence on the later of July 1, 1998 or the Distribution
Date (the "First Offering Date") and continue until June 30, 2000. The Plan
shall continue until terminated in accordance with Section 20 hereof. The Board
of Directors of the Company shall have the power to change the duration and/or
the frequency of Offering Periods with respect to future offerings without
shareholder approval if such change is announced at least fifteen (15) days
prior to the scheduled beginning of the first Offering Period to be affected.
Eligible employees may not participate in more than one Offering Period at a
time.
(b) Purchase Periods. Each Offering Period shall consist of four
(4) consecutive purchase periods of six (6) months duration. The last day of
each Purchase Period shall be the "Purchase Date" for such Purchase Period. A
Purchase Period commencing on January 1 shall end on the next June 30. A
Purchase Period commencing on July 1 shall end on the next December 31. The
first Purchase Period shall commence on the First Offering Date and shall end on
December 31, 1998. The Board of Directors of the Company shall have the power to
change the duration and/or frequency of Purchase Periods with respect to future
purchases without shareholder approval if such change is announced at least
fifteen (15) days prior to the scheduled beginning of the first Purchase Period
to be affected.
5. Participation.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement on the form provided by the Company and
filing it with the Company's Human Resources Department prior to the applicable
Offering Date, unless a later time for filing the subscription agreement is set
by the Board for all eligible Employees with respect to a given offering. The
subscription agreement shall set forth the percentage of the participant's
Compensation (which shall be not less than 1% and not more than 15% and which
must be in full percentage increments) to be paid as Contributions pursuant to
the Plan.
(b) Payroll deductions shall commence on the first payroll
following the Offering Date and shall end on the last payroll paid on or prior
to the last Purchase Period of the Offering Period to which the subscription
agreement is applicable, unless sooner terminated by the participant as provided
in Section 10.
6. Method of Payment of Contributions.
(a) The participant shall elect to have payroll deductions made
on each payday during the Offering Period in an amount not less than one percent
(1%) and not more than fifteen percent (15%) of such participant's Compensation
on each such payday. All payroll
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<PAGE> 4
deductions made by a participant shall be credited to his or her account under
the Plan. A participant may not make any additional payments into such account.
(b) A participant may discontinue his or her participation in the
Plan as provided in Section 10, or, on one occasion only during the Offering
Period, may decrease the rate of his or her Contributions during the Offering
Period by completing and filing with the Company a new subscription agreement.
The change in rate shall be effective as of the beginning of the next calendar
month following the date of filing of the new subscription agreement, if the
agreement is filed at least ten (10) business days prior to such date and, if
not, as of the beginning of the next succeeding calendar month.
(c) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 3(b) herein, a
participant's payroll deductions may be decreased to 0% at such time during any
Offering Period which is scheduled to end during the current calendar year that
the aggregate of all payroll deductions accumulated with respect to such
Offering Period and any other Offering Period ending within the same calendar
year would exceed the limitations set forth in such sections. Payroll deductions
shall re-commence at the rate provided in such participant's subscription
Agreement at the beginning of the first Offering Period which is scheduled to
end in the following calendar year, unless terminated by the participant as
provided in Section 10.
7. Grant of Option.
(a) On the Offering Date of each Offering Period, each eligible
Employee participating in such Offering Period shall be granted an option to
purchase on each Purchase Date a number of shares of the Company's Common Stock
determined by dividing such Employee's Contributions accumulated prior to such
Purchase Date and retained in the participant's account as of the Purchase Date
by the lower of (i) eighty-five percent (85%) of the fair market value of a
share of the Company's Common Stock on the Offering Date, or (ii) eighty-five
percent (85%) of the fair market value of a share of the Company's Common Stock
on the Purchase Date; provided however, that the maximum number of shares an
Employee may purchase during each Purchase Period shall not exceed one thousand
five hundred (1,500), and provided further that such purchase shall be subject
to the limitations set forth in Sections 3(b) and 13. The fair market value of a
share of the Company's Common Stock shall be determined as provided in Section
7(b).
(b) The option price per share of the shares offered in a given
Offering Period shall be the lower of: (i) 85% of the fair market value of a
share of the Common Stock of the Company on the Offering Date; or (ii) 85% of
the fair market value of a share of the Common Stock of the Company on the
Purchase Date. The fair market value of the Company's Common Stock on a given
date shall be determined by the Board in its discretion based on the closing
price of the Common Stock for such date (or, in the event that the Common Stock
is not traded on such date, on the immediately preceding trading date), as
reported by the National Association of Securities Dealers Automated Quotation
(Nasdaq) National Market or, if such price is not reported, the mean of the bid
and asked prices per share of the Common Stock as reported by
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<PAGE> 5
Nasdaq or, in the event the Common Stock is listed on a stock exchange, the fair
market value per share shall be the closing price on such exchange on such date
(or, in the event that the Common Stock is not traded on such date, on the
immediately preceding trading date), as reported in The Wall Street Journal. For
purposes of the Offering Date under the first Offering Period under the Plan,
the fair market value of a share of the Common Stock of the Company shall be the
closing price on the First Offering Date.
8. Exercise of Option. Unless a participant withdraws from the Plan as
provided in paragraph 10, his or her option for the purchase of shares will be
exercised automatically on each Purchase Date of an Offering Period, and the
maximum number of full shares subject to the option will be purchased at the
applicable option price with the accumulated Contributions in his or her
account. The shares purchased upon exercise of an option hereunder shall be
deemed to be transferred to the participant on the Purchase Date. No fractional
shares shall be purchased. Any payroll deductions accumulated in a participant's
account which are not sufficient to purchase a full share shall be retained in
the participant's account for the subsequent Purchase Period or Offering Period,
subject to earlier withdrawal by the participant as provided in Section 10. Any
other monies left over in a participant's account after a Purchase Date shall be
returned to the Participant. During his or her lifetime, a participant's option
to purchase shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after each Purchase Date of each
Offering Period, the Company shall arrange the delivery to each participant, as
appropriate, of a certificate representing the shares purchased upon exercise of
his or her option or the deposit of such number of shares with the broker
selected by the Company for administration of Plan stock purchases, as
determined by the Company.
10. Voluntary Withdrawal; Termination of Employment.
(a) A participant may withdraw all but not less than all the
Contributions credited to his or her account under the Plan at any time at least
ten (10) business days prior to each Purchase Date by giving written notice to
the Company. All of the participant's Contributions credited to his or her
account will be paid to him or her promptly after receipt of his or her notice
of withdrawal and his or her option for the current period will be automatically
terminated, and no further Contributions for the purchase of shares will be made
during the Offering Period.
(b) Upon termination of the participant's Continuous Status as an
Employee prior to the Purchase Date of an Offering Period for any reason,
including retirement or death, the Contributions credited to his or her account
will be returned to him or her or, in the case of his or her death, to the
person or persons entitled thereto under Section 15, and his or her option will
be automatically terminated.
(c) In the event an Employee fails to remain in Continuous Status
as an Employee of the Company for at least twenty (20) hours per week during the
Offering Period in which the employee is a participant, he or she will be deemed
to have elected to withdraw from
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<PAGE> 6
the Plan and the Contributions credited to his or her account will be returned
to him or her and his or her option terminated.
(d) A participant's withdrawal from an offering will not have any
effect upon his or her eligibility to participate in a succeeding offering or in
any similar plan which may hereafter be adopted by the Company.
11. Automatic Withdrawal. If the fair market value of the shares on each
of the first three Purchase Dates of an Offering Period is less than the fair
market value of the shares on the Offering Date for such Offering Period, then
every participant shall automatically (i) be withdrawn from such Offering Period
at the close of such Purchase Date and after the acquisition of shares for such
Purchase Period, and (ii) be enrolled in the Offering Period commencing on the
first business day subsequent to such Purchase Period.
12. Interest. No interest shall accrue on the Contributions of a
participant in the Plan.
13. Stock.
(a) The maximum number of shares of the Company's Common Stock
which shall be made available for sale under the Plan shall be 250,000 shares
subject to adjustment upon changes in capitalization of the Company as provided
in Section 19. If the total number of shares which would otherwise be subject to
options granted pursuant to Section 7(a) on the Offering Date of an Offering
Period exceeds the number of shares then available under the Plan (after
deduction of all shares for which options have been exercised or are then
outstanding), the Company shall make a pro rata allocation of the shares
remaining available for option grant in as uniform a manner as shall be
practicable and as it shall determine to be equitable. In such event, the
Company shall give written notice of such reduction of the number of shares
subject to the option to each Employee affected thereby and shall similarly
reduce the rate of Contributions, if necessary.
(b) The participant will have no interest or voting right in
shares covered by his or her option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan will
be registered in the name of the participant or in the name of the participant
and his or her spouse.
14. Administration. The Board, or a committee named by the Board, shall
supervise and administer the Plan and shall have full power to adopt, amend and
rescind any rules deemed desirable and appropriate for the administration of the
Plan and not inconsistent with the Plan, to construe and interpret the Plan, and
to make all other determinations necessary or advisable for the administration
of the Plan. The composition of the committee shall be in accordance with the
requirements to obtain or retain any available exemption from the operation of
Section 16(b) of the Exchange Act pursuant to Rule 16b-3 promulgated thereunder.
15. Designation of Beneficiary.
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<PAGE> 7
(a) A participant may file a written designation of a beneficiary
who is to receive any shares and cash, if any, from the participant's account
under the Plan in the event of such participant's death subsequent to the end of
a Purchase Period but prior to delivery to him or her of such shares and cash.
In addition, a participant may file a written designation of a beneficiary who
is to receive any cash from the participant's account under the Plan in the
event of such participant's death prior to the Purchase Date of an Offering
Period. If a participant is married and the designated beneficiary is not the
spouse, spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the
participant (and his or her spouse, if any) at any time by written notice. In
the event of the death of a participant and in the absence of a beneficiary
validly designated under the Plan who is living at the time of such
participant's death, the Company shall deliver such shares and/or cash to the
executor or administrator of the estate of the participant, or if no such
executor or administrator has been appointed (to the knowledge of the Company),
the Company, in its discretion, may deliver such shares and/or cash to the
spouse or to any one or more dependents or relatives of the participant, or if
no spouse, dependent or relative is known to the Company, then to such other
person as the Company may designate.
16. Transferability. Neither Contributions credited to a participant's
account nor any rights with regard to the exercise of an option or to receive
shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and
distribution, or as provided in Section 15) by the participant. Any such attempt
at assignment, transfer, pledge or other disposition shall be without effect,
except that the Company may treat such act as an election to withdraw funds in
accordance with Section 10.
17. Use of Funds. All Contributions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such Contributions.
18. Reports. Individual accounts will be maintained for each participant
in the Plan. Statements of account will be given to participating Employees
promptly following the Purchase Date, which statements will set forth the
amounts of Contributions, the per share purchase price, the number of shares
purchased and the remaining cash balance, if any.
19. Adjustments Upon Changes in Capitalization; Corporate Transactions.
(a) Adjustment. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each option under the Plan which has not yet been exercised and the number of
shares of Common Stock which have been authorized for issuance under the Plan
but have not yet been placed under option (collectively, the "Reserves"), as
well as the price per share of Common Stock covered by each option under the
Plan which has not yet been exercised, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of shares of Common Stock effected without receipt of
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<PAGE> 8
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issue by the Company of shares of stock
of any class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number or price of shares of Common Stock subject to an option.
(b) Corporate Transactions. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period will terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Board. In the event of a proposed sale of all or substantially
all of the assets of the Company, or the merger of the Company with or into
another corporation, each option under the Plan shall be assumed or an
equivalent option shall be substituted by such successor corporation or a parent
or subsidiary of such successor corporation, unless the Board determines, in the
exercise of its sole discretion and in lieu of such assumption or substitution,
to shorten the Offering Period then in progress by setting a new Purchase Date
(the "New Purchase Date"). If the Board shortens the Offering Period then in
progress in lieu of assumption or substitution in the event of a merger or sale
of assets, the Board shall notify each participant in writing, at least ten (10)
days prior to the New Purchase Date, that the Purchase Date for his or her
option has been changed to the New Purchase Date and that his or her option will
be exercised automatically on the New Purchase Date, unless prior to such date
he or she has withdrawn from the Offering Period as provided in Section 10. For
purposes of this paragraph, an option granted under the Plan shall be deemed to
be assumed if, following the sale of assets or merger, the option confers the
right to purchase, for each share of option stock subject to the option
immediately prior to the sale of assets or merger, the consideration (whether
stock, cash or other securities or property) received in the sale of assets or
merger by holders of Common Stock for each share of Common Stock held on the
effective date of the transaction (and if such holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding shares of Common Stock); provided, however, that if such
consideration received in the sale of assets or merger was not solely common
stock of the successor corporation or its parent (as defined in Section 424(e)
of the Code), the Board may, with the consent of the successor corporation and
the participant, provide for the consideration to be received upon exercise of
the option to be solely common stock of the successor corporation or its parent
equal in fair market value to the per share consideration received by holders of
Common Stock and the sale of assets or merger.
The Board may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the Reserves, as well as the price
per share of Common Stock covered by each outstanding option, in the event that
the Company effects one or more reorganizations, recapitalizations, rights
offerings or other increases or reductions of shares of its outstanding Common
Stock, and in the event of the Company being consolidated with or merged into
any other corporation.
20. Amendment or Termination.
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<PAGE> 9
(a) The Board of Directors of the Company may at any time
terminate or amend the Plan. Except as provided in Section 19, no such
termination may affect options previously granted, nor may an amendment make any
change in any option theretofore granted which adversely affects the rights of
any participant. In addition, to the extent necessary to comply with Rule 16b-3
under the Exchange Act, or under Section 423 of the Code (or any successor rule
or provision or any applicable law or regulation), the Company shall obtain
shareholder approval in such a manner and to such a degree as so required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been adversely affected, the Board
(or its committee) shall be entitled to change the Offering Periods and Purchase
Periods, limit the frequency and/or number of changes in the amount withheld
during an Offering Period, establish the exchange ratio applicable to amounts
withheld in a currency other than U.S. dollars, permit payroll withholding in
excess of the amount designated by a participant in order to adjust for delays
or mistakes in the Company's processing of properly completed withholding
elections, establish reasonable waiting and adjustment periods and/or accounting
and crediting procedures to ensure that amounts applied toward the purchase of
Common Stock for each participant properly correspond with amounts withheld from
the participant's Compensation, and establish such other limitations or
procedures as the Board (or its committee) determines in its sole discretion
advisable which are consistent with the Plan.
21. Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
As a condition to the exercise of an option, the Company may
require the person exercising such option to represent and warrant at the time
of any such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. Term of Plan; Effective Date. The Plan shall become effective upon
the earlier to occur of its adoption by the Board of Directors or its approval
by the shareholders of the Company. It shall continue in effect for a term of
twenty (20) years unless sooner terminated under Section 20.
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<PAGE> 10
24. Additional Restrictions of Rule 16b-3. The terms and conditions of
options granted hereunder to, and the purchase of shares by, persons subject to
Section 16 of the Exchange Act shall comply with the applicable provisions of
Rule 16b-3. This Plan shall be deemed to contain, and such options shall
contain, and the shares issued upon exercise thereof shall be subject to, such
additional conditions and restrictions as may be required by Rule 16b-3 to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
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<PAGE> 11
COHESION TECHNOLOGIES, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
New Election ______
Change of Election ______
1. I, ________________________, hereby elect to participate in the
COHESION TECHNOLOGIES, INC. 1998 Employee Stock Purchase Plan (the "Plan") for
the Offering Period ______________, _____ to _______________, _____, and
subscribe to purchase shares of the Company's Common Stock in accordance with
this Subscription Agreement and the Plan.
2. I elect to have Contributions in the amount of _____% of my
Compensation, as those terms are defined in the Plan, applied to this purchase.
I understand that this amount must not be less than 1% and not more than 15% of
my Compensation during the Offering Period. (Please note that no fractional
percentages are permitted).
3. I hereby authorize payroll deductions from each paycheck during the
Offering Period at the rate stated in Item 2 of this Subscription Agreement. I
understand that all payroll deductions made by me shall be credited to my
account under the Plan and that I may not make any additional payments into such
account. I understand that all payments made by me shall be accumulated for the
purchase of shares of Common Stock at the applicable purchase price determined
in accordance with the Plan. I further understand that, except as otherwise set
forth in the Plan, shares will be purchased for me automatically on the Purchase
Date of each Offering Period unless I otherwise withdraw from the Plan by giving
written notice to the Company for such purpose.
4. I understand that I may discontinue at any time prior to the Purchase
Date my participation in the Plan as provided in Section 10 of the Plan. I also
understand that I can decrease the rate of my Contributions to not less than 1%
of my Compensation on one occasion only during any Offering Period by completing
and filing a new Subscription Agreement with such decrease taking effect as of
the beginning of the calendar month following the date of filing of the new
Subscription Agreement, if filed at least ten (10) business days prior to the
beginning of such month. Further, I may change the rate of deductions for future
Offering Periods by filing a new Subscription Agreement, and any such change
will be effective as of the beginning of the next Offering Period. In addition,
I acknowledge that, unless I discontinue my participation in the Plan as
provided in Section 10 of the Plan, my election will continue to be effective
for each successive Offering Period.
5. I have received a copy of the Company's most recent description of
the Plan and a copy of the complete "COHESION TECHNOLOGIES, INC. 1998 Employee
Stock Purchase
<PAGE> 12
Plan." I understand that my participation in the Plan is in all respects subject
to the terms of the Plan.
6. Shares purchased for me under the Plan should be issued in the
name(s) of (name of employee or employee and spouse only):
------------------------------------
------------------------------------
7. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due to me under the Plan:
NAME: (Please print)
-------------------------------------
(First) (Middle) (Last)
- -------------------- -------------------------------------
(Relationship) (Address)
-------------------------------------
8. I understand that if I dispose of any shares received by me pursuant
to the Plan within 2 years after the Offering Date (the first day of the
Offering Period during which I purchased such shares) or within 1 year after the
Purchase Date, I will be treated for federal income tax purposes as having
received ordinary compensation income at the time of such disposition in an
amount equal to the excess of the fair market value of the shares on the
Purchase Date over the price which I paid for the shares, regardless of whether
I disposed of the shares at a price less than their fair market value at the
Purchase Date. The remainder of the gain or loss, if any, recognized on such
disposition will be treated as capital gain or loss.
I hereby agree to notify the Company in writing within 30 days
after the date of any such disposition, and I will make adequate provision for
federal, state or other tax withholding obligations, if any, which arise upon
the disposition of the Common Stock. The Company may, but will not be obligated
to, withhold from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make available to
the Company any tax deductions or benefits attributable to the sale or early
disposition of Common Stock by me.
9. If I dispose of such shares at any time after expiration of the
2-year and 1-year holding periods, I understand that I will be treated for
federal income tax purposes as having received compensation income only to the
extent of an amount equal to the lesser of (1) the excess of the fair market
value of the shares at the time of such disposition over the purchase price
which I paid for the shares under the option, or (2) 15% of the fair market
value of the
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<PAGE> 13
shares on the Offering Date. The remainder of the gain or loss, if any,
recognized on such disposition will be treated as capital gain or loss.
