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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
(Mark One)
[ X ] Annual report pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended JUNE 30, 1999,
OR
[ ] Transition report pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934 For the transition period from_____________ to
_______________
Commission file number: 000-24103
COHESION TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 94-3274368
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Identification No.)
Organization)
2500 FABER PLACE, PALO ALTO, CA 94303
(Address of Principal Executive Offices, including Zip Code)
Registrant's telephone number, including area code: (650) 320-5500
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 month (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing price of the common stock on September 3,
1999 on The Nasdaq Stock Market, was approximately $28,850,445. Shares of common
stock held by each officer and director and by each person who owns 5% or more
of the outstanding common stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of September 3, 1999, the registrant had 8,461,477 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the registrant's
1999 Annual Meeting of Stockholders are incorporated by reference in Part III of
this Report.
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The following information should be read in conjunction with the
Consolidated Financial Statements and the notes thereto. This Annual Report on
Form 10-K, and in particular the Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements regarding future events or the future performance of Cohesion that
involve certain risks and uncertainties including those discussed in "Additional
Factors that Might Affect Future Results" below. In this report, the words
"anticipates," "believes," "expects," "future" and similar expressions identify
forward-looking statements. Actual events or the actual future results of
Cohesion may differ materially from any forward-looking statements due to such
risks and uncertainties. Cohesion assumes no obligation to update these
forward-looking statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking statements, which reflect
management's analysis only as of the date hereof. Cohesion undertakes no
obligation to publicly release the results of any revision to these
forward-looking statements, which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
PART I
ITEM 1. BUSINESS
GENERAL
Cohesion Technologies, Inc. was organized as a Delaware corporation and
wholly owned subsidiary of Collagen Aesthetics, Inc., formerly known as Collagen
Corporation, in June 1997. In October 1997, Collagen announced that it would
separate its Aesthetic Technologies Group and its Collagen Technologies Group
into two independent, publicly-traded companies. Effective January 1, 1998,
Collagen contributed its research and development programs for hemostatic
devices, biosealants, orthopedics products and programs, adhesion barriers and
recombinant human collagen and thrombin and other related businesses of CTG to
Cohesion. Collagen also contributed various equity investments to us, including
all of its holdings in Boston Scientific Corporation. On August 18, 1998,
Collagen distributed as a dividend to its stockholders, one share of our common
stock for each share of Collagen common stock outstanding. Cohesion and Collagen
entered into various intercompany 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.
Cohesion 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)
Surgical Hemostat, our lead hemostatic product candidate, is designed for use in
cardiovascular, orthopedic and general surgery indications. We received European
Community certification for CoStasis in September 1998 and began product
introductions in Europe in February 1999. During fiscal 1999, we completed a
pivotal clinical trial of CoStasis in the U.S., and filed a PMA application with
the FDA in June 1999. We also completed a feasibility study and initiated an
expanded clinical study in Europe in fiscal 1999 for CoSeal(TM) Surgical
Sealant, our lead biosealant product candidate designed for sealing organs and
other tissues resulting from surgical wounds and incisions. Cohesion also sells
Collagraft(R), an orthopedic product, through its newly-formed subsidiary,
NeuColl, Inc., and has research and development programs in orthopedic areas and
in recombinant human collagen and thrombin. Our 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.
PRODUCTS AND DEVELOPMENT PROGRAMS
Although we are currently selling CoStasis in Europe and marketing a line
of collagen-based materials for research applications, which include Vitrogen,
Cell Prime, Angiostat and other bulk collagen products, most of our products are
still under development. Most of these products under development are being
designed to target the market for wound treatment, which includes at least two
significant segments: hemostatic products, used to control bleeding, and
surgical sealants, used to seal organs and tissues compromised by surgery or
other trauma. During most surgical procedures, which entail damage to the
vasculature and the compromise of normal
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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
tissues 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.
COSTASIS SURGICAL HEMOSTAT
Cohesion's first surgical product is CoStasis Surgical Hemostat. CoStasis
is a sprayable 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 closed-herd cows, whose
maintenance is overseen by Collagen and which constitute a source available to
none of our 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, we have 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 is packaged separately from CoStasis, and which we
believe makes 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 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 (less than 10 minutes).
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. We believe that these preclinical data
indicate that CoStasis has the potential to be highly effective in the rapid
control of diffuse bleeding from capillaries, venules, and arterioles under
diverse conditions modeling clinical use and tissue conditions.
CoStasis has been used to control bleeding in cardiovascular, orthopedic,
hepatic and general surgery indications in clinical trials in the United States
and Europe. We received a CE Mark in September 1998 and began product
introductions in Europe in February 1999, having signed and trained nine
distributors by the end of the fiscal year. We have also completed pivotal
trials in the United States and filed a PMA application with the FDA in June
1999.
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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 and the Center
for Devices and Radiological Health. The FDA has assigned lead review
responsibility to CDRH following a "Request for Designation" determination by
the FDA in September 1996. We believe that this decision was significant because
the regulatory approval processes for devices conducted by CDRH are typically of
a shorter duration and less complex than the review process conducted by CBER
for biological drugs. In July 1999, we were informed by the FDA that our PMA
filing would be given streamlined review status and that an advisory panel
hearing would not be required.
COSEAL SURGICAL SEALANT
Cohesion's second surgical product under development is CoSeal Surgical
Sealant. 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.
CoSeal Surgical Sealant 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, also known as PEG, 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 our clinical advisers, we are also developing a variety of
special delivery devices, which 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. During fiscal 1999, we completed a feasibility study in
Europe for cardiovascular and vascular surgery procedures and initiated an
expanded clinical study. The CE mark cohort of this expanded study was completed
by August 1999.
ORTHOPEDICS
In addition to the market for wound treatment, Cohesion is focusing on the
market for bone graft substitutes. On February 1, 1999, Cohesion formed a new
company, Neucoll, Inc., a wholly owned subsidiary, in order to commercialize
products in the orthopedics field, which include Collagraft(R) and NeuVisc(TM),
a collagen-based intra-articular implant. NeuColl is currently marketing
Collagraft, a proprietary bone graft substitute product, in the U.S. through its
partner, Zimmer, Inc., a subsidiary of Bristol-Myers Squibb Company. NeuColl is
also developing a number of additional collagen-based products for use in a
variety of orthopedic indications. In connection with the formation, Cohesion
granted NeuColl an exclusive license to certain patents relating to collagen and
polymer technology for orthopedic applications. Cohesion is providing the
initial funding for NeuColl. NeuColl is currently seeking third-party funding,
however, it may not be successful in finding financing during fiscal 2000 and
Cohesion may discontinue funding.
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Collagraft. Collagraft is a proprietary 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. Collagraft strip products 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 and are supplied sterile in
strip (premixed) form. When used with the patients's own bone marrow, Collagraft
takes on osteoinductive and osteogenic properties. 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.
NeuColl is currently marketing its Collagraft products through its partner,
Zimmer, in the U.S. and Asia, pursuant to a product development and distribution
agreement. Under the terms of the agreement, Zimmer has exclusive and perpetual
distribution rights for Collagraft in certain countries and territories. NeuColl
is required to pay Zimmer a royalty for Collagraft products sold by NeuColl in
NeuColl's territory over a specified period. NeuColl has sole discretion as to
whether and how to market Collagraft outside of Zimmer's territory and holds a
license to use, with the right to sublicense, Zimmer's Collagraft trademark to
market Collagraft outside of Zimmer's territory and to seek trademark protection
of Collagraft in its own name. NeuColl began selling Collagraft in Europe in the
last half of fiscal 1999 through a network of independent distributors.
NeuVisc(TM). 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. We conducted a European feasibility study
involving 30 patients in 1997. Significant pain reduction was obtained with a
single injection of NeuVisc(TM), NeuColl's injectable collagen intra-articular
implant. NeuColl continued to conduct preclinical studies in fiscal 1999 and
expects to conduct additional clinical trials in Europe during fiscal 2000.
Bone Anchors. Bone anchors are used to anchor soft tissue to bone. NeuColl
is in the process of developing a bone anchor product with Innovasive Devices,
Inc. pursuant to a research and development agreement. Under the terms of the
agreement, the parties have agreed to jointly develop fully or partially
resorbable mechanical meniscal repair devices and mechanical tissue-to-bone
fixation devices and the rights, title and interest in any technology jointly
developed are jointly owned. The parties have agreed that until October 2000,
neither party will develop or commence the development of any such products
independently, or in collaboration with, or purchase any such products from, any
third party. Under a related distribution agreement, Innovasive Devices holds
exclusive marketing rights to such product.
OTHER PRODUCT DEVELOPMENT PROGRAMS
Recombinant Human Collagen and Thrombin. The recombinant programs are
focused on the development of recombinant human collagen and thrombin through
transgenic animals and yeast. Our 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 our products. We
believe that by achieving this objective, we will be able to develop a wider
range of innovative surgical products for tissue repair and regeneration.
Cohesion 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.
Adhesion Prevention Barriers. Cohesion is also developing an
adhesion-prevention barrier, based on our 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.
Cohesion believes 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.
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RESEARCH AND DEVELOPMENT
Cohesion's research and development efforts are directed at achieving
continuing improvements in surgical products to achieve hemostasis, tissue
sealing and adhesion prevention. We have 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 our
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, 1999, 1998, and 1997 were
$15.3 million, $16.3 million and $9.6 million, respectively.
The following table summarizes the status of our products and development
programs. The column titled "Status" 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 " -- Government Regulation."
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------- -------------------------------------------- ------------------------------------------
PRIMARY PROGRAM/PRODUCT STATUS PRIMARY EXPECTED APPLICATION
- -------------------------------- -------------------------------------------- ------------------------------------------
COSTASIS SURGICAL HEMOSTAT Europe: CE Mark received in September General, hepatic, orthopedic and
1998; initial product launch in February cardiovascular procedures
1999
United States: Pivotal clinical trial
completed; filed PMA application in June
1999; informed by FDA in July 1999 of
streamlined review status
------------------------------- -------------------------------------------- ------------------------------------------
COSEAL SURGICAL SEALANT Completed feasibility study; initiated Anastamoses and incision lines in
expanded clinical study in Europe during cardiovascular and vascular procedures
fiscal 1999, completing CE Mark cohort by
August 1999
------------------------------- -------------------------------------------- ------------------------------------------
ORTHOPEDICS
Collagraft Marketed and distributed in U.S. and Asia Bone grafting applications
through Zimmer, Inc.
Distributed in Europe, Canada and Australia
by NeuColl via network of independent
distributors
NeuVisc(TM) Completed clinical feasibility study in Pain relief from osteoarthritis
Europe in 1997; continued preclinical (degenerative joint disease in bones)
studies in fiscal 1999;
European pivotal clinical trial planned for
fiscal 2000
Bone Anchor Development Soft tissue fixation to bone
------------------------------- -------------------------------------------- ------------------------------------------
OTHER PROGRAMS
Adhesion Prevention Preclinical studies Prevention of post-surgical adhesion
Barriers formation in general, gynecological,
orthopedic and cardiovascular procedures
Recombinant Human Research Replacement for bovine collagen and
Collagen and Thrombin thrombin
------------------------------- -------------------------------------------- ------------------------------------------
</TABLE>
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MANUFACTURING
Cohesion manufactures and packages the final products for CoStasis and uses
outside contractors for other functions such as non-proprietary, high-volume
processes. We anticipate that this will also be the case for CoSeal. Cohesion
has approximately 6,000 square feet of manufacturing space in Palo Alto,
California, which was constructed in fiscal 1999. There can be no assurance that
we will be able to attract, train and retain the required personnel or will be
able to increase our manufacturing capability to manufacture commercial
quantities of our 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 we may encounter
similar problems. We can make no assurance that our 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 a material adverse effect on our ability
to develop and commercialize products, which in turn would have a material
adverse effect on our business, financial condition and results of operations.
See "-- Additional Factors that Might Affect Future Results."
Cohesion purchases raw materials used in its products from various
suppliers. For example, Cohesion purchases all of its requirements for collagen
materials from Collagen pursuant to the terms of the intercompany agreements
entered into in connection with our spin-off from Collagen. These materials have
generally been readily available in the marketplace and have not been the
subject of shortages; however, Cohesion, its suppliers or contract manufacturers
may experience material 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 Bovine Spongiform
Encephalopathy or BSE, a disease commonly known as mad cow disease, 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 its supply of acceptable cattle. Any such diminution would have
a material adverse effect on our ability to sell bovine collagen-based products
and, as a result, our results of operations would be materially and adversely
affected. Cohesion may also purchase polyethylene glycol, also known as PEG,
from a sole supplier. The PEG material is a key raw material component used in
our CoSeal product. Under the product development and distribution agreement
with Zimmer, NeuColl is required to purchase HA/TCP (hydroxyapatite/tricalcium
phosphate) solely from Zimmer for the manufacture of the Collagraft implant;
provided, however, NeuColl is released from such obligation if Zimmer is unable
to meet certain product specifications, Zimmer fails to supply NeuColl with a
certain percentage of its requirements for three consecutive months or an
alternative supplier becomes available at competitive prices which Zimmer is
unwilling to match. Any future shortages of materials or components could have a
material adverse effect on our business, financial condition and results of
operations. In addition, there can be no assurance that materials and components
can be obtained at attractive prices in the future. Pursuant to the intercompany
agreements, Collagen supplies NeuColl and our requirements for Collagraft and
Intermediate Products, respectively.
Cohesion, as well as any third-party manufacturers of its products, will be
subject to inspections by the FDA for compliance with applicable good
manufacturing practices, recently codified in the quality system regulation
requirements, which include requirements relating to manufacturing conditions,
extensive testing, control documentation and other quality assurance procedures.
Our facilities have undergone an ISO inspection in preparation for obtaining a
CE Mark on our products. Despite these efforts, we may not be able to obtain all
necessary FDA inspections of our facility in a timely fashion, if at all.
Cohesion has not yet undergone an FDA quality system regulation inspection but
expects to do so as part of the approval process for CoStasis. See " --
Government Regulation."
