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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended JUNE 30, 1997, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period
from_____________ to _______________
Commission file number: 0-10640
COLLAGEN CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2300486
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
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2500 FABER PLACE, PALO ALTO, CA 94303
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 856-0200
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS
(Title of class)
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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
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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 10K or any amendment to this
Form 10K. [ ]
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 5,
1997, on the Nasdaq Stock Market, was approximately $86,380,886. 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 5, 1997, Registrant had 8,822,064 shares of Common Stock
outstanding.
Parts of the Proxy Statement for Registrant's 1997 Annual Meeting of
Stockholders are incorporated by reference to Parts III and IV of this Form 10K
Report.
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PART I
ITEM 1. BUSINESS
GENERAL
Collagen Corporation (the "Company") designs, develops, manufactures
and markets on a worldwide basis high quality biocompatible products for the
treatment of defective, diseased, traumatized or aging human tissues with the
goal of superior physician and patient satisfaction for its products. The
Company has grown by identifying medical applications for its technology,
developing innovative products and building markets with respected healthcare
professionals, either directly or with marketing and technology partners. The
Company's core products are principally used in aesthetic and reconstructive
applications, the treatment of stress urinary incontinence, and bone repair. The
Company focuses on the development of new products based upon biomaterials,
especially collagen, for sale in human healthcare markets worldwide.
CORE TECHNOLOGY
The foundation of the Company's current business is the collagen
protein family, around which the Company has developed proprietary technology
and patented materials, processes and uses. Collagen is a family of naturally
occurring proteins that serve as the basic structural building blocks of the
tissues found in skin, cartilage, bone, tendons, ligaments, arterial walls,
nerve sheaths and other organs and tissues of the body. Collagen is present in
all mammals in higher concentration than any other protein and is quite similar
among species. There are at least fifteen types of collagen, the most common of
which is the type primarily used in the Company's collagen-based commercial
products and products under development.
The Company has developed proprietary processes to purify its bovine
(cow)-source collagen on a commercial scale and to manufacture "tissue-like"
implants from the resulting materials. These proprietary processes alter the
immunological profile of the bovine-source collagen, thus minimizing the
potential for causing an allergic reaction. The result is a purified and
sterilized fibrous collagen material that can be easily injected or implanted
into the human body.
The potential for causing an allergic reaction arising from the
injection of bovine-source collagen is relatively low. Based on the Company's
statistics, approximately 97% of men and women tested show no allergic reaction
to a skin test and can be treated with the bovine-source collagen injection. The
3% that show an allergic reaction to the skin test display typical symptoms of
hypersensitivity, which include redness, itchiness and swelling. An additional
1-2% of the people treated develop an allergic reaction after one or more
injections.
In August 1995, the Company acquired additional proprietary technology
when the Company entered into a stock purchase agreement with certain of the
stockholders of LipoMatrix, Incorporated of Neuchatel, Switzerland
("LipoMatrix"), a developer and the manufacturer of the Trilucent(TM) breast
implant ("Trilucent implant"), to purchase approximately 50% of the outstanding
securities of LipoMatrix on a fully diluted basis. The Company also entered into
a stock purchase agreement with certain of LipoMatrix's management and employees
to purchase the remaining 10% of the outstanding securities on a fully diluted
basis. This purchase increased the Company's ownership interest in LipoMatrix
from approximately 40% to 100% of the outstanding securities on a fully diluted
basis. The acquisition of LipoMatrix, which was completed in January 1996, was
accounted for as a purchase and had an aggregate purchase price of approximately
$23.7 million.
LipoMatrix is developing a proprietary line of breast implants,
Trilucent implant. The Company currently markets its Trilucent breast implant
with a soybean oil-based filler in certain international markets. Unlike
silicone and saline gel filled implants, the Trilucent implant is designed to be
radiolucent to facilitate effective mammography.
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STRATEGY
The Company's strategy consists of the following principal elements:
EXPAND EXISTING PRODUCT LINES. The Company introduced the first
injectable product for the treatment of lines, wrinkles and scars and the
Company's facial enhancement products have been used by more physicians and
patients than any competitive products. The Company has a history of introducing
new and improved collagen-based and non collagen-based products, and the Company
intends to continue to modify and enhance its existing product lines, for facial
enhancement, breast augmentation, reconstruction and replacement, and other
aesthetic applications in order to meet the needs and preferences of a growing
market of patients and physicians. The Company's current strategic technology
objectives include improving the clinical persistence of collagen materials,
reducing or eliminating allergic reactions arising from bovine-source collagen,
finding an alternative homogenous non-human source of collagen and expanding the
sizes, profiles and textures of its breast implant lines.
ACQUIRE AND IN-LICENSE COMPLEMENTARY PRODUCTS AND TECHNOLOGIES. The
Company actively seeks to meet the increasing demand for aesthetic and
reconstructive products by acquiring and in-licensing products, new technologies
and product distribution rights. For example, in fiscal 1996 and 1997, the
Company acquired exclusive rights to distribute Hylaform(R) viscoelastic gel
("Hylaform gel") in certain international countries, SoftForm(TM) facial implant
("SoftForm implant") and Refinity(TM) Medical Skin Solutions ("Refinity skin
solutions"). The Company intends to continue to identify, evaluate and acquire
complementary products and technologies that can provide effective, safe and
innovative solutions to the aesthetic and reconstructive needs of patients.
LEVERAGE PHYSICIAN RELATIONSHIPS. The Company has established close
relationships with its dermatologist and plastic surgeon customers and a strong
reputation among patients in the sixteen years since the introduction of its
first commercial product. The Company utilizes physician feedback to develop new
products, enhance existing products and design training programs which improve
the use of the Company's products. The Company is continuing to enhance its
relationships with physicians by designing and implementing innovative programs
to improve practice economics and patient satisfaction, such as the Collagen
Specialist Program.
IMPROVE UTILIZATION OF WORLDWIDE DISTRIBUTION NETWORK. The Company has
developed a worldwide distribution network, comprised of a direct sales force in
the United States and certain international markets, distributors in other
international markets and a marketing partner, Bard, for Contigen implant. This
distribution network is experienced in selling technologically advanced products
for aesthetic and reconstructive applications, thereby enabling the Company to
more rapidly and effectively introduce newly developed, acquired and in-licensed
products. The Company believes that the increased utilization of the existing
distribution network will lead to increased operating margins.
OPTIMIZE MANUFACTURING INFRASTRUCTURE. The Company has invested in and
successfully developed the necessary infrastructure to manufacture significant
volumes of aesthetic and reconstructive products, thereby positioning the
Company to increase profitability through greater utilization of its existing
infrastructure. The Company expects to reduce per unit manufacturing costs by
utilizing excess capacity and, where appropriate, by outsourcing the
manufacturing of certain high incremental-cost products.
BROADEN THERAPEUTIC APPLICATIONS. The Company has developed innovative
medical products that take advantage of the physical and biological properties
of collagen, and has developed proprietary collagen technology platforms that
could lead to new applications for product development. In addition, The Company
has implemented an "affiliate" program to expand its new product development
activities outside of the areas of its core competence, such as vascular stents
and grafts, ophthalmology, and bioadhesives.
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In order to facilitate the Company's overall strategy, during fiscal
1996 the Company reorganized its efforts into two operating divisions, the
Aesthetic Technologies Group and the Collagen Technologies Group. As previously
announced, the Company has taken further steps to separate these businesses and
has formed a wholly-owned subsidiary, Aesthetic Technologies Corporation
("Aesthetic Technologies"). Aesthetic Technologies was formed to capitalize on
the Company's long-time medical franchises in plastic surgery, dermatology and
aesthetic medicine and focuses on cosmetic and reconstructive medical technology
products. The Collagen Technologies Group, on the other hand, is focused on the
development (by the Company and its affiliates) of products and businesses
utilizing innovative collagen-based medical technologies. Where applicable, the
following discussions will be distinguished between these two businesses.
