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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, 2000,
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, $0.001 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 15,
2000 on The Nasdaq Stock Market, was approximately $104,000,000. 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 15, 2000, the registrant had 9,285,096 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the registrant's
2000 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
"may," "will," "could," "should," "continue," "anticipates," "believes,"
"expects," "future," "plans," "might," "intends," "seeks," "estimates," 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 in June 1997 as a Delaware
corporation and wholly owned subsidiary of Collagen Aesthetics, Inc., formerly
known as Collagen Corporation. Collagen Aesthetics, Inc. is now known as McGhan
Medical since Collagen was acquired by Inamed Corporation in the quarter ended
September 30, 1999. 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. 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, including various equity investments. 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(R) Surgical Hemostat, our hemostatic product, is designed for use in
cardiovascular, orthopedic and general surgery indications. We received European
Community certification ("CE Mark") for CoStasis in fiscal 1999, and in June
2000, we received approval from the FDA to market CoStasis in the United States.
We received CE Mark in February 2000 for CoSeal(TM) Surgical Sealant, our lead
biosealant product candidate designed for sealing vascular grafts and other
tissues, and are currently conducting clinical trials in the U.S. 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. In addition, we have research and development programs in recombinant
human collagen and thrombin.
PRODUCTS AND DEVELOPMENT PROGRAMS
Although we are currently selling CoStasis and marketing a line of
collagen-based materials for research applications, which include Vitrogen, Cell
Prime and other bulk collagen products (collectively "Intermediate Products"),
most of our products are still under development. Most of these products under
development are being designed to target the market for biosurgery, 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 tissue barriers, bleeding is
inevitable, but the degree to which bleeding constitutes a threat to the well-
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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 tissue
sealing.
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 McGhan and which constitute a source available
to none of our competitors. The thrombin component is obtained from a
biologically-licensed commercial source. 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 reduce the potential for viral contamination,
providing a further margin of safety. The pre-mixed nature of the
collagen/thrombin components reduces preparation time compared to either
lyophilized commercial fibrin sealants, which must be reconstituted before use,
or other agents, which have complex preparation requirements.
In addition, we have developed a patented system, called the
CellPaker(R) plasma collection device, 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 has a relatively short
preparation time of 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. Controlled clinical trials
demonstrated greater hemostatic performance of CoStasis versus hemostatic
collagen sponges. We believe that these preclinical and clinical 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.
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CoStasis has been used to control bleeding in cardiovascular, orthopedic
and general surgery indications in clinical trials in the United States and
Europe. In fiscal 1999, we received a CE Mark for CoStasis and began product
introductions in Europe. We received approval from the FDA to market CoStasis in
the United States in June 2000.
COSEAL SURGICAL SEALANT
Cohesion's second surgical product, currently 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 delivery 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. We
received a CE Mark for CoSeal in February 2000 and expect to launch the product
in Europe in September 2000. We are currently conducting clinical trials for
CoSeal in the United States.
OTHER PRODUCT DEVELOPMENT PROGRAMS
Next Generation Surgical Sealant. We are developing a next generation
sealant utilizing our proprietary PEG-polymer technology. The improved sealant
is expected to be initially targeted towards skin and muscle flap procedures and
eliminate the formation of seromas and hematomas at the surgical sites. As with
our other products, existing and under development, this resorbable sealant will
be designed to have a relatively short preparation time and to be easy to use.
Internal Adhesives. The internal adhesive program is currently focused
on characterizing and developing candidate formulations for a biocompatible,
self-polymerizing liquid, which would serve as the basis for an internal
adhesive product having the strength to potentially replace or minimize the use
of sutures and staples in surgeries.
Adhesion Prevention Barriers. We are also developing an
adhesion-prevention barrier, based on our proprietary PEG-polymer technology
which polymerize at the site of application and adhere to the tissue surface.
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. We
believe our 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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Recombinant Human Collagen and Thrombin. Our 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. We
have an equity investment in Pharming, B.V. of The Netherlands and are
collaborating with them for the purpose of developing recombinant human collagen
through transgenic animals.
ORTHOPEDICS
In February 1999, Cohesion formed a wholly-owned subsidiary, NeuColl,
Inc., to commercialize products in the orthopedics field, which include
Collagraft(R) Bone Graft Matrix ("Collagraft") and NeuVisc(TM), a collagen-based
intra-articular implant for the treatment of pain related to osteoarthritis.
During the quarter ended March 31, 2000, NeuColl obtained financing from a third
party which reduced Cohesion's ownership to below 50%. As a result, NeuColl's
operating results were no longer consolidated in Cohesion's financial results
subsequent to March 31, 2000.
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RESEARCH AND DEVELOPMENT
Our 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, 2000, 1999 and 1998 were $12.4
million, $15.3 million, and $16.3 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>
----------------------------------- -------------------------------------- -------------------------------------
PRIMARY PROGRAM/PRODUCT STATUS PRIMARY EXPECTED APPLICATION
----------------------------------- -------------------------------------- -------------------------------------
<S> <C> <C>
CoStasis Surgical Hemostat Marketed and distributed by U.S. General, orthopedic and
Surgical in United States, most cardiovascular procedures
European countries, Latin America,
Middle East, Australia, New Zealand
and India
CE Mark received in fiscal 1999
Received FDA approval in June 2000
----------------------------------- -------------------------------------- -------------------------------------
CoSeal Surgical Sealant CE Mark received in February 2000; Anastomoses and incision lines in
product launch in Europe expected in cardiovascular and vascular
September 2000 procedures
Initiated U.S. clinical trials in
February 2000
----------------------------------- -------------------------------------- -------------------------------------
Other Programs
Next Generation Surgical Preclinical studies Eliminate seroma or hematoma at
Sealant surgical sites in skin and muscle
flap procedures
Internal Adhesives Research Suture and staple replacement
Adhesion Prevention Research Prevention of post-surgical
Barriers adhesion 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
We manufacture and package the final products for CoStasis and use
outside contractors for other functions such as non-proprietary, high-volume
processes. We anticipate that this will also be the case for CoSeal. We have
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, hire, 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, we purchase all of our requirements for collagen
materials from McGhan 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 McGhan is bovine dermis. McGhan uses our patented viral inactivation
process for its collagen-based products to promote both safety and quality.
Since 1987, Collagen, now McGhan Medical, 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, McGhan 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 PEG from a sole supplier. The PEG material
is a key raw material component used in our CoSeal product. 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, McGhan supplies our
requirements for CoStasis and Intermediate Products.
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 ("GMP"), codified in the quality system regulation
("QSR") 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, in addition to annual renewal inspections.
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. See "-- Government
Regulation."
SALES, MARKETING AND DISTRIBUTION
In November 1999, we entered into an agreement with U.S. Surgical for
the marketing and distribution of CoStasis. The U.S. Surgical territories
include the United States, European Union, Eastern Europe, Latin America, Middle
East, Australia, New Zealand, and India. CoStasis is also distributed in certain
European countries 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
and has been very entrenched with using a fibrin sealant product for many years.
Our sales, marketing and distribution plans will be dependent in part on our
ability to enter into successful strategic relationships and hire, train and
retain specialized sales, marketing and distribution personnel. There can be no
assurance that we will be able to secure such strategic relationships or hire,
train or retain such specialized personnel on terms that are attractive and
acceptable to Cohesion, if at all.
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While sales of Collagraft bone graft products in fiscal years 2000, 1999
and 1998, totaled $1.2 million, $1.9 million and $1.5 million, respectively, we
will no longer reflect such sales in our future financial results as our
ownership in NeuColl fell below 50% in March 2000. Sales of our collagen-based
materials for research applications, which include Vitrogen, Cell Prime, and
other bulk collagen products, were not material in fiscal 2000, 1999 and 1998.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and " -- Government Regulation."
COMPETITION
We compete with many domestic and foreign medical device, pharmaceutical
and biopharmaceutical companies and organizations across each of our product
categories and areas in which we are 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 we do.
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 us 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 we have been or are developing 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 we do. 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 we commence 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 us, our financial
condition and results of operations.
Hemostatic and Biosealant Devices. In the hemostatic and biosealant
areas, we believe we face strong competition in the United States from existing
methodologies for controlling bleeding and sealing wounds resulting from
surgery. This competition results from hemostatic powders and sponges, as well
as from collagen-based hemostats and traditional sutures and staples marketed by
companies such as Johnson & Johnson, Tyco Healthcare Group and American Home
Products Corporation. In addition, Baxter Healthcare Corporation obtained 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,
and Haemacure Corporation. 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.