SALES, MARKETING AND DISTRIBUTION
CoStasis is currently distributed in Europe through geographically-focused,
specialty distributors with existing customer relationships and established
sales infrastructures. We face significant sales and marketing challenges in
Europe, which is a market that is fairly entrenched with using a fibrin sealant
product for many years. For the United States, Cohesion is currently considering
a range of distribution alternatives that will target the concentrated
cardiovascular surgery segment as well as other surgical specialties, such as
general surgery, neurosurgery and orthopedics. Our sales, marketing and
distribution plans will be dependent in part on
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our ability to enter into successful strategic relationships and hire, train and
retain specialized personnel. There can be no assurance that we will be able to
secure such strategic relationships or hire, train or retain specialized
personnel on terms that are attractive and acceptable to Cohesion, if at all.
While sales of Collagraft bone graft products to Zimmer in fiscal years
1999, 1998, and 1997 totaled $1.9 million, $1.5 million, and $1.9 million,
respectively, we can make no assurance regarding future sales levels. Collagraft
bone graft products are marketed in the United States and Asia by Zimmer. Our
orthopedic subsidiary, NeuColl, holds marketing rights for Collagraft bone graft
products in Europe, Canada, Australia, Africa and the Middle East and began
selling Collagraft in Europe during fiscal 1999 through a network of independent
distributors. Sales of our collagen-based materials for research applications,
which include Vitrogen, Cell Prime, Angiostat and other bulk collagen products,
were not material in fiscal 1999, 1998, and 1997. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and " --
Government Regulation."
COMPETITION
Cohesion competes 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 Cohesion.
They may also have greater experience in developing products, conducting
clinical trials, obtaining regulatory approvals, and manufacturing and marketing
such products. They may also 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 Cohesion or that render our technology and products
obsolete and non-competitive. Recently developed technologies or procedures are,
or may in the future be, the basis of competitive products. There can be no
assurance that our 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
Cohesion or that would render our technology and products obsolete or
uncompetitive. In such an event, our business, financial condition and results
of operations would be materially and adversely affected. Competitors may also
obtain approval or clearance by the FDA or foreign regulatory approval
organizations, achieve product commercialization or obtain patent protection
earlier than Cohesion. Additionally, there can be no assurance that any
marketing or other strategic partners that we may engage will not pursue
parallel development of technologies or products relating to or competitive with
our planned product portfolio. Also, to the extent Cohesion commences
manufacturing activities, we will also face competition with respect to
manufacturing efficiency and marketing capabilities, areas in which we currently
have limited experience. Failure to address the foregoing factors and
circumstances could have a material adverse impact on Cohesion, its financial
condition and results of operations.
Hemostatic and Biosealant Devices. In the hemostatic and biosealant areas,
we believe in the United States we 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, Baxter Healthcare Corporation received FDA approval
for a fibrin sealant product. We also face competition from more recent products
and technologies, such as those developed by Fusion Medical Technologies, Inc.
and Focal, Inc. Outside of the United States, other competitive products
currently being marketed include fibrin sealants and cyanoacrylates, another
class of sealants, which are sold in Europe and the Pacific Rim countries by
Immuno AG, Centeon L.L.C and Cryolife. In the United States, there are several
fibrin sealants under development, including those by the American Red Cross,
Convatec, a subsidiary of 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
cyanoacrylates or either collagen or polymer technologies, made by Fusion and
Focal.
Cohesion plans to develop a second-generation surgical sealant which
eliminates the need to collect and process plasma at the time of surgery due to
our PEG polymer technology and which will offer surgeons strong, easy-to-apply
sealing in sensitive open and endoscopic surgery situations. Cohesion plans to
ultimately seek additional indications in general surgery, urology and
neurology. We believe that the second-generation biosealants we currently have
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, because patch products are
generally more difficult to handle and apply than a liquid or gel, especially in
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minimally invasive surgery. Most second-generation products under development
are still in the preclinical 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, and BioGlue, which is sold by Cryolife.
Orthopedics. Bone graft substitutes currently are used in a small fraction
of bone grafting procedures. The 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 from coral, which is marketed by Interpore
International, Inc. A less direct competitor to Collagraft bone graft products
is an allograft bone product called Grafton, which is marketed by Osteotech,
Inc. Several companies and institutions 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 Cohesion have entered into an Assignment and License
Agreement, effective January 1, 1998, which, among other things, allocates
Collagen's technology and intellectual property between Cohesion and Collagen.
Pursuant to this Agreement, substantially all of Collagen's technology and
intellectual property (including patents, copyrights, trademarks, and trade
secrets), other than technology relating to the breast implant technology, was
assigned to Cohesion, and Cohesion 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 Cohesion 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, Cohesion and Collagen have covenanted to not
compete with each other's business until March 15, 2004.
As of September 1999, Cohesion's patent portfolio includes approximately
100 U.S. and foreign issued patents and approximately 50 U.S. and non-U.S.
patents pending. These patents 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. Cohesion 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,
Cohesion can make no assurance as to the effectiveness of its efforts and many
of the older patents covering collagen-containing compositions have already
begun to expire. However, the majority of the patent portfolio covers
biomaterials that are tailored for use in a particular manner, and these patents
will not expire until well into the next decade. In addition, Cohesion has a
number of more recently issued patents covering various methods of treatment
using specific formulations of biomaterials that will not expire for 15 or more
years.
Cohesion 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 Cohesion any competitive
advantages or will not be challenged by third parties.
Cohesion 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 Cohesion's proprietary technology or disclose such technology, or that
Cohesion can meaningfully protect its trade secrets. Cohesion 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 Cohesion during the
course of the individual's relationship with Cohesion 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 Cohesion shall be the
exclusive property of Cohesion; however, certain of Cohesion's agreements with
consultants, who typically are employed
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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 Cohesion
in the event of unauthorized use, transfer or disclosure of such information or
inventions.
Cohesion'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 Cohesion's pending or future patent applications
will issue, or that the claims of Cohesion's issued patents, or any patents that
may issue in the future, will provide any competitive advantages for Cohesion'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. Cohesion 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. We believe that obtaining foreign patents may be more difficult
than obtaining domestic patents because of differences in patent laws and
believe 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 our ability to make, use, offer for sale, sell and import its
products. We are 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 Cohesion
by third parties in the future challenging Cohesion's patent rights or claiming
infringement by Cohesion 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 Cohesion 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
Cohesion's proprietary technologies, products and processes, or that Cohesion
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, we cannot be certain that Cohesion's inventors or licensors
were the first to conceive of inventions covered by pending patent applications
or that Cohesion was the first to file patent applications for such inventions.
Cohesion 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 Cohesion, or at all. If Cohesion 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 Cohesion, to
protect trade secrets or know-how owned by Cohesion, 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 Cohesion or its licensors.
Litigation, interference or opposition proceedings could result in substantial
costs to and diversion of effort by Cohesion, and adverse determinations in any
such proceedings could prevent Cohesion from manufacturing, marketing or selling
its products and could have a material adverse effect on our business, financial
condition and results of operations.
Cohesion 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. Cohesion 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
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breached, that Cohesion would have adequate remedies for any breach, or that
Cohesion's trade secrets will not otherwise become known or be independently
discovered by competitors.
GOVERNMENT REGULATION
Cohesion's existing and proposed products, 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, 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 Cohesion to market its products in Europe and
other foreign countries, Cohesion 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 our products outside the United States may be longer or shorter than that
required in the United States. In order to market our products being developed
in the member countries of the European Union, we 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. As part of the CE Mark certification process,
Cohesion completed a successful quality systems audit to the ISO 9001/EN46001
and Medical Devices Directive requirements, one of the principal steps in the CE
Mark process. In addition to a quality system audit, the CE Mark process
involves review by the approving body of documentation submitted by Cohesion to
document each product's clinical safety and performance.
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, as
recently codified in the quality system regulation requirements. 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 Food, Drug
& Cosmetic Act or a premarket approval 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
demonstration may include a requirement to submit human clinical trial data. It
generally takes four to 12 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.
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 application can be
expensive, uncertain and lengthy, and a number of devices for which FDA approval
has been sought by other companies
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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 application. The FDA review
of a PMA application generally takes one to three years from the date the PMA
application 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 application
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 application. When, and if,
those conditions have been fulfilled to the satisfaction of the FDA, the FDA
will issue a PMA 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 application may be delayed
for one or more years while additional clinical trials are conducted and
submitted in an amendment to the PMA application. Modifications to a device that
is the subject of an approved PMA application, its labeling or manufacturing
process may require approval by the FDA of PMA supplements or new PMA
applications. Supplements to a PMA application often require the submission of
the same type of information required for an initial PMA application, except
that the supplement is generally limited to that information needed to support
the proposed change from the product covered by the original PMA application.
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, or 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, 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.
We anticipate that our products currently in development will be regulated
as Class III medical devices and will require PMA prior to being marketed in the
United States. If this belief is true, we will need to obtain for each of our
products an IDE in order to conduct clinical trials in the United States. There
can be no assurance that we will receive Class III medical device designation
for its products or that we 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 our product or will adequately
support a PMA application.
If clearance or approval for a given product is obtained, such product will
be subject to pervasive and continuing regulation by the FDA. For example,
Cohesion 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 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 Cohesion 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
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against the company, its officers and its employees. Failure to comply with the
regulatory requirements could have a material adverse effect on the Cohesion's
business, financial condition and results of operations. In addition,
regulations regarding the manufacture and sale of the Cohesion's products are
subject to change. Cohesion 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. Cohesion 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 we anticipate that our 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, or
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
application, or IND, must be submitted to the FDA. FDA regulations provide that
human clinical trials may begin 30 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 Cohesion 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 our 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 Cohesion will be able
to comply with the applicable QSR requirements. In addition, we are 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 to comply with QSR regulations, or other FDA
regulatory requirements, could have a material adverse effect on the Cohesion's
business, financial condition, or results of operations.
CoStasis contains thrombin, which is an FDA-licensed biological drug.
Consequently, the FDA considers CoStasis to be a combination product subject to
jurisdiction by Center for Biologics Evaluation and Research and the Center for
Devices and Radiological Health. The FDA has assigned lead review responsibility
to CDRH following a "Request for Designation" determination by the FDA in
September 1996. We believe 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. Although CoStasis is considered to be a
combination product, consistent with lead review responsibility being assigned
to CDRH, the product will be regulated primarily as a device. In June 1999, we
filed a PMA application with the FDA and in July 1999, was informed by the FDA
that CoStasis will be given streamlined review status and an advisory panel
hearing would not be required. There can be no assurance that the data from the
clinical trials will demonstrate the safety and effectiveness of CoStasis to the
satisfaction of the FDA, and consequently there can be no assurance that
CoStasis will be approved for commercial marketing by the FDA.
With respect to CoSeal, we believe that the product will be regulated by
the FDA as a medical device because similar biosealant products of other
manufacturers have been classified and regulated as medical devices by the FDA.
We completed a feasibility study and initiated an expanded clinical study in
Europe during fiscal 1999, completing the CE mark cohort by August 1999. We
expect to file an IDE application with the FDA, and seek marketing clearance at
the conclusion of those studies by filing a PMA application with the FDA. In any
event, there can be no assurance that the FDA will agree that the clinical study
results, once submitted, will have
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adequately demonstrated the safety and effectiveness of CoSeal.
The collagen used in our products is derived from the cow hides of U.S.
cattle. Bovine Spongiform Encephalopathy or BSE was 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,
we are not aware of any reports of BSE in U.S. cattle to date, and, currently
Cohesion relies on a "closed herd" of U.S. cattle for 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 our ability to manufacture, market or sell its bovine
collagen-based products, which could have a material and adverse effect on our
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, Cohesion 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 our products in the international
markets in which such approvals are sought.
In the United States, health care providers, such as hospitals and
physicians, which purchase medical devices such as Cohesion'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. Cohesion anticipates that in a prospective payment
system, such as the diagnostic-related group system utilized by Medicare, and in
many managed care systems used by private health care payors, there will be no
separate, additional reimbursement for our products and therefore no assurance
that reimbursement for Cohesion's products will be available. Accordingly, we
believe that there will be no procedure-specific reimbursement codes for our
products and therefore no assurance that reimbursement for Cohesion's products
will be available in the United States or in international markets under either
governmental or private reimbursement systems. Furthermore, Cohesion could be
adversely affected by changes in reimbursement policies of governmental or
private health care payors. Failure by physicians, hospitals and other users of
Cohesion's products to obtain sufficient reimbursement from health care payors
for procedures in which our 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 our business, financial
condition and results of operations. Cohesion'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.
PRODUCT LIABILITY AND INSURANCE
The development, manufacture and sale of the Cohesion's products may expose
us to product liability claims. Although to date no claim has been asserted
against the company, there can be no assurance that Cohesion will not experience
losses due to product liability claims in the future. Although we currently have
general liability insurance and product liability insurance, there can be no
assurance that such coverage will be available to us in the future on reasonable
terms, if at all. In addition, there can be no assurance that all of the
activities encompassed within Cohesion's business are or will be covered under
our policies. Cohesion 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
us, regardless of their merit or eventual outcome, could have a material adverse
effect on our business, financial condition and results of operations.
ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS
Cohesion has a history of operating losses and anticipates continued operating
losses.
Prior to July 1, 1998, our historical results of operations discussed in
this Annual Report, and contained in the
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financial statements and related notes included in this Annual Report, reflect
the historical operations of the transferred businesses contributed by Collagen
to Cohesion. The financial statements, prior to July 1, 1998, may not
necessarily reflect the results of operations, financial position and cash flows
of the transferred businesses had Cohesion been operated as an independent
entity during the periods presented. The transferred businesses incurred
operating losses in each of the past five years, including operating losses of
$31.5 million and $16.4 million in fiscal 1998 and 1997, respectively.
Cohesion's operating losses have resulted primarily from expenses incurred in
connection with research and development activities, including preclinical and
clinical trials, development of manufacturing processes and general and
administrative expenses, and we expect that such expenses will continue to
increase for the foreseeable future. While we had sales of Collagraft bone
products of $1.9 million, $1.5 million and $1.9 million for the years ended June
30, 1999, 1998 and 1997, respectively, we do not expect such sales to increase
substantially in the future. Such sales at their present levels do not
contribute, in a material way, to our operating profitability. Cohesion'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 CoStasis
Surgical Hemostat and 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 we will obtain required regulatory
approvals in a timely fashion, if at all, or successfully develop, manufacture,
commercialize and market products or that we will ever record significant
product revenues or achieve operating profitability.