PRODUCTS
AESTHETIC TECHNOLOGIES:
Aesthetic Technologies offers products for soft tissue reconstruction
and augmentation, breast reconstruction and augmentation, skin care and stress
urinary incontinence. In the United States, the Company markets a line of
collagen-based injectable products, Zyderm(R) I implant and Zyderm(R) II implant
(collectively, "Zyderm implants") and Zyplast(R) implant ("Zyplast implant"),
for soft tissue augmentation of the face. The Company has recently launched a
new product for subdermal soft tissue reconstruction and augmentation, the
SoftForm implant, made of ePTFE, expanded polytetrafluoroethylene, a
non-resorbable material. Internationally, the Company markets its Zyderm and
Zyplast injectable implants for the face; Trilucent implant for breast
reconstruction, augmentation and replacement of previously implanted breast
implants; and Hylaform gel, an injectable gel for facial wrinkles and scars that
does not require a skin sensitivity test. The Company currently plans to
introduce Refinity skin solutions, a line of alpha hydroxy acid (AHA) based skin
care products, in the United States and certain international markets in 1998.
In addition, the Company's product for stress urinary incontinence, Contigen(R)
Bard collagen implant ("Contigen implant"), is currently marketed on a worldwide
basis through the Company's marketing partner, C.R. Bard, Inc. ("Bard").
FACIAL ENHANCEMENT PRODUCTS
ZYDERM AND ZYPLAST IMPLANTS. The Company's collagen-based injectable
product line for the treatment of skin contour defects includes Zyderm implants
and Zyplast implant. Zyplast implant is a collagen product molecularly
cross-linked with glutaraldehyde. Zyderm and Zyplast implant treatments
replenish the skin's natural collagen support layer, smooth facial lines and
many types of scars, and can produce an immediate visible difference in the
appearance of a patient's skin. The implants are dispersed in a saline solution
containing a small amount of lidocaine, a local anesthetic, and injected with a
fine gauge needle into depressed layers of skin to elevate the area to the level
of the surrounding skin surface. As a result, Zyderm and Zyplast implants can
minimize lines and scars. Depending on the need and the product (or product
combination) used, many patients can achieve correction of wrinkles or scars in
one treatment session. The implants take on the texture and appearance of human
tissue and are subject to similar stresses and aging processes. Consequently,
supplemental treatments are necessary after initial treatment, depending on the
location and original cause of the skin deformity. On average, patients require
two to four treatments per year to maintain the desired result.
Zyderm implants were formulated especially for people with small or
superficial contour defects. These implants are particularly effective in
smoothing delicate frown and smile lines and fine creases that develop at the
corners of the eyes and above and below the lips, and can also help correct
certain kinds of shallow scars. Zyplast implants, which are the most persistent
of the collagen-based implants, are cross-linked with glutaraldehyde, are
designed to treat depressions requiring a stronger material and can be used for
more pronounced contour problems (such as deeper scars, lines and furrows) and
for areas upon which more force is exerted (such as the corners of the mouth).
Zyderm and Zyplast implants may be used alone or in conjunction with one
another.
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The Company markets its Zyderm and Zyplast implant products worldwide
to dermatologists, plastic surgeons, and other physicians. The Company estimates
that over one million patients worldwide have been treated with a collagen-based
injectable product of the Company, of which approximately 920,000 patients are
in the United States and Canada and approximately 575,000 are in international
markets.
HYLAFORM GEL. The Company has extended its injectable product line with
Hylaform gel, a product which can be used without a skin sensitivity test. The
Company has acquired exclusive distribution rights in certain international
markets from Biomatrix, Inc. ("Biomatrix") to sell Hylaform gel for facial
wrinkles and scars. Hylaform is a viscoelastic product made from hylan B, a
biopolymer created by cross linking hyaluronan molecules. Hyaluronan is the
elastoviscous polysaccharide present in the intercellular matrix of nearly all
human tissues. Hyaluronan plays an important role in the skin's hydration and
viscoelasticity. Over time, the hyaluronan content in skin decreases,
contributing to the aging appearance of skin. Due to its unique cross-linking to
hylan B, Hylaform gel has a higher water content and greater elastic properties
than other hyaluronan-derived products.
Since hyaluronan is neither tissue-specific nor species-specific,
Hylaform gel can be used without a skin test. In addition, Hylaform gel has a
chemical structure that is completely different from that of bovine collagen and
does not contain any bovine protein. Hylaform gel allows same day treatment of
facial wrinkles and scars, giving patients and doctors an additional treatment
option.
Biomatrix received CE mark approval for Hylaform gel in December 1995,
allowing this product to be marketed throughout Europe. The Company began
marketing Hylaform gel in several European countries in fiscal 1997. The Company
holds exclusive marketing and distribution rights to Hylaform gel outside the
United States and has the option to acquire the United States distribution
rights in the future. The exclusivity of the license will terminate if the
Company fails to meet certain sales goals. The Company plans to introduce
Hylaform gel in additional international markets following receipt of required
regulatory approvals or clearances. Biomatrix submitted a premarket approval
application in August 1995 for Hylaform gel with the United States Food and Drug
Administration (the "FDA"). Hylaform gel is not currently marketed in the United
States. There can be no assurance that Hylaform gel will be marketed in the
United States in the near future, if at all.
SOFTFORM IMPLANT. The Company has acquired exclusive worldwide
distribution rights from Tissue Technologies, Inc. ("Tissue Technologies") to
market SoftForm implant, for subdermal soft tissue reconstruction and
augmentation. SoftForm implant is a non-resorbable yet removable facial implant
for the treatment of deep facial furrow and creases such as nasolabial folds
(creases between the nose and corners of the mouth), deep frown lines and
definition of the vermilion border. SoftForm implant comes preloaded in a self
contained delivery system enabling precise placement without requiring
physicians to handle the implant prior to placement, which could reduce the risk
of contamination. Treatment with SoftForm implant consists of a simple in-office
procedure performed under a local anesthetic. The implant is inserted below the
surface of the skin through two small incisions. The procedure generally takes
less than 30 minutes, but treatment times will vary depending on the number of
implants used. Microporous material limits tissue ingrowth through the surface
of the implant, allowing easy removal of SoftForm implant. The removability of
SoftForm implant provides patients with the option of adjusting or removing the
implant as desired. The Company believes that SoftForm implant is more easily
removable than other non-resorbable facial implants.
SoftForm implant is a soft, tube-shaped implant made of the
biocompatible polymer ePTFE. SoftForm implant has a hollow configuration
designed to provide stability by promoting fibrous tissue ingrowth through the
inside of the tube. The Company believes that SoftForm implant demonstrates
greater stability and less likelihood of extrusion through the skin's surface
with the hollow configuration of SoftForm implant as compared to competitive
products. The ePTFE polymer used in the SoftForm implant has been used for more
than 20 years in a variety of medical applications, including replacement of
deteriorated blood vessels, hernia repair, abdominal wall reinforcement and soft
tissue augmentation of the face.
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SoftForm implant received marketing clearance from the FDA in April
1996 under a 510(k) application and the Company introduced SoftForm implant to a
panel of six physician advisors in December 1996. The Company expects to launch
SoftForm in the United States in late 1997. The product is currently approved
for usage in Canada and an application for CE mark is pending in the European
Union ("EU"). There can be no assurance that SoftForm implant will be marketed
internationally in the near future, if at all.
The Company's facial enhancement products have been designed to provide
a full complement of corrective products to the Company's customers. SoftForm
implant is designed to complement Zyderm and Zyplast implants as well as
Hylaform gel by offering a sub-dermal (under the skin), persistent treatment to
patients with deep furrows.