We plan to develop a second-generation surgical sealant which eliminates
the need to collect and process plasma at the time of surgery by utilizing 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
neurosurgery. 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
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 in the United States with Genzyme Surgical
Products, and BioGlue, which is sold by Cryolife.
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INTELLECTUAL PROPERTY
Collagen and Cohesion entered into an Assignment and License Agreement,
effective January 1, 1998, which, among other things, allocated 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, now McGhan
Medical, 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 2000, our patent portfolio includes approximately 157
U.S. and foreign issued patents and approximately 70 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. We also hold several registered
trademarks in the United States and a number of foreign countries and pursue the
protection of our trademarks and service marks, whether or not such marks are
registered. Notwithstanding these measures, we can make no assurance as to the
effectiveness of our 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, we have a number of more recently issued patents
covering various methods of treatment using specific formulations of
biomaterials that will not expire for approximately 10 or more years. We have
filed patent applications covering tissue adhesives, biosealants, and adhesion
prevention agents; however, we can make no assurance that any such patents will
issue, will provide us any competitive advantages or will not be challenged by
third parties.
We also rely upon trade secret protection for certain unpatented aspects
of our 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 our
proprietary technology or disclose such technology, or that we can meaningfully
protect our trade secrets. We require our employees and consultants to execute
appropriate confidentiality and proprietary information agreements upon the
commencement of an employment or consulting relationship with us. These
agreements generally provide that all confidential information developed or made
known to the individual by us during the course of the individual's relationship
with us 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 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 us in the event of
unauthorized use, transfer or disclosure of such information or inventions.
Our success will depend on our ability to obtain patent protection for
our products, preserve our trade secrets, prevent third parties from infringing
upon our 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 our pending or future patent applications will issue, or that the
claims of our issued patents, or any patents that may issue in the future, will
provide any competitive advantages for our 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. We have filed patent
applications in certain foreign countries corresponding to certain patent
applications that we have 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
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and obtain patents that will prevent, limit or interfere with our ability to
make, use, offer for sale, sell and import our 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 us by third parties in
the future challenging our patent rights or claiming infringement by us 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 we intend to seek patent protection
for our 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 our
proprietary technologies, products and processes, or that we 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 our inventors or licensors were the
first to conceive of inventions covered by pending patent applications or that
we were the first to file patent applications for such inventions. We 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 us or at all. If we do not obtain such licenses, we 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 us, to
protect trade secrets or know-how owned by us, 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 our patent applications or patent applications of our
licensors. Litigation, interference or opposition proceedings could result in
substantial costs to and diversion of effort by us, and adverse determinations
in any such proceedings could prevent us from manufacturing, marketing or
selling our products and could have a material adverse effect on our business,
financial condition and results of operations.
We also rely upon unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to develop and maintain our
competitive position, which we seek to protect, in part, by confidentiality
agreements with collaborative partners, vendors, suppliers, employees and
consultants. We also have invention or patent assignment agreements with our
employees and certain, but not all, commercial partners and consultants. There
can be no assurance that relevant inventions will not be developed by a person
not bound by an invention assignment agreement. There can be no assurance that
binding agreements will not be breached, that we would have adequate remedies
for any breach, or that our trade secrets will not otherwise become known or be
independently discovered by competitors.
GOVERNMENT REGULATION
Our 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 "FDC Act"),
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 takes a number of
years and involves the expenditure of substantial resources.
Additionally, in order for us to market our products in Europe and other
foreign countries, we and/or our 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
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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, we 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 us 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 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 FDC Act or a premarket
approval ("PMA") application under Section 515 of the FDC Act. A 510(k)
clearance will typically be granted by the FDA if it can be established that the
device is substantially equivalent to a "predicate device," which is a legally
marketed Class I or Class II device or a preamendment Class III device (i.e.,
one that has been marketed since a date prior to May 28, 1976) for which the FDA
has not called for PMAs. The FDA has been requiring an increasingly rigorous
demonstration of substantial equivalence and this 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 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.
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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 Institutional Review Boards ("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 in development 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 our products in development or that we
will be able to obtain IDEs for each of our 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,
we 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 us to comply with applicable regulatory
requirements could result in the detention or seizure of products, issuance of
an enjoinment of future product activities and the assessment of civil and
criminal penalties against the company, its officers and its employees. Failure
to comply with the regulatory requirements could have a material adverse effect
on our business, financial condition and results of operations. In addition,
regulations regarding the manufacture and sale of our products are subject to
change. We cannot predict the effect, if any, that such changes might have on
our 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.
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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.
We received approval from the FDA in June 2000 to market CoStasis in the
United States. 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 received a CE Mark for CoSeal in February 2000 and are currently
conducting clinical trials in the United States and expect to seek marketing
clearance at the conclusion of those studies by filing a PMA application with
the FDA. There can be no assurance that the FDA will agree that the clinical
study results, once submitted, will have adequately demonstrated the safety and
effectiveness of CoSeal.
The collagen used in our products is derived from the cow hides of
United States 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 United States
cattle to date, and, currently we rely on a "closed herd" of United States
cattle for our 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 our 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,
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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 our products may expose us to
product liability claims. To date, we have not been held liable for a products
liability claim asserted against us. However, there can be no assurance that we
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 our business are or will
be covered under our policies. We may require additional product liability
coverage if we significantly expand commercialization of our 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
We have a history of operating losses and anticipate continued operating losses.
Prior to July 1, 1998, our historical results of operations discussed in
this Annual Report, and contained in the financial statements and related notes
included in this Annual Report, reflect the historical operations of the
transferred businesses contributed by Collagen (now McGhan Medical) 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 $21.2 million, $24.9
million and $31.5 million in fiscal 2000, 1999 and 1998, 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 $1.2 million, $1.9 million, and $1.5 million for the years ended
June 30, 2000, 1999, and 1998, respectively, we will no longer reflect those
product sales in future financial results as our interest in NeuColl fell below
50% in March 2000. Our ability to achieve and sustain operating profitability is
highly dependent upon obtaining in a timely and efficient fashion, regulatory
approval for and successfully commercializing and marketing our products in
development, particularly CoSeal Surgical Sealant and developing sales and
marketing capabilities for our 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 CoStasis, CoSeal in Europe, and our line of Intermediate
Products, all of our products are in research or preclinical or clinical
development. The development and commercialization of new products is 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
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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 Marks 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.
We operate in an intense competitive environment.
We compete with many domestic and foreign medical device, pharmaceutical
and biopharmaceutical companies and organizations across each of our product
categories and areas in which we are 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, Tyco Healthcare
Group 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 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 the
Bristol-Myers Squibb Company, and Haemacure Corporation. 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. Additionally, several companies and
institutions are engaged in the development of collagen-based materials,
techniques, procedures and products for use in medical applications we
anticipate addressing with our 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 we do.
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 us 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 us or that
would render our technology and products obsolete and 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 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 these factors and circumstances could have a
material adverse impact on Cohesion, its financial condition and results of
operations. See "Business -- Competition;" and "Business -- Manufacturing."
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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 when and 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 our 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 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.
We currently have limited experience in marketing and selling our
products, including those under development, and we do not have a significant
marketing and sales staff. In order to achieve commercial success for any
product approved by the FDA, 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 we enter 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.
We depend on the sale of equity investments to fund operations.
The market prices of our equity investments are highly volatile. In
connection with our spin-off from Collagen, Collagen transferred to Cohesion,
effective January 1, 1998, all of its equity interest in Boston Scientific and
other investments. We have implemented a "hedge" strategy based on purchases of
put options and sales of call options in combination, commonly known as an
"equity collar," covering approximately 48% of our Boston Scientific holdings.
While the strategy is designed to minimize downside risk of loss should the
stock price decline below approximately $22.00 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
EMPLOYEES
As of September 15, 2000, we had 77 employees, 33 of whom were engaged
directly in research and new product development, 8 in regulatory affairs,
quality assurance and clinical activities, 15 in manufacturing, 4 in sales and
marketing and 17 in finance and administration. We maintain compensation,
benefits, equity participation and work environment policies intended to assist
in attracting, hiring and retaining qualified personnel. We believe the success
of our business will depend, in significant part, on our ability to attract,
hire and retain such personnel. None of our employees are represented by a
collective bargaining agreement, nor have we experienced any work stoppage. We
consider relations with our employees to be good.
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EXECUTIVE OFFICERS
Set forth below is certain information as of September 15, 2000 with
respect to our executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David Foster....................... 43 Chief Executive Officer, Director
Frank DeLustro, Ph.D............... 52 President and Chief Operating Officer, Director
Ross Erickson...................... 55 Vice President, Regulatory Affairs, Clinical Research and
Quality Assurance
Russ McDaniell..................... 51 Vice President, Sales
Deborah Webster.................... 41 Vice President and Chief Administrative Officer
Sharon Kokubun..................... 44 Vice President, Financial Operations
</TABLE>
David Foster, Chief Executive Officer and Director. Mr. Foster has
served as Chief Executive Officer of Cohesion 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 Cohesion
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 M.A.
from Western Michigan University.