We must develop and commercialize our products to generate revenues.
Except for Collagraft, our line collagen-based research material products,
and CoStasis in Europe, all of our products are in research or preclinical or
clinical development. We have not received marketing approval for any of our
products from the FDA. 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 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. We
cannot assure you that any of our development programs will be successfully
completed, that clinical trials will generate anticipated results or will
commence or be completed as planned. Additionally, we cannot assure you that we
will be able to obtain CE Mark in Europe, on a timely basis, if at all, or that
any 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 our 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, our business, financial condition and results
of operations will be materially and adversely affected.
Cohesion operates in an intense competitive environment.
Cohesion competes 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, we believe in
the United States that we 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, a fibrin sealant product is currently being marketed by Baxter
Healthcare Corporation. Cohesion faces competition from more recent products and
technologies, such as those developed by Focal, Inc. and Fusion Medical
Technologies, Inc. Outside of the United States, other competitive products
currently being marketed include fibrin sealants and another class of sealants,
cyanoacrylates, which sold in Europe and the Pacific Rim countries by Immuno AG,
Centeon L.L.C. and Cryolife. In the United States, there are several fibrin
sealants under development including those by the American Red Cross, 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 cyanoacrylates. In
the orthopedics area, NeuColl's Collagraft bone graft products face competition
from synthetic bone graft substitutes from Interpore International, Inc. and
Osteotech, Inc. Additionally, several companies and institutions are engaged in
the development of collagen-based materials, techniques, procedures
15
<PAGE> 16
and products for use in medical applications Cohesion anticipates addressing
with its current and proposed products and research programs.
Many of these companies and organizations have or will have substantially
greater financial, technological, research and development, regulatory and
clinical, marketing and sales and personnel resources than Cohesion. They may
also have greater experience in developing products, conducting clinical trials,
obtaining regulatory approvals, and manufacturing and marketing such products.
They may also 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 Cohesion or that render our technology and products obsolete
and non-competitive. Recently developed technologies or procedures are, or may
in the future be, the basis of competitive products. There can be no assurance
that our 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 Cohesion or
that would render our technology and products obsolete and uncompetitive. In
such an event, Cohesion's business, financial condition and results of
operations would be materially and adversely affected. Competitors may also
obtain approval or clearance by the FDA or foreign regulatory approval
organizations, achieve product commercialization or obtain patent protection
earlier than Cohesion. Additionally, there can be no assurance that any
marketing or other strategic partners that Cohesion may engage will not pursue
parallel development of technologies or products relating to or competitive with
our planned product portfolio. Also, to the extent Cohesion commences
manufacturing activities, we will also face competition with respect to
manufacturing efficiency and marketing capabilities, areas in which we currently
have limited experience. Failure to successfully address the foregoing factors
and circumstances could have a material adverse impact on Cohesion, its
financial condition and results of operations. See "Business -- Competition;"
and "Business -- Manufacturing."
The market may not accept our products.
CoStasis Surgical Hemostat is a device designed to control diffuse
capillary and small vein bleeding, and CoSeal Surgical Sealant 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. We believe 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. We believe that surgeons will
not use our 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 our ability to train
surgeons and other potential users of our 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 our 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
our products to achieve significant market acceptance will have a material
adverse effect on our business, financial condition and results of operations.
We have limited marketing and sales capabilities.
Cohesion currently has limited experience in marketing and 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, if any, we must either develop a marketing and sales force or enter into
arrangements with third parties to market and sell our products. If we develop
our own marketing and sales capabilities, we will be competing with other
companies that currently have experienced and well-funded marketing and sales
operations. To the extent that Cohesion enters into co-promotion or other
marketing and sales arrangements with other companies, any revenues we receive
will be dependent on the efforts of others, and there can be no assurance that
such efforts will be successful. Failure to develop a sales and marketing force
or enter into arrangements with other companies will reduce our ability to
generate revenues.
16
<PAGE> 17
We depend on the sale of Boston Scientific stock to fund operations.
In connection with our spin-off from Collagen, Collagen transferred to
Cohesion, effective January 1, 1998, all of its equity interest in Boston
Scientific. Cohesion 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 the substantial majority of its Boston Scientific
holdings. While the strategy is designed to minimize downside risk of loss
should the stock price decline below approximately $31.00 and allow for limited
upside participation should the stock price rise above approximately $49.00,
there can be no assurance that we will be able to sell any of the remaining
unhedged shares of Boston Scientific common stock at attractive prices if, when
and as needed. The market price of Boston Scientific common stock is highly
volatile and, as a medical device manufacturer, we believe that 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
EMPLOYEES
As of September 15, 1999, we had 81 employees, 29 of whom were engaged
directly in research and new product development, 11 in regulatory affairs,
quality assurance and clinical activities, 15 in manufacturing, 9 in sales and
marketing and 17 in finance and administration. Of the 81 employees, 10 are
employees of NeuColl, our wholly owned subsidiary. Cohesion maintains
compensation, benefits, equity participation, and work environment policies
intended to assist in attracting and retaining qualified personnel. We believe
the success of our business will depend, in significant part, on our ability to
attract and retain such personnel. No employee of Cohesion is represented by a
collective bargaining agreement, nor has Cohesion experienced any work stoppage.
Cohesion considers its relations with its employees to be good.
EXECUTIVE OFFICERS
Set forth below is certain information as of September 15, 1999 with
respect to our executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
David Foster..................... 42 Chief Executive Officer, Director
Frank DeLustro, Ph.D............. 51 President and Chief Operating Officer, Director
Ross Erickson.................... 54 Vice President, Regulatory Affairs, Clinical Research
and Quality Assurance
Charles Williams................. 56 Vice President, Operations
Alan Schempp..................... 47 Vice President, Sales and Marketing
Deborah Webster.................. 40 Vice President and Chief Administrative Officer
Sharon Kokubun................... 43 Vice President, Financial Operations
</TABLE>
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 of the
Collagen Technologies Group, a division of Collagen Aesthetics, Inc. From May
1992 until February 1997, Mr. Foster served as Chief Financial Officer of
Collagen. Mr. Foster serves on the Board of Directors of 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 January 1998. He served as President and Chief Executive Officer of
Cohesion Corporation from its inception in 1996 until December 1997. 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 the holder
of 18 U.S. patents.
Ross Erickson, Vice President, Regulatory Affairs, Clinical Research and
Quality Assurance. Mr. Erickson has served as Vice President, Regulatory
Affairs, Clinical Research and Quality Assurance of Cohesion 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 an
17
<PAGE> 18
M.A. from Western Michigan University.
Charles Williams, Vice President, Operations. Mr. Williams has served as
Vice President, Operations of Cohesion 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
an M.S. in biochemical engineering from Rutgers University.
Alan Schempp, Vice President, Sales and Marketing. Mr. Schempp has served
as Vice President, Sales and Marketing of Cohesion since January 1998. From
November 1997 to December 1997, he served as 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
Cohesion 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 Cohesion 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.
ITEM 2. PROPERTIES
Cohesion's principal executive, research and development, marketing, and
manufacturing activities presently are located in Palo Alto, California.
Cohesion leases approximately 33,000 square feet of facility under an agreement
that expires in 2004. We believe that the facilities are adequate to meet our
requirements through the end of fiscal year 2002.
ITEM 3. LEGAL PROCEEDINGS
Cohesion is currently involved in 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 our consolidated financial position or results of our
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE BY SECURITY HOLDERS
There were no matters submitted to a vote of our security holders during
the fourth quarter of the fiscal year ended June 30, 1999.
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<PAGE> 19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
Our common stock began trading on The Nasdaq Stock Market under the symbol
CSON as of August 13, 1998. There was no public market for our common stock
prior to that date. The following table sets forth, for the periods indicated,
the high and low trading prices for our common stock as reported on the Nasdaq
Stock Market.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ------------- ---- ---
<S> <C> <C>
September 30, 1998 ........................ $7.87 $2.93
December 31, 1998.......................... 4.37 2.50
March 31, 1999............................. 6.62 3.37
June 30, 1999 ............................. 7.12 3.81
</TABLE>
SALES OF UNREGISTERED SECURITIES
Cohesion has not engaged in any sale of unregistered securities in the
first year ending June 30, 1999.
HOLDERS OF RECORD
At September 3, 1999 there were approximately 828 holders of record of
Cohesion's common stock.
DIVIDENDS
Cohesion has never paid any cash dividends and does not anticipate paying
cash dividends in the foreseeable future.
19
<PAGE> 20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue -- product sales .................................. $ 2,594 $ 2,043 $ 2,527 $ 3,612 $ 3,546
Costs and expenses:
Cost of sales ........................................... 1,984 1,162 2,105 2,404 1,961
Research and development ................................ 15,292 16,251 9,627 4,268 3,416
Selling, general and administrative ..................... 6,841 5,526 7,153 3,120 2,726
Compensation expense related to cancelled
stock options ......................................... 3,385 -- -- -- --
Purchased in-process research and development ........... -- 10,587 -- 3,000 --
-------- -------- -------- -------- --------
Total costs and expenses ......................... 27,502 33,526 18,885 12,792 8,103
-------- -------- -------- -------- --------
Loss from operations ...................................... (24,908) (31,483) (16,358) (9,180) (4,557)
Other income (expense):
Net gain on investments, principally
Boston Scientific Corporation (Target
Therapeutics, Inc. ("Target") prior to April 1997) ... 36,269 19,096 9,063 82,093 5,110
Net gain on sale of investment in
Prograft Medical, Inc. ................................ -- -- 15,395 -- --
Equity in earnings of Target(1) ......................... -- -- -- 1,430 2,417
Equity in losses and impairment of other investments .... (1,321) (9) (813) (1,824) (1,230)
Interest income ......................................... 94 332 566 378 25
Interest expense ........................................ (15) -- (377) (2,532) (2,113)
-------- -------- -------- -------- --------
Income (loss) before provision for
income taxes and minority interest ...................... 10,119 (12,064) 7,476 70,365 (348)
Provision (benefit) for income taxes ...................... 3,918 (2,497) 3,162 31,718 553
Minority interest ......................................... -- -- (667) (27) --
-------- -------- -------- -------- --------
Net income (loss) ......................................... $ 6,201 $ (9,567) $ 4,981 $ 38,674 $ (901)
======== ======== ======== ======== ========
Earning per common share - basic .......................... $ 0.73
Pro forma earning per common share - basic(2) ............. $ (1.07) $ 0.57
Earning per common share assuming dilution ................ $ 0.72
Pro forma earning per common share assuming dilution(2).... $ (1.07) $ 0.56
Weighted average shares outstanding - basic(2)............. 8,550 8,913 8,804
Weighted average shares outstanding assuming dilution(2)... 8,635 8,913 8,930
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments ................................ $ 4,239 $ 1,607 $ 13,798 $ 11,074 $ 491
Working capital (deficiency) ................. 959 (1,900) 12,033 8,463 (30,530)
Investment in Boston Scientific Corporation
(Target prior to 1997)(1) .................. 41,632 73,979 83,874 65,841 17,570
Total assets ................................. 71,519 95,653 114,604 97,916 32,915
Long-term liabilities ........................ 18,985 31,923 35,131 27,260 8,206
Total stockholders' and parent company
equity (net capital deficiency) ............ 45,241 58,415 74,005 59,545 (8,560)
</TABLE>
- --------
(1) The first five months in fiscal 1996 and the 1995 financial information is
presented with Target accounted for under the equity method.
(2) Historical per share data has not been presented since no Cohesion common
shares were outstanding until June 25, 1998. Pro forma share and per share
data has been presented assuming the distribution of shares of Cohesion's
Common Stock to Collagen's stockholders had already occurred based on the
number of Collagen common shares and common equivalent shares outstanding
for those periods, reflecting a one-for-one exchange ratio in the
distribution.
20
<PAGE> 21
ITEM 7. 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 Annual Report. 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. These risks include, but are not limited to,
(i) significant unforeseen delays in the regulatory approval process, (ii)
determination by the FDA or foreign regulatory bodies that our clinical data
does not support the safety and efficacy of our products and (iii) competitive
products and technology. For a more detailed discussion of these and other
business risks, see "Business - Government Regulation," "Business -
Competition," and "Business Additional Factors that Might Affect Future
Results."
Cohesion 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 minimally invasive
surgeries. CoStasis Surgical Hemostat, our lead hemostatic product, is designed
for use in cardiovascular, orthopedic and general surgery indications. We
received a CE Mark in September 1998 and began to launch the product in Europe
in February 1999. We completed a pivotal clinical trial in the U.S. during
fiscal 1999, and filed a PMA application with the FDA in June 1999. We also
initiated an expanded clinical study in Europe in fiscal 1999 for CoSeal
Surgical Sealant, our lead biosealant product designed for sealing organs and
other tissues resulting from surgical wounds and incisions. We believe that our
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. Cohesion also
sells Collagraft implant, an orthopedic product, through its newly formed
subsidiary, NeuColl, Inc., and has research and development programs in other
orthopedic areas and in recombinant human collagen and thrombin. Our 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.
Cohesion was organized as a Delaware corporation and wholly owned
subsidiary of Collagen Aesthetics, Inc. formerly known as Collagen Corporation
in June 1997. During fiscal 1998, Collagen proceeded to separate its Aesthetic
Technologies Group and its Collagen Technologies Group into two independent,
publicly-traded companies. Effective January 1, 1998, Collagen contributed its
research and development programs for hemostatic devices, biosealants,
orthopedics products and programs, adhesion barriers and recombinant human
collagen and thrombin and other related businesses of CTG to Cohesion. Collagen
also contributed various equity investments to Cohesion, including all of its
holdings in Boston Scientific Corporation. On August 18, 1998, Collagen
distributed as a dividend to its stockholders, one share of Cohesion's Common
Stock for each share of Collagen common stock outstanding. Cohesion and Collagen
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 of Cohesion's common stock. A description of the assets and
liabilities contributed by Collagen to Cohesion is contained in Note 1 of Notes
to Consolidated Financial Statements.
Cohesion's historical financial position and results of operations prior to
the distribution reflect the historical operations of the transferred businesses
contributed by Collagen to Cohesion. In particular, this Management's Discussion
and Analysis of Financial Condition and Results of Operations reflects the
historical results of the Collagen Technologies Group operating group for all
years presented through January 1, 1998, as if the contribution of the
transferred businesses by Collagen to Cohesion had occurred on July 1, 1992.