REFINITY SKIN SOLUTIONS. The Company has acquired exclusive worldwide
rights from Cosmederm Technologies, Inc. ("Cosmederm") to distribute Refinity
skin solutions, a line of AHA skin care products being developed by the Company
and Cosmederm. Refinity skin solutions products contain a proprietary
anti-irritant developed by Cosmederm. The Company believes that these cosmetic
products diminish the appearance of fine lines and wrinkles and give the skin a
smoother texture while minimizing or eliminating the itching, burning and
stinging traditionally associated with AHA products. The Company currently plans
to introduce Refinity skin solutions in the United States and certain
international markets in 1998.
The Company plans to distribute its Refinity skin care products through
physicians' offices to leverage the Company's existing distribution network. In
order to develop a higher level AHA product which produces minimal adverse
effects, Cosmederm is developing the Refinity skin solutions product line
exclusively for the Company utilizing Cosmederm's proprietary anti-irritant,
COSMEDERM-7. Because Refinity skin solutions products contain significantly
higher levels of active ingredients than currently available products, the
Company believes that they can achieve more effective results. The Refinity skin
solutions product line will include a home use product with an AHA concentration
of 15% (compared with other physician dispensed products with concentrations
generally ranging from 8-12%).
BREAST IMPLANTS
The Company markets its Trilucent breast implant in certain
international markets. Unlike silicone and saline filled implants, Trilucent
breast implant is designed to be radiolucent to facilitate effective
mammography. Trilucent breast implant is filled with triglycerides derived from
oils and fats from a soybean source which have a similar chemical composition to
the triglycerides of normal human fat. The same triglycerides used in Trilucent
breast implant have been used medically for over 40 years as intravenous
nutrition for seriously ill patients and premature infants. In addition,
triglyceride is 40 times more viscous than saline and thus retains a better
shape with less wrinkling.
Human fat is the lucent "window" through which the glandular tissue is
observed during mammography. Silicone and saline, the traditional breast implant
fillers, interfere with the ability to observe the breast tissue during
mammography because such fillers are radio-opaque. Trilucent implant is
different from other implants because it is filled with triglycerides. Trilucent
breast implant is designed to have an x-ray density similar to human fat.
Neither saline nor silicone gel filled implants have this radiolucent profile.
Trilucent implant is currently being sold in 13 European countries, but
is not being marketed in the United States. In late fiscal 1997, the Company
initiated design modifications to Trilucent implant intended to address United
States physician and patient preferences. In addition, the Company began to
pursue strategies to reduce the manufacturing costs of Trilucent implant,
including potentially out-sourcing the manufacture of the implant shells. As a
result of these two strategic decisions, the Company has since postponed
enrolling additional patients in its clinical trial program while the Company
investigates alternative measures to lower costs, and designs and develops
product line extensions. The Company currently is following 450 patients
previously enrolled in its European, United States and Canadian clinical trials.
There can be no assurance that clinical trials will resume.
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CONTIGEN IMPLANT
Contigen implant injections are designed to treat incontinence due to
intrinsic sphincter deficiency ("ISD"). Contigen implant is a sterile, highly
purified bovine dermal collagen that is crosslinked and dispersed in a saline
solution. Contigen implant is injected into the submucosal tissues of the
urethra and/or bladder neck, and into the tissues adjacent to the urethra. The
injection of Contigen implant creates increased tissue bulk and subsequent
joining of the urethral lumen. After injection, the suspended collagen forms a
soft cohesive network of fibers and over time, the implant takes on the
appearance of human tissue. The treatment cycle of Contigen implant may require
multiple injections at the start of treatment and may require supplementary
injections over time.
The Company obtained premarket approval ("PMA") to market Contigen
implant in September 1993 for the treatment of ISD. Under the terms of a
distribution agreement with Bard, the Company sells Contigen implant to Bard and
the Company receives a royalty on end market sales of Contigen implant. Bard has
exclusive worldwide marketing and distribution rights to Contigen implant. Bard
has received reimbursement codes for Contigen implant and is expected to
commence marketing in the United Kingdom, France and Japan.
COLLAGEN TECHNOLOGIES GROUP:
ORTHOPAEDICS
The Company and its orthopaedic marketing partner, Zimmer, Inc.
("Zimmer"), a wholly-owned subsidiary of Bristol-Myers Squibb, received approval
from the FDA in May 1993 to market Collagraft(R) bone graft matrix implant
("Collagraft implant"). Collagraft(R) bone graft matrix strip ("Collagraft
strip"), a premixed formulation, was subsequently approved in January 1994.
Collagraft implant and Collagraft strip (collectively, "Collagraft bone graft
products"), when used with autogenous bone marrow, is indicated for use in acute
long bone fractures and traumatic osseous defects to provide a matrix for the
repair process of bone. A bone graft substitute eliminates the need for patients
to undergo a painful autograft bone grafting procedure, which involves
harvesting patients' own bone from another site, and prevents the transmission
of human infectious agents and inconsistent results from allograft procedures
(bone graft supplied through a bone bank). During surgery, Collagraft strip or
Collagraft implant is mixed with the patient's own bone marrow and is placed
into the fracture site, providing a scaffolding around which new bone will grow.
Medical conditions which may require bone grafting include acute long bone
fractures and certain tumors and cysts.
Collagraft bone graft products are a mixture of purified fibrillar
collagen and hydroxyapatite/tricalcium phosphate ceramic ("HA/TCP") and are
supplied sterile in both strip (premixed) and ready-to-mix form. Hydroxyapatite
is a biocompatible substance that is minimally resorbed. Tricalcium phosphate is
radiopaque, biocompatible and biodegradable. Its degradation products can be
reconstituted by the body to form new bone mineral, allowing for bone
deposition.
An agreement between the Company and Zimmer provides for the
development and distribution of collagen and other biologically-based products
for orthopaedic applications. The Company will manufacture approved products and
sell them to Zimmer, which has exclusive marketing rights for Collagraft bone
graft products in the United States and Asia. The Company holds marketing rights
for Collagraft bone graft products in Europe, Canada, Africa and the Middle
East. Collagraft bone graft products are currently sold only in the United
States and the Company does not anticipate substantial sales outside the United
States for the foreseeable future. Sales of Collagraft bone graft products to
Zimmer in fiscal years 1997, 1996 and 1995 totaled $1.9 million, $3.1 million
and $3.0 million, respectively.
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OTHER MEDICAL PRODUCTS
During fiscal 1995, the Company expanded its product offerings to
include a line of collagen-based materials for research applications and other
custom needs. Sales of these products were not material in fiscal years 1997,
1996 or 1995.
SALES AND MARKETING
AESTHETIC TECHNOLOGIES:
SALES. Worldwide sales of Zyderm and Zyplast implants decreased 3%
while worldwide unit sales increased 3% in fiscal 1997 over fiscal 1996. In
fiscal 1996, worldwide sales and worldwide unit sales of Zyderm and Zyplast
implants increased 10% and 16%, respectively, over fiscal 1995. United States
sales of Zyderm and Zyplast implants, which represented approximately 49% of
worldwide sales of Zyderm and Zyplast implants in fiscal 1997, increased 2% over
fiscal 1996 sales, compared to a 3% increase in fiscal 1996 over fiscal 1995.
Unit sales of these implants in the United States increased 9% in fiscal 1997
over fiscal 1996, compared to a 10% increase in fiscal 1996 over fiscal 1995.
International sales of Zyderm and Zyplast implants, which represented
approximately 51% of worldwide sales of Zyderm and Zyplast implants in fiscal
1997, decreased 7% over fiscal 1996 sales, compared to a 16% increase in fiscal
1996 over fiscal 1995. International unit sales of these implants decreased 2%
in fiscal 1997 over fiscal 1996, compared to a 21% increase in fiscal 1996 over
fiscal 1995. (For information regarding export sales, see Note 11 of Notes to
Consolidated Financial Statements.) The Company has expanded and intends to
expand further its direct selling efforts in certain international markets.