Russ McDaniell, Vice President, Sales. Mr. McDaniell has served as Vice
President, Sales of Cohesion since March 2000. Prior to joining Cohesion, Mr.
McDaniell was a co-founder of CardioVention, an early stage cardiovascular
company where he served as Vice President of Marketing and Business Development.
Prior to CardioVention, Mr. McDaniell was Director of Sales at Cardio Thoracic
Systems. From 1986 to 1996, Mr. McDaniell was the Director of Sales for
Sulzer-Carbomedics. Mr. McDaniell holds a B.S. in marketing from Fairleigh
Dickinson University and an A.A.S. in Engineering from New York Technical
College.
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.
17
<PAGE> 18
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 a lease
agreement that expires in 2004. We believe that our facilities are adequate to
meet our requirements through the end of fiscal year 2002.
ITEM 3. LEGAL PROCEEDINGS
Two actions, Crane v. Collagen Aesthetics, Inc., et al., and Kerr, et
al., v. Inamed Corp., et al., were filed in August 2000 in the U.S. District
Court for the Northern District of California by the same attorneys. Both
actions allege personal injury claims arising out of the development and sale of
Trilucent breast implants outside the United States by an affiliate of Collagen
Aesthethics. Cohesion had no role in the development or sale of these products.
The Crane case is a personal injury complaint on behalf of a single plaintiff
seeking monetary damages, while the Kerr case is a purported class action
seeking "medical monitoring" and monetary damages.
Pursuant to the Separation and Distribution Agreement between Collagen
and Cohesion, Cohesion has called upon Collagen to indemnify Cohesion with
respect to these suits. Collagen has acknowledged its obligation to indemnify
Cohesion, and has assumed the defense of Cohesion in these suits.
Cohesion is currently involved in other legal actions arising in the
ordinary course of business. While the outcome of these other legal 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, 2000.
18
<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 by quarter in fiscal 1999 and 2000.
<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
September 30, 1999.............................. 6.00 5.75
December 31, 1999............................... 9.13 8.75
March 31, 2000.................................. 15.00 12.06
June 30, 2000 .................................. 12.25 11.50
</TABLE>
SALES OF UNREGISTERED SECURITIES
Cohesion has not engaged in any sale of unregistered securities in the
year ending June 30, 2000.
HOLDERS OF RECORD
At September 15, 2000 there were approximately 708 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 AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Product sales ............................................ $ 1,998 $ 2,594 $ 2,043 $ 2,527 $ 3,612
Other revenues ........................................... 500 -- -- -- --
-------- -------- -------- -------- --------
Total revenues ........................................... $ 2,498 $ 2,594 $ 2,043 $ 2,527 $ 3,612
Loss from operations(1) .................................. $(21,187) $(24,908) $(31,483) $(16,358) $ (9,180)
Net income (loss) ........................................ $ 8,906 $ 6,201 $ (9,567) $ 4,981 $ 38,674
Earnings per common share - basic ........................ $ 1.02 $ 0.73
Pro forma earnings (loss) per common share - basic(2) .... $ (1.07) $ 0.57
Earnings per common share assuming dilution .............. $ 0.93 $ 0.72
Pro forma earnings (loss) per common share assuming
dilution(2) .......................................... $ (1.07) $ 0.56
Weighted average shares outstanding - basic(2) ........... 8,756 8,550 8,913 8,804
Weighted average shares outstanding assuming dilution(2).. 9,557 8,635 8,913 8,930
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets .................. 65,820 71,519 95,653 114,604 97,916
Long-term liabilities ......... 12,876 18,985 31,923 35,131 27,260
</TABLE>
-------------
(1) The first five months of the fiscal 1996 financial information is presented
with the Target Therapeutics, Inc. investment 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,
the timing of product introductions, the success of scaling up product
production, the timing and terms of sales arrangements with other companies,
performance of third-party sales representatives, receipt of regulatory
approvals, including approvals from the FDA, clinical efficacy of and market
demand for products, results of clinical studies and potential unfavorable
publicity regarding us or our products, among other matters. Such differences
may be based upon factors within our control, such as strategic planning
decisions by management and reallocation of internal resources, or on factors
outside our control, such as scientific advances by third parties, introduction
of competitive products and delays by regulatory authorities, including
approvals from the FDA. 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 hemostatic product, is
designed for use in cardiovascular, orthopedic and general surgery indications.
We received a CE Mark for CoStasis in fiscal 1999 and received FDA approval in
June 2000 to market the product in the United States. In November 1999, we
announced an agreement with U.S. Surgical for the marketing and distribution of
CoStasis. The U.S. Surgical territories include the United States, European
Union, Eastern Europe, Latin America, Middle East, Australia, New Zealand and
India. In February 2000, we received a CE Mark for CoSeal Surgical Sealant, our
biosealant product candidate designed for sealing vascular grafts. We are
currently conducting clinical trials for CoSeal in the United States. We believe
that our surgical products will provide several distinct advantages over
currently available technologies, including ease of preparation and use, better
delivery systems, improved safety profiles and clinical effectiveness. 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. We also have research and development programs in
recombinant human collagen and thrombin. We reported sales of Collagraft
implant, an orthopedic product, through our investment in NeuColl, Inc. up
through March 31, 2000. In March 2000, our interest in NeuColl fell below 50%
and, as a result, we no longer reflect NeuColl product sales in our financial
results.
Cohesion was organized in June 1997 as a Delaware corporation and wholly
owned subsidiary of Collagen Aesthetics, Inc. formerly known as Collagen
Corporation, now known as McGhan Medical since Collagen was acquired by Inamed
Corporation. During fiscal 1998, Collagen proceeded to separate its Aesthetic
Technologies Group and its Collagen Technologies Group ("CTG") 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, including various equity investments. 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. 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 CTG
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.
21
<PAGE> 22
In February 1999, we formed a new subsidiary, NeuColl, Inc., to
commercialize products in the orthopedics field, which included Collagraft and
NeuVisc(TM), a collagen-based intra-articular implant for the treatment of pain
related to osteoarthritis. In connection with the formation, we granted NeuColl
an exclusive license to certain patents relating to collagen and polymer
technology for orthopedic applications. During the quarter ended March 31, 2000,
NeuColl obtained a total of $4 million in financing from a third party in two
tranches, which reduced our ownership from 100% to approximately 39% as of March
31, 2000. For the quarter ended March 31, 2000, we consolidated NeuColl's
operating loss in our results of operations and reported the related minority
interest for a two-month period. Beginning March 31, 2000, we no longer
consolidated NeuColl into our financial results and instead, reported our share
of NeuColl's operating income or loss under the equity method of accounting.
RESULTS OF OPERATIONS
Fiscal Years Ended June 30, 2000, 1999, and 1998
Revenues were $2.5 million, $2.6 million, and $2.0 million for fiscal
years 2000, 1999, and 1998, respectively. Fiscal 2000 revenues included $0.5
million for a milestone payment from U.S. Surgical upon receipt of FDA approval
to market CoStasis. Product sales were $2.0 million in fiscal 2000, compared to
product sales of $2.6 million in fiscal 1999 and $2.0 million in fiscal 1998.
The decrease in product sales reflects only nine months of Collagraft sales in
fiscal 2000. Other fluctuations in product sales are primarily due to the timing
of shipments of Collagraft product to a distributor. As of March 31, 2000, we no
longer consolidated NeuColl's operations into our financial results as our
ownership fell below 50%. Currently, we expect revenues to be higher in fiscal
2001 primarily due to CoStasis sales in the U.S. 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 U.S. Surgical. 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 product sales was 167%, 76%, and 57%
for fiscal years 2000, 1999 and 1998, respectively. The increases in cost of
sales as a percentage of sales in fiscal years 2000 and 1999 were primarily due
to manufacturing startup costs for the CoStasis product. Cost of sales for
fiscal 2001 is expected to continue to reflect manufacturing startup costs as we
bring our CoSeal product into commercial production.
Research and development expenses were $12.4 million, $15.3 million, and
$16.3 million for fiscal 2000, 1999, and 1998, respectively. The decreases in
R&D spending over the three-year period were due primarily to timing of clinical
trial expenses and lower spending in our recombinant programs. R&D expense for
fiscal years 2000, 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. Currently, we expect R&D spending in fiscal
2001 to be at higher levels than fiscal 2000.