(See Note 1 of Notes to Consolidated Financial Statements.)
21
<PAGE> 22
RESULTS OF OPERATIONS
Fiscal Years Ended June 30, 1999, 1998 and 1997
Revenues were $2.6 million, $2.0 million and $2.5 million for fiscal years
1999, 1998 and 1997, respectively. Sales of Collagraft in fiscal 1999 were $1.9
million, an increase of approximately $400,000 over fiscal 1998 sales of $1.5
million, primarily due to timing of shipments to Zimmer. Fiscal 1998 Collagraft
sales were approximately $400,000 lower than fiscal 1997 sales of $1.9 million.
The decrease in sales was due to lower sales of Collagraft by Zimmer and the
consequent decrease in sales from Cohesion to Zimmer. We expect revenues to be
higher in fiscal 2000 due to a full-year of CoStasis sales in Europe and
slightly higher sales of Collagraft from the anticipated product launch by
Zimmer in Japan and sales by NeuColl in certain European countries. A number of
uncertainties exist surrounding the marketing and distribution of our products
where the primary means of distribution is through a third party firm, such as
Zimmer. Our business and financial results could be adversely affected in the
event that a third party firm 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 as a percentage of sales was 76%, 57%, and 83% for fiscal
years 1999, 1998 and 1997, respectively. The increase in cost of sales as a
percentage of sales in fiscal 1999 from 1998 was primarily due to manufacturing
startup costs for the CoStasis product. The decrease in cost of sales as a
percentage of sales in fiscal 1998 from 1997 was primarily due to a lower
allocation of fixed overhead to Cohesion's products in relation to the total
cost of production at Collagen's manufacturing facility. Cost of sales as a
percentage of sales for fiscal 2000 is projected to be higher than fiscal 1999
as cost of sales is expected to continue to reflect manufacturing startup costs
for CoStasis.
Research and development expenses were $15.3 million, $16.3 million, and
$9.6 million for fiscal 1999, 1998 and 1997, respectively. The increase in R&D
spending levels over the three year period were due to clinical trial costs for
the tissue adhesive and biosealant programs and increased activity in the
recombinant human collagen programs, which in fiscal 1998 included contractual
payments owed to Pharming when program milestones were met. R&D expense for
fiscal 1999 and the last half of fiscal 1998 reflect reimbursement from Collagen
for the recombinant human collagen program in accordance with the intercompany
agreements entered into between Cohesion and Collagen in connection with our
spin-off from Collagen. We expect R&D spending in fiscal 2000 to be at slightly
lower levels than fiscal 1999.
Selling, general and administrative expenses were $6.8 million, $5.5
million and $7.2 million in fiscal 1999, 1998, and 1997, respectively. The
increase in SG&A expense in fiscal 1999 over fiscal 1998 is due primarily to
increased marketing costs associated with the launch of CoStasis in Europe. SG&A
costs for fiscal years 1998 and 1997 represent an allocation of Collagen's
expenses to Cohesion derived primarily as a function of headcount and specific
identifiable costs. The decrease in fiscal 1998 spending from fiscal 1997 was
due to lower officer separation costs and legal fees as a result of the
settlement of a lawsuit with Matrix Pharmaceuticals, Inc. SG&A expenses in
fiscal 1997 include 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 and costs
were allocated to Cohesion pursuant to the intercompany agreements entered into
in connection with our spin-off from Collagen. By agreement, Mr. Palefsky served
as a consultant through March 1999, providing general strategic advice,
especially with respect to stockholder value, as well as operational advice. We
made cash payments of $218,750, $575,000 and $752,000 to Mr. Palefsky in fiscal
1999, 1998 and 1997, respectively. We also agreed to forgive all indebtedness,
aggregating $1.6 million, owed by Mr. Palefsky to Collagen (and assumed by
Cohesion effective January 1, 1998) subject to certain conditions. See Note 1 of
Notes to Consolidated Financial Statements. Such indebtedness was fully reserved
during fiscal 1997. SG&A expenses are expected to increase in fiscal 2000 due to
increased spending in sales and marketing. Future levels of SG&A spending will
depend on various factors, including the level of product sales and how CoStasis
is distributed in the U.S.
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, substantially all of
the $3.0 million and $10.6 million purchase prices, respectively, were allocated
to in-process research and development, which was expensed at the time of the
purchases. The $10.6 million purchase price includes cash compensation amounts
of approximately $3.8 million associated with the purchase of certain vested
employee stock options. Pursuant to the intercompany agreements, Collagen
transferred its interest in Cohesion Corporation to Cohesion
22
<PAGE> 23
effective January 1, 1998.
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. We
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. The products and programs
related to the in-process technology acquired are currently in the clinical
trial and preclinical trial stages, respectively. This technology, which relates
to surgical hemostasis and sealing products we are developing, utilizes
liquid-based biomaterials and related delivery systems. We expect to benefit
from the in-process technology within the next three years, provided that
sufficient preclinical and clinical data has been generated, submitted to
regulatory authorities, and cleared for commercial sale by those regulatory
authorities; however we can make no assurance in this regard. We expect to spend
approximately $5 to $6 million per year for the next three years on the
in-process technology in an effort to develop commercially viable products. If
this technology is not successfully developed and commercialized, our ability to
generate product revenue and our business, financial condition and results of
operations will be materially and adversely effected.
During fiscal 1999, Cohesion recorded $3.4 million of compensation expense
in connection with the cancellation of the remaining stock options of Cohesion
Corporation. In September 1998, our board of directors approved a program to
cancel options to purchase shares of the common stock of Cohesion Corporation.
In connection with this cancellation, Cohesion offered to pay each holder of
canceled options a per share amount equal to the excess of $16.70 over the
exercise price of the canceled option. Cohesion will make this option payment
ratably over the original vesting period of the canceled option so long as the
former holder thereof remains an employee or consultant of Cohesion. We expect
to record an additional $2.6 million of compensation expense with respect to the
cash-out of canceled options, which will be recognized during the next two
fiscal years.
The charge for purchased in-process research and development of $10.6
million in fiscal 1998 was a non-recurring charge related to the purchase of
substantially all of the remaining shares in Cohesion Corporation, including
cash compensation expense of approximately $3.8 million associated with the
purchase of certain vested employee stock options.
Net realized gains on sales of investments were $36.3 million, $19.1
million, and $24.4 million in fiscal 1999, 1998 and 1997, respectively. In
fiscal 1999 and 1998, the gains were primarily from the sale of common stock of
Boston Scientific Corporation. In April 1997, Target Therapeutics, Inc. was
acquired by Boston Scientific and, as a result, Collagen received approximately
2,730,400 shares of Boston Scientific common stock. In fiscal 1997, our net gain
on investments of $24.4 million, primarily resulted from the sale of 330,000
shares of Target common stock and the sale of our holdings in Prograft Medical,
Inc. The timing and number of additional shares of Boston Scientific common
stock sold will depend on market conditions and our anticipated cash needs.
Equity in losses of other affiliate companies and impairment of investments
were $1,321,000, $9,000, and $813,000 for fiscal 1999, 1998 and 1997,
respectively. The increase in fiscal 1999 was due to a $1.3 million writedown
related to an impairment of the Innovasive investment. The decrease in equity
losses in fiscal 1998 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 $94,000, $332,000, and $566,000 in fiscal 1999, 1998
and 1997, respectively. The decreases in fiscal 1999 and 1998 were due to lower
average cash, cash equivalent, and short-term investment balances during the
respective fiscal years.
Interest expense was $15,000, $0, and $377,000 in fiscal 1999, 1998 and
1997, respectively. Interest expense in fiscal 1999 related to short-term
borrowings secured by the Boston Scientific stock. Interest expense in fiscal
1997 related to borrowings under Collagen's $15.0 million revolving credit
facility. The revolving line of credit was allocated to us because the credit
facility was secured by shares of Target common stock, which were also allocated
to Cohesion.
Cohesion's effective tax rate for fiscal 1999 was 39% primarily reflecting
utilization of credit for research and development expenditures. In fiscal 1998,
we recorded a benefit for income taxes of 21%. The tax benefit is primarily due
to the in-process research and development charges related to the increase in
ownership of
23
<PAGE> 24
Cohesion Corporation which is not deductible for tax purposes. Our effective
income tax rate was approximately 42% for fiscal 1997.
COMPARISON OF SEGMENTS
Cohesion operates in two segments: 1) our surgical business and 2) our
orthopedics business. Our surgical segment develops proprietary surgical
products, including bioresorbable hemostatic devices and biosealants, such as
CoStasis and CoSeal, for tissue repair and regeneration. On February 1, 1999,
Cohesion formed a new company, NeuColl, Inc., a wholly owned subsidiary, in
order to commercialize products in the orthopedics field, which include
Collagraft(R) and NeuVisc(TM), a collagen-based intra-articular implant for the
treatment of osteoarthritis. For a discussion of product sales, see revenue
discussion in " - Results of Operations."
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, cash and investments were $59.6 million compared to $89.3
million at June 30, 1998. Net cash used in operating activities was $28.8
million, $19.0 million and $6.1 million for fiscal 1999, 1998 and 1997,
respectively.
For the fiscal year ended June 30, 1999, cash provided by investing
activities of $34.0 million was primarily related to proceeds of $34.8 from the
sale of 1.0 million shares of Boston Scientific common stock and proceeds of
approximately $4.9 million from the sale of short-term and other investments,
including $1.1 million of other affiliated stock. The investment proceeds were
offset by capital expenditures of $5.7 million, which was primarily related to
the manufacturing facility. We anticipate capital expenditures to be
approximately $2.0 million in fiscal 2000.
Our principal sources of liquidity include sales of Boston Scientific
common stock and its cash, cash equivalents and short-term investments. During
fiscal 1999 and 1998, we sold an aggregate of 1,699,680 shares of Boston
Scientific common stock for an aggregate pre-tax gain of approximately $51.6
million ($55.2 million proceeds less cost basis of $3.6 million). As a result of
the acquisition of Target by Boston Scientific in April 1997, Collagen received
approximately 2,730,400 shares of Boston Scientific common stock in exchange for
Collagen's 2,551,776 shares of Target common stock. Cohesion 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. We may defer sales of Boston Scientific common stock 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, we may
in the near term establish a credit facility, although there can be no assurance
that a line of credit will be available to us on acceptable terms, if at all.
In September 1998, our Board of Directors approved a stock repurchase
program to buy back up to 1.0 million shares of common stock at a price of up to
$4.25 per share. As of September 15, 1999, we had repurchased 515,100 shares of
common stock under this program.
In September 1998, our Board of Directors approved a program to cancel
options to purchase shares of the common stock of Cohesion Corporation. In
connection with such program, Cohesion offered to pay each holder of canceled
options a per share amount equal to the excess of $16.70 over the exercise price
of the canceled option. Cohesion will make this option payment ratably over the
original vesting period of the canceled option so long as the holder thereof
remains an employee or consultant of Cohesion. Cohesion expects to record an
additional $2.6 million of compensation expense with respect to the cash-out of
canceled options during the next two fiscal years.
We believe that our current sources of liquidity should be adequate to fund
our anticipated capital requirements through at least the next two years.
However, during this period and thereafter, we may require additional financing.
Our capital requirements will depend on numerous factors, including the progress
of our clinical research and product development programs, the extent to which
we enter into collaborative relationships with third parties and the scope of
our obligations in such relationships, the receipt of, and the time required to
obtain, regulatory clearances and approvals, the resources required to protect
our intellectual property and other factors. We cannot accurately predict the
timing and amount of such capital requirements. Additional financing may not be
available to us on acceptable terms, if at all.
24
<PAGE> 25
INVESTMENTS AND ACQUISITIONS
On February 1, 1999, we formed a new company, NeuColl, Inc., a wholly owned
subsidiary, in order to commercialize products in the orthopedics field, which
include Collagraft and NeuVisc, a collagen-based intra-articular implant. In
connection with the formation, Cohesion granted NeuColl an exclusive license to
certain patents relating to collagen and polymer technology for orthopedic
applications. Cohesion is providing initial funding to NeuColl, however, Neucoll
is currently seeking third-party funding.
Collagen made equity investments in Pharming B.V. of The Netherlands, which
is dedicated to the development and worldwide commercialization of human health
care products produced in transgenic animals. In connection with the
distribution of Cohesion common stock and pursuant to the intercompany
agreements, the Pharming ownership position was transferred to Cohesion,
effective January 1, 1998. Cohesion and Pharming are attempting to produce
collagen in the milk of transgenic cattle. In fiscal 1998, we invested an
additional $2.5 million in Pharming when program milestones were met. In July
1998, Pharming became a publicly traded company, at which time our shares were
converted into 838,512 shares of Pharming common stock. At June 30, 1999, our
ownership position in Pharming was approximately 6%.
In October 1995, Collagen purchased approximately 844,000 shares of common
stock, representing approximately 9% of the outstanding capital stock of
Innovasive Devices, Inc. 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.
Cohesion, pursuant to the intercompany agreements, assumed Collagen's
relationship and obligations with Innovasive. NeuColl and Innovasive are
collaborating to develop certain resorbable mechanical tissue-fixation devices
utilizing collagen-based biomaterials for applications in orthopedic tissue
repairs. NeuColl is performing development activities in accordance with a
project plan and Innovasive is reimbursing NeuColl for such activities in
accordance with the project budget. Accordingly, over the next several years,
the collaboration will require our expertise with collagen-based biomaterials
and a small percentage of our R&D expenditures. In the event that marketable
products are developed as a result of this collaboration, NeuColl will have the
right but not the obligation to manufacture such products.
YEAR 2000
The Year 2000 issue refers to problems that computer programs may have in
determining the correct century; for example, time-sensitive software may
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. Cohesion
has developed a plan to address potential exposures related to the Year 2000
issue and is taking reasonable steps to ensure that its systems, software and
equipment involving date-related information will continue to function properly
after December 31, 1999. Our plan to address the Year 2000 issue involves the
following phases: 1) inventory and risk assessment, 2) remediation, 3) testing,
and 4) full compliance and/or creation of contingency plans. Our plan also
encompasses compliance with regulatory guidelines on the Year 2000 issue.