I understand that this tax summary is only a summary and is subject to
change. I further understand that I should consult a tax advisor concerning the
tax implications of the purchase and sale of stock under the Plan.
10. I hereby agree to be bound by the terms of the Plan. The
effectiveness of this Subscription Agreement is dependent upon my eligibility to
participate in the Plan.
SIGNATURE:
-------------------------------------
SOCIAL SECURITY #:
-----------------------------
DATE:
------------------------------------------
SPOUSE'S SIGNATURE (necessary
if beneficiary is not spouse):
- -----------------------------------------------
(Signature)
- -----------------------------------------------
(Print name)
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<PAGE> 14
COHESION TECHNOLOGIES, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
I, __________________________, hereby elect to withdraw my participation
in the COHESION TECHNOLOGIES, INC. 1998 Employee Stock Purchase Plan (the
"Plan") for the Offering Period _________. This withdrawal covers all
Contributions credited to my account and is effective on the date designated
below.
I understand that all Contributions credited to my account will be paid
to me within ten (10) business days of receipt by the Company of this Notice of
Withdrawal and that my option for the current period will automatically
terminate, and that no further Contributions for the purchase of shares can be
made by me during the Offering Period.
The undersigned further understands and agrees that he or she shall be
eligible to participate in succeeding offering periods only by delivering to the
Company a new Subscription Agreement.
Dated:
------------------------ -----------------------------
Signature of Employee
-----------------------------
Social Security Number
<PAGE> 1
EXHIBIT 10.13
COHESION TECHNOLOGIES, INC.
1998 DIRECTORS' STOCK OPTION PLAN
1. PURPOSES OF THE PLAN. The purposes of this Directors' Stock Option
Plan are to attract and retain the best available personnel for service as
Directors of the Company, to provide additional incentive to the Outside
Directors of the Company to serve as Directors, and to encourage their continued
service on the Board.
All options granted hereunder shall be nonstatutory stock
options.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Collagen" shall mean Collagen Corporation, a Delaware
corporation.
(d) "Common Stock" shall mean the Common Stock of the Company.
(e) "Company" shall mean Cohesion Technologies, Inc., a Delaware
corporation.
(f) "Continuous Status as a Director" shall mean the absence of
any interruption or termination of service as a Director.
(g) "Director" shall mean a member of the Board and in the
limited case of Vested Restructuring Options granted pursuant to Section
4(b)(ii) of the Plan, a member of the Board of Directors of Collagen Aesthetics,
Inc., or its predecessor corporation, Collagen Corporation ("Collagen").
(h) "Distribution Date" shall mean the date on which Collagen
distributes on a pro rata basis to holders of Collagen Common Stock all of the
outstanding shares of the Company owned by Collagen (the "Distribution") on such
date.
(i) "Employee" shall mean any person, including any officer or
director, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a director's fee by the Company shall not be sufficient in and of
itself to constitute "employment" by the Company.
(j) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(k) "Option" shall mean a stock option granted pursuant to the
Plan. All options shall be nonstatutory stock options (i.e., options that are
not intended to qualify as incentive stock options under Section 422 of the
Code).
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(l) "Optioned Stock" shall mean the Common Stock subject to an
Option.
(m) "Optionee" shall mean an Outside Director who receives an
Option.
(n) "Outside Director" shall mean a Director who is not an
Employee.
(o) "Parent" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(p) "Plan" shall mean this 1998 Directors' Stock Option Plan.
(q) "Share" shall mean a share of the Common Stock, as adjusted
in accordance with Section 11 of the Plan.
(r) "Subsidiary" shall mean a "subsidiary corporation," whether
now or hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 268,000 Shares ("Pool") of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan. If Shares which were acquired upon exercise of an
Option are subsequently repurchased by the Company, such Shares shall not in any
event be returned to the Plan and shall not become available for future grant
under the Plan.
4. ADMINISTRATION OF AND GRANTS OF OPTIONS UNDER THE PLAN.
(a) ADMINISTRATOR. Except as otherwise required herein, the Plan
shall be administered by the Board.
(b) PROCEDURE FOR GRANTS. All grants of Options hereunder shall
be automatic and nondiscretionary and shall be made strictly in accordance with
the following provisions:
(i) No person shall have any discretion to select which
Outside Directors shall be granted Options or to determine the number of Shares
to be covered by Options granted to Outside Directors.
(ii) On the Distribution Date, each Outside Director shall
be automatically granted an Option (a "Vested Restructuring Option") to purchase
the number of shares equal to the number of shares granted to the director under
the Collagen Corporation 1990 Directors' Stock Option Plan (the "Collagen Plan")
that are vested but not exercised as of such date (the "Vested Collagen
Option").
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(iii) On the Distribution Date, each Outside Director
shall be automatically granted an Option (an "Unvested Restructuring Option") to
purchase the number of shares equal to the number of shares granted to the
director under the Collagen Plan that have not vested as of such date (the
"Unvested Collagen Option").
(iv) Each Outside Director who first becomes an Outside
Director after the effective date of the Plan shall be automatically granted an
Option to purchase 10,000 Shares (the "Initial Option") on the date on which
such person first becomes an Outside Director, whether through election by the
stockholders of the Company or appointment by the Board of Directors to fill a
vacancy.
(v) Each Outside Director shall be automatically granted
an Option to purchase 5,000 Shares (an "Annual Option") on July 1 of each
calendar year, provided that, as of such date, he or she shall have served on
the Board for at least six (6) months. For purposes of the Annual Option,
service as a director of Collagen shall be equivalent to providing service as a
director of the Company.
(vi) Notwithstanding the provisions of subsections (ii),
(iii), (iv) and (v) hereof, in the event that a grant would cause the number of
Shares subject to outstanding Options plus the number of Shares previously
purchased upon exercise of Options to exceed the Pool, then each such automatic
grant shall be for that number of Shares determined by dividing the total number
of Shares remaining available for grant by the number of Outside Directors
receiving an Option on the automatic grant date. Any further grants shall then
be deferred until such time, if any, as additional Shares become available for
grant under the Plan through action of the stockholders to increase the number
of Shares which may be issued under the Plan or through cancellation or
expiration of Options previously granted hereunder.
(vii) Notwithstanding the provisions of subsections (ii),
(iii), (iv) and (v) hereof, any grant of an Option made before the Company has
obtained stockholder approval of the Plan in accordance with Section 17 hereof
shall be conditioned upon obtaining such stockholder approval of the Plan in
accordance with Section 17 hereof.
(viii) The terms of each Vested Restructuring Option
granted hereunder shall be as follows:
(1) the Vested Restructuring Option shall be
exercisable only while the Outside Director remains a Director of the Company or
of Collagen, except as set forth in Section 9 hereof or in the provisions of the
Collagen Plan, as applicable;
(2) the Exercise Price per share shall be determined
using a formula to preserve the spread between the exercise price of the Vested
Collagen Option and the fair market value of the Common Stock of Collagen prior
to the Distribution; and
(3) the Vested Restructuring Option shall be
exercisable in accordance with the terms under which the Vested Collagen Option
was granted, provided, however, that in the case of a Vested Restructuring
Option granted to an Outside Director of the
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<PAGE> 4
Company, service as a Director of the Company shall be equivalent to providing
service as a Director of Collagen.
(ix) The terms of each Unvested Restructuring Option
granted hereunder shall be as follows:
(1) the Unvested Restructuring Option shall be
exercisable only while the Outside Director remains a Director of the Company,
except as set forth in Section 9 hereof;
(2) the Exercise Price per share shall be determined
using a formula to preserve the portion of the spread between the exercise price
of the Unvested Collagen Option and the fair market value of the Common Stock of
Collagen prior to the Distribution that is attributable to the Company; and
(3) the Unvested Restructuring Option shall be
exercisable in accordance with the terms under which the Unvested Collagen
Option was granted, with service as a Director of the Company being the
equivalent of service as a Director of Collagen.
(x) The terms of each Initial Option granted hereunder
shall be as follows:
(1) the Initial Option shall be exercisable only
while the Outside Director remains a Director of the Company, except as set
forth in Section 9 hereof;
(2) the exercise price per Share shall be 100% of the
fair market value per Share on the date of grant of the Initial Option,
determined in accordance with Section 8 hereof; and
(3) the Initial Option shall become exercisable in
installments cumulatively as to 25% of the Shares subject to the Initial Option
on each of the first, second, third and fourth anniversaries of the date of
grant of the Option.
(xi) The terms of each Annual Option granted hereunder
shall be as follows:
(1) the Annual Option shall be exercisable only while
the Outside Director remains a Director of the Company, except as set forth in
Section 9 hereof;
(2) the exercise price per Share shall be 100% of the
fair market value per Share on the date of grant of the Annual Option,
determined in accordance with Section 8 hereof; and
(3) the Annual Option shall become exercisable as to
one hundred percent (100%) of the Shares subject to the Annual Option on the
first anniversary of the date of grant of the Annual Option.
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(c) POWERS OF THE BOARD. Subject to the provisions and
restrictions of the Plan, the Board shall have the authority, in its discretion:
(i) to determine, upon review of relevant information and in accordance with
Section 8(b) of the Plan, the fair market value of the Common Stock; (ii) to
determine the exercise price per share of Options to be granted, which exercise
price shall be determined in accordance with Section 8(a) of the Plan; (iii) to
interpret the Plan; (iv) to prescribe, amend and rescind rules and regulations
relating to the Plan; (v) to authorize any person to execute on behalf of the
Company any instrument required to effectuate the grant of an Option previously
granted hereunder; and (vi) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
(d) EFFECT OF BOARD'S DECISION. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.
(e) SUSPENSION OR TERMINATION OF OPTION. If the Chief Executive
Officer or his or her designee reasonably believes that an Optionee has
committed an act of misconduct, the Chief Executive Officer may suspend the
Optionee's right to exercise any option pending a determination by the Board of
Directors (excluding the Outside Director accused of such misconduct). If the
Board of Directors (excluding the Outside Director accused of such misconduct)
determines an Optionee has committed an act of embezzlement, fraud, dishonesty,
nonpayment of an obligation owed to the Company, breach of fiduciary duty or
deliberate disregard of the Company rules resulting in loss, damage or injury to
the Company, or if an Optionee makes an unauthorized disclosure of any Company
trade secret or confidential information, engages in any conduct constituting
unfair competition, induces any Company customer to breach a contract with the
Company or induces any principal for whom the Company acts as agent to terminate
such agency relationship, neither the Optionee nor his or her estate shall be
entitled to exercise any option whatsoever. In making such determination, the
Board of Directors (excluding the Outside Director accused of such misconduct)
shall act fairly and shall give the Optionee an opportunity to appear and
present evidence on Optionee's behalf at a hearing before the Board or a
committee of the Board.
5. ELIGIBILITY. Options may be granted only to Outside Directors. All
Options shall be automatically granted in accordance with the terms set forth in
Section 4(b) hereof. An Outside Director who has been granted an Option may, if
he or she is otherwise eligible, be granted an additional Option or Options in
accordance with such provisions.
The Plan shall not confer upon any Optionee any right with
respect to continuation of service as a Director or nomination to serve as a
Director, nor shall it interfere in any way with any rights which the Director
or the Company may have to terminate his or her directorship at any time.
6. TERM OF PLAN; EFFECTIVE DATE. The Plan shall become effective on the
Distribution Date. It shall continue in effect for a term of ten (10) years
unless sooner terminated under Section 13 of the Plan.
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<PAGE> 6
7. TERM OF OPTIONS. The term of each Option shall be ten (10) years from
the date of grant thereof.
8. EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. Except as otherwise provided in Sections
4(b)(viii)(2) and 4(b)(ix)(2) hereof, the per Share exercise price for the
Shares to be issued pursuant to exercise of an Option shall be 100% of the fair
market value per Share on the date of grant of the Option.
(b) FAIR MARKET VALUE. The fair market value shall be determined
by the Board; provided, however, that in the event the Common Stock is traded on
the Nasdaq National Market or listed on a stock exchange, the fair market value
per Share shall be the closing price on such system or exchange on the date of
grant of the Option (or, in the event that the Common Stock is not traded on
such date, on the immediately preceding trading date), as reported in The Wall
Street Journal, or where there is a public market for the Common Stock, the fair
market value per Share shall be the mean of the bid and asked prices of the
Common Stock in the over-the-counter market on the date of grant, as reported in
The Wall Street Journal (or, if not so reported, as otherwise reported by the
National Association of Securities Dealers Automated Quotation ("Nasdaq")
System).
(c) FORM OF CONSIDERATION. The consideration to be paid for the
Shares to be issued upon exercise of an Option shall be determined by the Board
and may consist entirely of (i) cash, (ii) check, (iii) promissory note; (iv)
other Shares of Common Stock having a fair market value on the date of surrender
equal to the aggregate exercise price of the Shares as to which said Option
shall be exercised (which, if acquired from the Company, shall have been held
for at least six months), (v) delivery of a properly executed exercise notice
together with irrevocable instructions to a broker to promptly deliver to the
Company the amount of sale of loan proceeds required to pay the exercise price,
(vi) any combination of such methods of payment, (viii) or any other
consideration or method of payment as shall be permitted under applicable
corporate law.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable at such times as are set forth in Section
4(b) hereof; provided, however, that no Options shall be exercisable prior to
stockholder approval of the Plan in accordance with Section 17 hereof has been
obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written
notice of such exercise has been given to the Company in accordance with the
terms of the Option by the person entitled to exercise the Option and full
payment for the Shares with respect to which the Option is exercised has been
received by the Company. Full payment may consist of any consideration and
method of payment allowable under Section 8(c) of the Plan. Until the issuance
(as evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company) of the stock certificate evidencing
such Shares, no right to vote or receive dividends or
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<PAGE> 7
any other rights as a stockholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. A share certificate for the
number of Shares so acquired shall be issued to the Optionee as soon as
practicable after exercise of the Option. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the stock
certificate is issued, except as provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a
decrease in the number of Shares which thereafter may be available, both for
purposes of the Plan and for sale under the Option, by the number of Shares as
to which the Option is exercised.
(b) TERMINATION OF STATUS AS A DIRECTOR. If an Outside Director
ceases to serve as a Director, he or she may, but only within three (3) months
after the date he or she ceases to be a Director of the Company, exercise his or
her Option to the extent that he or she was entitled to exercise it at the date
of such termination. Notwithstanding the foregoing, in no event may the Option
be exercised after its term set forth in Section 7 has expired. To the extent
that such Outside Director was not entitled to exercise an Option at the date of
such termination, or does not exercise such Option (which he or she was entitled
to exercise) within the time specified herein, the Option shall terminate.
(c) DISABILITY OF OPTIONEE. Notwithstanding Section 9(b) above,
in the event a Director is unable to continue his or her service as a Director
with the Company as a result of his or her total and permanent disability (as
defined in Section 22(e)(3) of the Code), he or she may, but only within six (6)
months from the date of such termination, exercise his or her Option to the
extent he or she was entitled to exercise it at the date of such termination.
Notwithstanding the foregoing, in no event may the Option be exercised after its
term set forth in Section 7 has expired. To the extent that he or she was not
entitled to exercise the Option at the date of termination, or if he or she does
not exercise such Option (which he or she was entitled to exercise) within the
time specified herein, the Option shall terminate.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee
during the term of the Option who is, at the time of his or her death, a
Director of the Company and who shall have been in Continuous Status as a
Director since the date of grant of the Option, the Option may be exercised, at
any time within six (6) months following the date of death, by the Optionee's
estate or by a person who acquired the right to exercise the Option by bequest
or inheritance, but only to the extent of the right to exercise that had accrued
at the date of death. Notwithstanding the foregoing, in no event may the Option
be exercised after its term set forth in Section 7 has expired.
10. NONTRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution or pursuant to a qualified
domestic relations order (as defined by the Code or the rules thereunder). The
designation of a beneficiary by an Optionee does not constitute a transfer. An
Option may be exercised during the lifetime of an Optionee only by the Optionee
or a transferee permitted by this Section.
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11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS.
(a) ADJUSTMENT. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
(b) CORPORATE TRANSACTIONS. In the event of (i) a dissolution or
liquidation of the Company, (ii) a sale of all or substantially all of the
Company's assets, (iii) a merger or consolidation in which the Company is not
the surviving corporation, or (iv) any other capital reorganization in which
more than fifty percent (50%) of the shares of the Company entitled to vote are
exchanged, the Company shall give to the Eligible Director, at the time of
adoption of the plan for liquidation, dissolution, sale, merger, consolidation
or reorganization, either a reasonable time thereafter within which to exercise
the Option, including Shares as to which the Option would not be otherwise
exercisable, prior to the effectiveness of such liquidation, dissolution, sale,
merger, consolidation or reorganization, at the end of which time the Option
shall terminate, or the right to exercise the Option, including Shares as to
which the Option would not be otherwise exercisable (or receive a substitute
option with comparable terms), as to an equivalent number of shares of stock of
the corporation succeeding the Company or acquiring its business by reason of
such liquidation, dissolution, sale, merger, consolidation or reorganization.
12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for
all purposes, be the date determined in accordance with Section 4(b) hereof.
Notice of the determination shall be given to each Outside Director to whom an
Option is so granted within a reasonable time after the date of such grant.
13. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may amend or terminate
the Plan from time to time in such respects as the Board may deem advisable;
provided that, to the extent necessary to comply with Rule 16b-3 under the
Exchange Act (or any other applicable law or regulation), the Company shall
obtain approval of the stockholders of the Company to Plan amendments to the
extent and in the manner required by such law or regulation.
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<PAGE> 9
(b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
termination of the Plan that would impair the rights of any Optionee shall not
affect Options already granted to such Optionee and such Options shall remain in
full force and effect as if this Plan had not been amended or terminated, unless
mutually agreed otherwise between the Optionee and the Board, which agreement
must be in writing and signed by the Optionee and the Company.
14. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance. As a
condition to the exercise of an Option, the Company may require the person
exercising such Option to represent and warrant at the time of any such exercise
that the Shares are being purchased only for investment and without any present
intention to sell or distribute such Shares, if, in the opinion of counsel for
the Company, such a representation is required by any of the aforementioned
relevant provisions of law.
15. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. Inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
16. OPTION AGREEMENT. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
17. STOCKHOLDER APPROVAL. The effectiveness of the Plan shall be subject
to approval by the stockholders of the Company. If such stockholder approval is
obtained at a duly held stockholders' meeting, it may be obtained by the
affirmative vote of the holders of a majority of the outstanding shares of the
Company present or represented and entitled to vote thereon. If such stockholder
approval is obtained by written consent, it may be obtained by the written
consent of the holders of a majority of the outstanding shares of the Company.
Options may be granted, but not exercised, before such stockholder approval.