Selling, general and administrative expenses were $6.5 million, $6.8
million, and $5.5 million in fiscal 2000, 1999, and 1998, respectively. The
slight decrease in SG&A spending in fiscal 2000 over the prior year is due to
spin-off related costs incurred in fiscal 1999. 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. Currently, we expect SG&A
expenses to increase in fiscal 2001 due to increased spending in sales and
marketing for resources required to support current and future products. Future
levels of SG&A spending will depend on various factors, including the level of
product sales and how future products are 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 effective January
1, 1998.
22
<PAGE> 23
We 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. Except for CoStasis, 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 years 2000 and 1999, we recorded $1.4 million and $3.4
million, respectively, 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, we 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. We 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. Currently, we expect to record an additional
$0.5 million of compensation expense with respect to the cash-out of canceled
options, which will be recognized during the next two fiscal years.
Realized gains on investments were $31.8 million, $36.3 million, and
$19.1 million in fiscal 2000, 1999, and 1998, respectively. In fiscal 2000, 1999
and 1998, the gains were primarily from the sale of common stock of Boston
Scientific Corporation. During fiscal 2000, gains also included $4.4 million
resulting from a business combination between Innovasive Devices and Johnson &
Johnson. The timing and number of shares of common stock sold will depend on
market conditions and our anticipated cash needs.
Equity in losses of affiliates were $20,000 in fiscal 2000 and $9,000 in
fiscal 1998. The fiscal 2000 loss is related to the investment in NeuColl and
the equity loss in fiscal 1998 was related to Cohesion Corporation. The fiscal
1999 impairment of investments of $1,321,000 was due to a writedown of the
Innovasive Devices investment.
Interest income was $987,000, $94,000 and $332,000 in fiscal 2000, 1999,
and 1998, respectively. The increase in fiscal 2000 was due to higher average
cash and cash equivalent balances during the fiscal year, whereas in fiscal
1999, average cash balances were lower than in fiscal 1998 which contributed to
the decrease in interest income over fiscal 1998.
Interest expense was $224,000, $15,000, and $0 in fiscal 2000, 1999, and
1998, respectively. Interest expense in fiscal 2000 was related to our
obligation under our capital lease whereas, in fiscal 1999, interest expenses
was related to short-term borrowings secured by the Boston Scientific common
stock.
Cohesion's effective tax rate for fiscal 2000 was 22% due to tax
benefits related to investments and equity losses in affiliate companies. The
tax rate for fiscal 1999 was 39% which primarily reflected 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
Cohesion Corporation which is not deductible for tax purposes.
23
<PAGE> 24
SEGMENT INFORMATION
Historically, we have operated 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. In February
1999, we formed a new subsidiary, NeuColl, Inc., to commercialize products in
the orthopedics field, which included Collagraft(R) and NeuVisc(TM), a
collagen-based intra-articular implant for the treatment of pain related to
osteoarthritis. For a discussion of Collagraft sales, see revenue discussion in
"- Results of Operations." Our ownership in NeuColl decreased from 100% to below
50% as of March 31, 2000 due to financing received by NeuColl from a third
party. Beginning March 31, 2000, we are no longer consolidating NeuColl into our
financial results and instead, will report our share of NeuColl's income or loss
under the equity method of accounting. Subsequent to March 31, 2000, we are
operating in only one segment, our surgical business. Additional financial
information with respect to our segments can be found in Note 11 to our
financial statements contained in Part II, Item 8 of this Annual Report on Form
10-K.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, cash and investments were $51.3 million compared to
$59.6 million at June 30, 1999. Net cash used in operating activities was $21.5
million, $28.8 million, and $19.0 million for fiscal 2000, 1999, and 1998,
respectively.
For the fiscal year ended June 30, 2000, cash provided by investing
activities of $22.7 million was related to proceeds of approximately $23.1
million from the sale of equity investments and proceeds of approximately $4.9
million from the maturity of our equity collars. The investment proceeds were
offset by $4.2 million for the purchase of investments and $1.1 million for
capital expenditures. Currently, we anticipate that capital expenditures will
not exceed $2.0 million in fiscal 2001. Net cash provided by financing
activities for the fiscal year ended June 30, 2000 was $8.7 million primarily
due to proceeds of $4.2 million from the sale-leaseback of our manufacturing
facility improvements and equipment and $5.3 million of proceeds from stock
programs (incentive stock options and employee stock purchases), which were
offset by payments of approximately $0.8 million on a capital lease obligation.
Our principal sources of liquidity include our marketable equity
investments, cash, and cash equivalents. We anticipate 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 equity investments for tax planning purposes or other reasons,
although decisions concerning prospective stock sales will also be affected by
the then-current market price of the common stock. As another source of
financing, we may in the future 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, 2000, we had repurchased 515,100 shares of
our common stock under this program, none of which were repurchased in fiscal
2000.
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 $0.5 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
achievement of targeted sales levels, 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
24
<PAGE> 25
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.
In February 1999, we formed a new subsidiary, NeuColl, Inc., in order to
commercialize products in the orthopedics field, which included Collagraft and
NeuVisc(TM), a collagen-based intra-articular implant. We provided the initial
funding for NeuColl; however, during the quarter ended March 31, 2000, NeuColl
obtained a total of $4 million in financing from a third party, reducing our
ownership from 100% to below 50%. Accordingly, NeuColl's operations were no
longer consolidated from that date forward and we began to report our share of
NeuColl's operating results under the equity method of accounting. As of June
30, 2000, the carrying value of our investment in NeuColl was zero. We hold a
warrant to purchase an additional 3.0 million shares of common stock in NeuColl,
which expires in February 2006.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Revenue Recognition
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 Revenue Recognition in Financial Statements ("SAB
101"), which provides guidance on the accounting for revenue recognition. The
Company is currently evaluating the applicability of SAB 101 to its existing
agreements. Should the Company conclude that its approach is different from the
approach described in SAB 101, it will change its method of accounting. As
amended, SAB 101 must be implemented no later than the quarter ending December
2000. The Company receives payments from customers for product sales and
licenses. The license payments are generally non-refundable but are reported as
deferred revenue until they are recognizable as revenue. The Company follows the
following principles in recognizing revenue:
Product Sales: Revenue from product sales, including shipment to
distributors, is recognized upon transfer of title, which is generally
upon shipment, net of allowances for estimated future returns.
License Fees: Fees to license distribution rights of the Company's
products are recognized over the period of the distribution agreement.
Milestone payments are recognized as revenue when the milestone is
achieved.
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 the Company as of July 1, 2000. The adoption of SFAS 133 is
estimated to result in a loss of approximately $130,000, net of tax.
EXEMPTION FROM INVESTMENT COMPANY REGULATION
Given the composition of its current assets, the Company may fall within
the definition of investment company under the Investment Company Act of 1940,
as amended (the "Investment Company Act") and may be required to register as
such. Because of this possibility and the fact that regulation as an investment
company would not permit the Company to accomplish many of its business
objectives and policies, the Company has applied for and obtained an order of
the Securities and Exchange Commission under Sections 6(c) and 6(e) of the
Investment Company Act. The order exempts the Company from all provisions of the
Investment Company Act, except Sections 9, 17(e), 17(f) and 37 through 53 of the
Investment Company Act, and the rules and regulations under these sections, with
certain exceptions as described in the Company's application to the Commission
for an order of exemption. The Company, and certain other persons in their
transactions with the Company, must comply with these provisions as if the
Company were a registered investment company. The order continues in effect
until the earlier of August 18, 2001 or such time as the Company may no longer
be deemed to be an investment company.
25
<PAGE> 26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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, 2000 and 1999, Cohesion held
approximately $12,509,875 and $2,526,000 of interest rate sensitive investments
in debt securities, respectively. A hypothetical 1% increase in interest rates
would result in a decrease in the fair value of investments in debt securities
of less than $30,000 and $20,000 as of June 30, 2000 and 1999, respectively.