We have significantly completed our assessment of information technology
business systems, product, operating equipment, and third-party interfaces,
including suppliers. To date, we have not identified any significant problems.
Cohesion had previously utilized Collagen's computer systems under one of the
intercompany agreements but was not responsible for any costs incurred by
Collagen to become Year 2000 compliant. During fiscal 1999, we implemented a new
financial information system, which we believe is Year 2000 compliant, and we
are no longer dependent on Collagen's computer systems. With respect to
third-party interfaces, Cohesion has and will continue to evaluate the Year 2000
readiness of those third parties through January 1, 2000. In the event that
third-party software, hardware or services is not Year 2000 ready, we may need
to replace or revise it. This could be time-consuming and expensive, resulting
in lost revenues and increased costs for us.
25
<PAGE> 26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Cohesion is exposed to financial market risks, including changes to interest
rates and equity security prices. To mitigate these risks, Cohesion utilizes
derivative financial instruments. Cohesion does not utilize derivative financial
instruments for speculative or trading purposes.
INTEREST RATE RISK
The primary objective of Cohesion's debt investment portfolio is to
preserve principal. Cohesion invests in debt instruments that meet high credit
quality standards and limits the amount of credit exposure to any one issue,
issuer, or type of instrument. Cohesion also limits the maturity of debt
investments to 400 days or less. As of June 30, 1999 and 1998, Cohesion held
approximately $2,526,000 and $1,234,000 of interest rate sensitive investments
in debt securities, respectively. An hypothetical 1% increase in interest rates
would result in a decrease in the fair value of investments in debt securities
of less than $20,000 as of June 30, 1999 and 1998. This estimate is based on
sensitivity analyses performed on Cohesion's financial positions at June 30,
1999 and 1998. Actual results may differ materially.
EQUITY SECURITY PRICE RISK
Cohesion is exposed to equity security price risks on investments in
Boston Scientific common stock and equity instruments of other biotechnology or
biomedical device companies. To hedge against fluctuations in the market value
of a portion of the Boston Scientific common stock, Cohesion entered into
costless collar instruments that expire quarterly from August 1998 through May
2001 and will require settlement in cash. At June 30, 1999, 1.0 million shares,
out of approximately 1.0 million held by Cohesion, were hedged using these
collars. The costless collar instruments are collateralized by shares of Boston
Scientific common stock held by Cohesion. Certain investments that are
restricted are carried at cost until the restrictions have lapsed.
<TABLE>
<CAPTION>
FAIR VALUE FAIR VALUE
EQUITY INVESTMENTS AT 6/30/99 AT 6/30/98
- ------------------ ---------- ----------
<S> <C> <C>
(IN `000S)
Boston Scientific, $45,286 $73,979
Ownership % 0.3% 0.5%
Boston Scientific, Collar ($3,654) $96
Innovasive $2,743 $7,916
Ownership % 9.0% 9.0%
Medarex $3,351 $1,920
Ownership % 2.6% 1.0%
Pharming $7,675 $7,010
Ownership % 6.0% 6.0%
------- -------
Total $55,401 $90,921
======= =======
</TABLE>
26
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COHESION TECHNOLOGIES, INC. CONSOLIDATED FINANCIAL STATEMENTS:
Report of Ernst & Young LLP, Independent Auditors .................................... 28
Consolidated Balance Sheets as of June 30, 1999 and 1998 ............................. 29
Consolidated Statements of Operations and Statements of Comprehensive Income
(Loss) for the years ended June 30, 1999, 1998 and 1997 .............................. 30
Consolidated Statements of Stockholders' and Parent Company Equity for the
years ended June 30, 1999, 1998 and 1997 ............................................. 31
Consolidated Statements of Cash Flows for the years ended June 30, 1999, 1998 and 1997 32
Notes to Consolidated Financial Statements ........................................... 33
Supplementary Quarterly Consolidated Financial Data (unaudited) ...................... 49
</TABLE>
27
<PAGE> 28
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cohesion Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Cohesion
Technologies, Inc. ("the Company") as of June 30, 1999 and 1998, and the related
consolidated statements of operations, stockholders' and parent company equity
and cash flows for each of the three years in the period ended June 30, 1999.
These financial statements are the responsibility of the Company'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
Technologies, Inc. at June 30, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1999, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Jose, California
July 28, 1999
28
<PAGE> 29
COHESION TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................................... $ 4,239 $ 591
Short-term investments ............................................................. -- 1,016
Accounts receivable, less allowance for doubtful accounts
($20 in 1999 and $13 in 1998) ................................................ 895 473
Inventories ........................................................................ 976 81
Current deferred taxes ............................................................. 888 942
Receivable from Collagen Aesthetics, Inc. .......................................... 925 --
Other current assets ............................................................... 329 312
-------- --------
Total current assets ........................................................ 8,252 3,415
Property and equipment, net .......................................................... 6,705 2,072
Intangible assets, net ............................................................... 727 1,184
Investment in Boston Scientific Corporation .......................................... 41,632 73,979
Other investments .................................................................... 13,769 14,707
Other assets ......................................................................... 434 296
-------- --------
$ 71,519 $ 95,653
======== ========
LIABILITIES AND STOCKHOLDERS' AND PARENT COMPANY EQUITY
Current liabilities:
Accounts payable ................................................................... $ 1,035 $ 792
Accrued compensation ............................................................... 1,172 953
Accrued liabilities ................................................................ 2,965 2,390
Payable to Collagen Aesthetics, Inc. ............................................... 1,168 880
Income taxes payable ............................................................... 953 300
-------- --------
Total current liabilities ................................................... 7,293 5,315
Long-term liabilities:
Deferred income taxes and other long-term liabilities ............................... 18,985 31,923
-------- --------
Total liabilities ........................................................... 26,278 37,238
Commitments and contingencies
Stockholders' and parent company equity:
Preferred stock, $.001 par value, authorized: 5,000,000 shares,
issued and outstanding: no shares at June 30, 1999 and 1998 ...................... -- --
Common stock, $.001 par value, authorized: 15,000,000 shares,
issued: June 30, 1999 - 8,953,167 shares; June 30, 1998 - 8,861,040 shares;
outstanding: June 30, 1999 - 8,438,067 shares; June 30, 1998 - 8,861,040 shares .. 9 9
Additional paid-in capital ......................................................... 15,193 9,612
Parent company equity .............................................................. -- 4,961
Retained earnings (since August 19, 1998) .......................................... 5,705 --
Accumulated other comprehensive income ............................................. 26,308 43,833
Treasury stock, at cost, 515,100 shares at June 30, 1999, no shares at June 30, 1998 (1,974) --
-------- --------
Total stockholders' and parent company equity ............................... 45,241 58,415
-------- --------
$ 71,519 $ 95,653
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
29
<PAGE> 30
COHESION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue ............................................... $ 2,594 $ 2,043 $ 2,527
Costs and expenses:
Cost of sales ....................................... 1,984 1,162 2,105
Research and development ............................ 15,292 16,251 9,627
Selling, general and administrative ................. 6,841 5,526 7,153
Compensation expense related to cancelled stock
options .......................................... 3,385 -- --
Purchased in-process research and development ....... -- 10,587 --
-------- -------- --------
Total costs and expenses .................... 27,502 33,526 18,885
-------- -------- --------
Loss from operations .................................. (24,908) (31,483) (16,358)
Other income (expense):
Net gain on investments, principally
Boston Scientific Corporation ...................... 36,269 19,096 9,063
Net gain on sale of investment in
Prograft Medical, Inc. ............................. -- -- 15,395
Equity in losses and impairment of other investments .. (1,321) (9) (813)
Interest income ....................................... 94 332 566
Interest expense ...................................... (15) -- (377)
-------- -------- --------
Income (loss) before provision for
income taxes and minority interest .................. 10,119 (12,064) 7,476
Provision (benefit) for income taxes .................. 3,918 (2,497) 3,162
Minority interest ..................................... -- -- (667)
-------- -------- --------
Net income (loss) ..................................... $ 6,201 $ (9,567) $ 4,981
======== ======== ========
Earnings per common share - basic ..................... $ 0.73 $ -- $ --
======== ======== ========
Pro forma earnings per common share - basic ........... $ -- $ (1.07) $ 0.57
======== ======== ========
Earnings per common share assuming dilution ........... $ 0.72 $ -- $ --
======== ======== ========
Pro forma earnings per common share assuming dilution . $ -- $ (1.07) $ 0.56
======== ======== ========
Weighted average shares outstanding ................... 8,550 8,913 8,804
======== ======== ========
Weighted average shares outstanding assuming dilution . 8,635 8,913 8,930
======== ======== ========
Net income (loss) ..................................... $ 6,201 $ (9,567) $ 4,981
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities
available-for-sale, net of tax expense of
$18,042, $30,061 and $32,507
for 1999, 1998 and 1997, respectively ............... (17,525) (3,236) 12,520
-------- -------- --------
Total comprehensive income (loss) ..................... $(11,324) $(12,803) $ 17,501
======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
30
<PAGE> 31
COHESION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' AND PARENT COMPANY EQUITY
YEARS ENDED JUNE 30, 1999, 1998, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL PARENT
COMMON STOCK PAID-IN COMPANY
SHARES AMOUNT CAPITAL EQUITY
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at June 30, 1996 ...................... -- $ -- $ 9,621 $ 15,375
Other advances to Collagen Aesthetics, Inc. ... -- -- -- (3,041)
Other comprehensive income .................... -- -- -- --
Net income .................................... -- -- -- 4,981
-------- -------- -------- --------
Balance at June 30, 1997 ...................... -- -- 9,621 17,315
Other advances to Collagen Aesthetics, Inc. ... -- -- -- (2,787)
Other comprehensive loss ...................... -- -- -- --
Issuance of shares to Collagen Aesthetics, Inc. 8,861 -- -- --
Net loss ...................................... -- -- -- (9,567)
-------- -------- -------- --------
Balance at June 30, 1998 ...................... 8,861 -- 9,621 4,961
Other advances to Collagen Aesthetics, Inc. ... (14) -- -- (290)
Separation from Collagen Aesthetics, Inc. ..... -- 9 5,158 (5,167)
Stock-based compensation ...................... -- -- 12 --
Common stock issuance from exercise of stock
options and employee stock purchase plan ... 106 -- 402 --
Net income .................................... -- -- -- 496
Other comprehensive loss ...................... -- -- -- --
Treasury stock purchased ...................... (515) -- -- --
-------- -------- -------- --------
Balance at June 30, 1999 ...................... 8,438 $ 9 $ 15,193 $ --
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
TOTAL
STOCK-
HOLDERS' AND
PARENT
COMPANY
OTHER EQUITY
RETAINED COMPREHENSIVE TREASURY (NET CAPITAL
EARNINGS INCOME STOCK DEFICIENCY)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at June 30, 1996 ...................... $ -- $ 34,549 $ -- $ 59,545
Other advances to Collagen Aesthetics, Inc. ... -- -- -- (3,041)
Other comprehensive income .................... -- 12,520 -- 12,520
Net income .................................... -- -- -- 4,981
-------- -------- -------- --------
Balance at June 30, 1997 ...................... -- 47,069 -- 74,005
Other advances to Collagen Aesthetics, Inc. ... -- -- -- (2,787)
Other comprehensive loss ...................... -- (3,236) -- (3,236)
Issuance of shares to Collagen Aesthetics, Inc. -- -- -- --
Net loss ...................................... -- -- -- (9,567)
-------- -------- -------- --------
Balance at June 30, 1998 ...................... -- 43,833 -- 58,415
Other advances to Collagen Aesthetics, Inc. ... -- -- -- (290)
Separation from Collagen Aesthetics, Inc. ..... -- -- -- --
Stock-based compensation ...................... -- -- -- 12
Common stock issuance from exercise of stock
options and employee stock purchase plan ... -- -- -- 402
Net income .................................... 5,705 -- -- 6,201
Other comprehensive loss ...................... -- (17,525) -- (17,525)
Treasury stock purchased ...................... -- -- (1,974) (1,974)
-------- -------- -------- --------
Balance at June 30, 1999 ...................... $ 5,705 $ 26,308 $ (1,974) $ 45,241
======== ======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
31
<PAGE> 32
COHESION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................ $ 6,201 $ (9,567) $ 4,981
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Stock-based compensation .............................. 12 -- --
Purchased in-process research and development ......... -- 10,587 --
Depreciation and amortization ......................... 1,311 662 564
Equity in losses and impairment of other investments . 1,321 9 813
Loss on disposal of property and equipment ............ 174 -- --
Gains on investments, net ............................. (36,269) (19,096) (13,625)
Deferred income taxes ................................. (1,149) 995 326
Decrease (increase) in assets:
Accounts receivable ................................. (423) (376) 435
Inventories ......................................... (895) (25) --
Other ............................................... 153 (1,971) 1,166
Increase (decrease) in liabilities:
Accounts payable, accrued liabilities and other ..... 88 2,247 (463)
Income taxes payable ................................ 653 (2,400) 408
Other long-term liabilities ......................... -- (57) (679)
-------- -------- --------
Total adjustments ........................................ (35,024) (9,425) (11,055)
-------- -------- --------
Net cash used in operating activities ............. (28,823) (18,992) (6,074)
-------- -------- --------
Cash flows from investing activities:
Proceeds from sales of Boston Scientific
Corporation/Target Therapeutics, Inc. stock ............. 34,786 20,442 5,578
Proceeds from sales of other affiliate stock ............ 1,133 704 9,771
Proceeds from equity collar investments ................. 2,769 -- --
Proceeds from maturities of short-term investments ...... 1,016 1,591 --
Purchases of short-term investments ..................... -- (2,515) --
Expenditures for property and equipment ................. (5,661) (1,058) (532)
Increase in intangible and other assets ................. -- -- (824)
Equity investments and loans to affiliates .............. -- (2,700) (287)
Acquisition of shares of Cohesion
Corporation, net of cash balances ....................... -- (10,587) --
-------- -------- --------
Net cash provided by investing activities ......... 34,043 5,877 13,706
-------- -------- --------
Cash flows from financing activities:
Proceeds from short-term borrowings ...................... 3,250 -- --
Repayment of short-term borrowings ....................... (3,250) -- (5,000)
Purchase of treasury stock ............................... (1,974) -- --
Proceeds from exercise of stock options and employee stock
purchase plan ......................................... 402 -- --
-------- -------- --------
Net cash used in financing activities ............. (1,572) -- (5,000)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ....... 3,648 (13,115) 2,632
Cash and cash equivalents at beginning of year ............. 591 13,706 11,074
-------- -------- --------
Cash and cash equivalents at end of year ................... $ 4,239 $ 591 $ 13,706
======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
32
<PAGE> 33
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Cohesion Technologies, Inc. ("Cohesion" or the "Company") was organized as
a Delaware corporation and a wholly owned subsidiary of Collagen Aesthetics,
Inc. formerly known as Collagen Corporation ("Collagen") in June 1997. In
October 1997, Collagen announced that it would separate its Aesthetic
Technologies Group and its Collagen Technologies Group ("CTG") into two
independent, publicly-traded companies. On August 18, 1998, Collagen distributed
as a dividend to its stockholders, one share of the Company's Common Stock for
each share of Collagen common stock outstanding (the "Distribution"). The
Distribution was 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
believed the separation into two independent companies would enhance the ability
of each to focus on strategic initiatives and new business opportunities,
improve cost structures and operating efficiencies and create incentives that
were more attractive and appropriate for the recruitment and retention of key
employees. As a consequence, Collagen believed that investors would 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 the Company and Collagen (collectively, the "Intercompany
Agreements") 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 the Company 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 comprised Cohesion as a component of Collagen up
through August 18, 1998 and as a separate stand-alone company thereafter. The
financial statements of Cohesion include the operating results of Cohesion
Corporation, a subsidiary of the Company, 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 up
through August 18, 1998 and as a separate stand-alone company thereafter.