There can be no assurance that difficulties associated with a transition to
direct marketing efforts will not have an adverse effect on the Company's
results of operations.
The Company recorded approximately $7.9 million, $6.2 million, and
$16.5 million of revenue from sales of Contigen implant in fiscal years 1997,
1996 and 1995, respectively. Of such revenue, $1.2 million, $.3 million and
$13.4 million was derived from sales of Contigen implant to Bard and $6.7
million, $5.9 million and $3.1 million from Bard's direct sales to physicians in
fiscal years 1997, 1996, and 1995, respectively. (See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Product Sales").
MARKETING. The Company markets its Zyderm and Zyplast implants directly
to dermatologists, plastic surgeons and other physicians in the United States
and several European countries, Canada, Australia and New Zealand and through
distributors in certain other international markets. The Company has granted
exclusive distribution rights for the Zyderm and Zyplast implants in Japan to
Lederle (Japan), Ltd. The Company expects to launch SoftForm implants in the
United States in late 1997 through its direct sales force and, when introduced
internationally, the Company expects to market SoftForm implants both directly
with its established sales force and through its international distributors.
Hylaform gel and Trilucent implants are currently sold in several European
countries through the Company's direct sales force and its international
distributors, but are not approved for marketing in the United States. Trilucent
implants are not available in France due to the ban imposed on all but
saline-filled breast implants. Contigen implant is marketed worldwide through
Bard, the Company's marketing partner.
The Company utilizes a variety of methods to promote its aesthetic and
reconstructive products to patients and physicians. To stimulate demand at the
patient level, the Company conducts consumer marketing awareness programs,
including public relations events, health and beauty magazine advertising,
direct mailing campaigns and patient seminars. The Company's marketing efforts
to physicians consist of on-going training, education and promotional
activities. Examples of physician marketing activities include in-office
training and education, presence at medical meetings, and direct mail campaigns.
The Company has emphasized physician education to ensure proper training in the
use of its products and timely communication of clinical and product use
information.
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The Company is committed to optimizing patient satisfaction through
various initiatives aimed at meeting the patient's cosmetic needs while making
the Company's products more affordable. Market research sponsored by the Company
and conducted during fiscal 1996 revealed that many patients were not receiving
enough collagen material per treatment to provide for full correction of soft
tissue defects and that existing prices for the product discouraged patients
from purchasing more collagen. As a result, the Company introduced syringes with
larger fill volumes, offering more collagen material with a minimal increase in
cost and injection time and an opportunity for more complete correction. The
Company benefits from this strategy due to increased patient satisfaction. In
addition to larger syringes, the Company has also introduced programs to further
encourage more complete correction at the initial treatment and on an ongoing
basis.
The Company has instituted a new patient program in an effort to
attract new patients and increase existing patient satisfaction. The Company's
program offers all patients special pricing options that make full and ongoing
correction more affordable. In addition, the Company has initiated the Collagen
Specialist Program which trains nurses to administer collagen proficiently,
which the Company believes may increase collagen-based injectable revenues of
both the Company and its physician customers while maintaining patient
satisfaction. The Company believes this program may improve physician's practice
economics while providing for continued high quality patient care.
For the uncertainties or risk factors that exist surrounding the
marketing and distribution of the Company's aesthetic and reconstructive
products and its stress urinary incontinence product, see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Factors Affecting Future Results of Operations."
COLLAGEN TECHNOLOGIES GROUP:
SALES. Sales of Collagraft bone graft products to Zimmer in fiscal
years 1997, 1996 and 1995 totaled $1.9 million, $3.1 million and $3.0 million,
respectively.
MARKETING. Collagraft bone graft products are marketed in the United
States through Zimmer, the Company's marketing partner. Zimmer has exclusive
marketing rights for Collagraft bone graft products in the United States and
Asia. The Company holds marketing rights for Collagraft bone graft products in
Europe, Canada, Africa and the Middle East. Collagraft bone graft products are
currently sold only in the United States and the Company does not anticipate
substantial sales outside the United States for the foreseeable future.
For the uncertainties or risk factors that exist surrounding the
marketing and distribution of Collagraft bone graft products, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations- Factors Affecting Future Results of Operations."
COMPETITION
The medical device industry is characterized by rapidly evolving
technology and increasing competition under the recent changes in the health
care environment. The Company faces competition in each of its target product
markets.
AESTHETIC TECHNOLOGIES:
The market for aesthetic and reconstructive products and treatments is
characterized by rapidly evolving technology and increasing competition under
the recent changes in the health care environment. The Company faces competition
in each of its target product markets.
FACIAL ENHANCEMENT. The Company faces direct and indirect competition
for its Zyderm and Zyplast implant products. At the present time, the Company is
aware of a commercial product marketed in the United States and Canada that
competes directly with Zyderm and Zyplast implants. This product is a
gelatin-based (denatured collagen) product for soft tissue augmentation. The
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Company also competes with products derived from human tissue. Collagenesis,
Inc. produces a product requiring a biopsy of the patient's tissue, which tissue
is then used to generate an injectable material. Fat injections require surgical
removal of the patient's fatty tissue. Implantable cadaver tissue obtained
through tissue banks is sold under the brand name Alloderm and competes directly
with the Company's SoftForm implant. Internationally, the direct competitors in
the injectable product segment are primarily derived from collagen, hyaluronic
acid and silicone. The Company is aware of one foreign company that is marketing
internationally a collagen-based material for soft tissue augmentation. The
Company is aware of a hyaluronic acid-based product called Restylane that is
competitive with Hylaform gel. In addition, W.L. Gore, Inc. markets an ePTFE
product that is directly competitive with SoftForm implant. The Company's
injectable products also compete in the dermatology and plastic surgery markets
with substantially different treatments, such as laser treatments, chemical
peels, fat injections, dermabrasion, botulinum toxin injections and face lifts.
In addition, several companies are engaged in research and development
activities examining the use of collagen and other biomaterials for the
correction of soft tissue defects. Although the Company believes it has a
leadership position in the injectable product segment of the soft tissue
augmentation market, there can be no assurance that the Company will not face
increased direct and indirect competition in such a market.
Refinity skin solutions, once introduced, will compete in the extremely
competitive worldwide alpha hydroxy acid market. Worldwide sales of alpha
hydroxy acid products total approximately $1.0 billion per year, with those
products distributed through physicians contributing approximately 6% to 7% of
this total. Large retailers, salons and department stores participate in the
alpha hydroxy market. During the last two years, several large pharmaceutical
companies with high product profiles within the dermatology market have
purchased or agreed to distribute alpha hydroxy acid skin care lines. In
addition, physicians dispense a significant number of private label in-office
peel and take-home AHA products.
BREAST IMPLANTS. The principal competitors of Trilucent implant are
saline implants worldwide, and silicone gel implants outside the United States,
Canada and France. Mentor Corporation and McGhan Medical Corporation, which
market both saline implants and silicone gel implants, are the Company's primary
competitors for breast implants. These companies have greater financial,
marketing and manufacturing resources than the Company.
CONTIGEN IMPLANT. At the present time, autologous fat, silicone
micro-implants and polytetrafluoroethylene (Teflon paste, or PTFE) are directly
competing or will compete with the Contigen implant for the treatment of stress
incontinence due to ISD. Neither silicone micro-implants nor PTFE have been
approved by the FDA for use in the United States. Contigen implant also competes
with other methods of treatment or amelioration of ISD including absorbent
products (diapers, pads and other drip and collection devices), drugs and
estrogen therapy, behavior modification (kegel exercises, electrical
stimulation, and biofeedback), surgery (artificial urinary sphincter, sling
procedures, bladder neck suspension and bone anchors), and bulking agents
(Urethrin, Macroplastique, inert materials and fat).