This estimate is based on sensitivity analyses performed on Cohesion's financial
positions at June 30, 2000. 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, 2000, 350,000 shares, out
of 725,720 held by Cohesion, were hedged using these collars. The costless
collar instruments are collateralized by shares of Boston Scientific common
stock held by Cohesion. The collars hedge 200,000 shares at prices between $32
and $49 and 150,000 shares at prices between $22 and $29. As of June 30, 2000,
the market value of Boston Scientific stock was $22. The fair values of these
investments as of June 30, 2000 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
EQUITY INVESTMENTS 2000 1999
------------------------------ -------- --------
<S> <C> <C>
Boston Scientific ............ $ 15,921 $ 45,286
Boston Scientific, Collar .... $ 2,198 $ (3,654)
Johnson & Johnson ............ $ 8,150 $ --
Innovasive Devices, Inc. ..... $ -- $ 2,743
Medarex, Inc. ................ $ -- $ 3,351
Pharming Group N.V ........... $ 10,894 $ 7,675
-------- --------
Total ........................ $ 37,163 $ 55,401
======== ========
</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, 2000 and 1999 ................................... 29
Consolidated Statements of Operations and of Comprehensive Income (Loss) for the years
ended June 30, 2000, 1999 and 1998 ..................................................... 30
Consolidated Statements of Stockholders' and Parent Company Equity for the years ended June
30, 2000, 1999 and 1998 ................................................................. 31
Consolidated Statements of Cash Flows for the years ended June 30, 2000, 1999 and 1998 ..... 32
Notes to Consolidated Financial Statements ................................................. 33
Supplementary Quarterly Consolidated Financial Data (unaudited) ............................ 47
</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. as of June 30, 2000 and 1999, and the related consolidated
statements of operations and comprehensive income (loss), stockholders' and
parent company equity and cash flows for each of the three years in the period
ended June 30, 2000. 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 auditing standards generally
accepted in the United States. 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, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 2000 in conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
Palo Alto, California
July 27, 2000
28
<PAGE> 29
COHESION TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 14,154 $ 4,239
Restricted cash - current portion ................................................. 792 --
Accounts receivable, less allowance for doubtful accounts of $78 ($20 in 1999) .... 78 895
Inventories ....................................................................... 2,508 976
Current deferred taxes ............................................................ -- 888
Other current assets .............................................................. 1,189 1,254
-------- --------
Total current assets ....................................................... 18,721 8,252
Property and equipment, net:
Machinery and equipment ........................................................... 5,874 5,493
Leasehold improvements ............................................................ 4,792 4,873
-------- --------
10,666 10,366
Accumulated depreciation and amortization ......................................... (4,785) (3,661)
-------- --------
5,881 6,705
Investment in equity securities ..................................................... 37,163 55,401
Other assets ........................................................................ 4,055 1,161
-------- --------
$ 65,820 $ 71,519
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................. $ 920 $ 1,035
Accrued compensation .............................................................. 629 1,172
Accrued liabilities ............................................................... 2,401 4,133
Deferred revenue .................................................................. 750 --
Income taxes payable .............................................................. 681 953
Current portion of capital lease obligation ....................................... 792 --
-------- --------
Total current liabilities ........................................................... 6,173 7,293
Long-term liabilities:
Deferred income taxes .............................................................. 10,237 18,985
Obligation under capital lease ..................................................... 2,639 --
Stockholders' equity:
Preferred stock, $.001 par value, authorized: 5,000,000 shares,
issued and outstanding: no shares at June 30, 2000 and 1999 ..................... -- --
Common stock, $.001 par value, authorized: 15,000,000 shares,
issued: June 30, 2000 - 9,246,227 shares; June 30, 1999 - 8,953,167 shares;
outstanding: June 30, 2000 - 8,731,127 shares; June 30, 1999 -
8,438,067 shares ................................................................ 10 9
Additional paid-in capital ........................................................ 20,571 15,193
Retained earnings ................................................................. 14,611 5,705
Accumulated other comprehensive income ............................................ 13,553 26,308
Treasury stock, at cost, 515,100 shares at June 30, 2000 and 1999 ................. (1,974) (1,974)
-------- --------
Total stockholders' equity ................................................. 46,771 45,241
-------- --------
$ 65,820 $ 71,519
======== ========
</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
COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Product sales ....................................................... $ 1,998 $ 2,594 $ 2,043
Other revenue ....................................................... 500 -- --
-------- -------- --------
2,498 2,594 2,043
Costs and expenses:
Cost of sales and manufacturing start-up costs ..................... 3,341 1,984 1,162
Research and development ........................................... 12,438 15,292 16,251
Selling, general and administrative ................................ 6,475 6,841 5,526
Compensation expense related to cancelled stock
options ......................................................... 1,431 3,385 --
Purchased in-process research and development ...................... -- -- 10,587
-------- -------- --------
Total costs and expenses ................................... 23,685 27,502 33,526
-------- -------- --------
Loss from operations ................................................. (21,187) (24,908) (31,483)
Other income (expense):
Realized gain on investments ....................................... 31,763 36,269 19,096
Impairment of investment ........................................... -- (1,321) --
Equity in losses of affiliates ..................................... (20) -- (9)
Interest income .................................................... 987 94 332
Interest expense ................................................... (224) (15) --
-------- -------- --------
Income (loss) before provision for
Income taxes and minority interest ................................. 11,319 10,119 (12,064)
Provision (benefit) for income taxes ................................. 2,546 3,918 (2,497)
-------- -------- --------
Income (loss) before minority interest ............................... 8,773 6,201 (9,567)
Minority interest (benefit) in net loss of subsidiary ................ (133) -- --
-------- -------- --------
Net income (loss) .................................................... $ 8,906 $ 6,201 $ (9,567)
======== ======== ========
Earnings per common share - basic .................................... $ 1.02 $ 0.73
======== ========
Pro forma earnings (loss) per common share - basic ................... $ (1.07)
========
Earnings per common share assuming dilution .......................... $ 0.93 $ 0.72
======== ========
Pro forma earnings (loss) per common share assuming dilution ......... $ (1.07)
========
Weighted average shares outstanding .................................. 8,756 8,550 8,913
======== ======== ========
Weighted average shares outstanding assuming dilution ................. 9,557 8,635 8,913
======== ======== ========
Net income (loss) ..................................................... $ 8,906 $ 6,201 $ (9,567)
Other comprehensive income (loss), net of tax:
Increase (decrease) in unrealized gain on available-for-
sale securities, net of tax of $9,295, $18,042 and
$30,061 for 2000, 1999 and 1998, respectively ...................... (12,755) (17,525) (3,236)
-------- -------- --------
Total comprehensive income (loss) ..................................... $ (3,849) $(11,324) $(12,803)
======== ======== ========
</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, 2000, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL STOCK-
HOLDERS'
ACCUMULATED AND
COMMON STOCK ADDITIONAL PARENT OTHER PARENT
------------------ PAID-IN COMPANY RETAINED COMPREHENSIVE TREASURY COMPANY
SHARES AMOUNT CAPITAL EQUITY EARNINGS INCOME STOCK EQUITY
-------- -------- -------- -------- -------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 ......... -- $ -- $ 9,621 $ 17,315 $ -- $ 47,069 $ -- $ 74,005
Other advances to Collagen
Aesthetics, Inc. .............. -- -- -- (2,787) -- -- -- (2,787)
Decrease in unrealized gain on
investments ................... -- -- -- -- -- (3,236) -- (3,236)
Issuance of shares to Collagen
Aesthetics, Inc. .............. 8,861 -- -- -- -- -- -- --
Net loss ......................... -- -- -- (9,567) -- -- -- (9,567)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at June 30, 1998 ......... 8,861 -- 9,621 4,961 -- 43,833 -- 58,415
Other advances to Collagen
Aesthetics, Inc. .............. (14) -- (290) -- -- -- (290)
Separation from Collagen
Aesthetics, Inc. .............. -- 9 5,158 (5,167) -- -- -- --
Stock-based compensation ......... -- -- 12 -- -- -- -- 12
Common stock issuance from
exercise of stock options and
employee stock purchase plan .. 106 -- 402 -- -- -- -- 402
Net income ....................... -- -- -- 496 5,705 -- -- 6,201
Decrease in unrealized gain on
investments ................... -- -- -- -- -- (17,525) -- (17,525)
Treasury stock purchased ......... (515) -- -- -- -- -- (1,974) (1,974)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at June 30, 1999 ......... 8,438 9 15,193 -- 5,705 26,308 (1,974) 45,241
Stock-based compensation ......... -- -- 83 -- -- -- -- 83
Common stock issuance from
exercise of stock options and
employee stock purchase plan .. 808 1 5,295 -- -- -- -- 5,296
Net income ....................... -- -- -- -- 8,906 -- -- 8,906
Decrease in unrealized gain on
investments ................... -- -- -- -- -- (12,755) -- (12,755)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at June 30, 2000 ......... 9,246 $ 10 $ 20,571 $ -- $ 14,611 $ 13,553 $ (1,974) $ 46,771
======== ======== ======== ======== ======== ======== ======== ========
</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,
--------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ....................................... $ 8,906 $ 6,201 $ (9,567)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Stock-based compensation ............................. 83 12 --
Purchased in-process research and development ........ -- -- 10,587
Depreciation and amortization ........................ 2,370 1,311 662