Results prior to the distribution 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 Intercompany Agreements as discussed in Note 2 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 expense 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 settled in May 1997, were allocated based on the focus of the lawsuit
during fiscal years 1995 to 1997. Costs and expenses associated with cost of
sales and research and development were generally allocated to Cohesion on a
specific identification basis.
33
<PAGE> 34
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 short-term
investments remained with Collagen and the remaining cash, cash equivalents and
short-term investments were transferred to the Company at December 31, 1997.
Each debt security was allocated between the companies pro rata to the total
allocation of such investments. 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") 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 and the costs associated with the agreement were allocated to
Cohesion.
Under the terms of the services and supply agreements between Cohesion and
Collagen, 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 by $48,000 in fiscal 1998 and decreased by $589,000 in fiscal
1997.
Under the terms of the Recombinant Technology and Development License
agreement between Cohesion and Collagen discussed in Note 2 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 $1.0 million and $1.3
million in fiscal years 1998 and 1997, respectively. Reimbursements for fiscal
1999 were approximately $953,000.
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 two
industry segments focusing on the development and sale of medical devices and
orthopedic products. 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.
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.
Reclassification
Certain prior year amounts in the consolidated financial statements have
been reclassified to conform with the current year presentation.
34
<PAGE> 35
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 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, 1999 and 1998 and for the years ended June 30, 1999, 1998 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 the unrestricted portion
of the Company's holdings in Innovasive Devices are carried at fair value with
the unrealized gains and losses, net of tax, reported as a separate component of
stockholders' 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" in the accompanying balance sheets. The
cost of securities sold is based on the specific identification method. The fair
value of public equity securities held is based upon quoted closing market
prices.
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.
Equity Collar Instruments
At June 30, 1999, Cohesion held approximately 1.0 million shares of Boston
Scientific common stock. In order to manage the risk of market fluctuations in
the price of this stock, Cohesion entered into certain costless collar
instruments (the "Collars"), to hedge a portion (1.0 million shares at June 30,
1999) of the Boston Scientific equity securities against changes in market
value. A costless collar instrument is a form of equity collar instrument
consisting of 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. Cohesion obtained the Collars with expiration
dates and numbers of shares so that the potential adverse impact of movements in
market price of the stock will be at least partially offset by an associated
increase in the value of the Collars.
Realized gains and losses on the Collars are recorded in other income
(expense) with the related gains from the sale of the stock. Unrealized gains
and losses on these instruments, net of tax, are recorded as an adjustment to
unrealized gains and losses on available-for-sale investments, a component of
stockholders' and parent company equity, with a corresponding adjustment to the
investment in Boston Scientific Corporation. Fair value of the equity collar
instruments are based upon broker quote for similar instruments. Equity collar
instruments that do not qualify for hedge accounting and early termination of
these instruments with the sale of the underlying stock, would be recognized in
other income (expense).
35
<PAGE> 36
Inventories
Inventories are valued at the lower of cost, determined on a standard cost
basis which approximates average cost, or market.
Inventories comprise the following at June 30, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
JUNE 30,
----------------
1999 1998
---- ----
<S> <C> <C>
Raw materials ..... $158 $ --
Work-in-process.... 737 --
Finished goods..... 81 81
---- ----
$976 $ 81
==== ====
</TABLE>
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, current lease
expires November 2004
</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.
Loans to Officers and Employees
Principal plus accrued interest due from current and former employees
totaled approximately $1.5 million at June 30, 1998 prior to reserves. Principal
plus accrued interest due from officers totaled approximately $9,000 at June 30,
1998. The fair value of the notes held approximates the carrying value based on
quoted market prices for loans with similar terms. Outstanding at June 30, 1999,
loans to officers and employees totaled $38,000.
Included within the amounts due from current and former employees at June
30, 1998 were 2 promissory notes totaling $1.5 million prior to reserves, due
from Collagen's former Chairman and Chief Executive Officer, Howard Palefsky.
All such notes were subject to interest at the lower of 10% per annum or the
prime rate. Two loans totaling $425,000 were forgiven on March 15, 1998 and two
loans totaling $1.1 million were forgiven on March 15, 1999. The loans to Mr.
Palefsky were written-down as of June 30, 1997 due to uncertainties regarding
collection at that time.
Summary of Fair Values of Financial Instruments
The table below summarizes the carrying value and fair value of Cohesion's
financial instruments which are all held for purposes other than trading.
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
---------------------- -----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------- --------- --------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash equivalents and short-term
investments (see Note 4).............................. $ 2,526 $ 2,526 $ 1,234 $ 1,234
Boston Scientific stock (see Note 5).................... 45,285 45,285 73,979 73,979
Other equity securities (see Note 6).................... 13,769 13,769 14,707 15,596
Loans to officers and employees......................... 38 38 208 208
Equity collar instruments............................... (3,653) (3,653) -- 96
</TABLE>
36
<PAGE> 37
Revenue Recognition
Revenue from product sales, including shipment to distributors, is
recognized at time of shipment, net of allowances for estimated future returns.
Earnings Per Share
Historical per share data for each of the two years preceding the period
ended June 30, 1999 has not been presented as no common shares were outstanding
until June 25, 1998.
Pro forma share and per share data has been presented below for each of the
two years preceding the period ended June 30, 1999 assuming the distribution of
shares of the Company's Common Stock to Collagen's stockholders had already
occurred based on the number of Collagen common shares and common equivalent
shares outstanding for those periods, reflecting a one-for-one exchange ratio in
the distribution.
Under Statement of Financial Accounting Standards No. 128, Earnings Per
Share ("SFAS 128"), basic earnings per share ("EPS") is calculated using the
weighted average number of common shares outstanding for the period. The
computation of diluted EPS includes the effects of stock options, warrants and
convertible preferred stock, if such effect is dilutive. Options that had an
exercise price greater than their market price during the years ended June 30,
1999, 1998 and 1997 were excluded, as their inclusion would have been
anti-dilutive. Below is a reconciliation between the basic and diluted weighted
average common and common-equivalent shares for 1999, 1998 and 1997:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------
1999 1998 1997
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Basic (weighted average common shares outstanding) 8,550 8,913 8,804
Weighted average common stock options outstanding 85 -- 126
----- ----- -----
Diluted weighted average shares outstanding ..... 8,635 8,913 8,930
===== ===== =====
</TABLE>
Concentration of Credit Risk
Cohesion sells its intermediate products (Vitrogen, Cell Prime, Zygen,
Angiostat and other bulk collagen products) to various universities and
institutions, and Collagraft bone graft matrix strip is sold to Zimmer, Inc.
("Zimmer"), Cohesion's marketing partner for Collagraft bone graft products and
a network of distributors. CoStasis is sold to specialty distributors in Europe.
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. Accounts receivable
from Zimmer totaled $721,000 or 79% of the total accounts receivable at June 30,
1999.
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.
Stock Based Compensation
The Company accounts for stock based compensation using the intrinsic value
method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
grant over the amount an employee much pay to acquire the stock. The Company has
adopted the disclosure provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" for options issued to
employees.
37
<PAGE> 38
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
which provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. SFAS 133 is effective for
years beginning after June 15, 2000 and is not anticipated to have an impact on
the Company's results of operations or financial condition when adopted.
2. CONTRACTUAL AGREEMENTS WITH COLLAGEN
Cohesion entered into supply, services, research and development, benefits,
tax allocation, and distribution agreements with Collagen effective January 1,
1998. Under the Collagraft Supply Agreement, 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 Cohesion 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 was effective through
June 30, 1999, Cohesion provided 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 provided 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
used Collagen's computer systems during fiscal 1999; however, the Company
purchased and implemented its own computer systems by the end of the fiscal
year. In accordance with the Recombinant Technology and Development License
Agreement, Cohesion and Collagen are collaborating to develop recombinant human
collagen and provide for cost sharing for the project until certain milestones
are met. The Benefits Agreement provided 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, which was effective through June
30, 1999, Collagen International, Inc., a subsidiary of Collagen, acted as
Cohesion's distributor in Germany for Vitrogen.
3. BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Property and equipment:
Machinery and equipment................................... $ 5,493 $ 5,438
Leasehold improvements.................................... 4,873 2,874
--------- ---------
10,366 8,312
Less accumulated depreciation and amortization............ (3,661) (6,240)
--------- ---------
$ 6,705 $ 2,072
========= =========
Intangible assets:
Patents and trademarks.................................... $ 2,265 $ 2,265
Less amortization......................................... (1,538) (1,018)
--------- ---------
$ 727 $ 1,184
========= =========
</TABLE>
4. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale debt securities at
amortized cost which approximates fair value.
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash Equivalents:
Corporate obligations................................ $ 2,526 $ 218
========= =========
Short-term investments:
Corporate obligations............................... $ -- $ 1,016
========= =========
</TABLE>
38
<PAGE> 39
During fiscal years 1999, 1998 and 1997, the Company had no sales of its
available-for-sale debt securities. 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 June 30, 1999.
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 1997, Cohesion sold 330,000 shares of
Target common stock with a cost basis of $1.5 million for a realized 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, Boston Scientific acquired Target and, as a
result, Cohesion received 2,730,400 shares of Boston Scientific common stock in
exchange for 2,551,776 shares of Target common stock. During the fiscal years
ended June 30, 1999 and 1998, Cohesion sold 1,035,000 and 664,680 shares,
respectively of Boston Scientific common stock with a fair value of $2.2 million
and $1.4 million, respectively for a realized gain of approximately $32.5
million and $19.0 million, respectively.
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 June 30, 1999, the closing price of Boston
Scientific common stock was $43.94 per share. At June 30, 1999, The Company held
1.0 million shares (post-split) of Boston Scientific, representing less than 1%
ownership interest.
The following is a summary of the aggregate estimated fair value, gross
unrealized gains and cost of the Company's investment in Boston Scientific
common stock:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cost................................... $ 2,229 $ 4,468
Gross unrealized gains................. 43,056 69,511
--------- ---------
45,285 73,979
Value of equity collars................ (3,653) 96
--------- ---------
Estimated fair value................... $ 41,632 $ 74,075
========= =========
</TABLE>
To hedge against fluctuations in the market value of a portion of the
Boston Scientific common stock, Cohesion entered into costless collar
instruments that expire quarterly from August 1998 through May 2001 and will
require settlement in cash. At June 30, 1999, 1.0 million shares were hedged
under these collars. The call options are collateralized by shares of Boston
Scientific common stock held by Cohesion.
6. OTHER INVESTMENTS
The following is a summary of the aggregate estimated fair value, gross
unrealized gains and cost of the Company's investment in common stock:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cost net of impairment write-down...... $ 10,253 $ 13,287
Gross unrealized gains................. 3,516 1,420
--------- ---------
Estimated fair value................... $ 13,769 $ 14,707
========= =========
</TABLE>
39
<PAGE> 40
Innovasive Devices, Inc.
Prior to October 1996, 843,936 shares of common stock of Innovasive Devices
were valued at cost or $4.1 million due to restrictions that prevented the sale
of any such shares. At June 30, 1999, these restrictions were no longer
applicable on 325,800 shares of Innovasive Devices common stock held by the
Company. Cohesion carries the portion of its investments in Innovasive Devices
which can be sold in one year, as an available-for-sale investment at market
value, or $1.1 million at June 30, 1999. The remaining 516,136 restricted shares
are valued at $1.6 million. At June 30, 1999, the Company determined that its
cost basis in Innovasive Devices has incurred other-than-temporary impairment
and adjusted the cost basis down to market value at June 30, 1999. The resulting
$1.3 million write-down in cost basis at June 30, 1999, has been included in
"Equity in losses and impairment of other investments " in the accompanying
consolidated statements of operations.
During fiscal years 1999, 1998 and 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 June 30, 1999, was $3.25 per share. At June
30, 1999, Cohesion held approximately a 9% ownership position in Innovasive
Devices.
Pharming, B.V.
Prior to July 1998, Cohesion's investment in Pharming B.V. ("Pharming") was
valued at cost or $7.0 million. In July 1998, Pharming became a publicly traded
company, at which time the Company's shares were converted into 838,512 shares
of Pharming common stock. The Pharming common stock held by the Company was
restricted from sale until December 31, 1998. Cohesion's shares of Pharming
common stock are classified as an available-for-sale investment at market value,
or $7.7 million at June 30, 1999, reflecting an unrealized gain of $700,000
($7.7 million fair value less $7.0 million cost), which has been included in a
separate component of stockholders' equity, net of tax.