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EXHIBIT 10.20
MANUFACTURING AND SUPPLY AGREEMENT
This Manufacturing and Supply Agreement ("Agreement") is entered into
effective as of October 17, 1995 (the "Effective Date"), by and between Collagen
Corporation, a Delaware corporation with an office at 2500 Faber Place, Palo
Alto, California 94303 ("Collagen"), and Innovasive Devices, Inc., a
Massachusetts corporation with an office at 100 South Street, Hopkinton, MA
01748 ("Innovasive").
WHEREAS, the parties have entered into (i) a Research and Development
Agreement (the "R&D Agreement") effective on even date herewith, pertaining to
the development of certain resorbable or partially resorbable mechanical
tissue-fixation devices utilizing collagen-based biomaterials, and (ii) a
Distribution Agreement (the "Distribution Agreement") effective on even date
herewith, pertaining to the distribution of certain products;
WHEREAS, the parties intend that this Agreement will cover the
manufacture and supply of products to be distributed pursuant to the
Distribution Agreement;
NOW, THEREFORE, in consideration of the mutual covenants set forth
herein, Collagen and Innovasive agree as follows:
1. Definitions.
1.1 All terms with initial letters capitalized which are not expressly
defined herein shall have the definitions set forth in the R&D Agreement.
1.2 A "Catastrophe" with respect to a particular Supplied Product shall
be deemed to occur when either (i) the Supplier of such Supplied Product is
unable to supply any units of such Supplied Product for a period of three (3)
consecutive months, or (ii) in any six (6) calendar month period (the "Test
Period") after the expiration of the first six (6) complete calendar months
following the first commercial sale of such Supplied Product, the Supplier of
such Supplied Product is unable to supply at least fifty percent (50%) of the
units of such Supplied Product ordered by the Purchaser of such Supplied
Product. Notwithstanding the foregoing, with respect to (ii) of the preceding
sentence, (a) the number of units of such Supplied Product which the Purchaser
of such Supplied Product rejects in the last calendar month of the Test Period
shall be deemed to have been ordered and supplied, and (b) the maximum number of
units of such Supplied Product which the Supplier of such Supplied Product can
be deemed to have failed to supply during the second three (3) months of the
Test Period shall equal one hundred and ten percent (110%) of the units of such
Supplied Product ordered during the first three (3) months of the Test Period,
and (c) the parties will mutually agree on the orders which may be placed during
the first Test Period.
1.3 A "Lot" of a given Supplied Product shall mean a quantity of such
Supplied Product which shall be mutually agreed upon by the parties.
<PAGE> 2
1.4 The "Purchaser" of a given Supplied Product shall be the party which
shall purchase such Supplied Product from the other party pursuant to this
Agreement.
1.5 "Shipment Point" for a given Supplied Product shall mean the
facility operated by or for the Supplier of such Supplied Product, at which such
Supplied Product is manufactured.
1.6 "Specifications" for a given Supplied Product shall mean mutually
agreed upon written specifications for such Supplied Product, which shall be
attached hereto as Exhibit A promptly after such specifications have been agreed
upon. The Specifications may be amended from time to time by mutual written
consent of the parties.
1.7 "Supplied Product" shall mean any unit of any Product or Other
Innovasive Product for which development has been completed and for which a
forecast has been furnished by a party with the right to distribute such product
under the Distribution Agreement.
1.8 The "Supplier" of a given Supplied Product shall be the party which
shall supply such Supplied Product to the other party pursuant to this
Agreement.
2. Supply of the Supplied Product.
2.1 Supplied Products. During such time as this Agreement remains in
effect with respect to a particular Supplied Product, the Supplier of such
Supplied Product shall use its commercially reasonable efforts to supply the
Purchaser of such Supplied Product with the Purchaser's requirements for such
Supplied Product.
2.2 Exclusivity. Except as set forth below, the Supplier of a Supplied
Product, or, in the Supplier's sole discretion and subject to Good Manufacturing
Practices audit of the subcontractor by the Purchaser of such Supplied Product,
the Supplier's subcontractor, shall be the Purchaser's exclusive source of the
Supplied Product; provided, however, that in the event that a Catastrophe occurs
with respect to such Supplied Product, the Supplier shall notify the Purchaser,
within thirty (30) days after the Supplier receives written notice from the
Purchaser that such Catastrophe has occurred, if the Supplier intends to
establish a second source for such Supplied Product. If the Supplier provides
such written notification, then the Supplier shall use commercially reasonable
efforts to establish such second source. If the Supplier does not provide such
written notice, or if the Supplier is unable to establish a second source,
within a period of six (6) months after Supplier's receipt of such written
notice, which is able to supply at least the order level for such Supplied
Product in effect during the last calendar month prior to the date on which the
Catastrophe is deemed to have occurred, the Purchaser shall have the right to
establish a second source itself; provided, that such second source established
by the Purchaser shall not use any of the Supplier's proprietary trade secrets
or Confidential Information. Thereafter, the Supplier may, at its option, regain
its rights to exclusively supply such Supplied Product if it (i) demonstrates to
the Purchaser's reasonable satisfaction that the Supplier is able to meet the
Purchaser's requirements for such Supplied Product, and (ii) pays the Purchaser
the Purchaser's reasonable incremental costs of establishing its own second
source and obtaining units of such Supplied Product from such second source.
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<PAGE> 3
3. Distribution of Supplied Products; Proprietary Rights.
The ownership of intellectual property and other rights in Supplied
Products is set forth in the R&D Agreement. The parties' rights to distribute
Supplied Products are set forth in the Distribution Agreement.
4. Terms and Conditions for Supply of Supplied Products.
4.1 Forecasts. During the term of this Agreement,
(i) A party intending to be the Purchaser of a Supplied Product
shall provide a preliminary forecast for its anticipated purchase order levels
during the first twelve (12) months following the first commercial sale of such
Supplied Product (the "Preliminary Forecast"). Such preliminary forecast shall
be provided to the Supplier of such Supplied Product at least twelve (12) months
prior to the anticipated date (as determined by the parties) of first commercial
sale of such Supplied Product.
(ii) The Purchaser shall provide the Supplier on or prior to the
first day of each calendar month (the "Forecast Due Date") with a twelve (12)
month rolling forecast for units of such Supplied Product to be manufactured by
the Supplier in the twelve (12) month forecast period commencing three (3)
calendar months after the Forecast Due Date, setting forth the Purchaser's
estimated monthly requirements for Supplied Products. Such forecast shall be
updated monthly. Such quantity requirements shall be specified as multiples of
complete and undivided Lots. The first such forecast shall be provided at least
three (3) complete calendar months prior to the anticipated date of first
commercial sale of such Supplied Product. The parties understand and agree that
because of variability in the yield of manufacturing processes, the Supplier
shall be regarded as being in compliance with its supply obligations under this
Agreement if it meets such quantity requirements to within plus or minus ten
percent (10%).
(iii) Each such forecast shall be accompanied by a firm purchase
order. The first such firm purchase order shall cover the three (3) calendar
month period commencing three (3) calendar months after the Forecast Due Date.
Each such forecast thereafter shall be accompanied by a firm purchase order for
the calendar month commencing five (5) calendar months after the date of such
forecast. The Supplier shall only be obligated to supply Supplied Products for
which a firm purchase order has been provided by the Purchaser. The Purchaser
shall only be obligated to purchase Supplied Products which are ordered in a
firm purchase order. Firm purchase orders shall include requested delivery dates
and shipping instructions for shipments in the period covered by such firm
purchase orders, and may not be canceled or rescheduled.
(iv) During the first six (6) months after first commercial sale
of a Supplied Product, the Purchaser shall purchase at least fifty percent (50%)
of the units of such Supplied Product forecasted for such six (6) month period
in the Preliminary Forecast referred to in Section 4.1 (i) above.
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<PAGE> 4
4.2 Packing, Delivery and Title. Each Supplied Product shall be shipped
by the Supplier of such Supplied Product in conformance with the Supplier's
standard shipping procedures. Shipment shall be F.O.B. the Shipment Point for
such Supplied Product. All freight, insurance and other shipping expenses from
the Shipment Point shall be borne by the Purchaser of such Supplied Product. The
Supplied Product shall be shipped to the Purchaser's address as set forth in the
purchase orders provided by the Purchaser pursuant to Section 4.1(iii), or to
such other address as may be specified by the Purchaser in writing. Risk of loss
and title to Supplied Products shall pass to the Purchaser upon delivery by the
Supplier of such products to the Shipment Point. All Supplied Products delivered
pursuant to this Section 4.2 shall be packed for shipment in the manner
specified in the Specifications.
4.3 Inspection and Acceptance.
(i) The Purchaser shall have thirty (30) days after receipt by
the Purchaser of Supplied Products shipped by the Supplier to inspect and test
such Supplied Products. During such thirty (30) day period, the Purchaser shall
store such Supplied Products in a manner which preserves the integrity of such
Supplied Products for commercial sale and use. If the Purchaser determines,
using inspection and testing procedures set forth in the Specifications, that
any such Supplied Products fail to meet any applicable Specifications in any
material way, the Purchaser may reject such Supplied Products by notifying the
Supplier in writing of such rejection and the reasons for such rejection. The
Purchaser shall, as directed by the Supplier, destroy or return any rejected
Supplied Products in accordance with the Supplier's then-standard procedures for
destruction or return of rejected products manufactured by Supplier. Provided
that the Purchaser has already paid the original costs of shipment of such
rejected Supplied Products from the Supplier to the Purchaser, the Supplier
shall bear the cost (if any) incurred by the Purchaser in returning correctly
rejected Supplied Products, and the cost of shipping replacement Supplied
Products to the Purchaser. The Purchaser shall bear all costs incurred by the
Purchaser in shipping incorrectly rejected Supplied Products to the Supplier,
and the cost incurred by the Supplier in returning such incorrectly rejected
Supplied Products to the Purchaser, or in shipping replacement Supplied Products
to the Purchaser. Failure by the Purchaser to provide written notification of
rejection to the Supplier within the thirty (30) day inspection and testing
period set forth in this Section 4.3 shall constitute acceptance of a shipment
of Supplied Products by the Purchaser. If the Supplier disputes the Purchaser's
reasons for rejection, and the parties are unable to resolve the dispute within
thirty (30) days of rejection, then (a) except as set forth in (b) of this
sentence, the rejected units of Supplied Product shall remain at the Purchaser's
location, and (b) the rejected units of Supplied Product shall be inspected and
tested by a mutually acceptable third party using the inspection and testing
procedures set forth in the Specifications and utilized by the Purchaser. The
decision of such third party shall be binding with respect to the issue of
acceptance or rejection of such units of Supplied Product. In the event that
such third party determines that units of Supplied Products were correctly
rejected, the parties will mutually discuss in good faith and agree upon the
disposition of all such rejected units remaining at the Purchaser's location. In
the event that such third party determines that units of Supplied Products were
incorrectly rejected, such units shall be deemed accepted by the Purchaser.
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<PAGE> 5
(ii) Notwithstanding anything to the contrary in Section 4.3(i)
above, it is the parties' intention that Innovasive shall accept Collagen's
certificate of analysis for units of any Supplied Product which are supplied by
Collagen more than twelve (12) months after the date on which Collagen first
supplies units of such Supplied Product to Innovasive, provided that the units
of such Supplied Product supplied by Collagen during such twelve (12) month
period have substantially complied with applicable Specifications. After such
twelve (12) month period, and subject to Innovasive's right to periodically
inspect and test units of such Supplied Product to verify compliance with
applicable Specifications, Section 4.3(i) shall cease to apply with respect to
units of such Supplied Product other than any units of such Supplied Product
that have been rejected based on Innovasive's inspection and testing in
accordance with Section 4.3(i), and units of such Supplied Product (other than
those rejected as aforesaid) shall be deemed accepted by Innovasive once such
units have passed Collagen's internal quality control procedures and received
Collagen's certificate of analysis.
5. Price and Payment.
5.1 Transfer Pricing for Supplied Products. The following transfer
pricing structure shall apply to the supply of Supplied Products hereunder:
5.1.1 Freight. All Supplied Product transfer prices referred to
in this Section 5 shall be F.O.B. the Shipment Points for such Supplied
Products.
5.1.2 Supplied Products for Commercial Use. For each Supplied
Product ordered by the Purchaser thereof for use by the Purchaser or the
Purchaser's customers, the Purchaser shall be charged the transfer prices set
forth for such Supplied Product in the Distribution Agreement, in Section 7.2
thereof and Section 1 of Exhibit B thereof. Transfer prices for non-sterile
units of such Supplied Product used by the Purchaser solely for demonstration
purposes and labeled for such Supplied Products shall be set forth in Section 2
of Exhibit B of the Distribution Agreement.
5.2 Taxes. All prices for any Supplied Product are exclusive of any
export, foreign import, federal, state or local tax or excise. Any such export,
federal, state or local tax or excise paid by the Supplier (other than taxes on
the Supplier's income) shall be reimbursed by the Purchaser of such Supplied
Product, and shall appear as a separate item on the Purchaser's invoice;
provided, however, that the Supplier shall not pay any such tax or excise if the
Supplier receives a valid tax exemption certificate from the Purchaser prior to
shipment.
5.3 Payment.
5.3.1 Invoices, Taxes. The Supplier of any Supplied Product shall
submit an invoice to the Purchaser of such Supplied Product upon shipment of
units of such Supplied Product. The invoice shall state the amount to be paid by
the Purchaser for all units of such Supplied Product in such shipment, as well
as any freight expenses and/or taxes paid by the Supplier which shall be
reimbursed by Purchaser in accordance with Sections 4.2 and 5.2.
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<PAGE> 6
5.3.2 Payment Terms. The full invoiced amount for each shipment
of Supplied Products shall be paid net thirty (30) days. All payments shall be
in U.S. Dollars. Late payments shall be subject to a charge of one and one-half
percent (1.5%) per month or the maximum rate permitted by law, whichever is
lower. The Supplier of any Supplied Product shall have the right at any time, in
its commercially reasonable discretion, to discontinue credit and require
payment prior to shipment. Notwithstanding anything to the contrary, if the
Purchaser of any Supplied Product is delinquent in its payments for units of
such Supplied Product and has not cured such delinquency within ten (10) days
after its receipt of written notice of such delinquency from the Supplier, the
Supplier may cease to supply the Purchaser with units of such Supplied Product
under Section 2 hereof for so long as the Purchaser remains delinquent in its
payments for units of such Supplied Product.
6. Changes to Supplied Products.
The Supplier of any Supplied Product shall notify the Purchaser of such
Supplied Product in writing of any changes to such Supplied Product which (i)
are required for safety reasons, or (ii) are required to meet any
Specifications, and shall begin implementing such changes promptly after
provision of such written notice; provided, that the changed Supplied Product
shall have substantially the same functionality as the Supplied Product it
replaces.
7. Warranties; Disclaimer.
7.1 By Both Parties. Each party warrants that (i) it has full right,
power and authority to enter into this Agreement and to grant the rights granted
to the other party hereunder, and (ii) it has not entered into, and during the
term of this Agreement will not enter into, any agreement with any third party
that is or would be inconsistent with its obligations hereunder.
7.2 Product Warranty. The Supplier of a Supplied Product warrants that
all units of such Supplied Product supplied by Supplier hereunder shall be
manufactured, if for pre-clinical use, in accordance with Good Laboratory
Practices for medical products (as defined by the U.S. Food and Drug
Administration ("FDA")), and if for clinical or commercial use, in accordance
with Good Manufacturing Practices for medical products (as defined by the FDA),
and shall meet the Specifications for such Supplied Product. The sole remedy of
the Purchaser of such Supplied Product for any breach of the warranty in this
Section 7.2 shall be replacement or credit at the Purchaser's discretion, by
Supplier at Supplier's expense, of any units of such Supplied Product that do
not meet applicable Specifications or are not manufactured in accordance with
such Good Manufacturing Practices; provided, however, that the Supplier shall
remain obligated to indemnify the Purchaser under Section 8 against product
liability claims brought against the Purchaser in connection with such Supplied
Product.
7.3 Disclaimer. EXCEPT FOR THE EXPRESS WARRANTIES IN THIS SECTION 7, THE
SUPPLIER OF ANY SUPPLIED PRODUCT MAKES, AND THE PURCHASER OF SUCH SUPPLIED
PRODUCT RECEIVES, NO WARRANTIES OR CONDITIONS IN CONNECTION WITH SUCH SUPPLIED
PRODUCT, WHETHER EXPRESS, IMPLIED, CONTRACTUAL OR STATUTORY, AND THE SUPPLIER
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<PAGE> 7
SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
8. Indemnity.
8.1 Intellectual Property Indemnity. Each party (the "Indemnifying
Party") shall defend, indemnify and hold the other party (the "Indemnified
Party") harmless against all damages, costs (including attorneys' fees) or other
liability actually incurred by the Indemnified Party or assessed against the
Indemnified Party by a court of competent jurisdiction, to the extent arising
from an action based on a claim that (i) Collagen's compliance with Innovasive's
mechanical design specifications, if Collagen is the Indemnified Party, or (b)
the collagen base material supplied by Collagen for use in any Supplied Product,
in the form supplied by Collagen, if Innovasive is the Indemnified Party,
infringes any patent, copyright, trademark, trade secret or other intellectual
property right owned by any third party; provided, the foregoing obligation
shall be subject to the Indemnified Party notifying the Indemnifying Party
promptly in writing of the claim, giving the Indemnifying Party the exclusive
control of the defense and settlement thereof, and providing all reasonable
assistance in connection therewith. Notwithstanding the foregoing, the
Indemnifying Party shall not settle any such claim without the written consent
of the Indemnified Party, which shall not be unreasonably withheld. Except as
expressly set forth herein, the parties shall mutually decide and collaborate
upon a joint response to any claims of infringement of third party intellectual
property rights by any Supplied Product.
8.2 Intellectual Property Indemnity by the Purchaser. The Purchaser of
any Supplied Product shall defend at its expense any action brought against the
Supplier of such Supplied Product to the extent such action is based on a claim
that the use to which the Purchaser has put the Supplied Products, or any part
thereof, infringes any patent, copyright, trademark, trade secret or other
intellectual property right owned by any third party, and the Purchaser shall
pay all damages, costs (including attorneys' fees) or other liability actually
incurred by the Supplier in such action which are attributable to such claim;
provided, the foregoing obligation shall be subject to the Supplier notifying
the Purchaser promptly in writing of the claim, giving the Purchaser the
exclusive control of the defense and settlement thereof, and providing all
reasonable assistance in connection therewith.
8.3 Product Liability Indemnity by the Supplier. The Supplier of any
Supplied Product shall, at its own expense, defend or at its option settle, any
claim, suit or proceeding brought against the Purchaser of such Supplied Product
arising out of any injury, illness, and/or death that resulted from (i) any
negligent act or omission by the Supplier, or its employees, agents or other
representatives in connection with the manufacture or supply of such Supplied
Product to the Purchaser, or (ii) a defect in the manufacture of any such
Supplied Product supplied by Supplier hereunder. The Supplier shall have sole
control of any such action or settlement negotiations, and the Supplier agrees
to pay, subject to the limitations hereinafter set forth, any settlement amount
agreed to by the Purchaser in such settlement negotiations, or any final
judgment entered against the Purchaser on such issue in any such suit or
proceeding defended by the Supplier. The Supplier, at its sole option, shall be
relieved of the foregoing obligations unless the Purchaser notifies Supplier
promptly in writing of such claim, suit or
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<PAGE> 8
proceeding, which notification shall be given not later than ten (10) days after
receipt of written notice of such claim by the Purchaser, and gives the Supplier
authority to proceed as contemplated herein, and, at the Supplier's expense,
gives the Supplier proper and full information and assistance to settle and/or
defend any such claim, suit or proceeding. Notwithstanding the foregoing, the
Supplier shall not settle any such claim, suit, or proceeding without the
written consent of the Purchaser, which shall not be unreasonably withheld.