Equity in losses of affiliates ....................... 20 -- 9
Impairment of investments ............................ -- 1,321 --
Loss on disposal of property and equipment ........... -- 174 --
Realized gains on investments ........................ (31,763) (36,269) (19,096)
Deferred income taxes ................................ 498 (1,149) 995
Decrease (increase) in assets:
Accounts receivable ................................ 817 (423) (376)
Inventories ........................................ (1,532) (895) (25)
Other .............................................. 955 153 (1,971)
Increase (decrease) in liabilities:
Accounts payable, accrued liabilities and other .... (1,602) 88 2,247
Income taxes payable ............................... (273) 653 (2,400)
Other long-term liabilities ........................ -- -- (57)
-------- -------- --------
Total adjustments ....................................... (30,427) (35,024) (9,425)
-------- -------- --------
Net cash used in operating activities ............ (21,521) (28,823) (18,992)
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of investments ....................... 23,107 34,786 20,442
Proceeds from sales of other affiliate stock ............ -- 1,133 704
Proceeds from equity collars ............................ 4,893 2,769 --
Proceeds from maturities of short-term investments ...... -- 1,016 1,591
Purchases of short-term investments ..................... -- -- (2,515)
Purchases of restricted cash investments ................ (3,800) -- --
Expenditures for property and equipment ................. (1,105) (5,661) (1,058)
Increase in other assets ................................ (385) -- --
Loans to affiliates ..................................... -- -- (2,700)
Acquisition of shares of Cohesion
Corporation, net of cash balances .................... -- -- (10,587)
-------- -------- --------
Net cash provided by investing activities ........ 22,710 34,043 5,877
-------- -------- --------
Cash flows from financing activities:
Proceeds from sale-leaseback of equip & leasehold
improvements ......................................... 4,188 -- --
Payment of capital lease obligation ..................... (757) -- --
Proceeds from short-term borrowings ..................... -- 3,250 --
Repayment of short-term borrowings ...................... -- (3,250) --
Purchase of treasury stock .............................. -- (1,974) --
Proceeds from exercise of stock options and employee
stock purchase plan .................................. 5,295 402 --
-------- -------- --------
Net cash provided by (used in) financing
activities .................................... 8,726 (1,572) --
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ...... 9,915 3,648 (13,115)
Cash and cash equivalents at beginning of year ............ 4,239 591 13,706
-------- -------- --------
Cash and cash equivalents at end of year .................. $ 14,154 $ 4,239 $ 591
======== ======== ========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest ................................................ $ 224 $ 15 $ --
Income taxes (net of refunds) ........................... $ 1,770 $ 4,185 $ (65)
</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, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Cohesion Technologies, Inc. ("Cohesion" or the "Company") was organized
in June 1997 as a Delaware corporation and a wholly owned subsidiary of Collagen
Aesthetics, Inc. formerly known as Collagen Corporation ("Collagen"), and now
known as McGhan Medical ("McGhan") since Collagen was acquired by Inamed
Corporation. In fiscal 1998, Collagen proceeded to separate its Aesthetic
Technologies Group and its Collagen Technologies Group ("CTG") into two
independent, publicly-traded companies. 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. 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 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"). Cohesion
and Collagen entered into various agreements (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. The various
assets, liabilities, revenues and expenses associated with CTG were allocated to
the historical financial statements of Cohesion in a manner consistent with the
Intercompany Agreements. Management believes that the consolidated statements of
operations include either a reasonable allocation of costs incurred by Collagen,
which benefit Cohesion, or a specific identification basis where appropriate.
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 operated
in two industry segments through March 2000, 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.
33
<PAGE> 34
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 remaining maturities less than 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 credit 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, 2000 and 1999 and for the years ended June 30, 2000, 1999 and
1998. Unrestricted available-for-sale equity securities are carried at fair
value with the unrealized gains and losses, net of tax, included in other
comprehensive income. Restricted equity securities are carried at cost or
estimated realizable value, if less. 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, 2000, Cohesion held 725,720 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 (350,000 shares at June 30, 2000) of the Boston
Scientific equity securities against changes in market value. A costless collar
instrument is a combination 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
other comprehensive income. 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 or early termination of these instruments
would be recognized in other income (expense).
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, 2000 and 1999,
respectively (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------
2000 1999
------ ------
<S> <C> <C>
Raw materials ...... $ 692 $ 158
Work-in-process .... 925 737
Finished goods ..... 891 81
------ ------
$2,508 $ 976
</TABLE>
34
<PAGE> 35
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. As of
June 30, 2000 and 1999, gross intangible assets were $2,265,000 net of
accumulated amortization of $2,016,000 and $1,538,000, respectively. Intangible
assets are recorded in other assets in the consolidated balance sheet.
Loans to Officers and Employees
Principal plus accrued interest due from officers and employees totaled
$27,323 and $38,000 at June 30, 2000 and 1999, respectively.
Revenue Recognition
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 Revenue Recognition in Financial Statements ("SAB
101"), which provides guidance on the accounting for revenue recognition. The
Company is currently evaluating the applicability of SAB 101 to its existing
agreements. Should the Company conclude that its approach is different from the
approach described in SAB 101, it will change its method of accounting. As
amended, SAB 101 must be implemented no later than the quarter ending December
2000. The Company receives payments from customers for product sales and
licenses. The license payments are generally non-refundable but are reported as
deferred revenue until they are recognizable as revenue. The Company follows the
following principles in recognizing revenue:
Product Sales: Revenue from product sales, including shipment to
distributors, is recognized upon transfer of title, which is generally
upon shipment, net of allowances for estimated future returns.
License Fees: Fees to license distribution rights of the Company's
products are recognized over the period of the distribution agreement.
Milestone payments are recognized as revenue when the milestone is
achieved.
Earnings Per Share
Historical per share data for the year ended June 30, 1998 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 the year
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, reflecting a one-for-one exchange ratio in the distribution.
35
<PAGE> 36
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, 2000, 1999 and
1998 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 2000, 1999 and 1998:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
2000 1999 1998
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Basic (weighted average common shares outstanding) ............... 8,756 8,550 8,913
Dilutive effect of stock options ................................. 801 85 --
----- ----- -----
Weighted average common shares outstanding, assuming dilution .... 9,557 8,635 8,913
===== ===== =====
</TABLE>
Concentration of Credit Risk
Cohesion sells its intermediate products (Vitrogen, Cell Prime, and
Zygen) to various universities and institutions. CoStasis(TM) is sold to U.S.
Surgical ("USS") and certain 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. 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.
New Accounting Guidance
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 the Company as of July 1, 2000. The adoption of SFAS 133 is
estimated to result in a loss of approximately $130,000, net of tax at June 30,
2000.
2. NEUCOLL, INC.
In February 1999, the Company formed a new subsidiary, NeuColl, Inc., to
commercialize products in the orthopedics field, which include Collagraft and
NeuVisc(TM), a collagen-based intra-articular implant for the treatment of pain
related to osteoarthritis. During the quarter ended March 31, 2000, NeuColl
obtained $4 million in financing from a third party, $2 million of which was
received in February 2000 and the remaining $2 million on March 31, 2000,
reducing the Company's ownership from 100% to approximately 60% and 39%,
respectively. For the quarter ended March 31, 2000, the Company consolidated
NeuColl's operating results in its results of operations and reported the
related minority interest benefit of $133,000 for a two-month period. Upon
receipt of the second tranch of financing on March 31, 2000, the Company's
voting interest in NeuColl decreased below 50%. Accordingly, Neucoll's
operations were no longer consolidated from that date forward, and the Company
began to report its share of NeuColl's operating results under the equity method
of accounting. As of June 30, 2000, the Company's receivable balance from
NeuColl was approximately $331,000, with no carrying value assigned to the
investment. The Company holds a warrant to purchase an additional 3.0 million
shares of common stock in NeuColl, which expires in February 2006. Cohesion
entered into a Service
36
<PAGE> 37
Agreement with NeuColl effective February 1999. Under the terms of the
agreement, Cohesion will provide facility and general and administrative
services at specified costs through June 2001. Reimbursements from NeuColl
totaled approximately $360,000 in fiscal 2000.
3. MARKETING AND DISTRIBUTION AGREEMENT WITH U.S. SURGICAL
In November 1999, Cohesion entered into a marketing and distribution
agreement with USS for CoStasis. The USS territories include the U.S. European
Union, Eastern Europe, Latin America, Middle East, Australia, New Zealand and
India. The agreement provides for milestone payments which are payable upon
certain events. The Company received $1.25 million in payments from USS in
fiscal 2000, of which $0.5 million was recognized as Other Revenue in the
statement of operations. The remaining $0.75 million was deferred for
recognition in future periods. In accordance with our revenue recognition
policy, fees for license distribution rights are recognized over the period of
the distribution agreement while milestone payments are recognized when the
milestone is achieved.