During fiscal years 1999, 1998 and 1997, Cohesion did not sell any of its
shares of common stock of Pharming. Pharming common stock is quoted on The
Easdaq Stock Market under the symbol PHAR. The closing price of Pharming common
stock at June 30, 1999, was $9.15 per share. At June 30, 1999, Cohesion held a
6% ownership position in Pharming.
Medarex
Medarex common stock held by the Company was restricted from sale until
December 31, 1998. Cohesion's shares of Medarex common stock are classified as
an available-for-sale investment at market value, or $3.4 million at June 30,
1999, reflecting an unrealized gain of $2.9 million ($3.4 million fair value
less $500,000 cost), which has been included in a separate component of
stockholders' equity, net of tax.
During fiscal years 1999, 1998 and 1997, Cohesion did not sell any of its
shares of common stock of Medarex, Cohesion did not sell any of its shares of
common stock of Medarex. Medarex common stock is quoted on The Nasdaq Stock
Market under the symbol MEDX. The closing price of Medarex common stock at June
30, 1999, was $4.13 per share. At June 30, 1999, Cohesion held less than a 3%
ownership position in Medarex.
Prograft Medical, Inc.
In June 1997, the Company sold its investment in Prograft Medical, Inc. of
Palo Alto, California ("Prograft"), a privately held affiliate of the Company
and recorded a realized gain of $15.4 million. Prograft was formed in July 1993
by the Company, Target Therapeutics, Inc. and Celtrix Pharmaceuticals, Inc. to
develop vascular prostheses, including stents, grafts, and stent-graft for the
treatment of diseased and damaged blood vessels.
40
<PAGE> 41
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 was a privately-held
company developing novel biomaterials in the area of hemostats, biosealants, and
adhesion prevention barriers for surgical applications. In connection with
Collagen's investments and purchases of Cohesion Corporation shares,
substantially all of the $3.0 million and $10.6 million purchase prices,
respectively, were allocated to in-process research and development, which was
expensed at the time of the purchases. The $10.6 million fiscal 1998 purchase
price included $3.8 million of cash compensation amounts associated with the
purchase of certain vested employee stock options, which amounts were expensed
in accordance with Accounting Principles Board Opinion No. 25. After
consideration of the amounts allocated to in-process technology, there was no
excess of purchase price over the fair value of the net assets acquired and no
goodwill was recorded.
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. At June 30, 1998, there
were additional vested and unvested options outstanding providing for the
purchase of the remaining shares of Cohesion Corporation common stock. In
September 1998, the Company's Board of Directors approved a program to cancel
the remaining options to purchase shares of the common stock of Cohesion
Corporation (the "Canceled Options"). In connection with such program, the
Company offered to pay each holder of Canceled Options a per share amount equal
to the excess of $16.70 over the exercise price of the Canceled Option (the
"Option Payment"). The Company will make this Option Payment ratably over the
original vesting period of the Canceled Option so long as the holder thereof
remains an employee or consultant of the Company. The Company recorded
compensation expense of approximately $3.4 million in fiscal 1999 and expects to
record an additional $2.6 million of compensation expense to be recognized over
the next two fiscal years.
The unaudited pro forma results of operations of Cohesion assuming the
acquisitions of Cohesion Corporation shares occurred on July 1, 1996, on the
basis described above with all material intercompany transactions eliminated,
are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------
1998 1997
------- -------
<S> <C> <C>
Revenue........................... $ 2,043 $ 2,527
Net income........................ $ 1,020 $ 4,081
</TABLE>
The unaudited pro forma net income amounts above do not include the charges
for in-process research and development aggregating $13.6 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.
8. COMMITMENTS
Minimum lease payments
Future minimum lease payments to third parties under noncancelable operating
leases at June 30, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000................................................ $ 557
2001................................................ 557
2002................................................ 557
2003................................................ 557
2004................................................ 557
Thereafter.......................................... 232
--------
Total minimum lease payments.............. $ 3,017
========
</TABLE>
Rental expense was $814,000, $636,000, and $722,000 in fiscal 1999, 1998,
and 1997, respectively.
41
<PAGE> 42
Short-term Borrowing Agreement
The Company has a short-term borrowing arrangement with a securities
brokerage firm. The interest rate on the demand loan is based on LIBOR + 1-1/8%
and the debt is collateralized by the investment Boston Scientific common stock
(see Note 5, "Investment in Boston Scientific"). At June 30, 1999, there was no
balance outstanding under the arrangement.
9. STOCKHOLDERS' AND PARENT COMPANY EQUITY
Parent Company Equity
Cohesion's equity account with its parent company, Collagen, was closed out
to Additional Paid-in Capital as of the Distribution date. Retained earnings has
been established thereafter, and includes net income for the Company since
August 19, 1998.
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 June 30, 1999.
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.
Common Stock
On June 25, 1998, each of the Company's ten outstanding shares of preferred
stock converted into 886,104 shares of common stock and the Company's authorized
common stock was increased from 10,000,000 to 15,000,000 shares.
Options Held by Employees and Consultants
Each employee (including officers) and consultant of Collagen or any
subsidiary of Collagen who, immediately prior to August 18, 1998, the
Distribution Date, held a vested but not exercised stock option to purchase
shares of Collagen common stock, in connection with the Distribution, received
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 gave 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, held an
unvested stock option to purchase shares of Collagen common stock, in connection
with the Distribution, received 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 was employed or retained as a
consultant following the Distribution.
42
<PAGE> 43
The exercise price of each new option was determined in accordance with
Emerging Issues Task Force Issue 90-9 as agreed upon by the Company's Board and
the Collagen Board (or any committee thereof), after consultation with legal and
accounting advisors. The exercise price, as adjusted in light of the above
considerations, was 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 are 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.
Options for Nonemployee Directors
Each nonemployee director of Collagen or any subsidiary of Collagen who,
immediately prior to the Distribution Date, held a vested but not exercised
option to purchase shares of Collagen common stock, in connection with the
Distribution, received 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 ("Vested Restructured Options"). Each new option
gave the holder the right to purchase a number of shares equal to the number of
shares in the original option. Each nonemployee director of Collagen who,
immediately prior to the Distribution Date, held an unvested stock option to
purchase shares of Collagen common stock, in connection with the Distribution,
received a new option in replacement of the original option to acquire the same
number of shares of Common Stock of the entity (Collagen or the Company) for
which such optionee will serve as a director following the Distribution
("Unvested Restructured Options").
The exercise price of each new option was determined in accordance with
Emerging Issues Task Force Issue 90-9 as agreed upon by the Collagen Board of
Directors and the Company's Board of Directors (or any committees thereof),
after consultation with legal and accounting advisors. The exercise price, as
adjusted in light of the above considerations, was not intended to result in any
compensation expense to Collagen or the Company. All other terms of the new
options are the same as those of the original options; provided, however, that
service as a director of Cohesion Corporation or the Company shall be equivalent
to providing service as a director of Collagen.
Following the Distribution, each nonemployee director of Collagen and
Cohesion is eligible to participate in the Company's 1998 directors' 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.
Stock Option Plans
The Company has various stock option plans under which incentive stock
options may be granted to officers, directors, employees and consultants to
purchase the Company's common stock. The options are granted at no less than
fair market value at the dates of grant and generally expire after ten years.
Incentive stock options become exercisable at the rate of two percent per month
beginning the first full month after the date of grant for fifty months with an
initial cliff period of one year.
At June 30, 1999, the total number of shares of common stock reserved for
issuance under The Company's 1998 Stock Option Plan and the 1998 Directors'
Stock Option Plan were 2,578,211 shares and 262,000 shares, respectively.
Stock option activities under Cohesion's Stock Option Plans were as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
PRICE NUMBER
NUMBER OPTION EXERCISE PRICE PER OF SHARES
OF SHARES RANGE PER SHARE SHARE EXERCISABLE
--------- --------------- ----- -----------
<S> <C> <C> <C> <C>
Outstanding at June 30, 1998............................ -- --
Granted................................................. 2,295,660 $2.90 -- $8.19 $ 4.94
Exercised............................................... (34,789) 3.59 -- 6.42 5.31
Forfeitures or expired.................................. (111,283) 2.90 -- 7.54 5.07
--------- -------
Outstanding at June 30, 1999............................ 2,149,588 $3.63 -- $8.19 $ 4.92 948,115
========= =======
Available for grant at June 30, 1999.................... 690,623
=========
</TABLE>
43
<PAGE> 44
Employee Stock Purchase Plan
The Board of Directors of Collagen designated Cohesion and each of
Cohesion's subsidiaries as a designated subsidiary under the Collagen Employee
Stock Purchase Plan (the "Collagen ESPP") as of January 1, 1998. The Collagen
ESPP and the offering period that commenced on January 1, 1998 under the
Collagen ESPP terminated one week prior to the record date for the Distribution
and all employee contributions through such date were used to purchase shares of
Collagen common stock. As of that date, Collagen and Cohesion had adopted new
employee stock purchase plans having such terms as approved by the respective
Board of Directors. 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. During fiscal 1999,
70,790 shares were purchased. At June 30, 1999, 179,210 shares were available
for future sale under the plan. The average issuance price in fiscal 1999 was
$3.08. The Purchase Plan 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 commenced on August 19, 1999 and ends on
June 30, 2000; the initial purchase period ended on December 31, 1998. Under the
1998 Purchase Plan, the Company's employees, subject to certain restricts, may
purchase shares 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.
Stock Compensation
The Company has elected to follow Accounting Principles Board Statement No.
25 ("APB No. 25") and related interpretations in accounting for their 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 (loss) is required by SFAS 123.
Prior to fiscal 1999, Cohesion and its subsidiaries had accounted for Cohesion
Corporation employee stock options granted subsequent to Cohesion's acquisition
of a majority ownership in Cohesion Corporation in May 1996 under 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 1999: risk-free
interest rate of 6.00%; volatility factor of the expected market price of
Cohesion's and Cohesion Corporation's common stock of .50; no dividend payments;
and a weighted-average expected life of the options of 3 years. The pro forma
impact is not representative of future years, as future years will include the
effect of options vesting as well as the impact of multiple years of stock
option grants. The full effect of SFAS 123 will not be fully reflected until
2001.
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.
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.
The pro forma information for 1998 and 1997 reflects only the Cohesion
Corporation subsidiary stock options. Cohesion's pro forma information follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Pro forma net income (loss) ................... $ 5,744 $ (9,590) $ 4,973
Pro forma earnings per common share - basic(1) $ .67 $ (1.08) $ .56
Pro forma earnings per common share assuming
dilution(1) ................................. $ .67 $ (1.08) $ .56
</TABLE>
44
<PAGE> 45
(1) Pro forma share and per share data has been presented for each of the
two years preceding fiscal 1999 in the period ended June 30, 1998,
assuming the distribution of shares of the Company's Common Stock to
Collagen's stockholders had already occurred 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.
The following table summarizes information about Cohesion's stock options
outstanding at June 30, 1999:
<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 1999 EXERCISE PRICE
--------------- ----------- -------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 3.63 -- $3.63 1,500 $ 3.63 9.32 -- $ --
4.06 -- 4.06 1,012,000 4.06 9.20 7,350 4.06
4.13 -- 5.66 556,072 5.00 6.50 436,349 5.11
5.73 -- 8.19 580,016 6.35 4.49 504,416 6.43
--------- ------- ---- ------- -------
$ 3.63 -- $8.19 2,149,588 $ 4.92 7.23 948,115 $ 5.80
========= ======= ==== ======= =======
</TABLE>
The weighted-average fair value of options granted during the year ended
June 30, 1999 was $1.62 per share, respectively.
Cohesion Corporation Subsidiary 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. Stock options were granted to officers, directors, key employees and
consultants to purchase Cohesion Corporation common stock.
In September 1998, the Company's Board of Directors approved a program to
cancel options to purchase shares of common stock of Cohesion Corporation (the
"Canceled Options"). In connection with such program, the Company offered to pay
each holder of Canceled Options a per share amount equal to the excess of $16.70
over the exercise price of the Canceled Option (the "Option Payment"). The
Company will make this Option Payment ratably over the original vesting period
of the Canceled Option so long as the former holder thereof remains an employee
or consultant of the Company or Cohesion Corporation. The Company recorded $3.4
million of compensation expense related to these Canceled Options during fiscal
1999. The Company expects to record an additional $2.6 million of compensation
expense with respect to the cash-out of Canceled Options, which will be
recognized during fiscal years 2000 and 2001.
Stock option activities under the Cohesion Corporation Stock Option Plan
were as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
PRICE NUMBER
NUMBER OPTION EXERCISE 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............................................... (181,233) 0.20 -- 0.70 0.23
Forfeitures or expired.................................. (58,563) 0.20 -- 0.70 0.57
--------- -------
Outstanding at June 30, 1998............................ 354,204 $0.20 -- $0.70 $ 0.54 354,204
=======
Canceled Options (354,204)
Outstanding at June 30, 1999............................ -- --
=========
Available for grant at June 30, 1999.................... --
=========
</TABLE>
45
<PAGE> 46
Stockholders' Rights Plan
On April 21, 1999, the Board of Directors of the Company adopted a Rights
Agreement, and has authorized and declared a dividend of one preferred share
purchase right (a "Right") for each common stock outstanding at the close of
business on May 19, 1999. When exercised, each Right will entitle stockholders
to purchase 1/1000 of a share of Series A Junior Participating Preferred Stock
of the Company at a price of $25.00 per 1/1000 preferred stock share. The Rights
only become exercisable in certain limited circumstances involving acquisitions
of or tender offers of 15% or more of the Company's common stock. At any time
prior to the announcement of any such acquisition or offer, the Rights are
redeemable by the Company at a price of $0.01 per Right. The Rights expire on
April 21, 2009.
10. SEGMENT AND GEOGRAPHICAL INFORMATION
The Company adopted Statement of Financial Standards No. 131, "Disclosure
about Segments of an Enterprise and Related Information," ("SFAS 131"). SFAS
establishes standards for reporting information about operating segments and
related disclosures about products, geographic information and major customers.
The Company develops proprietary surgical products, including bioresorbable
hemostatic devices and biosealants for tissue repair and regeneration. The
Company operates in two segments: 1) the surgical business and 2) an orthopedic
business. In February 1999, the Company formed a new subsidiary, NeuColl to
commercialize its products in the orthopedics field, which includes Collagraft
and NeuVisc. Both segments report to the Chief Executive Officer ("CEO") of
Cohesion who allocates resources to each company. The CEO has been identified as
the Chief Operating Decision Maker as defined by SFAS 131. Currently management
does not allocate assets between, or evaluate operating profit or loss of the
two segments.