Notwithstanding anything to the contrary contained herein, the Supplier shall
have no liability under the above indemnity for any claim of injury, illness
and/or death, if such claim arises from use of any Supplied Product that has
been modified, altered, repaired or serviced by any party other than Supplier,
or if such claim arises from any Supplied Product that has been combined with a
product not produced by the Supplier, unless such claim arises from a material
defect in the Supplied Product as originally manufactured by the Supplier. No
settlement or compromise entered into without the Purchaser's prior written
consent shall be binding upon the Purchaser.
8.4 Product Liability Indemnity by Purchaser. The Purchaser of any
Supplied Product shall defend, or at its option settle, any claim, suit or
proceeding brought against the Supplier of such Supplied Product arising out of
any injury, illness, and/or death resulting from (i) any negligent or willful
act or omission by the Purchaser or its employees , agents or other
representatives (including without limitation any false representations made
with respect to Supplied Products) in connection with such Supplied Product, or
(ii) use of a unit of such Supplied Product that has been modified, altered,
repaired, assembled or serviced by the Purchaser, or combined by the Purchaser
with a product not produced by the Supplier, unless such claim is due to a
material defect in such unit of such Supplied Product as originally manufactured
by the Supplier. Notwithstanding the foregoing, the Purchaser shall not settle
any such claim, suit or proceeding without the written consent of the Supplier,
which shall not be unreasonably withheld. No settlement or compromise entered
into without the Supplier's prior written consent shall be binding upon the
Supplier.
9. Limitation of Liability.
EXCEPT AS SET FORTH IN SECTION 8, IN NO EVENT WILL EITHER PARTY HAVE ANY
LIABILITY FOR ANY SPECIAL, INDIRECT, OR CONSEQUENTIAL DAMAGES ARISING IN ANY WAY
OUT OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES. THESE LIMITATIONS WILL APPLY NOTWITHSTANDING THE
FAILURE OF THE ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.
10. Confidential Information.
This Agreement shall be governed by the confidentiality provisions set
forth in Section 13 of the R&D Agreement, which are incorporated herein by
reference.
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<PAGE> 9
11. Compliance with Laws.
Any obligation of the Supplier of a Supplied Product to provide units of
such Supplied Product under this Agreement shall be subject in all respects to
all United States laws and regulations governing the license and delivery of
technology and products abroad by persons subject to the jurisdiction of the
United States. The Purchaser of such Supplied Product shall not export, directly
or indirectly, any units of such Supplied Product or related information without
first obtaining all required licenses and approvals from the appropriate
government agencies. The Purchaser shall not export, reexport, or transship,
directly or indirectly, units of such Supplied Product purchased hereunder to
any countries to which such export, reexport or transshipment is prohibited by
applicable United States laws and regulations, including the Export
Administration Act of 1979, as amended, any successor legislation, and the
Export Administration Regulations issued by the U.S. Department of Commerce
Bureau of Export Administration.
12. Term, Termination.
12.1 Term. This Agreement shall become effective as of the Effective
Date and, with respect to any Supplied Product, shall continue in force, until
either (i) the Distribution Agreement expires or is terminated with respect to
such Supplied Product, or (ii) this Agreement is terminated in accordance with
the provisions of this Section 12 (which termination will trigger the
termination of the Distribution Agreement).
12.2 Default. If either party defaults in the performance of any of its
material obligations hereunder and if such default is not corrected within
ninety (90) days after written notice thereof by the other party, then the
nondefaulting party, at its option, may, in addition to any other remedies it
may have, terminate this Agreement by giving written notice of termination to
the defaulting party.
12.3 Insolvency. This Agreement may be terminated by either party, upon
written notice, (i) if the other party becomes insolvent, (ii) upon the
institution by the other party of insolvency, receivership or bankruptcy
proceedings or any other proceedings for the settlement of its debts, (iii) upon
the institution of such proceedings against the other party, which are not
dismissed or otherwise resolved in its favor within sixty (60) days thereafter,
(iv) upon the other party's making a general assignment for the benefit of
creditors, or (v) upon the other party's dissolution or ceasing to conduct
business in the normal course.
12.4 Survival. Sections 7.1(i), 7.2, 7.3, 8, 9, 10, 12.4 and 13 and all
payment obligations incurred prior to the termination or expiration of this
Agreement, shall survive such termination or expiration; provided, that Section
13 shall survive any termination or expiration of this Agreement to the same
extent that any of the provisions of the R&D Agreement referred to therein would
survive the expiration or termination of the R&D Agreement.
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<PAGE> 10
13. Additional Provisions.
The following provisions of the R&D Agreement are hereby incorporated by
reference: Sections 9 ("Representations and Warranties"), 13
("Confidentiality"), 14 ("Confidentiality of Agreement"), and 15 ("General").
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<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by duly authorized officers or representatives as of the date first above
written.
COLLAGEN CORPORATION INNOVASIVE DEVICES, INC.
BY: /s/ Frank DeLustro BY: /s/ James V. Barrile
------------------------------- -------------------------------
PRINT NAME: /s/ Frank DeLustro PRINT NAME: /s/ James V. Barrile
TITLE: Senior Vice President TITLE: Vice President, Chief
Financial Officer
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<PAGE> 1
EXHIBIT 10.21
Application for an order granting confidential
treatment pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934 has been made.
Confidential portions of this document have been
redacted and marked with an [*] and have been
filed with the Securities and Exchange
Commission separately with such application.
DISTRIBUTION AGREEMENT
This Distribution Agreement ("Agreement") is entered into effective as of
October 17, 1995 (the "Effective Date"), by and between Collagen Corporation, a
Delaware corporation with offices at 2500 Faber Place, Palo Alto, CA 94303
("Collagen"), and Innovasive Devices, Inc., a Massachusetts corporation with
offices at 100 South Street, Hopkinton, MA 01748 ("Innovasive").
WHEREAS, the parties have entered into a Research and Development Agreement
effective on even date herewith (the "R&D Agreement"), pursuant to which they
will collaborate to develop certain resorbable or partially resorbable
mechanical tissue-fixation devices utilizing collagen-based biomaterials;
WHEREAS, the parties wish to allocate the distribution rights for products
developed under the R&D Agreement;
WHEREAS, the parties have entered into a Manufacturing and Supply Agreement
effective on even date herewith (the "Supply Agreement"), pertaining to the
manufacture and supply of certain products which will be distributed under this
Agreement;
NOW THEREFORE, in consideration of the mutual covenants set forth herein,
Collagen and Innovasive agree as follows:
1. Definitions.
1.1 All terms with initial capitals that are not defined in this
Agreement shall have the meanings set forth in the R&D Agreement.
1.2 "Affiliate" shall mean any entity which controls, is controlled by,
or is under common control with, a party hereto. An entity shall be regarded as
in control of another entity if it owns or controls, directly or indirectly,
fifty percent (50%) or more of the shares of the subject entity entitled to vote
in the election of directors (or, in the case of an entity that is not a
corporation, for the election of the corresponding managing authority).
1.3 "Collagen-Distributed Product" shall mean (i) any Product labeled
for facial plastic surgery or dermatology applications that is developed
independently by Innovasive, or jointly by Collagen and Innovasive, (a) prior to
the fifth (5th) anniversary of the effective date of
<PAGE> 2
the R&D Agreement, or (b) for which a revised Project Plan covering such Product
is approved by both parties prior to the fifth (5th) anniversary of the
effective date of the R&D Agreement and for which the parties after the fifth
(5th) anniversary of the effective date of the R&D Agreement actively provide
development funding in accordance with the Project Plan for such Product until
the completion of such Product, and (ii) any Other Innovasive Product which is
labeled for facial plastic surgery or dermatology applications.
1.4 "Distributing Party" shall have the meaning set forth in Section
6.1.
1.5 "Equivalent Affiliate Price" shall mean the [*] price at which such
Licensed Product is sold to [*] in the [*] in arm's-length transactions. The
weighted average selling price shall be computed by dividing [*] in such [*] by
the [*] to [*] in such quarter.
1.6 "Innovasive-Distributed Product" shall mean any Product developed
independently by Collagen or jointly by Collagen and Innovasive, (a) prior to
the fifth (5th) anniversary of the effective date of the R&D Agreement, or (b)
for which a revised Project Plan covering such Product is approved by both
parties prior to the fifth (5th) anniversary of the effective date of the R&D
Agreement and for which the parties after the fifth (5th) anniversary of the
effective date of the R&D Agreement actively provide development funding in
accordance with the Project Plan for such Product until the completion of such
Product, that is labeled for Orthopedic applications.
1.7 "Net Sales" shall mean, with respect to any product, the [*] price
of such product billed to [*] customers, or the Equivalent Affiliate Price if
such product is sold to an Affiliate for such Affiliate's use, [*], if
applicable: (i) amounts [*] on [*], (ii) actual [*] incurred, (iii) [*] actually
[*], (iv) [*] and other [*] incurred, and (v) [*] and other [*] or [*] upon the
[*] of such product.
1.8 "Other Innovasive Products" shall mean the ROC suture fastener being
developed as of the Effective Date by Innovasive, which is depicted and
described in the product literature attached hereto as part of Exhibit C. Such
ROC suture fastener is a device consisting of a drive pin with suture attached
and an expandable tip. An interference action exists between the drive pin and
the expandable tip which locks the fastener with attached suture securely within
the bone site, slightly below the outer surface of the bone. The pin and tip are
molded from Acetal and HDPE, respectively. Fasteners include 2.8mm, 3.5mm and
1.9mm diameter devices. Innovasive is under no obligation to develop the
fastener in other diameters, lengths or materials, since such development would
require incremental development and manufacturing investments. However, if
Innovasive does develop an ROC suture fastener in other diameters, lengths or
materials, such products would constitute "Other Innovasive Products" within the
meaning of this Agreement.
[*] Application for an order granting confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934 has been made. Confidential
portions of this document have been redacted and marked with an [*] and have
been filed with the Securities and Exchange Commission separately with such
application.
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<PAGE> 3
1.9 "Other Party" shall have the meaning set forth in Section 6.1.
1.10 "Reverted Product" shall mean any product that a Distributing Party
originally had the exclusive right to distribute pursuant to Sections 2 or 3,
but which the Other Party gained the right to distribute pursuant to Section 6
because the Distributing Party was unable to meet performance minimums.
2. Collagen Distribution Rights.
2.1 License. Subject to the terms and conditions of this Agreement,
Innovasive hereby grants Collagen, under all of Innovasive's patent, copyright,
trade secret and other intellectual property rights in that portion of the
Collagen-Distributed Products, and in all technology contained in the
Collagen-Distributed Products, which is solely owned by Innovasive, jointly
owned by Innovasive and one (1) or more third parties, with the right of
Innovasive to sublicense to Collagen, or in-licensed by Innovasive with the
right to sublicense to Collagen, an exclusive, nontransferable (except as set
forth in Section 6 and in the "General" provisions incorporated herein pursuant
to Section 12) license, with right to sublicense, to use and sell or otherwise
distribute Collagen-Distributed Products.
2.2 Further Grant of Rights. To the extent that the Collagen-Distributed
Products, or technologies incorporated therein, are jointly owned by Collagen
and Innovasive, Innovasive hereby agrees, subject to the terms and conditions of
this Agreement, not to exercise its right to sell or otherwise distribute the
Collagen-Distributed Products.
3. Innovasive Distribution Rights.
3.1 License. Subject to the terms and conditions of this Agreement,
Collagen hereby grants Innovasive, under all of Collagen's patent, copyright,
trade secret and other intellectual property rights in that portion of the
Innovasive-Distributed Products, and in all technology contained in the
Innovasive-Distributed Products, which is solely owned by Collagen, jointly
owned by Collagen and one (1) or more third parties, with the right of Collagen
to sublicense to Innovasive, or in-licensed by Collagen with the right to
sublicense to Innovasive, an exclusive, nontransferable (except as set forth in
Section 6 and in the "General" provisions incorporated herein pursuant to
Section 12) license, with right to sublicense, to use and sell or otherwise
distribute Innovasive-Distributed Products.
3.2 Further Grant of Rights. To the extent that the
Innovasive-Distributed Products, or technologies incorporated therein, are
jointly owned by Collagen and Innovasive, Collagen hereby agrees, subject to the
terms and conditions of this Agreement, not to exercise its right to sell or
otherwise distribute the Innovasive-Distributed Products.
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<PAGE> 4
4. Additional Distribution Rights.
The parties may negotiate a separate agreement covering expanded
indications of the Products within and outside the Orthopedic, dermatology or
facial plastic surgery fields, and the distribution of jointly developed
products outside such fields.
5. Restricted Transfer of Distribution Rights.
Except as otherwise expressly set forth in this Agreement, the product
distribution rights set forth in Sections 2 and 3 may not be sublicensed by a
party except to a wholly or partially-owned subsidiary or to a third party which
is part of such party's customary distribution channels.
6. Performance Criteria.
6.1 Loss of Exclusivity. For each Collagen-Distributed Product (if the
Distributing Party is Collagen) or Innovasive-Distributed Product (if the
Distributing Party is Innovasive), in the event that a party with exclusive
distribution rights for such product under Sections 2 or 3 above (the
"Distributing Party") fails to sell at least the number of units of such product
set forth in Exhibit A in any year commencing on an anniversary of the first
commercial sale of such product by the Distributing Party, then the other party
(the "Other Party") shall have the co-exclusive and assignable right to
distribute such product, subject to payment by the Other Party to the
Distributing Party of the royalties set forth in Section 6.2.
6.2 Royalties Payable by the Other Party. In the event that an Other
Party receives the co-exclusive right under Section 6.1 above to distribute a
Reverted Product whose development was wholly funded by the Distributing Party,
the Other Party shall pay the Distributing Party a royalty of [*] percent ([*]%)
of the Other Party's Net Sales of such Reverted Product. The parties agree that
for purposes of this Section 6.2 Product One, and any other Product for which
the Distributing Party funds the entire Project Budget for such Product, shall
be considered a Product whose development was wholly funded by the Distributing
Party. In the event that an Other Party receives the co-exclusive right under
Section 6.1 above to distribute a Reverted Product whose development was
partially funded by the Distributing Party, the Other Party shall pay the
Distributing Party a mutually agreed upon royalty, which shall be negotiated in
good faith by the parties prior to or promptly after the Other Party receives
such co-exclusive right to distribute such Reverted Product, and which shall not
exceed [*] percent ([*]%) of the Other Party's Net Sales of such Reverted
Product. The amount of such mutually agreed upon royalty shall be set forth in
the Project Plan at the time it is approved. Royalties payable under this
Section 6.2 shall be paid in accordance with Sections 6.3 through 6.8 below.
[*] Application for an order granting confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934 has been made. Confidential
portions of this document have been redacted and marked with an [*] and have
been filed with the Securities and Exchange Commission separately with such
application.
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<PAGE> 5
6.3 Reports, Payment Terms.
(i) After the first commercial sale of a unit of Reverted Product
by an Other Party for which a royalty is payable to the Distributing Party, the
Other Party shall make quarterly written reports to the Distributing Party,
within thirty (30) days after the end of each calendar quarter, stating in
reasonably specific detail, on a country-by-country basis, (A) the number of
units of the Reverted Product directly or indirectly sold by the Other Party
during the reporting period; (B) the gross sales of units of the Reverted
Product sold directly or indirectly during the reporting period by the Other
Party and the calculation of Net Sales from such gross sales; (C) the royalties,
if any, payable by the Other Party under this Agreement on its sales of units of
the Reverted Product during the reporting period; (D) the exchange rates used in
converting foreign currencies to U.S dollars in the calculation of the royalties
referred to in (C), and (E) the withholding taxes, if any, required by law to be
deducted from royalties payable by the Other Party under this Agreement in
connection with its sales of units of the Reverted Product during the reporting
period. With respect to royalties payable on sales of units of the Reverted
Product invoiced in U.S. dollars, the gross sales, Net Sales, and royalties
payable to the Distributing Party shall be expressed in U.S. dollars. With
respect to royalties payable on sales of units of the Reverted Product invoiced
in a currency other than U.S. dollars, the gross sales, Net Sales and amounts
payable to the Distributing Party shall be expressed in the domestic currency of
the party making the sale together with the U.S. dollar equivalent of the
royalty payable, calculated using the selling exchange rate quoted by Bank of
America (San Francisco) at the close of business on the last banking day of the
calendar quarter prior to the date of payment.
(ii) Concurrently with the making of each such report, the Other
Party shall pay to the Distributing Party the royalty payments due under Section
6.2 on sales of units of the Reverted Product during the quarter covered by such
report. All payments by the Other Party to the Distributing Party hereunder
shall be in U.S. Dollars.
6.4 Combination Products. In the event that a unit of Reverted Product
is sold in combination with another product for a single price, Net Sales, for
purposes of determining royalty payments under Section 6.2 with respect to such
combination product, shall be obtained by multiplying Net Sales for the
combination product by [*], where [*] is the [*] of a unit of the [*] in the
country where the combination product is sold and [*] is the [*] of [*] of the
[*] sold separately. In the event that [*] and/or [*] cannot be determined, Net
Sales for purposes of determining royalty payments under Section 6.2 shall be a
reasonable apportionment of the [*] therefor based upon the relative
contribution of the Reverted Product to the price of the combination product.
Such apportionment shall be negotiated in good faith between the parties.
[*] Application for an order granting confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934 has been made. Confidential
portions of this document have been redacted and marked with an [*] and have
been filed with the Securities and Exchange Commission separately with such
application.
-5-
<PAGE> 6
6.5 [*]. For purposes of this Agreement, each product sold hereunder
shall be [*] in a [*] transaction, and [*] of such product shall [*] result in
any [*] hereunder.
6.6 Taxes. Each party shall be responsible for paying all taxes
associated with its distribution of products under this Agreement. In the event
that a party is required to deduct withholding taxes from royalty payments which
would otherwise be payable to the other party hereunder, the party withholding
such taxes will promptly provide the other party with all documentation required
by such other party to obtain a corresponding reduction in such other party's
U.S. taxes.
6.7 Late Payments; Nonpayments of Royalties and License Fees. All
royalty payments which are not paid by the Other Party as required in Section
6.3 shall be subject to a late charge equal to [*] and [*] percent ([*]%) per
month (or, if less, the maximum allowed by applicable law).