In addition, several companies and institutions are engaged in the
development of collagen-based and other materials, techniques, procedures and
products for use in aesthetic and reconstructive applications anticipated to be
addressed by the Company's products. Some of these companies and institutions
may have substantially greater capital resources, research and development
staffs and facilities, experience in conducting clinical trials and obtaining
regulatory approvals, and manufacturing and marketing products than the Company.
There can be no assurance that the Company's competitors will not succeed in
developing technologies and products that are more effective than any products
that have been or may be developed by the Company or that would render the
Company's technology and products obsolete or noncompetitive, or that the
Company will be able to compete effectively against such competitors based on
its abilities to manufacture, market and sell its products. There can be no
assurance that such potential competition will not have an adverse effect on the
future business or financial condition of the Company.
The Company believes that the primary competitive factors in the market
for aesthetic and reconstructive medical products are safety, efficacy,
reliability, cost-effectiveness, patient recovery
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time, absence of significant side effects, availability of third-party
reimbursement, and physician and public awareness of the existence and efficacy
of products. The medical device industry is characterized by rapid and
significant technological change. The length of time required for product
development and regulatory approval plays an important role in a company's
competitive position. Consequently, the Company's success will depend in part on
its ability to respond quickly to medical and technological changes through the
development and commercialization of new products. Product development involves
a high degree of risk and there can be no assurance that the Company's research
and development efforts will result in commercially successful products. The
Company believes that it competes favorably with respect to these factors,
although there can be no assurance that it will continue to do so.
COLLAGEN TECHNOLOGIES GROUP:
COLLAGRAFT BONE GRAFT PRODUCTS. Bone graft substitutes currently are
used in a small fraction of bone grafting procedures. The vast majority of bone
grafting procedures currently use autograft (autologous bone) taken from the
patient's own body and allograft (bone bank bone taken from deceased donors).
Collagraft bone graft products belong to a new family of products called bone
graft substitutes. The most direct competitor to Collagraft bone graft products
is Pro-Osteon, a synthetic bone graft substitute made of a coral-like mineral. A
less direct competitor to Collagraft bone graft products is an allograft bone
product called Grafton, which is packaged in a syringe and marketed and priced
like a bone graft substitute.
In addition, several companies and institutions are engaged in the
development of collagen-based and other materials, techniques, procedures and
products for use in medical applications anticipated to be addressed by
Collagraft bone graft products. Some of these companies and institutions may
have substantially greater capital resources; research and development staffs
and facilities; and experience in conducting clinical trials, obtaining
regulatory approvals, and manufacturing and marketing products similar to those
of the Company. There can be no assurance that the Company's competitors will
not succeed in developing technologies and products that are more effective than
any which have been or may be developed by the Company or that would render the
Company's technology and products obsolete or non-competitive. There can be no
assurance that such potential competition will not have an adverse effect on the
future business or financial condition of the Company.
MANUFACTURING
The Company manufactures its collagen-based injectable products
utilizing readily available chemicals and enzymes. The source of its collagen is
bovine dermis. The Company uses a patented viral inactivation process for its
collagen-based products to promote both their safety and quality. Since 1987,
the hides have been sourced from a closed herd, in an effort to prevent diseases
such as Bovine Spongiform Encephalopathy ("BSE"), from contaminating its
collagen-based products. Maintaining a closed herd requires the physical
separation of the herd from other herds, the tracking of the lineage of each
animal and the maintenance of each animal under a veterinary program. Under the
Company's product development and distribution agreement with Zimmer, the
Company is required to purchase HA/TCP (hydroxyapatite/tricalcium phosphate)
solely from Zimmer for the manufacture of Collagraft implant. The Company
believes that the supply of raw materials and processing materials for its
manufacturing operations is and will continue to be adequate for the foreseeable
future and that such materials can be available from other sources.
The Company's principal collagen-based products have refrigerated shelf
lives of 36 months. The Company typically ships products to physicians as orders
are received on an express delivery basis, and has no material backlog. It is
the Company's policy to maintain levels of finished goods inventory adequate to
allow for the expeditious handling of orders received. The Company believes its
physician customers typically purchase products on an as-needed basis, while
distributor customers purchase products based on inventory stocking levels.
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The Company manufactures Zyderm and Zyplast implant products, Contigen
implant products and Collagraft bone graft products in its Fremont, California
facility. This facility is used primarily for bulk processing, aseptic filling
and packaging of finished goods. The Company has the capacity to manufacture
approximately 2 million cc's of collagen per year at this facility. While the
Company has not experienced any disruptions in its manufacturing schedule during
the last two fiscal years, there can be no assurance that the Company will not
experience disruptions in its manufacturing schedule in the event that it
attempts to manufacture products in larger quantities and with new process
improvements. In addition to the Company's in-house inspection teams which work
to promote the quality and consistency of the Company's products, the Company's
manufacturing facilities are subject to regulatory requirements and periodic
inspection by regulatory authorities, such as the FDA in the United States. In
June 1995, the Company's quality systems were inspected by TUV Product Services,
Munich ("TUV") to ensure that the Company's products met the requirements of the
European Medical Directive. After the completion of the inspection, the Company
was certified to place the CE Mark on its Zyderm and Zyplast implant product
packages and to sell these products directly to physicians in most European
countries. In June 1997, after the required annual surveillance audit, the
Company's quality systems were recertified by TUV.
The Company currently produces the Trilucent implant, which has a shelf
life of 24 months, in Neuchatel, Switzerland, where it maintains a facility with
a quality system meeting the requirements of IS09001 and EN46001 quality
standards as certified by TUV and SQS Product Services in June 1996. In June
1997, the quality system was recertified by both TUV and SQS Product Services.
Such certification ensures that the quality system conforms to the essential
requirements of the European Medical Directive and along with other requirements
allows the CE mark to be placed on the product packages. The Company is actively
pursuing strategies to reduce the manufacturing costs of Trilucent implant,
including potentially outsourcing the manufacture of the implant shells. There
can be no assurance that the Company will be successful in outsourcing the
manufacture of the implant shells. Any such failure could have a material
adverse effect on the sale of Trilucent implant. Geographic area data with
respect to the operations of LipoMatrix is not included herein, as the
associated amounts have not been significant.
Hylaform gel, SoftForm implant and Refinity skin solutions products,
distributed or expected to be distributed by the Company, are manufactured by
third parties. The Company is dependent on these third parties to manufacture
and supply products to the Company as required. While the Company has supply
agreements with these third parties, there can be no assurances that these third
parties will manufacture and supply high quality products on a timely basis or
in adequate quantities. Inventory shortages or quality issues could adversely
affect the Company's sales of these products and as a result, could adversely
affect the Company's business, financial condition and results of operations.
PRODUCT RESEARCH AND DEVELOPMENT
The Company maintains an active program of technology and new product
development. The Company intends to continue to devote a significant portion of
revenues to research and product development activities throughout its product
lines to generate significant returns to stockholders. Research and development
("R & D") expenses for the Company totaled $18.8 million, $12.2 million and $9.9
million in fiscal years 1997, 1996 and 1995, respectively. R & D expenses
represented 26%, 18% and 14% of product sales for those years.
The Company's current product development efforts are focused in four
major areas: 1) new injectable products and enhancements to existing products
for the treatment of skin contour defects, 2) Trilucent implant and
enhancements, 3) investment in affiliated companies working on new and existing
technologies in a wide variety of medical indications, and 4) joint development
programs focused on the orthopaedics area.