The following table shows revenue by segment by year (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
SEGMENT REVENUE 1999 1998 1997
- --------------- ------- ------- -------
<S> <C> <C> <C>
Orthopedic................................. $ 1,936 $ 1,520 $ 1,943
------- ------- -------
Surgical................................... 658 523 584
------- ------- -------
$ 2,594 $ 2,043 $ 2,527
======= ======= =======
</TABLE>
During fiscal years 1999, 1998 and 1997, Cohesion realized product sales
from its marketing partner, Zimmer, of $1.9 million, 1.5 million and $1.9
million, respectively, which represented 73%, 75% and 77% of product sales.
Zimmer has exclusive marketing rights for Collagraft bone graft products in the
United States and Asia.
Export sales, which were in European countries only, were $233,000, $129,000
and $124,000 in fiscal 1999, 1998 and 1997, respectively.
11. INCOME TAXES
The provision was prepared on the basis that Cohesion filed separate tax
returns in each year. 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, 1999 and 1998 are presented below (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Unrealized gain on Boston Scientific stock $ 18,042 $ 30,061
Investments .............................. 943 1,888
Intangible assets ........................ (219) 1
-------- --------
Total deferred tax liabilities ... 18,766 31,950
-------- --------
Deferred tax assets:
Equity in losses of affiliates ........... 3,364 3,107
State income taxes ....................... (50) 19
Non-deductible accruals .................. 771 913
Other .................................... 247 332
Valuation allowance ...................... (3,364) (3,381)
-------- --------
Total deferred tax assets ........ 968 990
-------- --------
Net deferred tax liabilities ..... $ 17,798 $ 30,960
======== ========
</TABLE>
46
<PAGE> 47
The valuation allowance decreased by $17,000 in fiscal 1999 and increased
by $224,000 in fiscal 1998. Significant components of the provision for income
taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal .............. $ 4,015 $(2,875) $ 1,981
State ................ 1,046 (617) 875
------- ------- -------
Total current 5,061 (3,492) 2,856
------- ------- -------
Deferred:
Federal .............. (913) 1,049 203
State ................ (230) (54) 103
------- ------- -------
Total deferred (1,143) 995 306
------- ------- -------
$ 3,918 $(2,497) $ 3,162
======= ======= =======
</TABLE>
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,
------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Income (loss) before income taxes ...... $ 10,119 $(12,064) $ 7,476
======== ======== ========
Expected tax at 35% .................... $ 3,542 $ (4,222) $ 2,617
State income tax, net of federal benefit 518 (618) 725
In-process research and development .... -- 2,375 --
Equity in losses of affiliates ......... (621) 25 (278)
Research credits ....................... (181) -- --
Investment gains and losses ............ 525 -- --
Other .................................. 135 (57) 98
-------- -------- --------
$ 3,918 $ (2,497) $ 3,162
======== ======== ========
</TABLE>
12. COMPREHENSIVE INCOME
As of July 1, 1998, the Company adopted Financial Accounting Standards No.
130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS 130 establishes new
rules for reporting and display of comprehensive income and its components;
however, the adoption of this statement had no impact of the Company's net
income (loss) or stockholders' equity. SFAS 130 requires unrealized gains or
losses on the Company's available-for-sale securities, which prior to adoption
were reported separately in stockholders' equity, to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of SFAS 130.
The following are the components of accumulated other comprehensive income
(loss) net of tax (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Unrealized gain on investments $26,308 $43,833 $47,069
------- ------- -------
$26,308 $43,833 $47,069
======= ======= =======
</TABLE>
The following schedule of other comprehensive income (loss) shows the gross
current-period gain (loss) and the reclassification adjustment (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Unrealized gain on available-for-sale securities $ 15,021 $ 15,764 $ 21,742
Less: reclassification adjustment for (gain)
realized in net income (loss) ............... (32,546) (19,000) (9,222)
-------- -------- --------
Other comprehensive income (loss) .............. $(17,525) $ (3,236) $ 12,520
======== ======== ========
</TABLE>
47
<PAGE> 48
13. STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------
1999 1998 1997
------ -------- ------
<S> <C> <C> <C>
Cash paid during the year for:
Interest .................... $ 15 $ -- $ 377
Income taxes (net of refunds) 4,185 (65) 2,370
</TABLE>
14. EMPLOYEE BENEFIT PLAN
The Company has a savings plan which qualifies under Section 401(k) of the
Internal Revenue Code. Under the plan, participating employees may defer up to
15% of their pre-tax salary; highly compensated employees may defer up to 10% of
their pre-tax salary. All regular U.S. employees are eligible to participate.
The plan provides for the Company to match based on the first 6% of contribution
at 50% for every dollar an employee defers, up to $1,000 annually.
15. SUBSEQUENT EVENTS (UNAUDITED)
In September 1999, the Company entered into a lease agreement that covers
manufacturing and office equipment and leasehold improvements. The lease line
will cover expenditures up to $5.0 million. The term of the lease is 48 months
with a one year extension option. Quarterly rental payments are based on a
monthly equivalent rental payment factor of 2.038% of the lease line utilized.
The lease is collateralized by equipment and certain investments.
48
<PAGE> 49
SUPPLEMENTARY QUARTERLY CONSOLIDATED FINANCIAL DATA
(UNAUDITED)
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
Quarters ended June 30 March 31 December 31 September 30
- --------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
FISCAL 1999
Revenue .............................................. $ 942 $ 428 $ 828 $ 396
Cost of sales ........................................ 991 398 412 183
Selling, general and administrative .................. 1,909 1,712 1,531 1,689
Research and development ............................. 4,110 3,724 3,470 3,988
Compensation expense related to
Cancelled stock options ........................ 439 498 635 1,813
Operating loss ....................................... (6,507) (5,904) (5,220) (7,277)
Net gain on investments, principally Boston Scientific
Corporation ..................................... 9,078 13,220 4,353 9,618
Net income (loss) .................................... 891 4,385 (466) 1,391
Net income (loss) per share - Basic .................. $ .11 $ .52 $ (.05) $ .16
Net income (loss) per share - Diluted ................ $ .10 $ .52 $ (.05) $ .16
</TABLE>
<TABLE>
<CAPTION>
Quarters ended June 30 March 31 December 31 September 30
- --------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
FISCAL 1998
Revenue .............................................. $ 571 $ 238 $ 526 $ 708
Cost of sales ........................................ 347 124 279 412
Selling, general and administrative .................. 1,149 1,229 1,249 1,341
Research and development ............................. 5,500 3,908 3,623 3,837
In-process R&D(1) .................................... 57 -- 10,530 --
Operating loss ....................................... (6,481) (5,021) (15,155) (4,826)
Net gain on investments, principally Boston Scientific
Corporation ..................................... 5,358 4,964 2,843 5,931
Net income (loss) .................................... (1,053) (33) (12,578) 1,600
Pro forma net income (loss) per share - Basic(2) ..... $ (.12) $ (.01) $ (1.41) $ .18
Pro forma net income (loss) per share - Diluted(2) ... $ (.12) $ (.01) $ (1.41) $ .18
</TABLE>
(1) Represents charge of $10.6 million for in-process research and development
costs in connection with the acquisition of Cohesion Corporation.
(2) Historical share and per share data has not been presented as no Company
common shares were outstanding until June 25, 1998. Pro forma share and per
share data has been presented assuming the distribution of shares of the
Company's Common Stock to Collagen's stockholders had already occurred based
on the number of Collagen common shares and common equivalent shares
outstanding for those periods, reflecting a one-for-one exchange ratio in
the distribution.
The Common Stock of the Company is traded over-the-counter on The Nasdaq Stock
Market under the symbol CSON. The Company does not expect to pay dividends in
the near future.
49
<PAGE> 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning our directors is
incorporated by reference from the information under the caption "Election of
Directors" in our Proxy Statement for our 1999 Annual Meeting of Stockholders
filed on or about September 27, 1999.
The information required by this item concerning our executive officers is
set forth in "Item 1 - Business - Executive Officers" of this Form 10-K.
ITEM 11. COMPENSATION
The information required by this item is incorporated by reference from the
information under the caption "Executive Officer Compensation" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information under the caption "Share Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information under the caption "Certain Transactions" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements - See Index to Consolidated Financial
Statements at Item 8 of this report.
2. Financial Statement Schedules - Schedules have been omitted because
they are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or
notes thereto.
3. Exhibits - A complete listing of required exhibits is given in the
Exhibit Index that precedes the exhibits filed with this report.
(b) Reports on Form 8-K:
1. On May 3, 1999 we filed a Current Report on Form 8-K dated April 21,
199 disclosing under Item 5 the adoption of a Shareholder Rights
Agreement.
50
<PAGE> 51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COHESION TECHNOLOGIES, INC.
/s/ David Foster
------------------------------------------
David Foster
Chief Executive Officer, and Director
(Principal Executive Officer)
Dated: September 24, 1999
51
<PAGE> 52
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ David Foster Chief Executive Officer, and Director September 24, 1999
- --------------------------------- (Principal Executive Officer)
David Foster
/s/ Frank DeLustro, Ph.D. President, Chief Operating Officer September 24, 1999
- --------------------------------- and Director
Frank DeLustro, Ph.D.
/s/ Sharon Kokubun Vice President, Financial Operations September 24, 1999
- --------------------------------- (Principal Accounting Officer)
Sharon Kokubun
/s/ John R. Daniels, M.D. Director September 7, 1999
- ---------------------------------
John R. Daniels, M.D.
/s/ Craig T. Davenport Director September 7, 1999
- ---------------------------------
Craig T. Davenport
/s/ Reid W. Dennis Director September 7, 1999
- ---------------------------------
Reid W. Dennis
/s/ Craig W. Johnson, Esq. Director September 7, 1999
- ---------------------------------
Craig W. Johnson, Esq.
/s/ Mark Philip, Ph.D. Director September 4, 1999
- ---------------------------------
Mark Philip, Ph.D.
</TABLE>
52
<PAGE> 53
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER NOTES DESCRIPTION
------ ---------- -----------
<S> <C> <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.
4.2 (21) Preferred Shares Rights Agreement between the Registrant and the Bank of New
York dated April 21, 1999.
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 (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.
10.8 (20) Vitrogen International Distribution Agreement dated January 1, 1998, between
the Company and Collagen Corporation.
10.9 (1)(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 (1)(11) 1998 Stock Option Plan.
10.12 (1)(11) 1998 Employee Stock Purchase Plan.
10.13 (1)(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)(2) 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 (1)(2) Manufacturing and Supply Agreement dated as of October 17, 1995 between
Collagen Corporation and Innovasive Devices, Inc.
10.21 (1)(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.
</TABLE>
53
<PAGE> 54
<TABLE>
<CAPTION>
NUMBER NOTES DESCRIPTION
------ ---------- -----------
<S> <C> <C>
10.23 (8)(11) 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 (1)(11) Form of Management Continuity Agreement between certain officers of the
Company and Collagen Corporation dated February 7, 1997.
10.27 (1)(2) Intellectual Property and Production Agreement between Genotypes and Collagen
Corporation dated August 15, 1996.
10.28 (1)(11) Secured Loan Agreement between Charles Williams and Cohesion Corporation dated
December 15, 1997.
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule (EDGAR version only).
</TABLE>
- ------------
(1) Incorporated by reference to the identically numbered exhibit filed with
the Company's Registration Statement on Form 10, as amended (File No.
000-24103), which became effective on June 26, 1998.
(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 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 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.
54
<PAGE> 55
(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.
(21) Incorporated by reference to the identically numbered exhibit filed with
the Company's Current Report on Form 8-K (File No. 000-24103) dated May 3,
1999.
55
<PAGE> 1
EXHIBIT 21.1
COHESION TECHNOLOGIES, INC.
Subsidiaries of Cohesion Technologies, Inc.
The Registrant owns the following percentages of the outstanding voting
securities of the following corporations, which are included in the Registrant's
consolidated financial statements.
<TABLE>
<CAPTION>
Percent Ownership of
Outstanding Voting
Securities @ Jurisdiction of
Name September 15, 1999 Incorporation
- ---- -------------------- ---------------
<S> <C> <C>
NeuColl, Inc. 100% Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8) pertaining to the 1998 Employee Stock Purchase Plan, 1998 Stock Option
Plan, and the 1998 Directors' Stock Option Plan of Cohesion Technologies, Inc.
of our report dated July 28, 1999, with respect to the consolidated financial
statements of Cohesion Technologies, Inc. included in its Annual Report (Form
10-K) for the year ended June 30, 1999.
San Jose, California
September 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1997 JUN-30-1999
<PERIOD-START> JUL-01-1997 JUL-01-1996 JUL-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1997 JUN-30-1999
<CASH> 591 13,706 4,239
<SECURITIES> 1,016 92 0
<RECEIVABLES> 473 97 915
<ALLOWANCES> 13 2 20
<INVENTORY> 81 56 976
<CURRENT-ASSETS> 3,415 17,501 8,252
<PP&E> 8,312 7,284 10,366
<DEPRECIATION> 6,240 5,718 3,661
<TOTAL-ASSETS> 95,653 114,604 71,519
<CURRENT-LIABILITIES> 5,315 5,468 7,293
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 0 0 9
<OTHER-SE> 58,415 74,005 45,232
<TOTAL-LIABILITY-AND-EQUITY> 95,653 114,604 71,519
<SALES> 2,043 2,527 2,594
<TOTAL-REVENUES> 2,043 2,527 2,594
<CGS> 1,162 2,105 1,984
<TOTAL-COSTS> 1,162 2,105 1,984
<OTHER-EXPENSES> 32,364 16,780 25,518
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 377 15
<INCOME-PRETAX> (12,064) 7,476 10,119
<INCOME-TAX> (2,497) 3,162 3,918
<INCOME-CONTINUING> (9,567) 4,981 6,201
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (9,567) 4,981 6,201
<EPS-BASIC> 0 0 0.73
<EPS-DILUTED> 0 0 0.72
</TABLE>