6.8 Audits.
(i) The Other Party shall keep true and accurate books of account
and records in sufficient detail to properly determine the royalties payable to
the Distributing Party in connection with the Other Party's distribution of
Reverted Products. The Other Party shall keep such books and records for at
least three (3) years following the end of the calendar quarter to which they
pertain, and shall make available such books and records for inspection during
such three (3) year period by a certified public accountant retained by the
Distributing Party for such purpose, solely for the purpose of verifying the
Other Party's royalty payments hereunder. Such inspections may be made no more
than once in any twelve (12) month period, at reasonable times mutually agreed
upon by the parties after at least five (5) days written notice to the Other
Party. The certified public accountant shall execute a reasonable
confidentiality agreement prior to commencing any such inspection.
(ii) Inspections conducted under Section 6.8 (i) shall be at the
expense of the Distributing Party, unless an underpayment exceeding ten percent
(10%) of the amount payable for the period covered by the inspection is
established in the course of any such inspection, whereupon all costs relating
to such inspection shall be paid by the Other Party.
7. Supply; Payments.
7.1 Supply. Supply by one party to the other of products to be
distributed under this Agreement shall be governed by the terms and conditions
of the Supply Agreement. The parties contemplate that except as otherwise
indicated in Section 7.5, products distributed hereunder by one party shall be
manufactured and supplied by the other party.
[*] Application for an order granting confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934 has been made. Confidential
portions of this document have been redacted and marked with an [*] and have
been filed with the Securities and Exchange Commission separately with such
application.
-6-
<PAGE> 7
7.2 Transfer Prices. Transfer prices for a product which is manufactured
by one party and distributed by the other party shall be appended to Exhibit B
prior to the commencement of supply or distribution of such product. Such
transfer prices shall be stated as a percentage (the "Applicable Percentage") of
the distributing party's then-current Actual Average Selling Price (as defined
in Section 7.4).
7.3 Payment of Transfer Price. The transfer prices referred to in
Section 7.2 shall be paid as follows: (i) units of each product distributed
hereunder will be ordered and paid for by the party distributing such product in
accordance with the procedures set forth in the Supply Agreement, (ii) the
amount invoiced by the manufacturing party for each unit of product ordered
shall be equal to the Applicable Percentage multiplied by the then-current
Estimated Selling Price for such product (as defined in Section 7.4) , and (iii)
within eight (8) days after the end of any calendar quarter, the distributing
party will provide the manufacturing party with a written report stating whether
the aggregate amount invoiced by the manufacturing party for such product during
such quarter was less than, equal to, or greater than the amount actually
payable under Section 7.2. Such report shall result in a corresponding credit
against all future purchases of products under this Agreement by the
distributing party from the manufacturing party, if the aggregate price invoiced
for such product pursuant to (ii) of this Section 7.3 in the quarter covered by
the report exceeded the amount actually payable by the distributing party. Such
report shall be accompanied by a payment by the distributing party to the
manufacturing party, if the aggregate price invoiced for such product pursuant
to (ii) of this Section 7.3 in the quarter covered by the report was less than
the amount actually payable for such quarter under Section 7.2. Any credit may
be brought forward and utilized for a period of ninety (90) days after the end
of the quarter in which such credit was issued; provided, that (a) at the end of
such ninety (90) day period, the manufacturing party shall refund any portion of
such credit which has not been utilized, and (b) any portion of such credit
which has not been utilized as of the date of termination or expiration of this
Agreement shall be refunded by the manufacturing party.
7.4 Estimated and Actual Average Selling Prices. Any party which
distributes products for which it must pay a transfer price pursuant to Section
7.2 shall provide the other party, at the beginning of each calendar quarter
during which such products will be sold, with its good faith estimate of the
average selling price for such products for the succeeding quarter ("Estimated
Average Selling Price"). In addition, each quarterly report referred to in
Section 7.3 shall contain the actual average selling price of the units of each
product sold by the reporting party, and supplied by the other party, in the
quarter which is the subject of such quarterly report (the "Actual Average
Selling Price").
7.5 Royalties. In the event that a party wholly or partially funds the
development of a product, but the other party manufactures and sells or
otherwise distributes such product, the distributing party shall pay the other
party the applicable royalty set forth in Exhibit B (as amended from time to
time by mutual consent of the parties). The provisions of Sections 6.3 through
6.8 inclusive, after substitution of such product in place of the Reverted
Product, shall apply to the payment of such royalties.
-7-
<PAGE> 8
8. Regulatory Requirements.
Each party will comply with all applicable regulatory requirements,
including without limitation medical device reporting, adverse event monitoring,
and post-marketing surveillance obligations. To the extent permitted by
applicable laws and regulations, the parties shall collaborate to prepare
filings for regulatory approvals of each product distributed under this
Agreement, and such filings shall be made in the name of, and any resulting
regulatory approvals shall be owned by, the party manufacturing such product.
The party distributing such product, if it is not the manufacturer of such
product, shall report any information that it is required to report to the party
manufacturing the product as soon as possible after such distributing party
becomes aware of such information.
9. Term and Termination.
9.1 Term.
(i) This Agreement shall become effective on the Effective Date
and shall continue in effect for all Products and Other Innovasive Products
distributed hereunder, unless terminated in accordance with Sections 9.2, 9.3 or
9.4, for an initial term of ten (10) years from the Effective Date. The tenth
(10th) anniversary of the Effective Date shall be known as the "Default
Termination Date". In addition, with respect to (a) any specific commercial
Product or Other Innovasive Product for which development has been completed
prior to the fifth (5th) anniversary of the Effective Date of the R&D Agreement,
or (b) any specific commercial Product for which the parties approve a Project
Plan covering such Product prior to the fifth (5th) anniversary of the effective
date of the R&D Agreement and actively fund the development of such Product in
accordance with the Project Budget for such Product until completion of such
Product, this Agreement shall continue in effect until the fifth (5th)
anniversary of the first commercial sale of such Product, if later than the
Default Termination Date, unless earlier terminated in accordance with Sections
9.2, 9.3 and 9.4.
(ii) For any product which the parties are distributing as of the
Default Termination Date, or, if later and if applicable under Section 9.1(i)
above, the fifth (5th) anniversary of the first commercial sale of such product,
this Agreement shall renew with respect to such product after the expiration of
the term set forth in Section 9.1(i) above for successive one (1) year terms
("Renewal Terms"), unless terminated (A) in writing by either party at least six
(6) months prior to the commencement of the next Renewal Term, or (B) in
accordance with Sections 9.2, 9.3 or 9.4.
9.2 Default. If either party defaults in the performance of any of its
material obligations hereunder and if such default is not corrected within
ninety (90) days after written notice thereof by the other party, then the
nondefaulting party, at its option, may, in addition to any other remedies it
may have, terminate this Agreement by giving written notice of termination to
the defaulting party.
-8-
<PAGE> 9
9.3 Insolvency. This Agreement may be terminated by either party, on
notice, (i) if the other party becomes insolvent, (ii) upon the institution by
the other party of insolvency, receivership or bankruptcy proceedings or any
other proceedings for the settlement of its debts, (iii) upon the institution of
such proceedings against the other party, which are not dismissed or otherwise
resolved in its favor within sixty (60) days thereafter, (iv) upon the other
party's making a general assignment for the benefit of creditors, or (v) upon
the other party's dissolution or ceasing to conduct business in the normal
course.
9.4 Additional Termination Provisions. This Agreement shall terminate
with respect to any product which is distributed or may be distributed hereunder
in the event that (i) development of such product is terminated in accordance
with Section 10.2 of the R&D Agreement, or (ii) the R&D Agreement is terminated
pursuant to Section 10.3(ii) of the R&D Agreement prior to completion of the
development of such product, due to a material failure by one party to fulfill
its obligations under the Project Plan, or (iii) the parties have not approved
an extension to the Project Plan to cover such product prior to the fifth
anniversary of the Effective Date of the R&D Agreement, or (iv) the first
commercial sale of such product has not occurred within six (6) months after the
later of the completion of development of such product and the obtaining of all
regulatory approvals necessary for the sale of such product in the U.S., or (v)
the Supply Agreement is terminated due to Section 12 thereof with respect to
such product.
9.5 Survival. Section 6.8 shall survive any termination or expiration of
this Agreement for a period of three (3) years after such expiration or
termination. Sections 10 and 11 shall survive any termination or expiration of
this Agreement. Section 12 shall survive any termination or expiration of this
Agreement to the same extent that any of the provisions of the R&D Agreement
referred to therein would survive the expiration or termination of the R&D
Agreement.
10. Indemnities.
10.1 Indemnity. Subject to Section 10.2 below, each party (the
"Indemnifying Party") shall defend, indemnify and hold the other party (the
"Indemnified Party") harmless against all damages, costs (including attorneys'
fees) or other liability, actually incurred by the Indemnified Party or assessed
against the Indemnified Party by a court of competent jurisdiction, arising from
any claim, suit or proceeding brought individually or severally against the
Indemnified Party as a result of the distribution of Collagen-Distributed
Products, if the Indemnifying Party is Collagen, or the distribution of
Innovasive-Distributed Products, if the Indemnifying Party is Innovasive. The
Indemnified Party shall provide the Indemnifying Party with prompt notification
of any such claim, suit or proceeding, and shall provide the Indemnifying Party
with reasonable assistance, at the Indemnifying Party's expense, in connection
with the defense or settlement thereof. The Indemnifying Party shall have sole
control of the defense or settlement of any such claim, suit or proceeding. The
Indemnified Party may retain counsel of its own choosing at its own expense.
Indemnification by a party manufacturing a product distributed hereunder is
dealt with in the Supply Agreement.
-9-
<PAGE> 10
10.2 Exceptions. A party distributing a product manufactured by the
other party shall have no obligation under Section 10.1 above to defend the
other party against any damages, costs or liability arising from any defect in
the manufacture of such product or any breach of any third party's intellectual
party rights due to the use of any technology which is not solely or jointly
owned by the distributing party.
11. Limitation of Liability.
EXCEPT AS SET FORTH IN SECTION 10, IN NO EVENT SHALL ANY PARTY BE LIABLE
TO ANY OTHER PARTY FOR LOST PROFITS OR ANY CONSEQUENTIAL, SPECIAL, INCIDENTAL,
OR INDIRECT DAMAGES OF SUCH OTHER PARTY, HOWEVER CAUSED AND ON ANY THEORY OF
LIABILITY, ARISING OUT OF THIS AGREEMENT. THESE LIMITATIONS SHALL APPLY
NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.
12. Additional Provisions.
The following provisions of the R&D Agreement are hereby incorporated by
reference: Sections 9 ("Representations and Warranties"), 13
("Confidentiality"), 14 ("Confidentiality of Agreement"), and 15 ("General").
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed
by duly authorized officers or representatives as of the date first above
written.
COLLAGEN CORPORATION INNOVASIVE DEVICES, INC.
BY: /s/ Frank DeLustro BY: /s/ James V. Barrile
------------------------------- -------------------------------
PRINT NAME: /s/ Frank DeLustro PRINT NAME: /s/ James V. Barrile
TITLE: Senior Vice President TITLE: Vice President, Chief
Financial Officer
-10-
<PAGE> 11
EXHIBIT A
PERFORMANCE MINIMUMS
o Year 1 of distribution of a Product or Other Innovasive Product - no
minimums.
o Year 2 of distribution of a Product or Other Innovasive Product - [*]
percent ([*]%) of the Distributing Party's sales of such Product or
Other Innovasive Product in Year 1.
o Performance minimums for any subsequent Year of distribution of a
Product or Other Innovasive Product will be agreed upon prior to the
commencement of such Year.
For purposes of this Exhibit A, a "Year" of distribution of a
Product or Other Innovasive Product shall commence on the date of first
commercial sale of such Product or Other Innovasive Product, or an anniversary
of such date.
<PAGE> 12
EXHIBIT B
PRICE
1. PRODUCTS FOR COMMERCIAL DISTRIBUTION
<TABLE>
<CAPTION>
PARTY FUNDING MANUFACTURING DISTRIBUTING
DEVELOPMENT PARTY PARTY PRICING ARRANGEMENT
- ----------- ----- ----- -------------------
<S> <C> <C> <C>
Collagen Collagen Innovasive Collagen receives [*]% of the Actual
Average Selling Price
Innovasive receives [*]% of the Actual
Average Selling Price
Innovasive Collagen Collagen Collagen pays Innovasive:
(i) a [*]% royalty on
Net Sales if Collagen
pays for clinical
development and
regulatory approval;
(ii) a [*]% royalty on
Net Sales if Innovasive
pays for clinical
development and
regulatory approval.
Innovasive Innovasive Collagen Innovasive receives [*]% of the Actual
Average Selling Price
Collagen receives [*]% of the Actual
Average Selling Price
Innovasive Collagen Innovasive Innovasive receives [*]% of the Actual
Average Selling Price
Collagen receives [*]% of the Actual
Average Selling Price
</TABLE>
2. NON-STERILE PRODUCTS FOR DEMONSTRATION PURPOSES
[*] percent ([*]%) of the manufacturing party's [*].
<PAGE> 13
EXHIBIT C
PRODUCT LITERATURE FOR EXISTING OTHER INNOVASIVE PRODUCT
PRODUCT FOCUS
ROC(TM) FASTENER SYSTEM
----------------------------------------------------
"Selecting a Fastener for Hard Bone: Beyond Pull Out Strength"
HIGH STRENGTH FIXATION [GRAPHIC OF DEVICE]
The ROC Fastener has proven pull out strength, demonstrated to be
at least 50% greater than the average strength of the attached
suture.
RADIOLUCENT ALL-PLASTIC CONSTRUCTION
Exclusive, all-plastic construction provides uncompromised
magnetic resonance imaging.
DESIGNED FOR SPECIFIC BONE TYPE
The unique surface geometry of the ROC Fastener features grooves
spaced and sized to provide maximum bone/Fastener contact for
superior performance in hard bone.
RELIABLE CONFIRMATION OF DEPTH AND ALIGNMENT PRIOR TO DEPLOYMENT
The exclusive "test-fit capability" of the ROC Fastener allows
accutate assessment of Fastener position before permanent
implantation. Radial expansion minimizes the potential for
Fastener migration within the drill hole.
SMOOTH IMPLANTATION
Universal handle of the ROC Fastener System provides simple,
single-step advancement of the drivepin for smooth, reliable
Fastener implantation.
PROTECTION OF SUTURE FROM ABRASION
Centralized suture positioning within the Fastener eliminates
risk of suture abrasion from rough bone surfaces.
UNSURPASSED ECONOMY
Unit cost is 25% - 40% lower than competitive fasteners.
<PAGE> 14
ROC(TM) FASTENER SYSTEM
----------------------------------------------------
ORDERING INFORMATION (800) 435-6001
<TABLE>
<CAPTION>
3.5MM ROC FASTENERS 2.8MM ROC FASTENERS
---------------------------------------------------------- --------------------------------------------------------------
Suture Suture
Catalog Pin Suture Length Catalog Pin Suture Length
Number Configuration Supplied (cm) Quantity Number Configuration Supplied (cm) Quantity
------ ------------- -------- ---- -------- ------ ------------- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2004 Fixed Suture None 10 6 2281 Slip Suture None 10 6
2351 Slip Suture None 10 6 2283 Slip Suture None 18 6
2353 Slip Suture None 18 6 2282 Slip Suture #1 10 6
Suture/Needle
2352 Slip Suture #2 10 6 2284 Slip Suture #1 Suture 18 6
Suture/Needle
2354 Slip Suture #2 Suture 18 6
</TABLE>
Short Shaft with Slip Suture
[Graphics]
Long Shaft with Slip Suture
[Graphics]
SOFT TISSUE REPAIR INSTRUMENTATION
<TABLE>
<CAPTION>
Catalog
Number Description
- ------ -----------
<S> <C>
2001 ROC Fastener Delivery Handle
2002 Drill Guide for ROC Fastener Cat. #2004
2003 3.5mm Drill for ROC Fastener Cat. #2004
2100 Sterilization Tray for Open ROC Fastener System
2700 Universal Sterilization Tray
2820 18cm Fishmouth Drill Guide for Arthroscopic ROC
Fasteners
Cat. #2353, #2354, #2284
2821 Obturator for Fishmouth Drill Guide Cat. #2820
2830 2.8mm Drill for Arthroscopic ROC Fasteners Cat.
#2283, #2284
2840 3.5mm Drill for Arthroscopic ROC Fasteners Cat.
#2353, #2354
2919 Drill Guide for ROC Fasteners Cat. #2151,
#2352, #2282, #2381
2930 2.8mm Drill for ROC Fasteners Cat. #2281, #2282
2940 3.5mm Drill for ROC Fasteners Cat. #2351, #2352
</TABLE>
SOFT TISSUE REPAIR KITS
<TABLE>
<CAPTION>
Catalog
Number Description
- ------ -----------
<S> <C>
200 Soft Tissue Repair Kit for 10cm ROC Fastener
Cat. #2004
Contains each of the following:
o Universal Delivery Handle (2 each)
o Drill Guide
o Drill (2 each)
o Sterilization Tray
2800 Soft Tissue Repair Kit for 18cm ROC Fasteners
Cat. #2353, #2354, #283, #2284
Contains each of the following
o Universal Delivery Handle (2 each)
o Drill Guide and Obturator
o Drill (2 each)*
o Universal Sterilization Tray
2900 Soft Tissue Repair Kit for 10cm ROC Fastener
Cat. #2351, #2352, #2281, #2282
Contains each of the following:
o Universal Delivery Handle (2 each)
o Drill Guide
o Drill (2 each)*
o Universal Sterilization Tray
</TABLE>
*Please specify ROC Fastener type when ordering
Innovasive is a registered trademark of Innovasive
Devices, Inc.
ROC and ID are trademark of Innovasive Devices, Inc.
U.S. Patent 5268061
Order Patent Pending
(C) 1994 Innovasive Devices, Inc.
All rights reserved. Printed in USA
2/95 90000014 Rev. B
Available Spring, 1995
[LOGO]
INNOVASIVE DEVICES, INC.
100 SOUTH STREET, HOPKINTON, MA 01748
(506) 435-6000 (800) 435-6001
<PAGE> 1
EXHIBIT 10.26
COHESION TECHNOLOGIES, INC.
MANAGEMENT CONTINUITY AGREEMENT
This Management Continuity Agreement (the "Agreement") is dated as of
February 9, 1998 by and between Officer ("Employee"), Cohesion Technologies,
Inc., a Delaware corporation (the "Company" or "Cohesion") and Collagen
Corporation, a Delaware corporation ("Collagen").
RECITALS
A. It is expected that another company may from time to time consider
the possibility of acquiring the Company or Collagen or that a change in control
may otherwise occur, with or without the approval of the Company's Board of
Directors (the "Board of Directors" or the "Board") or Collagen's Board of
Directors (collectively, the "Collective Board"). The Collective Board
recognizes that such consideration can be a distraction to Employee and can
cause Employee to consider alternative employment opportunities. The Collective
Board has determined that it is in the best interests of the Company, Collagen
and their stockholders to assure that the Company will have the continued
dedication and objectivity of the Employee, notwithstanding the possibility or
occurrence of a change of control of the Company or Collagen.