The soft tissue augmentation program has concentrated on improvements
relating to two performance criteria duration of treatment benefit and the
elimination of local inflammatory reactions. The Company is exploring several
formulations to improve persistence of its Zyderm and
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Zyplast implants and is also investigating human collagen as an alternative for
the potential collagen patients who are allergic to bovine-based products or who
elect to minimize the possibility of an allergic reaction to the product. The
Company's human collagen program is focused on the development of recombinant
human collagen through transgenic animals and yeast. The Company has made an
equity investment in and is actively collaborating with Pharming, B.V. of the
Netherlands for the purpose of developing recombinant human collagen through
transgenic animals. In addition, the Company has a collaborative agreement with
Genotypes, Inc. of South San Francisco, California, to develop recombinant human
collagen through yeast.
The Company intends to enhance the Trilucent breast implant product
line to address consumers' desire for a range of profiles, sizes and textures.
The Company initiated design modifications to the Trilucent implant in late
fiscal 1997.
As part of the Company's growing orthopaedics business, during fiscal
1996, the Company acquired approximately 11% of, and entered into a
collaborative product development agreement related to developing resorbable or
partially resorbable mechanical tissue-fixation devices for applications in
orthopaedic tissue repairs, with Innovasive Devices, Inc. of Marlborough,
Massachusetts ("Innovasive Devices"). The Company had a 9% ownership position in
Innovasive Devices at June 30, 1997. In addition, the Company is investigating
the use of other collagen-based biomaterials for use in a variety of orthopaedic
indications and continues to support its Collagraft bone graft products, which
are being marketed and sold in the United States by Zimmer.
With regard to investing in new technologies and products, the Company
has an active program for developing new products through affiliated companies
in which the Company makes equity and debt investments. The Company believes the
formation of new companies allows each to focus its technology and development
efforts on select market segments, to bring products efficiently to market and
to advance proprietary know-how at a rapid rate. However, there can be no
assurance that these investments will result in positive returns nor can there
be any assurance on the timing of any return on such investments. The Company's
current affiliate investments consist of the following principal elements:
New Products in New Market Segments. In fiscal 1994, the
Company and one of its founders, Dr. Rodney Perkins, formed
Cohesion Corporation (formerly Otogen Corporation), a start-up
company currently developing surgical tissue adhesives,
biosealants, and adhesion prevention barriers for use in
surgical applications in such areas as cardiovascular surgery,
thoracic surgery, neurology, and plastic surgery. In fiscal
1996, the Company increased its ownership position in Cohesion
Corporation ("Cohesion") from approximately 40% to 81%. During
fiscal 1997, Cohesion conducted a feasibility clinical trial
with its proprietary CollaSeal(TM) hemostatic device, which
proved to be very successful. Clinical trials will be expanded
in Europe beginning in the fall of 1997. The Company's
assessment of the size of the worldwide market for a sprayable
hemostatic device for the surgical market is estimated to be
$200 million and growing at a rate of 10 to 25 percent per
annum. The Company believes that Cohesion's proprietary
technology will have a cost advantage, will be easier to use,
and will stop bleeding more quickly than products that are
currently available. The Company expects that it will increase
its ownership position in Cohesion during fiscal 1998. In
fiscal 1993, the Company participated in the formation of
CollOptics, Inc. to develop collagen-based lenticules, which
are custom-made contact lenses for refractive errors. At June
30, 1997, the Company held a 47% ownership interest in
CollOptics, Inc. During fiscal 1997, the Board of Directors of
CollOptics, Inc. decided to suspend development efforts until
a suitable corporate partner can be identified to sponsor
product development and marketing efforts. In addition, in
fiscal 1996 the Company made an investment in Innovasive
Devices and entered into a collaborative relationship with
Innovasive Devices to develop resorbable or partially
resorbable mechanical tissue-fixation devices for applications
in orthopaedic tissue repairs.
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Access to New Technology. In fiscal 1996, the Company made an
equity investment in, and currently continues to actively
collaborate with Pharming, B.V. for the purpose of developing
recombinant human collagen. This technology could provide the
Company with a source of recombinant human collagen that is
chemically identical to native human collagen. The Company and
Pharming, B.V. will attempt to produce collagen in the milk of
dairy cattle.
For the uncertainties or risk factors that exist with the Company's
investments in affiliate companies, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors Affecting
Future Results of Operations."
PATENTS AND PROPRIETARY TECHNOLOGY
The Company depends substantially upon its proprietary technological
expertise in the extraction, purification, and formulation of collagen-based
materials and other biomaterials into biomedical products. The Company seeks
patents on inventions concerning novel manufacturing processes, composition of
matter, and applications for its proprietary biomaterials. At present, the
Company holds over 60 issued patents and numerous patent applications.
LipoMatrix also holds several issued patents and patent applications related to
Trilucent implant.
Patent-related litigation is a risk in the medical device industry.
There can be no assurance the Company will be successful in the future in
obtaining patents or license rights, that patents will be issued for the
Company's current patent applications, that the Company will develop additional
proprietary technology that is patentable, that any issued patents will provide
the Company with any competitive advantages or will not be challenged by third
parties, or that patents of others will not have an adverse effect on the
Company. No assurance can be given that the processes or products of the Company
or its licensors will not infringe patents or proprietary rights of others or
that any licenses required under any such patents or proprietary rights would be
made available on terms acceptable to the Company. If the Company does not
obtain such licenses, it could encounter delays in product introductions while
it attempts to design around such patents, or it could find that the
manufacture, sale or use of products requiring such licenses could be enjoined.
In addition, the Company could incur substantial costs in defending itself in
suits brought against the Company on such patents or in bringing suits to
protect the Company's patents against infringement. In particular, although the
Company intends to seek international coverage for all patents held by it, the
Company's rights to one currently issued patent covering technology used in its
Trilucent breast implant extends only to the United States. Therefore, the
Company is not currently able to prevent others from practicing such technology
disclosed in such patent outside of the United States.
The Company relies upon trade secret protection for certain unpatented
aspects of its proprietary technology. There can be no assurance that others
will not independently develop or otherwise acquire substantially equivalent
proprietary information or techniques, that others will not otherwise gain
access to the Company's proprietary technology or disclose such technology, or
that the Company can meaningfully protect its trade secrets.
The Company requires its employees and consultants to execute
appropriate confidentiality and proprietary information agreements upon the
commencement of employment or consulting relationship with the Company. These
agreements generally provide that all confidential information developed or made
known to the individual by the Company during the course of the individual's
relationship with the Company is to be kept confidential and not disclosed to
third parties, except in specific circumstances. The agreements generally
provide that all inventions conceived by the individual in the course of
rendering services to the Company shall be the exclusive property of the
Company; however, certain of the Company's agreements with consultants, who
typically are employed on a full-time basis by academic institutions or
hospitals, do not contain assignment of invention provisions. There can be no
assurance, however, that these agreements will provide meaningful protection or
adequate remedies for the Company in the event of unauthorized use, transfer or
disclosure of such information or inventions.
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The Company holds several registered trademarks in the United States
and a number of foreign countries and vigorously pursues the protection of its
trademarks and service marks, whether registered or not.
GOVERNMENT REGULATION
The Company's manufacturing activities and products sold in the United
States are subject to extensive and rigorous regulations by the FDA and by
comparable agencies in certain foreign countries where these products are
manufactured and/or distributed. The FDA regulates the manufacture, clinical
research and sale of medical devices, including labeling, advertising and
recordkeeping. Before a new device can be introduced into the market, generally
the manufacturer must obtain FDA approval of a PMA or clearance of a 510(k)
notification submission. 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 Class III device for which the FDA has called for PMAs. The PMA
application must contain the results of clinical trials, the results of all
relevant bench tests, laboratory and animal studies, a complete description of
the device and its components, and a detailed description of the methods,
facilities and controls used to manufacture the device. The FDA's review of a
PMA application generally takes one to two years from the date the PMA is
accepted for filing, but it may take significantly longer. The review time is
often significantly extended by FDA requests for additional information or
clarification of information already provided in the submission. Modifications
to a device that is the subject of an approved PMA, its labeling or
manufacturing process may require approval by the FDA of PMA supplements or new
PMAs. The PMA process 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.