4. CONTRACTUAL AGREEMENTS WITH MCGHAN MEDICAL
Cohesion entered into supply, services, research and development,
benefits, tax allocation, and distribution agreements with Collagen effective
January 1, 1998. Under the terms of the Collagen Supply Agreement, McGhan
supplies certain products to Cohesion at a cost based 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. Under the terms of
the Recombinant Technology and Development License Agreement, Cohesion and
McGhan are collaborating 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 for fiscal 1998 are based on historical costs. If
such prospective arrangements had been in place, R&D expenses, net of
reimbursements from Collagen, would have decreased by $1.0 million in fiscal
year 1998. Reimbursements for fiscal 2000 and 1999 were approximately $304,000
and $964,000, respectively. Under the Services Agreement, which was effective
through June 30, 1999, Cohesion and Collagen provided each other various
services as part of the transition. 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. Under the Collagraft Supply Agreement, McGhan supplies
NeuColl with Collagraft product necessary for NeuColl to fulfill its obligations
under its agreement with Zimmer, Inc., NeuColl's marketing partner in the United
States, at a price that is the greater of a percentage of the NeuColl sales
price or a defined multiplier of McGhan's cost.
5. INVESTMENTS IN DEBT SECURITIES
As of June 30, 2000 and 1999, corporate debt securities were held in
various short-term corporate obligations totaling $12,510,000 and $2,526,000,
respectively. Available-for-sale debt securities are carried at amortized cost
which approximates fair value. During fiscal years 2000, 1999 and 1998, the
Company had no sales of its available-for-sale debt securities.
6. INVESTMENTS IN EQUITY SECURITIES
The following is a summary of the aggregate estimated fair value, gross
unrealized gains and cost of the Company's investment in equity securities:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cost ...................... $ 14,316 $ 12,482
Gross unrealized gains .... 20,649 46,572
-------- --------
34,965 59,054
Value of equity collars ... 2,198 (3,653)
-------- --------
Estimated fair value ...... $ 37,163 $ 55,401
======== ========
</TABLE>
37
<PAGE> 38
Equity Collar
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, 2000, 350,000 shares were hedged under
these collars. The call options are collateralized by shares of Boston
Scientific common stock held by Cohesion.
Impairment of Investment
At June 30, 1999, the Company determined that its cost basis in
Innovasive Devices had incurred other-than-temporary impairment and adjusted the
cost basis down to market value. The resulting $1.3 million write-down in cost
basis at June 30, 1999, was included in "Impairment of investment " in the
accompanying consolidated statements of operations.
Realized Gain on Business Combinations
In June 2000, the shares of common stock of Innovasive Devices were
exchanged for 80,005 shares of Johnson & Johnson common stock as a result of a
business combination between the two companies. At time of the exchange,
Cohesion realized a gain of $4.4 million, which is included in "Realized gain on
investments" in the statement of operations.
7. ACQUISITIONS OF COHESION CORPORATION
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. 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 is making 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 $1.4 million and approximately $3.4
million in fiscal 2000 and 1999, respectively. The Company expects to record an
additional $0.4 million of compensation expense to be recognized in fiscal 2001
and an additional $0.1 million of compensation expense to be recognized in
fiscal 2002.
38
<PAGE> 39
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>
YEAR ENDED JUNE 30, 1998
------------------------
<S> <C>
Revenue...................... $ 2,043
Net income................... $ 1,020
</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. CAPITAL LEASE OBLIGATION
The Company entered into a lease agreement that covers manufacturing
equipment and leasehold improvements. The lease has a term of 48 months with a
one year extension option or a single cash payment of 20% of the leased amount.
Rental payments are based on a monthly equivalent rental payment factor of the
amount leased. Equipment and certain investments collateralize the lease.
The following is a schedule of future minimum lease payments as of June
30, 2000 (in thousands):
<TABLE>
<S> <C> <C> <C>
Fiscal Year 2001 $ 1,035
2002 1,035
2003 1,035
2004 819
---------
3,924 Total future minimum lease payments
(493) Less: Amount representing interest
---------
3,431 Present value of net minimum lease payments
792 Current portion of capital lease obligation
---------
$ 2,639 Long term portion of capital lease obligations
=========
</TABLE>
9. COMMITMENTS
Minimum lease payments
Future minimum lease payments to third parties under noncancelable
operating leases at June 30, 2000 are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal Year 2001 ............................ $ 557
Fiscal Year 2002 ............................ 557
Fiscal Year 2003 ............................ 557
Fiscal Year 2004 ............................ 557
Fiscal Year 2005 ............................ 233
Thereafter .................................. --
------
Total minimum lease payments ...... $2,461
======
</TABLE>
Rental expense was $654,000, $814,000 and $636,000 in fiscal 2000, 1999
and 1998, respectively.
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 any borrowings would be collateralized by the investment Boston Scientific
common stock (see Note 5, "Investment in Equity Securities"). At June 30, 2000,
there was no balance outstanding under the arrangement.
39
<PAGE> 40
10. 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,
as amended, 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, 2000.
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.
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.
40
<PAGE> 41
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, 2000, 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 1,888,185 shares and 224,300 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
==========
Granted ................................ 287,659 5.56 -- 13.88 8.54
Exercised .............................. (727,726) 4.06 -- 9.38 5.42
Forfeitures or expired ................. (292,687) 4.06 -- 12.06 4.90
----------
Outstanding at June 30, 2000 ........... 1,416,834 $ 3.63 -- $13.88 $ 5.41 636,509
==========
Available for grant at June 30, 2000 ... 695,651
==========
</TABLE>
41
<PAGE> 42
Employee Stock Purchase Plan
The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan")
was adopted by the Board of Directors and approved by Collagen as the sole
stockholder in April 1998. A total of 250,000 shares of Common Stock have been
reserved for issuance under the Purchase Plan. During fiscal 2000 and 1999,
80,434 shares and 70,790 shares, respectively, were purchased. At June 30, 2000,
98,776 shares were available for future sale under the plan. The average
issuance price in fiscal 2000 was $3.33. The Purchase Plan consists of 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 consists of four consecutive purchase
periods of six months' duration. The initial offering period commenced on August
19, 1999 and ended 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.
Pro Forma Information
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 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Risk free interest rate ........................................... 6% 6%
Expected volatility factor of the market price of common stock .... 0.598 0.490
Dividend payments ................................................. $ 0.00 $ 0.00
Weighted average expected life .................................... 3 years 3 years
</TABLE>
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 reflects only the Cohesion Corporation
subsidiary stock options. Cohesion's pro forma information follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Pro forma net income (loss) .............................. $ 8,262 $ 5,744 $ (9,590)
Pro forma earnings (loss) per common share - basic (1) ... $ 0.94 $ 0.67 $ (1.08)
Pro forma earnings (loss) per common share -- assuming
dilution (1) ........................................... $ 0.86 $ 0.67 $ (1.08)
</TABLE>
(1) Pro forma share and per share data has been presented for fiscal
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.
42
<PAGE> 43
The following table summarizes information about Cohesion's stock options
outstanding at June 30, 2000:
<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 2000 EXERCISE PRICE
---------------- ----------- -------------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 3.63 -- $ 3.63 1,500 $3.63 8.32 620 $3.63
4.06 -- 4.06 693,172 4.06 8.20 243,572 4.06
4.13 -- 6.00 421,243 5.23 6.90 245,369 5.16
6.16 -- 13.88 300,919 8.73 6.25 146,948 6.84
------- -------
$ 3.63 -- $13.88 1,416,834 5.41 7.40 636,509 5.13
========= =======
</TABLE>
The weighted-average fair value of options granted during the years
ended June 30, 2000 and June 30, 1999 was $5.41 and $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 $1.4 million and $3.4 million of compensation expense related to these
Canceled Options during fiscal 2000 and 1999, respectively. The Company expects
to record an additional $0.4 million and $0.1 million of compensation expense
with respect to the cash-out of Canceled Options, which will be recognized
during fiscal years 2000 and 2001, respectively.
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 June 30, 1998 ............ 354,204 $ 0.20 -- $ 0.70 $ 0.54 354,204
Canceled Options ........................ (354,204)
------------
Outstanding at June 30, 1999 ............ -- --
------------
Outstanding at June 30, 2000 ............ -- --
============
Available for grant at June 30, 2000 .... --
============
</TABLE>
43
<PAGE> 44
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.