B. The Collective Board believes it is in the best interests of the
Company, Collagen and their stockholders to retain Employee and provide
incentives to Employee to continue in the service of the Company.
C. The Collective Board further believes that it is imperative to
provide Employee with certain benefits upon a Change of Control (as defined
below) and, under certain circumstances, upon termination of Employee's
employment in connection with a Change of Control, which benefits are intended
to provide Employee with financial security and provide sufficient income and
encouragement to Employee to remain with the Company, notwithstanding the
possibility of a Change of Control.
D. To accomplish the foregoing objectives, the Collective Board has
directed the Company, upon execution of this Agreement by Employee, to agree to
the terms provided in this Agreement.
Now therefore, in consideration of the mutual promises, covenants and
agreements contained herein, and in consideration of the continuing employment
of Employee by the Company, the parties hereto agree as follows:
1. AT-WILL EMPLOYMENT. The Company and Employee acknowledge that
Employee's employment is and shall continue to be at-will, as defined under
applicable law, and that Employee's employment with the Company may be
terminated by either party at any time for any or no reason. If Employee's
employment terminates for any reason, Employee shall not be entitled to any
payments, benefits, damages, award or compensation other than as provided in
<PAGE> 2
this Agreement, or as may otherwise be available in accordance with the terms of
the Company's established employee plans and written policies at the time of
termination. The terms of this Agreement shall terminate upon the earlier of (i)
the date on which Employee ceases to be employed as an executive corporate
officer of the Company, other than as a result of an involuntary termination by
the Company without Cause (as defined below), (ii) the date that all obligations
of the parties hereunder have been satisfied, (iii) twenty-four (24) months
after a Change of Control, or (iv) the date on which Collagen distributes to its
stockholders on a pro rata basis all of the shares of the Company's Common Stock
owned by Collagen on such date. A termination of the terms of this Agreement
pursuant to the preceding sentence shall be effective for all purposes, except
that such termination shall not affect the payment or provision of compensation
or benefits on account of a termination of employment occurring prior to the
termination of the terms of this Agreement. The rights and duties created by
this Section 1 may not be modified in any way except by a written agreement
executed by an officer of the Company upon direction from the Board of
Directors.
2. BENEFITS UPON A CHANGE OF CONTROL; TERMINATION OF EMPLOYMENT.
(a) TREATMENT OF COLLAGEN STOCK OPTIONS UPON A CHANGE OF CONTROL.
In the event of a Change of Control and regardless of whether Employee's
employment with the Company is terminated in connection with the Change in
Control and unless otherwise limited by the provisions of Section 5, each stock
option to purchase Collagen's Common Stock granted to Employee over the course
of his or her employment with Collagen and held by Employee on the effective
date of a Change of Control shall become immediately vested on such date as to
that number of shares that would have vested in accordance with the terms of
such option (assuming that Employee had remained in Continuous Status as an
Employee, as defined in the relevant plan and option agreement, for 24 months
after the date of termination of employment) as of the date 24 months after the
effective date of the Change of Control and each such option shall be
exercisable in accordance with the provisions of the option agreement and plan
pursuant to which such option was granted.
(b) INVOLUNTARY TERMINATION FOLLOWING A CHANGE OF CONTROL. In the
event that Employee's employment is terminated as a result of an Involuntary
Termination (as defined below) other than for Cause at any time within 24 months
following the effective date of a Change of Control, then Employee will be
entitled to receive severance benefits as follows: (A) severance payments during
the period from the date of Employee's termination until the date 18 months
after the effective date of the termination (the "Severance Period") equal to
the base salary which Employee was receiving immediately prior to the Change of
Control, which payments shall be paid during the Severance Period in accordance
with the Company's standard payroll practices, (B) a lump sum payment as soon as
practicable after the date of termination of employment equal to Employee's
scheduled bonus for the Company's fiscal year in which the termination occurs
or, if no such bonus has been scheduled, equal to the bonus paid to Employee for
the Company's fiscal year prior to the Company's fiscal year in which the
termination occurs, (C) continuation of the health insurance benefits provided
to Employee immediately prior to the Change of Control at Company expense
pursuant to the terms of the Collective Omnibus Budget Reconciliation Act of
1985, as amended ("COBRA") through the earlier of the end of the
-2-
<PAGE> 3
Severance Period or the date upon which Employee is no longer eligible for such
COBRA benefits under applicable law, (D) in the event that the acceleration of
vesting provided for in Section 2(a) did not occur due to the provisions of
Section 5 on the effective date of the Change of Control, then, except to the
extent that the provisions of Section 5 would not permit acceleration of vesting
pursuant to this Section 2(b), each stock option to purchase Collagen's Common
Stock granted to Employee over the course of his or her employment with Collagen
and held by Employee on the date of termination of employment shall become
immediately vested on such date as to that number of shares that would have
vested in accordance with the terms of such option (assuming that Employee had
remained in Continuous Status as an Employee, as defined in the relevant plan
and option agreement, for 24 months after the date of termination of employment)
as of the date 24 months after the date of termination of employment and each
such option shall be exercisable in accordance with the provisions of the option
agreement and plan pursuant to which such option was granted, and (E) except to
the extent that the provisions of Section 5 would not permit acceleration of
vesting pursuant to this Section 2(b), each stock option to purchase Cohesion
Corporation Common Stock granted to Employee over the course of his or her
employment with Cohesion Corporation and held by Employee on the date of
termination of employment shall become immediately vested on such date (if not
already vested) as to that number of shares that would have vested in accordance
with the terms of such option (assuming that Employee had remained in Continuous
Status as an Employee, as defined in the relevant plan and option agreement, for
24 months after the date of the Change of Control) as of the date 24 months
after the date of the Change of Control and each such option shall be
exercisable in accordance with the provisions of the option agreement and plan
pursuant to which such was granted. In addition, Employee will receive
payment(s) for all salary, bonuses and unpaid vacation accrued as of the date of
Employee's termination of employment.
(c) TERMINATION FOR CAUSE. If Employee's employment is terminated
for Cause at any time, then Employee shall not be entitled to receive payment of
any severance benefits. Employee will receive payment(s) for all salary, bonuses
and unpaid vacation accrued as of the date of Employee's termination of
employment and Employee's benefits will be continued under the Company's then
existing benefit plans and policies in accordance with such plans and policies
in effect on the date of termination and in accordance with applicable law.
(d) VOLUNTARY RESIGNATION. If Employee voluntarily resigns from
the Company, then Employee shall not be entitled to receive payment of any
severance benefits. Employee will receive payment(s) for all salary, bonuses and
unpaid vacation accrued as of the date of Employee's termination of employment
and Employee's benefits will be continued under the Company's then existing
benefit plans and policies in accordance with such plans and policies in effect
on the date of termination and in accordance with applicable law.
3. DEFINITION OF TERMS. The following terms referred to in this Agreement
shall have the following meanings:
(a) CHANGE OF CONTROL. "Change of Control" shall mean the
occurrence of any of the following events:
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<PAGE> 4
(i) OWNERSHIP OF THE COMPANY. Any "Person" (as such term
is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended) is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 under
said Act), directly or indirectly, of securities of the Company representing 50%
or more of the total voting power represented by the Company's then outstanding
voting securities without the approval of the Board;
(ii) OWNERSHIP OF COLLAGEN. Any Person is or becomes the
Beneficial Owner, directly or indirectly, of securities of Collagen representing
50% or more of the total voting power represented by Collagen's then outstanding
voting securities without the approval of Collagen's Board of Directors.
(iii) MERGER/SALE OF ASSETS OF THE COMPANY. A merger or
consolidation of the Company whether or not approved by the Board, other than a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least 50% of the total voting power represented by the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of all or substantially all of the
Company's assets; or
(iv) MERGER/SALE OF ASSETS OF COLLAGEN. A merger or
consolidation of Collagen, whether or not approved by Collagen's Board of
Directors, other than a merger or consolidation which would result in the voting
securities of Collagen outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least 50% of the total voting power
represented by the voting securities of Collagen or such surviving entity
outstanding immediately after such merger or consolidation, or the stockholders
of Collagen approve a plan of complete liquidation of Collagen or an agreement
for the sale or disposition by Collagen of all or substantially all of
Collagen's assets; or
(v) CHANGE IN THE COMPANY'S BOARD COMPOSITION. A change in
the composition of the Board, as a result of which fewer than a majority of the
directors are Incumbent Directors. "Incumbent Directors" shall mean directors
who either (A) are directors of the Company as of February 9, 1998 or (B) are
elected, or nominated for election, to the Board with the affirmative votes of
at least a majority of the Incumbent Directors at the time of such election or
nomination (but an Incumbent Director shall not include an individual whose
election or nomination is in connection with an actual or threatened proxy
contest relating to the election of directors to the Company).
(vi) CHANGE IN COLLAGEN'S BOARD COMPOSITION. A change in
the composition of Collagen's Board of Directors, as a result of which fewer
than a majority of the directors are Collagen Incumbent Directors. "Collagen
Incumbent Directors" shall mean directors who either (A) are directors of
Collagen as of February 9, 1998 or (B) are elected, or nominated for election,
to Collagen's Board of Directors with the affirmative votes of at least a
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<PAGE> 5
majority of the Collagen Incumbent Directors at the time of such election or
nomination (but a Collagen Incumbent Director shall not include an individual
whose election or nomination is in connection with an actual or threatened proxy
contest relating to the election of directors to Collagen).
(b) CAUSE. "Cause" shall mean (i) gross negligence or willful
misconduct in the performance of Employee's duties to the Company where such
gross negligence or willful misconduct has resulted or is likely to result in
substantial and material damage to the Company or its subsidiaries (ii) repeated
unexplained or unjustified absence from the Company, (iii) a material and
willful violation of any federal or state law; (iv) commission of any act of
fraud with respect to the Company or (v) conviction of a felony or a crime
involving moral turpitude causing material harm to the standing and reputation
of the Company, in each case as determined in good faith by the Board.
(c) INVOLUNTARY TERMINATION. "Involuntary Termination" shall
include any termination by the Company other than for Cause and Employee's
voluntary termination, upon 30 days prior written notice to the Company,
following (i) any reduction of Employee's base compensation (other than in
connection with a general decrease in base salaries for most officers of the
successor corporation), or (ii) Employee's refusal to relocate to a facility or
location more than 30 miles from the Company's current location.
4. LIMITATION ON PAYMENTS. In the event that the severance and other
benefits provided for in this Agreement to the Employee (i) constitute
"parachute payments" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code") and (ii) but for this Section, would be
subject to the excise tax imposed by Section 4999 of the Code, then the
Employee's severance benefits under Sections 2(a) and 2(b) shall be payable
either:
(a) in full, or
(b) as to such lesser amount which would result in no portion of
such severance benefits being subject to excise tax under Section 4999 of the
Code, whichever of the foregoing amounts, taking into account the applicable
federal, state and local income taxes and the excise tax imposed by Section
4999, results in the receipt by the Employee on an after-tax basis, of the
greatest amount of severance benefits under Section 2(a) and 2(b),
notwithstanding that all or some portion of such severance benefits may be
taxable under Section 4999 of the Code. Unless the Company and the Employee
otherwise agree in writing, any determination required under this Section 4
shall be made in writing by independent public accountants agreed to by the
Company and the Employee (the "Accountants"), whose determination shall be
conclusive and binding upon the Employee and the Company for all purposes. For
purposes of making the calculations required by this Section 4, the Accountants
may make reasonable assumptions and approximations concerning applicable taxes
and may rely on reasonable, good faith interpretations concerning the
application of Section 280G and 4999 of the Code. The Company and the Employee
shall furnish to the Accountants such information and documents as the
Accountants may reasonably request in order to make a determination under this
Section.
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<PAGE> 6
The Company shall bear all costs the Accountants may reasonably incur in
connection with any calculations contemplated by this Section 4.
5. CERTAIN BUSINESS COMBINATIONS. In the event it is determined by the
Board of Directors of the company undergoing the Change of Control, upon
consultation with such company's management and independent auditors, that the
enforcement of any agreement between Employee, the Company and Collagen,
including the provisions of Section 2(a) and 2(b) of this Agreement, which
allows for the acceleration of vesting of stock options granted for Collagen's
Common Stock upon the effective date of a Change of Control or thereafter, would
preclude accounting for any proposed business combination of the Company or
Collagen involving a Change of Control as a pooling of interests, and the
respective Board of Directors otherwise desires to approve such a proposed
business transaction which requires as a condition to the closing of such
transaction that it be accounted for as a pooling of interests, then any such
provision of this Agreement shall be null and void. For purposes of this Section
5, the respective Board of Directors' determination shall require the unanimous
approval of the non-employee Board members.
6. SPIN-OFF TRANSACTION. Collagen has recently announced its intention
to formally "spin-off" the Company whereby all shares of the Company's Common
Stock held by Collagen will be distributed to the Collagen stockholders. The
distribution of shares of the Company's Common Stock to the stockholders of
Collagen will not by itself result in any obligation of the Company to make any
payments to Employee pursuant to Section 2 of this Agreement.
7. CONFLICTS. Employee represents that his or her performance of all the
terms of this Agreement will not breach any other agreement to which Employee is
a party. Employee has not, and will not during the term of this Agreement, enter
into any oral or written agreement in conflict with any of the provisions of
this Agreement. Employee further represents that he or she is entering into or
has entered into an employment relationship with the Company of his or her own
free will and that he or she has not been solicited as an employee in any way by
the Company.
8. SUCCESSORS. Any successor to the Company (whether direct or indirect
and whether by purchase, lease, merger, consolidation, liquidation or otherwise)
to all or substantially all of the Company's business and/or assets shall assume
the obligations under this Agreement and agree expressly to perform the
obligations under this Agreement in the same manner and to the same extent as
the Company would be required to perform such obligations in the absence of a
succession. The terms of this Agreement and all of Employee's rights hereunder
and thereunder shall inure to the benefit of, and be enforceable by, Employee's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
9. NOTICE. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. Mailed notices to Employee shall be
addressed to Employee at the home address which Employee most recently
communicated to the Company in writing. In the case of the Company,
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<PAGE> 7
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be directed to the attention of its Secretary.
10. MISCELLANEOUS PROVISIONS.
(a) NO DUTY TO MITIGATE. Employee shall not be required to
mitigate the amount of any payment contemplated by this Agreement (whether by
seeking new employment or in any other manner), nor shall any such payment be
reduced by any earnings that Employee may receive from any other source.
(b) WAIVER. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by Employee and by an authorized officer of the Company
(other than Employee). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
(c) WHOLE AGREEMENT. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof. This Agreement
supersedes any agreement of the same title and concerning similar subject matter
dated prior to the date of this Agreement, and by execution of this Agreement
both parties agree that any such predecessor agreement shall be deemed null and
void.
(d) CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California without reference to conflict of laws provisions.
(e) SEVERABILITY. If any term or provision of this Agreement or
the application thereof to any circumstance shall, in any jurisdiction and to
any extent, be invalid or unenforceable, such term or provision shall be
ineffective as to such jurisdiction to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable the remaining
terms and provisions of this Agreement or the application of such terms and
provisions to circumstances other than those as to which it is held invalid or
unenforceable, and a suitable and equitable term or provision shall be
substituted therefor to carry out, insofar as may be valid and enforceable, the
intent and purpose of the invalid or unenforceable term or provision.
(f) ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement may be settled at the option of either party by
binding arbitration in the County of Santa Clara, California, in accordance with
the rules of the American Arbitration Association then in effect. Judgment may
be entered on the arbitrator's award in any court having jurisdiction. Punitive
damages shall not be awarded.
(g) LEGAL FEES AND EXPENSES. The parties shall each bear their
own expenses, legal fees and other fees incurred in connection with this
Agreement.
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<PAGE> 8
(h) NO ASSIGNMENT OF BENEFITS. The rights of any person to
payments or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this Section 11(h) shall be
void.
(i) EMPLOYMENT TAXES. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.
(j) ASSIGNMENT BY COMPANY. The Company may assign its rights
under this Agreement to an affiliate, and an affiliate may assign its rights
under this Agreement to another affiliate of the Company or to the Company. In
the case of any such assignment, the term "Company" when used in a section of
this Agreement shall mean the corporation that actually employs the Employee.
(k) COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
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<PAGE> 9
The parties have executed this Agreement on the date first written above.
COHESION TECHNOLOGIES, INC.
By:
Title:
Address: 2500 Faber Place
Palo Alto, California 94303
COLLAGEN CORPORATION
By:
-------------------------------------
Title:
---------------------------------
Address: 2500 Faber Place
Palo Alto, California 94303
Officer
Signature:
--------------------------------
Address:
--------------------------------
--------------------------------
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<PAGE> 1
EXHIBIT 10.27
Application for an order granting
confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange
Act of 1934 has been made. Confidential
portions of this document have been
redacted and marked with an [*] and have
been filed with the Securities and
Exchange Commission separately with such
application.
GENOTYPES - COLLAGEN
INTELLECTUAL PROPERTY AND PRODUCTION AGREEMENT
FOR THE PRODUCTION OF COLLAGENS
USING A YEAST EXPRESSION SYSTEM
THIS PRODUCTION AGREEMENT is effective August 15, 1996 between COLLAGEN
CORPORATION, with its principal place of business at 2500 Faber Place, Palo
Alto, California 94303, (hereinafter "COLLAGEN") and GENOTYPES, INC., with its
principal place of business at 61 Airport Boulevard, Suite B, South San
Francisco, California 94080 (hereinafter "GENOTYPES").
For purposes of this Production Agreement, the term "COLLAGEN" shall
include Collagen Corporation and any corporation or other business entity
controlled by, controlling or under common control with Collagen Corporation.
For purposes of this paragraph, "control" shall mean (i) direct or indirect
beneficial ownership of greater than fifty percent (50%) of the voting stock or
equity, or greater than fifty percent (50%) interest in the income of such
corporation or other business entity, or (ii) direct control of greater than
fifty percent (50%) of the total number of seats on the Board of Directors of
such corporation or other business entity, or (iii) direct management of the
operations of such corporation or other business entity.
For purposes of this Production Agreement, the term "GENOTYPES" shall
include Genotypes, Inc. and any corporation or other business entity controlled
by, controlling or under common control with Genotypes, Inc. For purposes of
this paragraph, "control" shall mean (i) direct or indirect beneficial ownership
of greater than fifty percent (50%) of the voting stock or equity, or greater
than fifty percent (50%) interest in the income of such corporation or other
business entity, or (ii) direct control of greater than fifty percent (50%) of
the total number of seats on the Board of Directors of such corporation or other
business entity, or (iii) direct management of the operations of such
corporation or other business entity.