If human clinical trials of a device are required, and the device
presents a "significant risk" to the patient, the sponsor of the trial (usually
the manufacturer or the distributor of the device) will have to file an
Investigational Device Exemption ("IDE") application prior to commencing human
clinical trials. The IDE application must be supported by data, typically
including the results of animal and laboratory testing. If the IDE application
is approved by the FDA and the study protocol is approved by one or more
appropriate Institutional Review Boards ("IRBs"), human clinical trials may
begin at a specific number of investigational sites with a specific number of
patients, as approved by the FDA. If the device presents a "nonsignificant risk"
to the patient, a sponsor may begin the clinical trial after obtaining approval
for the study by one or more appropriate IRBs without the need for FDA approval.
Sponsors of clinical trials are permitted to sell investigational devices
distributed in the course of the study provided that compensation does not
exceed recovery of the costs of manufacture, research, development and handling.
An IDE supplement must be submitted and approved by the FDA and appropriate
IRB(s) 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.
A 510(k) clearance will be granted if the submitted information
establishes that the proposed device is "substantially equivalent" to a legally
marketed Class I or Class II medical device or a Class III medical device for
which the FDA has not called for PMAs. The FDA recently has been requiring more
rigorous demonstration of substantial equivalence than in the past, including,
in some cases, requiring submission of clinical trial data. The FDA may
determine that the proposed device is not substantially equivalent to a
predicate device, or that additional information is needed before it is deemed
substantially equivalent to a predicate device or that additional information is
needed before a substantial equivalence determination can be made.
The Company's primary products are classified as Class III medical
devices, which require pre-market approval from the FDA. All of the Company's
products described in "Products, Markets and Methods of Distribution," other
than Trilucent implant and Hylaform gel, have been approved or cleared for sale
in the United States. Refinity skin solutions are cosmetic products. Medical
market applications that have not yet been approved by the FDA may only be
exported from the United States with the appropriate regulatory approval(s). The
Company has initiated Trilucent clinical trials in Europe, Canada and the United
States, which are expected to take several years and may involve multiple
product design changes and studies. Biomatrix submitted a PMA application in
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August 1995 for Hylaform gel and FDA approval of such product is currently
pending. There can be no assurance that the FDA will choose to designate future
products as medical devices rather than drugs, biologics or combination
products. Any such change in FDA designation would potentially lengthen and
increase the cost and complexity of the approval process.
The Company's clinical research program has been and remains subject to
the IDE regulations of the FDA. These regulations govern many important aspects
of the clinical investigation of medical products, including obtaining informed
consent from clinical subjects, securing the approval of an IRB and maintaining
required documentation relating to the conduct of the investigational study. In
addition, these regulations may require that the Company obtain approval from
the FDA prior to the commencement of clinical investigations of new products or
of expanded applications of commercially available products.
Compliance with the current Quality Systems Regulations ("QSR"),
formerly Good Manufacturing Practices, is necessary to receive FDA approval to
market new products and to continue to market current products. Manufacturers of
medical devices for marketing in the United States are required to adhere to
applicable regulations setting forth detailed QSR requirements, which include
testing, control and documentation requirements. Manufacturers must also comply
with Medical Device Reporting ("MDR") requirements that a company report to the
FDA any incident in which its product may have caused or contributed to a death
or serious injury, or in which its product malfunctioned and, if the malfunction
were to recur, would be likely to cause or contribute to death or serious
injury. Labeling and promotional activities are subject to scrutiny by the FDA
and, in certain circumstances, by the Federal Trade Commission. FDA enforcement
policy prohibits the marketing of approved medical devices for unapproved uses.
The Company is registered with the FDA as a manufacturer of medical
devices. The Company is subject to routine inspection by the FDA and certain
state agencies for compliance with QSR requirements, MDR requirements and other
applicable regulations. The Company's facilities and manufacturing processes
have been inspected periodically by the State of California and other agencies,
and remain subject to audit from time to time. The Company believes that it is
in substantial compliance with all applicable federal and state regulations.
Nevertheless, there can be no assurance that the FDA or a state agency will
agree with the Company's position, or that its QSR compliance will not be
challenged at some subsequent point in time. Enforcement of QSR has increased
significantly in the last several years and the FDA has stated publicly that
compliance will be scrutinized more strictly. In the event that the Company is
determined to be in noncompliance with FDA regulations, to the extent that the
Company is unable to convince the FDA or state agency of the adequacy of its
compliance, the FDA or state agency has the power to assert penalties or
remedies, including injunction or temporary suspension of shipment until
compliance is achieved. Noncompliance may also lead to a recall of product. Such
penalties or remedies could have a materially adverse effect on the Company's
business, financial condition and results of operations.
The continuing trend of more stringent FDA oversight in product
clearance and enforcement activities has caused medical device manufacturers to
experience longer approval cycles, more uncertainty, greater risk and higher
expenses. Failure to obtain, or delays in obtaining, the required regulatory
approvals for new products, including the Trilucent implant, could adversely
affect the Company, as could product recalls. In addition, there can be no
assurance that the FDA will give approval to the Company to market its current
products for broader or different applications, or that it will grant approval
with respect to separate product applications which represent extensions of the
basic collagen technology, or that existing approvals will not be withdrawn.
Further, changes in governmental reimbursement systems, pursuant to which
hospitals and physicians are reimbursed for medical procedures at a fixed rate
according to diagnosis-related groups or other reimbursements, could have an
economic impact on the purchase and use of medical devices. A material decrease
in current reimbursement levels for treatment of ISD could have a material
adverse effect on the Company's business.
In the United States, health care providers that purchase medical
devices, such as Contigen implant, 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 the procedure in which the
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device is used. Such reimbursement is typically made at a fixed rate. Changes in
reimbursement policies could have an economic impact on the purchase and use of
medical devices. Although the Company's aesthetic products are not generally
subject to reimbursement, a material decrease in current reimbursement levels
for treatment of ISD could have a material adverse effect on sales of Contigen
implant and on the Company's business.
Sales of medical devices outside the United States are subject to
foreign regulatory requirements that vary widely from country to country. The
time required to obtain clearance required by foreign countries may be longer or
shorter than that required for FDA clearance, and requirements for such foreign
clearances may differ significantly from FDA requirements. Some countries have
historically permitted human studies earlier in the product development cycle
than regulations in the United States permit. Other countries, such as Japan,
have requirements similar to those of the United States. This disparity in the
regulation of medical devices may result in more rapid product clearance in
certain countries than in others.
The primary regulatory environment in Europe is that of the EU which
consists of 15 countries encompassing most of the major countries in Europe.
Certain other countries, such as Switzerland, have voluntarily adopted laws and
regulations that mirror those of the EU with respect to medical devices. The EU
has adopted numerous directives and standards regulating the design,
manufacture, clinical trial, labeling, and adverse event reporting for medical
devices. The principal directives prescribing the laws and regulations
pertaining to medical devices in the EU are found in the Medical Device
Directive, 93/42/EEC.
Devices that comply with requirements of a relevant directive will be
entitled to bear CE conformity marking, indicating that the device conforms with
the essential requirements of the applicable directive and, accordingly, can be
commercially distributed throughout the EU. The method of assessing conformity
varies depending on the class of the product, but normally involves a
combination of self-assessment by the manufacturer and a third-party assessment
by a Notified Body. This third-party assessment may consist of an audit of the
manufacturer's quality system and specific testing of the manufacturer's
products. An assessment by a Notified Body in one country within the EU is
required in order for a manufacturer to commercially distribute the product
throughout the EU. Medical products must obtain by mid-1998 the right to affix
the CE mark. Failure to obtain the right to affix the CE mark will prohibit the
Company from selling its products in member countries in the EU. There can be no
assurance that the Company will be successful in meeting the European quality
standards or other certification requirements. The Company's Zyderm implants and
Zyplast implant received the CE mark on June 23, 1995, Contigen implant received
the CE mark on October 26, 1995, Trilucent implant received the CE mark on
December 22, 1994 and Hylaform gel received the CE mark on November 2, 1995. CE
Mark for SoftForm is pending.