11. SEGMENT AND GEOGRAPHICAL INFORMATION
The Company develops proprietary surgical products, including
bioresorbable hemostatic devices and biosealants for tissue repair and
regeneration. The Company operated in two segments until it reduced its
ownership interest in the NeuColl orthopedics subsidiary during the March 2000
quarter: 1) the surgical business, and 2) an orthopedic business. Both segments
reported to the Chief Executive Officer ("CEO") of Cohesion who allocated
resources to each segment. The CEO was 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 2000 1999 1998
-------------------- ------ ------ ------
<S> <C> <C> <C>
Orthopedic ......... $1,176 $1,936 $1,520
Surgical ........... 1,322 658 523
------ ------ ------
$2,498 $2,594 $2,043
====== ====== ======
</TABLE>
During fiscal years 2000, 1999 and 1998, Cohesion, through its
orthopedic unit NeuColl, realized product sales of $1.0 million, $1.9 million
and $1.5 million, respectively. As of March 31, 2000, Cohesion's ownership
interest in NeuColl fell below 50%. From that date forward NeuColl's operations
were no longer consolidated with the results of the Company.
Export sales, which are denominated in U.S. dollars and represent
substantially all the Company's international sales, represent sales to the
Company's customers primarily throughout Europe. The following table displays
sales by the Company to customers in different geographic areas, expressed as a
percentage of revenue, by year:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------
GEOGRAPHIC REVENUE 2000 1999 1998
------------------------------ ---- ---- ----
<S> <C> <C> <C>
United States ................ 83% 91% 94%
Other countries .............. 17% 9% 6%
---- ---- ----
Total sales .................. 100% 100% 100%
==== ==== ====
</TABLE>
44
<PAGE> 45
12. INCOME TAXES
Cohesion uses the liability method for income taxes required by SFAS No.
109. 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, 2000 and 1999 are presented below (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Unrealized gain on equity investments ..... $ 11,927 $ 18,985
Intangible assets ......................... -- (219)
-------- --------
Total deferred tax liabilities .... 11,927 18,766
-------- --------
Deferred tax assets:
Equity in losses of affiliates ............ -- 3,364
State income taxes ........................ (64) (50)
Non-deductible accruals ................... 1,238 771
Other ..................................... 963 247
Valuation allowance ....................... -- (3,364)
-------- --------
Total deferred tax assets ......... 2,137 968
-------- --------
Net deferred tax liabilities ...... $ 9,790 $ 17,798
======== ========
</TABLE>
The valuation allowance decreased by $3,364,000 and $17,000 in fiscal
2000 and 1999, respectively. Significant components of the provision
(benefit) for income taxes are as follows (in thousands):
<TABLE>
YEARS ENDED JUNE 30,
----------------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Current:
Federal .................... $ 1,498 $ 4,015 $(2,875)
State ...................... 309 1,046 (617)
------- ------- -------
Total current ...... 1,807 5,061 (3,492)
------- ------- -------
Deferred:
Federal .................... 593 (913) 1,049
State ...................... 146 (230) (54)
------- ------- -------
Total deferred ..... 739 (1,143) 995
------- ------- -------
$ 2,546 $ 3,918 $(2,497)
======= ======= =======
</TABLE>
The provision (benefit) 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,
--------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Income (loss) before income taxes and minority interest .... $ 11,319 $ 10,119 $(12,064)
======== ======== ========
Expected tax at 35% ........................................ $ 3,962 $ 3,542 $ (4,222)
State income tax, net of federal benefit ................... 421 518 (618)
In-process research and development ........................ -- -- 2,375
Equity in losses of affiliates ............................. (649) (621) 25
Research credits ........................................... (220) (181) --
Investment gains and losses ................................ (1,005) 525 --
Other ...................................................... 37 135 (57)
-------- -------- --------
$ 2,546 $ 3,918 $ (2,497)
======== ======== ========
</TABLE>
45
<PAGE> 46
13. COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Unrealized gain on available-for-sale securities .... $ 9,192 $ 15,021 $ 15,764
Less: reclassification adjustment for (gain)
realized in net income (loss) .................... (21,947) (32,546) (19,000)
-------- -------- --------
Other comprehensive income (loss) ................... $(12,755) $(17,525) $ (3,236)
======== ======== ========
</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.
46
<PAGE> 47
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 2000
Revenue ..................................... $ 702 $ 849 $ 503 $ 444
Cost of sales ............................... $ 499 $ 1,274 $ 899 $ 669
Selling, general and administrative ......... $ 1,381 $ 1,515 $ 1,694 $ 1,885
Research and development .................... $ 2,856 $ 3,422 $ 2,915 $ 3,245
Compensation expense related to
cancelled stock options ............... $ 186 $ 354 $ 442 $ 449
Operating loss .............................. $ (4,220) $ (5,716) $ (5,447) $ (5,804)
Net gain on investments ..................... $ 5,231 $ 1,511 $ 12,322 $ 12,699
Net income (loss) ........................... $ 2,793 $ (2,257) $ 4,177 $ 4,193
Net income (loss) per share - Basic ......... $ 0.31 $ (0.25) $ 0.49 $ 0.50
Net income (loss) per share - Diluted ....... $ 0.28 $ (0.25) $ 0.47 $ 0.49
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 ..................... $ 9,078 $ 13,220 $ 4,353 $ 9,618
Net income (loss) ........................... $ 891 $ 4,385 $ (466) $ 1,391
Net income (loss) per share - Basic ......... $ 0.11 $ 0.52 $ (0.05) $ 0.16
Net income (loss) per share - Diluted ....... $ 0.10 $ 0.52 $ (0.05) $ 0.16
</TABLE>
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.
47
<PAGE> 48
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 "Proposal No.
1: Election of Directors" in our Proxy Statement for our 2000 Annual Meeting of
Stockholders filed on or about September 28, 2000 (the "Proxy Statement").
The information required by this item concerning our executive officers
is set forth in "Item1 - 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 "Proposal No. 1: Election of Directors -
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 "Information Concerning Solicitation and
Voting - 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 "Proposal No. 1: Election of Directors -
Certain Transactions" in the Proxy Statement.
48
<PAGE> 49
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:
None
49
<PAGE> 50
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 and
Principal Financial Officer)
Dated: September 25, 2000
50
<PAGE> 51
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 25, 2000
---------------------------- (Principal Executive Officer and
David Foster Principal Financial Officer)
/s/ Frank DeLustro, Ph.D. President, Chief Operating Officer and Director September 17, 2000
----------------------------
Frank DeLustro, Ph.D.
/s/ Sharon Kokubun Vice President, Financial Operations September 25, 2000
---------------------------- (Principal Accounting Officer)
Sharon Kokubun
/s/ John R. Daniels, M.D. Director September 12, 2000
----------------------------
John R. Daniels, M.D.
/s/ Craig T. Davenport Director September 25, 2000
----------------------------
Craig T. Davenport
/s/ Reid W. Dennis Director September 25, 2000
----------------------------
Reid W. Dennis
Director September __, 2000
----------------------------
Craig W. Johnson, Esq.
/s/ Mark Philip, Ph.D. Director September 25, 2000
----------------------------
Mark Philip, Ph.D.
/s/ Robert C. Robbins, M.D. Director September 25, 2000
----------------------------
Robert C. Robbins, M.D.
/s/ Thomas M. Prescott Director September 14, 2000
----------------------------
Thomas M. Prescott
</TABLE>
51
<PAGE> 52
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 Amended and Restated 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
10.23 (8)(11) Amended and Restated Secured Loan Agreement between
Ross R. Erickson
</TABLE>
52
<PAGE> 53
<TABLE>
<S> <C> <C>
NUMBER NOTES DESCRIPTION
------ --------- -------------------------------------------------------
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
10.29 (22) License and distributorship agreement between Cohesion
Technologies, Inc. and United States Surgical, a
division of Tyco Healthcare Group LP dated November 22,
1999
10.30 First Amendment to the 1998 Stock Option Plan
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.
53
<PAGE> 54
(14) Incorporated by reference to Exhibit 10.97 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1998.
(15) Incorporated by reference to Exhibit 10.103 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1998.
(16) Incorporated by reference to Exhibit 10.98 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1998.
(17) Incorporated by reference to Exhibit 10.100 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1998.
(18) Incorporated by reference to Exhibit 10.101 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1998.
(19) Incorporated by reference to Exhibit 10.99 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1998.
(20) Incorporated by reference to Exhibit 10.102 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1998.
(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.
(22) Incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q for
the fiscal quarter ended December 31, 1999.
54