WITNESSETH THAT:
WHEREAS, COLLAGEN is in the business of developing, manufacturing, and
marketing biocompatible products for the treatment of defective, diseased,
traumatized, and aging tissues, and in particular is developing recombinantly
produced collagen-based materials which can be used to manufacture such
biocompatible products; and
<PAGE> 2
WHEREAS, GENOTYPES is in the business of developing yeast expression
systems for the production of various biological materials; and
WHEREAS, COLLAGEN and GENOTYPES are parties to (i) an agreement dated
April 12, 1995 entitled "Genotypes-Collagen Intellectual Property Agreement /
Development Program for Production of Type I(alpha)1 Polypeptide Chains in a
Yeast Expression System" (the "First Agreement"); and (ii) an agreement dated
August 15, 1995 entitled "Genotypes-Collagen Intellectual Property and
Development Agreement for the Production of Human Type I Procollagen In a Yeast
Expression System" (the "Second Agreement"); and
WHEREAS, COLLAGEN and GENOTYPES want to co-develop a commercial scale
method of producing [*], partially [*] and fully [*] human [*], [*], partially
[*] and fully [*] human type [*], [*], partially [*] and fully [*] human type
[*], [*], partially [*] and fully [*] human type [*] and other [*], partially
[*] and fully [*] [*] and [*], and mutants thereof, from a [*] system, which
development will require the exchange of Confidential Information (including
materials) between the parties and may result in the generation of proprietary
Know-How, Trade Secrets, and patentable technology; and
WHEREAS, the parties need to protect their individual Confidential
Information, as well as the propriety Know-How, Trade Secrets, and patentable
technology which may be generated during the course of this Production
Agreement; and
WHEREAS, COLLAGEN and GENOTYPES intend that the terms and conditions set
forth in this Production Agreement shall govern the rights and obligations of
the parties and that, upon execution of this Production Agreement, the First
Agreement and the Second Agreement shall each terminate and no provision or term
in either the First Agreement or the Second Agreement shall govern any right or
obligation of either COLLAGEN or GENOTYPES with respect to any aspect of the
relationship between COLLAGEN and GENOTYPES, including without limitation any
provision or term indicated in either such agreement to survive or to continue
or to remain in full force and effect after termination.
NOW, THEREFORE, the parties agree to the premises set forth above and to
the terms and conditions set forth below as follows:
1. Nondisclosure and Nonuse of Confidential Information
(a) "Confidential Information" of either party shall mean any and
all information concerning any aspect of that party's technology or business or
proposed business not generally known to persons not associated with that party.
"Confidential Information" shall include any and all information relating to the
production of any and all non-hydroxylated, partially hydroxylated and fully
hydroxylated procollagens and/or collagens, and consultants thereof, using a
yeast expression system which is generated under this Production Agreement, or
which was generated under either the First or Second Agreements, which is not
generally known
[*] Application for an order granting confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934 has been made. Confidential
portions of this document have been redacted and marked with an [*] and have
been filed with the Securities and Exchange Commission separately with such
application.
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<PAGE> 3
to persons not associated with either of the parties to this Production
Agreement. Confidential Information may be disclosed by one party hereto to the
other party hereto in writing or orally. However, when disclosed in writing, the
Confidential Information must be labeled as such and, when disclosed orally, the
Confidential Information must be confirmed as "Confidential" in writing within
thirty (30) days following such oral disclosure. Confidential Information shall
also include material samples, which need not be labeled as Confidential
Information to qualify as such. Information (other than material samples) which
is not specifically identified as Confidential Information will be presumed to
fall within the public domain. Confidential Information shall include any and
all information or material samples that were designated or were considered
Confidential Information pursuant to the First or Second Agreement.
(b) Each party agrees not to disclose or make use of, or allow
others to use, the Confidential Information of the other party, or the
Confidential Information generated during the term of this Production Agreement,
except as necessary to facilitate the purpose of this Production Agreement and,
in such case, the Confidential Information shall be used only by employees of
the parties, or in the case of COLLAGEN a contract organization designated by
COLLAGEN, who have a "need to know" in order to conduct activities which are the
purpose of this Production Agreement and have signed a nondisclosure agreement
with the party which employs them. Each party shall inform its employees who
have a "need to know" of their obligations of confidentiality under this
Production Agreement.
(c) A receiving party shall use at least the same standard of
care in preventing the unauthorized disclosure or use of a disclosing party's
Confidential Information and the Confidential Information generated during this
Production Agreement as such party uses to safeguard its own Confidential
Information and under no circumstances less than a reasonable standard of care.
The receiving party shall promptly return any materials and all copies thereof
of Confidential Information provided by a disclosing party upon request, except
that one copy may be retained by the receiving party for its legal records.
(d) Exceptions to and termination of confidentiality and non-use
obligations shall be the following:
With respect to any particular item of a disclosing party's Confidential
Information, the receiving party shall be under no obligation to maintain such
particular item in confidence, and may freely use such particular item at any
time for any purpose (subject only to any rights the disclosing party may have
under the patent laws) if the receiving party can document that such particular
item:
(i) Is publicly known and available not due to receiving
party's act or omission of acts; or
(ii) Was in the receiving party's possession prior to
disclosure by the disclosing party as evidenced by a written instrument; or
(iii) Comes into the receiving party's possession through
a third party free of any obligation of confidence to the disclosing party; or
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<PAGE> 4
(iv) Is independently developed by an employee or
representative of the receiving party who did so without any knowledge of, or
access to, the disclosing party's Confidential Information.
Exceptions (i) and (iii) above shall apply only from and after the date such
information shall become known or generally available to the public or shall be
received from said third party, respectively.
Confidential Information shall NOT be deemed within the foregoing exceptions if:
(i) The Confidential Information is merely embraced by
more general information in the public domain or in the receiving party's
possession; or
(ii) The Confidential Information constitutes a
combination which can be reconstructed from multiple sources in the public
domain or in the receiving party's possession, but none of the individual
sources shows the entire combination of the Confidential Information.
(e) COLLAGEN and GENOTYPES acknowledge and agree that GENOTYPES
is in the business of, among other things, consulting and conducting experiments
in the use of microorganisms, including yeast, for expression and replication of
host and non-host genetic material. COLLAGEN and GENOTYPES agree that this
Production Agreement is a nonexclusive agreement for the services of GENOTYPES;
however, GENOTYPES hereby agrees not to provide consulting services to or for
any third party related to the expression of any or all nonhydroxylated,
partially hydroxylated and fully hydroxylated procollagens and/or collagens, and
mutants thereof, in yeast expression systems without first obtaining written
agreement from COLLAGEN, except as expressly set forth in paragraph 1(f).
COLLAGEN and GENOTYPES agree that nothing contained in this Production Agreement
shall be deemed to restrict in any way the freedom of COLLAGEN or GENOTYPES to
conduct any other business or activity that does not contravene or violate the
provisions of this Production Agreement. Specifically, GENOTYPES shall have a
right to use any technology developed by GENOTYPES pursuant to this Production
Agreement for replication and expression of host and non-host genetic material
other than any genetic material coding for any nonhydroxylated, partially
hydroxylated or fully hydroxylated procollagens and/or collagens, or mutants
thereof, or any genetic material transferred to GENOTYPES by COLLAGEN.
GENOTYPES' rights under this paragraph 1(e) shall not include any right to use
or otherwise exploit any intellectual property owned by COLLAGEN solely.
(f) After the year 2015, if COLLAGEN is not paying GENOTYPES
royalties pursuant either to paragraph 4(a) or paragraph 4(b) of this Production
Agreement, and COLLAGEN is not then supporting research at GENOTYPES, GENOTYPES
may provide consulting services to or for a third party, and conduct research
activities for such a third party, relating to any [*], partially [*] and fully
[*] or [*], or mutants thereof, not covered by at least one U.S. patent or
patent application co-assigned to COLLAGEN and GENOTYPES.
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<PAGE> 5
(g) Any breach of the restrictions contained in this section is a
breach of this Production Agreement which will cause irreparable harm to the
non-breaching party entitling such non-breaching party to injunctive relief in
addition to all legal remedies.
2. Trade Secrets and Know-How Developed during the Production Agreement
(a) Any and all Trade Secrets and Know-How developed during the
First or Second Agreement shall be Trade Secrets and Know-How subject to this
Production Agreement, as if such Trade Secrets or Know-How were generated under
this Production Agreement.
(b) Trade Secrets and Know-How developed during the Production
Agreement shall be considered intellectual property of the Production Agreement
and shall fall under the Licensing Provisions of this Production Agreement as if
they were patented technology.
(c) The confidentiality and non-use provisions of this Production
Agreement shall apply to such Trade Secrets and Know-How, and the exceptions
under paragraph 1(d) shall not apply under circumstances such that intellectual
property rights of value would be lost to the Production Agreement or to any
business developed based on products generated as a result of that Production
Agreement.
(d) A Trade Secret, as defined under the Uniform Trade Secrets
Act, may consist of any formula, pattern, device, or compilation of information
relating to the production of any and all non-hydroxylated, partially
hydroxylated and fully hydroxylated procollagens and/or collagens, and mutants
thereof, using a yeast expression system and which gives the parties an
opportunity to obtain an advantage over competitors who do not know or use it.
Know-How may consist of any technical data or technical skill particularly
related to production of any and all [*], partially [*] and fully [*] and/or
[*], and mutants thereof, using a yeast expression system and which can be used
to provide an advantage over competitors who do not know or use it. For purposes
of this Production Agreement, a Trade Secret and Know-How shall not under any
circumstance be considered or interpreted to include any formula, pattern,
device, or compilation of information, or any technical data or technical skill,
or any plasmid, expression construct, yeast strain, and procedures and methods
for construction, utilization or growth of same, generated by GENOTYPES on its
own behalf or on behalf of third parties and not relating to production of [*],
partially [*] and fully [*] or [*], or mutants thereof, using a yeast expression
system. In addition, for purposes of this Production Agreement, a Trade Secret
and Know-How shall not under any circumstance be considered or interpreted to
include any formula, pattern, device, or compilation of information, or any
technical data or technical skill, generated by COLLAGEN on its own behalf or on
behalf of third parties.
(e) Any breach of the restrictions contained in this section is a
breach of this Agreement which will cause irreparable harm to the non-breaching
party entitling such non-breaching party to injunctive relief in addition to all
legal remedies.
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<PAGE> 6
3. Intellectual Property Rights
(a) An Invention shall mean any discovery, concept or idea,
whether patentable or not patentable, including without limitation all Trade
Secrets and Know-How, conceived and/or reduced to practice jointly by COLLAGEN
and GENOTYPES during the term of this Production Agreement, or during the term
of the Second Agreement, or during the term of the First Agreement, relating to
the production of any and all [*], partially [*] and fully [*] and/or [*], and
mutants thereof, using a [*] or the purification of any and all [*], partially
[*] and fully [*] and/or [*], and mutants thereof, produced using a [*]. Any
and all Inventions conceived and/or reduced to practice either under the First
Agreement or the Second Agreement shall be considered Inventions subject to
this Production Agreement, as if those Inventions were conceived and/or reduced
to practice under this Production Agreement. For purposes of this Production
Agreement, an Invention shall not under any circumstance be considered or
interpreted to include any discovery, concept or idea conceived and/or reduced
to practice by GENOTYPES on its own behalf or on behalf of third parties and
not relating either to the production of [*], partially [*] and fully [*]
and/or [*], and mutants thereof, using a [*], or the purification of any and
all [*], partially [*] and fully [*] and/or [*], and mutants thereof, produced
using a [*] system. In addition, for purposes of this Production Agreement, an
Invention shall not under any circumstance be considered or interpreted to
include any discovery, concept or idea conceived and/or reduced to practice by
COLLAGEN on its own behalf or on behalf of third parties.
(b) Any and all Inventions conceived and/or reduced to practice
under the terms and conditions of this Production Agreement shall be considered
to be co-owned by and co-assigned to COLLAGEN and GENOTYPES hereunder. Each of
the parties shall take all steps required in order to effectuate co-ownership by
and co-assignment to COLLAGEN and GENOTYPES of any and all Inventions. Licensing
of third parties by GENOTYPES of an Invention made under the terms and
conditions of this Production Agreement shall be limited to applications which
are not competitive with any product line either on the market or under
development by COLLAGEN at the time of such third party licensing. Further,
COLLAGEN shall be given a right of first refusal for an exclusive license to an
Invention made under the terms of this Production Agreement, which Invention is
not competitive with an existing COLLAGEN product line, prior to such licensing
to third parties, with COLLAGEN to respond within 60 days of receipt of notice
from GENOTYPES that GENOTYPES intends to license such third party. Licensing of
an Invention to third parties by either COLLAGEN or GENOTYPES shall require the
party licensing the third party to pay to the other party to this Production
Agreement (the co-owner of the Invention) a running royalty equal in amount to
that specified for payment by COLLAGEN to GENOTYPES under the licensing
provisions which follow in paragraph 4 of this Production Agreement.
(c) Each party shall maintain ownership of intellectual property
developed prior to this Production Agreement and prior to the First and Second
Agreements. Further, each
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<PAGE> 7
party shall have ownership of any independently developed technology during the
terms of this Production Agreement or during the term of either the First
Agreement or the Second Agreement. If independently developed technology is
sufficiently closely related to the production of any and all non-hydroxylated,
partially hydroxylated and fully hydroxylated procollagens and/or collagens, and
mutants thereof, using a yeast expression system, or the purification of any and
all non-hydroxylated, partially hydroxylated and fully hydroxylated procollagens
and/or collagens, and mutants thereof, produced using a yeast expression system
which is the subject matter of this Production Agreement that one skilled in the
art would conclude that such technology was the product of the Production
Agreement, then the party claiming independent development shall have the burden
of proof, by written documentation, that the technology was independently
developed and that no concepts involved in such technology originated from
Confidential Information provided by the other party to this Production
Agreement.
(d) Expenses for preparation, prosecution, and maintenance of
patents for Inventions developed under the terms of this Production Agreement
shall be handled as follows:
(i) Where an Invention made under the terms of this
Production Agreement is deemed patentable by COLLAGEN, COLLAGEN shall, at its
own expense, prepare, file, and prosecute all patent applications related to
said Invention. GENOTYPES shall fully cooperate with COLLAGEN, on a worldwide
basis, in the development, preparation, execution, assignment, prosecution,
issuance and maintenance of all patent applications related to said Invention.
In the event that COLLAGEN elects not to file an application for patent
protection on an Invention, GENOTYPES may proceed to file and prosecute a patent
application related to said Invention, in which event, COLLAGEN shall fully
cooperate with GENOTYPES on a worldwide basis in the development, preparation,
execution, assignment, prosecution, issuance and maintenance of all patent
applications related to said Invention; and GENOTYPES shall bear the costs and
fees relating to all phases of such patenting activities. In the event that
after filing an application for patent protection on an Invention, the party
that filed such application elects not to continue prosecution of such
application, the other party hereto may proceed to prosecute such patent
application related to said Invention, in which event, the party that filed such
application shall fully cooperate with the party prosecuting such application on
a worldwide basis in the development, preparation, execution, assignment,
prosecution, issuance and maintenance of all patent applications related to said
Invention; and the party prosecuting such application shall bear the costs and
fees relating to all phases of such patenting activities. COLLAGEN and GENOTYPES
agree to maintain the existence of any patent application filed pursuant to this
Production Agreement in confidence until such patent application is published,
except as required for financial or legal disclosures. Each party shall bear its
own costs for assisting the other party in the preparation and prosecution of
any patent application, unless the number of hours involved in assisting the
other party exceeds 25 hours. In the event that more than 25 hours of assistance
are required, the assisting party shall be entitled to compensation, with the
amount of compensation to be negotiated by the parties in good faith at the time
it becomes apparent that more than 25 hours of assistance will be required. All
patents for Inventions made during the term of this Production Agreement shall
reflect equal ownership of the parties and shall be considered co-owned by and
co-assigned to the parties, without
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<PAGE> 8
consideration of inventorship and without consideration of which party has paid
the costs and fees relating to all phases of such patenting activities. Patents
falling under the terms of this Production Agreement are intended to include all
original applications, continuations, divisional applications, reissues, and
continuation-in-part applications which claim legal priority from an application
for an Invention made under the terms of this Production Agreement and any and
all patents issuing thereon.
(ii) Maintenance fees and all service fees associated
therewith during the prosecution of a patent application shall be paid by the
party responsible for prosecution of the patent application. Maintenance fees
due for the issued patent shall be paid by the party responsible for prosecution
of the patent application, with that party having the right to discontinue
payment of such maintenance fees within sixty (60) days of having given notice
to the other party who may elect to continue payment of such maintenance fees.
(iii) COLLAGEN shall have the right to enforce any patent
which issues for an Invention made under the terms of this Production Agreement,
and shall at all times keep GENOTYPES informed as to the status thereof.
COLLAGEN may, at its sole judgment and its own expense, institute suit against
any such infringer or alleged infringer and control, settle, and defend such
suit in a manner consistent with the terms and provisions hereof and recover for
its accounts any damage, awards, or settlements resulting therefrom, subject to
paragraph 3(d)(v) below. This right to sue for infringement shall not be used in
an arbitrary or capricious manner. GENOTYPES shall reasonably cooperate in any
such litigation at COLLAGEN's expense.
(iv) If COLLAGEN becomes aware of any patent infringement
and elects not to enforce any patent which issues for an Invention made under
the terms of this Production Agreement, then COLLAGEN shall so notify GENOTYPES
in writing, and GENOTYPES may, in its sole judgment and its own expense, do so
and control, settle, and defend such suit in a manner consistent with the terms
and provisions hereof and recover, for its own account, any damages, awards, or
settlements resulting therefrom. GENOTYPES shall at all times keep COLLAGEN
informed as to the status of any such suit. COLLAGEN shall reasonably cooperate
in such litigation at GENOTYPES' expense.
(v) Any compensatory damages received by COLLAGEN under
paragraph 3(d)(iii), above, shall be deemed to reflect loss of commercial sales,
and COLLAGEN shall pay GENOTYPES a royalty in accordance with this Production
Agreement on said lost sales net of all reasonable litigation costs and expenses
(including all reasonable attorneys' fees and disbursement, experts' fees and
disbursements, court costs, stenographers' fees and disbursements, and any other
reasonable fees and disbursements associated with the suit and litigation
activities and legal opinions obtained in connection therewith); provided
however, if damages are awarded in excess of compensatory damages, then said
litigation costs and expenses shall be deducted therefrom first, with any
remaining expenses then deducted from the compensatory damages.
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<PAGE> 9
(e) GENOTYPES shall provide to COLLAGEN all yeast, yeast strains,
yeast constructs, plasmids and other products and materials developed during the
course of this Production Agreement upon COLLAGEN's request, [*] by COLLAGEN to
GENOTYPES of [*].
All yeast, yeast strains, yeast constructs, plasmids and other
products and materials developed during the course of and pursuant to this
Production Agreement shall be co-owned by COLLAGEN and GENOTYPES. COLLAGEN may
use such materials solely for the development of products containing
non-hydroxylated, partially hydroxylated and fully hydroxylated procollagens
and/or collagens, and mutants thereof, expressed from yeast. However, COLLAGEN
may not transfer or sell any yeast strains, yeast constructs or plasmids
developed during the course of this Production Agreement to any affiliates,
subsidiaries, licensees or any other third parties without the permission of
GENOTYPES, such permission not to be unreasonably withheld. GENOTYPES may not
transfer or sell to any affiliates, subsidiaries, licensees or any other third
parties any yeast strains, yeast constructs or plasmids developed during the
course of this Production Agreement which contain any genetic material coding
for any non-hydroxylated, partially hydroxylated and fully hydroxylated
procollagens and/or collagens, and mutants thereof, or any genetic material
transferred to GENOTYPES by COLLAGEN.
(f) COLLAGEN agrees to purchase, at its sole discretion, a
fermenter to be utilized by GENOTYPES at GENOTYPES' facility. COLLAGEN agrees to
allow GENOTYPES to use such fermenter for other projects not related to this
Production Agreement, so long as the work conducted pursuant to this Production
Agreement receives priority. If GENOTYPES achieves the requirements of each
milestone described in paragraph 5(a) below at least 30 days before the date
corresponding to each such milestone, then COLLAGEN shall [*]. However, if
GENOTYPES fails to satisfy the requirements of each such milestone at least 30
days before the date corresponding to each such milestone, [*].
4. Licensing
(a) COLLAGEN hereby agrees to pay GENOTYPES a running royalty in
the amount of [*]% of Net Sales Price (as defined in paragraph 4(e) below) from
any product containing any [*] developed in whole or in part as a result of
research performed in accordance with this Production Agreement or in accordance
with the First Agreement or the Second Agreement (collectively, "Products"),
provided that such Products, or the method of producing such Products, are
covered by at least one issued and non-expired patent co-assigned to
[*] Application for an order granting confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934 has been made. Confidential
portions of this document have been redacted and marked with an [*] and have
been filed with the Securities and Exchange Commission separately with such
application.
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<PAGE> 10
COLLAGEN and GENOTYPES in the country in which such Products are
sold. However, if an issued patent which covers such a Product and which is
co-assigned to COLLAGEN and GENOTYPES is determined to be unenforceable by a
court or, where applicable, an agency or other government body of competent and
final jurisdiction over patent matters in the country where such patent has
issued, such an unenforceable patent, thereafter, shall not be considered a
"patent" for purposes of this paragraph 4(a).
(b) COLLAGEN hereby agrees to pay GENOTYPES a running royalty in
the amount of [*]% of Net Sales Price from Products, provided that such Products
are produced by any person and/or entity using any yeast expression system
developed in whole or in part as a result of research performed in accordance
with this Production Agreement or in accordance with the First Agreement or the
Second Agreement. No royalty shall be due if such Products are produced using a
yeast expression system that was not developed in whole or in part as a result
of research performed in accordance with this Production Agreement, or in
accordance with the First Agreement or the Second Agreement. COLLAGEN's
obligation to pay GENOTYPES a running royalty under this paragraph 4(b) shall
apply to each country in which Products are sold and shall extend to, and shall
not extend beyond, [*] and payment shall be made only in the event that [*] is
[*] by [*] to [*] paragraph [*]. After [*] may [*] any Products with [*] to [*]
pursuant to this paragraph 4(b).
(c) [*] shall be payable to GENOTYPES by COLLAGEN on any Product
sold in accordance with this Production Agreement because the manufacture, use,
or sale of said product are or shall be covered by: (i) more than one patent
application or patent co-assigned to COLLAGEN and GENOTYPES under this
Production Agreement or the First or Second Agreements; or (ii) both a patent
co-assigned to COLLAGEN and GENOTYPES and Know-How or Trade Secrets owned by
COLLAGEN and GENOTYPES or by GENOTYPES individually; or (iii) a patent to
GENOTYPES for an invention, the use of which is necessary to accomplish a
patented Invention made during this Production Agreement.
(d) With regard to the technology owned by GENOTYPES prior to
this Production Agreement, or developed independently of the Production
Agreement by GENOTYPES during the term of this Production Agreement and owned by
GENOTYPES, no royalty (except as otherwise set forth in paragraph 4(a) and/or
paragraph 4(b) above) shall be owed to GENOTYPES by COLLAGEN for use of such
technology when such use is necessary to produce Products in accordance with the
milestones set forth in paragraph 5 of this Production Agreement, or to permit
use of Inventions, Know-How or Trade Secrets which are co-assigned to the
parties. In connection with the use described in this paragraph, GENOTYPES
grants COLLAGEN a nonexclusive worldwide right and license to use such
technology to make, use, sell, offer to sell, import and distribute Products.
[*] Application for an order granting confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934 has been made. Confidential
portions of this document have been redacted and marked with an [*] and have
been filed with the Securities and Exchange Commission separately with such
application.
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<PAGE> 11
(e) "Net Sales Price" shall mean the [*] on the [*] by COLLAGEN
for sale of Products, [*] and [*],[*],[*] or [*],[*] and [*], and [*], all as
[*] by [*]. If, prior to sale of any Product to a third party, COLLAGEN adds
biologically active agents to such Product, the Net Sales Price of such Product
shall be [*] to COLLAGEN for the biologically active agents added. As used
herein, the term biologically active agents does not include [*].
COLLAGEN and GENOTYPES agree that any [*] of the cost of biologically active
agents is the actual cost (as evidenced by invoice) [*] to a [*] for COLLAGEN's
actual purchase and acquisition cost of said biologically active agents. Such
purchase and acquisition cost [*].
In the event that any Product is [*] for [*], Net Sales Price shall [*] the [*]
of such [*] at the time of COLLAGEN's receipt thereof.
(f) [*] royalties shall be due for samples of Products provided
by COLLAGEN to third parties for the purpose of obtaining marketing approvals
for Products, and for market introduction and acceptance of such Products.
(g) Until COLLAGEN has the capability of producing [*], GENOTYPES
agrees to [*] relating to [*] produced in the [*] due to Stanford University for
licensing of the [*] during the term of this agreement. In no case shall
GENOTYPES pay more than $[*] in any year under this paragraph 4(g). After
COLLAGEN has the capability of producing [*] in the [*] shall have
responsibility for [*] any and all payments due to Stanford University for
licensing of the [*] for activities of [*].
(h) COLLAGEN and GENOTYPES each agree to conduct any and all
negotiations with third parties relating to the granting of any right and
license under Inventions, Trade Secrets and/or Know-How in good faith and in
accordance with, and as permitted under, the terms and conditions of this
Production Agreement subject to an appropriate confidentiality and non-use
restrictions so as to maintain such Inventions, Trade Secrets and/or Know-How
and the potential uses of same by third parties in confidence.
(i) COLLAGEN shall keep accurate books and records in sufficient
detail to enable the royalties due GENOTYPES pursuant to this Production
Agreement to be determined. Such books and records shall be kept at COLLAGEN's
principal place of business and shall be retained by COLLAGEN for three (3)
years following the end of the calendar year to which they pertain.
[*] Application for an order granting confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934 has been made. Confidential
portions of this document have been redacted and marked with an [*] and have
been filed with the Securities and Exchange Commission separately with such
application.
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<PAGE> 12
(j) During the period that COLLAGEN has an obligation to pay to
GENOTYPES royalties pursuant to 4(a) and (b) above and for an additional period
of one year thereafter, upon the written request of GENOTYPES, at GENOTYPES'
expense and not more than once during each calendar year, COLLAGEN shall permit
an independent public accountant selected by GENOTYPES and reasonably acceptable
to COLLAGEN to have access during normal business hours to COLLAGEN's books and
records as may be reasonably necessary for the purpose of verifying (i) the
accuracy of reports provided to GENOTYPES pursuant to this Production Agreement,
and (ii) the status of entities purchasing or otherwise receiving Products (as
defined in paragraph 4(a) above) from COLLAGEN. In the event that an independent
public accountant selected by GENOTYPES pursuant to this paragraph 4(j)
concludes that additional royalties were owed to GENOTYPES, COLLAGEN shall pay
such additional royalties promptly.
(k) All royalty payments due and payable to GENOTYPES under this
Production Agreement shall be paid on a calendar quarterly basis in United
States of America dollars. Such payments shall be provided to GENOTYPES via the
United States Postal Service by letter posted first class and addressed to
GENOTYPES, INC., Attention: Ms. Joy Hitzeman, or other GENOTYPES appointed
designee, to the address set forth above. Such letter shall be posted by
COLLAGEN not later than the close of business on the 30th business day after the
close of each calendar quarter for which such royalty payment is due and
payable.
5. Deliverables and Payments Under The Production Agreement
(a) GENOTYPES, unless otherwise agreed in writing between
COLLAGEN and GENOTYPES, will use its best efforts to achieve expression of human
collagens (as further described below) in a five or ten liter bioreactor that is
at least 1% by weight of soluble yeast protein as periplasmic or media localized
trimer meeting the specifications set forth below on or before the date of
delivery by GENOTYPES to COLLAGEN of yeast which, after analysis by COLLAGEN,
fulfills the requirements as set forth below:
<TABLE>
<CAPTION>
Milestone Date of Delivery
--------- ----------------
<S> <C>
1. Human Type I collagen having a [*] at [*] [*]
degrees [*] that is capable of [*].
2. Human Type I collagen containing [*] and having [*]
a [*] at [*] degrees [*] that is capable of [*].
3. Human type II collagen having a [*] at [*] [*]
degree [*] that is capable of fiber [*].
</TABLE>
[*] Application for an order granting confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934 has been made. Confidential
portions of this document have been redacted and marked with an [*] and have
been filed with the Securities and Exchange Commission separately with such
application.
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<PAGE> 13
COLLAGEN will provide to GENOTYPES the cDNA for the protein to be expressed
under this Production Agreement. COLLAGEN will verify the sequence of any cDNAs
provided to GENOTYPES for expression in yeast and will also test for
functionality of gene in its homologous environment during GENOTYPE's work on
the system.
(b) Upon expression of each [*], as set forth above, GENOTYPES
will provide [*], and [*] materials to COLLAGEN for analysis for the detection
and quantification of [*] in the [*]. Such analysis shall determine whether
GENOTYPES has satisfied the requirements for the milestones set forth in
paragraph 5(a). COLLAGEN will promptly perform [*].
(c) GENOTYPES will prepare and submit to COLLAGEN quarterly
written reports summarizing progress on the activities conducted by GENOTYPES
pursuant to this Production Agreement. GENOTYPES will prepare and submit to
COLLAGEN a final written report within thirty (30) days following expiration or
termination of this Production Agreement.
(d) Upon execution of this Production Agreement, COLLAGEN will
pay to GENOTYPES $[*] for performance of [*] month's work for the period [*] to
[*]. Thereafter, COLLAGEN shall pay to GENOTYPES $[*] on the first day of each
month thereafter until the total of all payments by COLLAGEN to GENOTYPES under
this Production Agreement shall equal $[*]. COLLAGEN shall have no obligation to
pay to GENOTYPES any amount in excess of $[*] unless otherwise agreed to in
writing by COLLAGEN and GENOTYPES.
(e) [*] payments made by COLLAGEN to GENOTYPES under paragraph
5(d) of this Production Agreement, and [*] payments made by COLLAGEN to
GENOTYPES under either the First Agreement or the Second Agreement, shall be
[*]. If this Production Agreement is terminated by COLLAGEN in accordance with
paragraph 6(a), COLLAGEN shall have no obligation to make any payments to
GENOTYPES pursuant to paragraph 5(d) of this Production Agreement after the
effective date of such termination.
(f) COLLAGEN and GENOTYPES agree that GENOTYPES and COLLAGEN will
use their [*] to achieve the milestones set forth in paragraph 5(a) above. In
addition, COLLAGEN agrees that COLLAGEN's obligation to make payments to
GENOTYPES, as set forth in paragraph 5(d), is [*] set forth in paragraph 5(a).
6. Term and Termination
(a) This Production Agreement shall terminate on the last day of
the month during which COLLAGEN makes the final payment to GENOTYPES pursuant to
paragraph 5(d) above, unless terminated prior to such date in accordance with
the terms of this Production
[*] Application for an order granting confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934 has been made. Confidential
portions of this document have been redacted and marked with an [*] and have
been filed with the Securities and Exchange Commission separately with such
application.
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<PAGE> 14
Agreement set forth below. After October 1, 1997, COLLAGEN may
provide written notice to GENOTYPES that COLLAGEN desires to terminate this
Production Agreement. Such termination may be for any reason or for no reason.
The effective date of such a termination shall be the date one hundred eighty
days (180) after the date of such written notice to GENOTYPES. In the event that
GENOTYPES is unable to provide the equivalent of three (3) full time trained
employees to work on the Production Agreement, or in the event that GENOTYPES
breaches, or is unwilling or unable to perform under, any provision of this
Production Agreement for any reason (including unforeseeable causes that are
beyond GENOTYPES' control, including without limitation, acts of God or of a
public enemy, acts of government (other than those relating to prices), fires,
floods, epidemics, quarantine restrictions, strikes, freight embargoes, and
unusually severe weather), COLLAGEN reserves the right to terminate this
Production Agreement by giving GENOTYPES thirty (30) days advanced written
notice of such termination. The effective date of such a termination by COLLAGEN
for breach or other actions by GENOTYPES shall be the date thirty (30) after the
date of such written notice to GENOTYPES.
(b) GENOTYPES agrees, upon COLLAGEN's written request, to
cooperate with and provide Know-How to transfer technology developed during the
course of this Production Agreement to COLLAGEN, or to a contract organization
designated by COLLAGEN, for the manufacture of human recombinant collagen using
a yeast expression system. During the term of this Production Agreement,
services rendered in connection with transfer of said technology to COLLAGEN or
to a contract organization designated by COLLAGEN shall be provided by GENOTYPES
at no additional cost or expense. After the term of this Production Agreement,
COLLAGEN will compensate GENOTYPES at a rate of $[*] per hour plus [*] for
services rendered in connection with the transfer of said technology to COLLAGEN
or to a contract organization designated by COLLAGEN. Compensation for such [*].
Payments by COLLAGEN to GENOTYPES for GENOTYPES' expenses in connection with
said technology transfer (including related travel expenses) shall not exceed a
total of $[*] corresponding to a total of [*] hours of services by GENOTYPES.
Thereafter, if COLLAGEN desires additional assistance in connection with
technology transfer under this paragraph 6(b), such assistance shall be provided
by GENOTYPES only in accordance with the terms and conditions expressly agreed
upon by both COLLAGEN and GENOTYPES.
(c) Upon termination of this Production Agreement, the following
paragraphs will remain in full force and effect: 1(a), 1(b), 1(c), 1(d), 1(e), 1
(f), 1(g), 2(a), 2(b), 2(c), 2(d), 2(e), 3(a), 3(b), 3(c), 3(d), 3(e), 3(f),
4(a), 4(b) 4(c), 4(d), 4(e), 4(f), 4(g), 4(h), 4(i), 4(j), 4(k), 5(c), 5(e),
6(a), 6(b), 6(c), 7, 8(a), 8(b), 8(c), 8(d), 8(e), 8(f), 8(g) and 8(h).
[*] Application for an order granting confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934 has been made. Confidential
portions of this document have been redacted and marked with an [*] and have
been filed with the Securities and Exchange Commission separately with such
application.
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<PAGE> 15
7. Independent Contractor
The relationship between GENOTYPES and COLLAGEN established by
this Production Agreement shall be that of independent contractors. GENOTYPES'
employees will not be eligible for any COLLAGEN employee benefits. COLLAGEN's
employees will not be eligible for any GENOTYPES employee benefits. GENOTYPES
shall have no authority to enter into contracts which bind COLLAGEN or to create
obligations on the part of COLLAGEN without prior written authorization of
COLLAGEN. COLLAGEN shall have no authority to enter into contracts which bind
GENOTYPES or to create obligations on the part of GENOTYPES without prior
written authorization of GENOTYPES.
8. General Provisions
(a) The laws of the State of California of the United States of
America shall govern this Production Agreement.
(b) COLLAGEN and GENOTYPES acknowledge that GENOTYPES makes no
express or implied warranties about the results or lack thereof of research
conducted pursuant to this Production Agreement. Further, COLLAGEN and GENOTYPES
acknowledge that any strain and/or plasmid and/or other material that is part of
an Invention made under the terms of this Production Agreement may, in order for
said Invention to be used to produce a product to be sold require the payment of
moneys to third parties (parties other than GENOTYPES) by COLLAGEN, in the form
of license fees and/or royalties.
(c) COLLAGEN and GENOTYPES each agree to provide the other with
copies of all press releases in advance of their release for review. No
authorization is given by either party to use individual employee names of
either party without express written authorization.
(d) Authorship of any and all publications arising out of or in
connection with the research conducted under this Production Agreement relating
to production of non-hydroxylated, partially hydroxylated and/or fully
hydroxylated procollagens and/or collagens, or mutants thereof, using a yeast
expression system shall be determined in accordance with generally accepted
standards, including without limitation the degree of individual participation
of individual scientists at COLLAGEN and of individual scientists at GENOTYPES.
Any publication by GENOTYPES arising out of or in connection with the research
conducted under this Production Agreement relating to production of
non-hydroxylated, partially hydroxylated and/or fully hydroxylated procollagens
and/or collagens, or mutants thereof, using a yeast expression system shall
acknowledge the support of such research by COLLAGEN. GENOTYPES and COLLAGEN
each shall use reasonable efforts to provide notice to the other party hereto of
any publication and any presentation, whether written or orally relating to
production of non-hydroxylated, partially hydroxylated and/or fully hydroxylated
procollagens and/or collagens, or mutants thereof, using a yeast expression
system at scientific meetings.
(e) This Production Agreement represents the entire agreement
with respect to the subject matter hereof and shall supersede all previous
negotiations, commitments, or
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<PAGE> 16
communications, with respect to such subject matter, including without
limitation the First and Second Agreements.
(f) This Production Agreement may only be amended in writing by
both of the parties. All notices, requests, and other communications called for
by this Production Agreement shall be deemed to have been given if made in
writing and mailed, postage paid, to the parties at the addresses set forth
above.
(g) The rights and liabilities of the parties hereto will bind
and inure to the benefit of their successors, executors or administrators;
provided that as COLLAGEN has specifically contracted for GENOTYPES' services,
GENOTYPES may not assign or delegate its obligations under this Production
Agreement either in whole or in part, without prior written consent of COLLAGEN.
COLLAGEN shall be entitled to assign this Production Agreement to a successor to
all or substantially all of its assets relating to the subject matter of this
Production Agreement, whether by sale, merger or otherwise. Any permitted
assignee or transferee shall agree in writing to GENOTYPES to comply with and be
bound by all terms and restrictions contained in this Production Agreement. Any
attempted assignment in violation of the provisions of this paragraph 8(g) will
be void.
(h) The invalidity of any portions hereof shall not affect the
validity, force, or effect of the remaining portions hereof.
The parties hereto have executed this Production Agreement in
duplicate originals by duly authorized representatives.
COLLAGEN CORPORATION GENOTYPES, INC.
("COLLAGEN") ("GENOTYPES")
/s/ David Foster /s/ Ronald A. Hitzeman
- ------------------------------- -------------------------------
David Foster Ronald A. Hitzeman, Ph.D.
Vice President President and Research Director
Date: September 26, 1996 Date: September 26, 1996
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