While no additional pre-market approvals for individual EU countries
are required prior to the marketing of a device bearing the CE mark, practical
complications with respect to market introduction may occur. For example
differences among countries have arisen with regard to labeling requirements.
Unapproved devices subject to the PMA requirements generally must
receive prior FDA export approval unless they are approved for use by any member
country of the EU and certain other countries, including Australia, Canada,
Israel, Japan, New Zealand, Switzerland and South Africa, in which case they can
be exported to any country without prior FDA approval upon meeting certain
requirements. Exports of products subject to the 510(k) notification
requirements, but not yet cleared to market, are permitted without FDA export
approval provided certain requirements are met. However, the Company must, among
other things, notify the FDA and meet the importing country's requirements.
There can be no assurance that the Company will receive FDA export approval when
such approval is necessary, or that countries to which the devices are to be
exported will approve the devices for import. Failure of the Company to receive
import approval from foreign countries, or to obtain Certificates for Products
for Export when required, meet FDA's export requirements or obtain FDA export
approval when required to do so, could have a material adverse effect on the
Company's business, financial condition and results of operations.
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EMPLOYEES
As of September 1, 1997, the Company employed 389 employees, of whom 70
were engaged in research and development, 108 of whom were engaged in sales and
marketing, 141 of whom were involved in production and quality control and 70 of
whom were engaged in finance and administration. None of the Company's employees
is covered by a collective bargaining agreement. The Company also has a Board of
Scientific Advisors which currently consists of five scientists, each of whom is
prominent in his or her field. The Company has a consulting agreement with each
scientific advisor which ranges from two to three years.
EXECUTIVE OFFICERS
The Company has corporate officers who are not executive officers. As
of September 1, 1997, the executive officers of the Company, who are elected by
and serve at the discretion of the Board of Directors, are as follows:
<TABLE>
<CAPTION>
OFFICER
NAME AGE POSITION SINCE
- ------------------------- --- ----------------------------------------------------------- -------
<S> <C> <C> <C>
Gary S. Petersmeyer 50 President and Chief Executive Officer 1995
Deborah Webster Berard 38 Vice President, Human Resources and Administrative Services 1991
Jean-Pierre Capdevielle 47 Vice President and Managing Director, International 1997
David J. Foster 40 Senior Vice President and General Manager, Collagen 1990
Technologies Group
Charlene Andros Friedman 40 General Counsel and Assistant Secretary 1996
Norman L. Halleen 44 Vice President, Finance and Chief Financial Officer 1997
Reinhard Koenig, M.D. 37 Vice President, Medical Affairs 1996
Michael I. Levitt 46 Vice President, Operations 1994
Jane A. Moffitt 44 Vice President, Worldwide Regulatory Affairs 1997
Rebecca A. Stirn 44 Vice President, Global Marketing Strategy 1996
</TABLE>
Mr. Petersmeyer joined the Company as President, Chief Operating
Officer and Director in February 1995. In February 1997, Mr. Petersmeyer became
the Company's Chief Executive Officer. Prior to joining the Company, Mr.
Petersmeyer was employed by Syntex Corporation, a manufacturer of pharmaceutical
products, from 1991 to January 1995, where he served as Vice President of
Managed Health Care from March 1993 to January 1995, as well as serving at
various times as National Sales Director and Director of Corporate Development.
From 1986 to 1990, he served as President and Chief Operating Officer of Beta
Phase, Inc., a medical device manufacturer, and from 1982 to 1986, he was the
Executive Vice President and General Manager, Ophthalmic Products Division, of
CooperVision, Inc., a manufacturer and distributor of ophthalmic products.
Ms. Berard joined the Company as a member of the Finance staff in
February 1982 and served in various Human Resource positions. In 1991, Ms.
Berard was promoted to Vice President, Human Resources and Administrative
Services.
Mr. Capdevielle joined the Company as Vice President and Managing
Director, International in February 1997. Prior to joining the Company, Mr.
Capdevielle was employed by SOFAMOR DANEK Group from March 1993 to February
1997, where he served as Executive Vice President for International Operations.
From 1989 to February 1993, Mr. Capdevielle served as Director of Continental
Europe and President of German, French and Spanish Operations for Smith & Nephew
Richards.
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<PAGE> 19
Mr. Foster joined the Company as Financial Analyst in November 1984 and
served in various positions in the Company. In 1992, Mr. Foster was appointed
Chief Financial Officer. In February 1997, Mr. Foster was appointed Senior Vice
President and General Manager, Collagen Technologies Group. From 1979 to 1984,
Mr. Foster was employed by Brown, Vence and Associates, an energy and
environmental consulting firm, as Engineering Project Manager. In addition, Mr.
Foster serves on the Board of Directors of Pharming, B.V., CollOptics, Inc. and
Innovasive Devices, Inc.
Ms. Friedman joined the Company as General Counsel and Assistant
Secretary in February 1996. Prior to joining the Company, Ms. Friedman practiced
law for 13 years, representing corporate and individual clients in the
litigation of product liability, commercial and general liability cases. Prior
to joining the Company, Ms. Friedman was employed by the law firm of Lillick &
Charles in San Francisco. From July 1993 to May 1995, she practiced with Warner
& Stackpole in Boston, Massachusetts. From September 1983 through June 1993, Ms.
Friedman practiced at Murphy, DeMarco & O'Neill, Boston. She is a member of the
California and Massachusetts bars.
Mr. Halleen joined Collagen as Vice President, Finance and Chief
Financial Officer in February 1997. From July 1989 to January 1997, Mr. Halleen
ran his own business as a finance consultant in Hong Kong. In addition, from
October 1993 through June 1996, he served as Chief Financial Officer of the
Dutra Group, a privately held company in the construction/marine dredging
business. In January 1997, subsequent to Mr. Halleen's departure from the Dutra
Group, the Dutra Group filed a petition for reorganization under Chapter 11 with
the United States Bankruptcy Court, Northern District of California. Prior to
July 1989, he was employed for ten years with Syntex Corporation, serving in
various positions, including Regional Director of Finance for the Asia/Pacific
region.
Dr. Koenig joined the Company in October 1996 as Vice President,
Medical Affairs. From May 1995 until October 1996, he was employed by Genentech,
Inc., a manufacturer of biotechnology products, as the Director, Medical
Information and Drug Experience. From January 1989 to May 1995, Dr.Koenig was
employed by Boehringer Mannheim Therapeutics in Germany and the United States in
various positions in medical affairs and clinical research, including the
position of Director, Medical Affairs.
Mr. Levitt joined the Company in July 1994 as Vice President,
Operations. Prior to joining the Company, Mr. Levitt was employed by Eli Lilly
and Company, a manufacturer of pharmaceutical products. During his 18 years with
Eli Lilly and Company, Mr. Levitt held positions in sales, research, human
resources and operations. Mr. Levitt's last position with Eli Lilly and Company
was Director of Pharmaceutical Operations.
Ms. Moffitt joined the Company as Vice President, Worldwide Regulatory
Affairs in January 1997. From August 1996 to January 1997, Ms. Moffitt consulted
for several corporations. Prior to joining the Company, she was employed by
Amsco International as Vice President Regulatory Affairs/Quality Assurance from
January 1993 through July 1996. From October 1982 to December 1992, Ms. Moffitt
was employed by Allergan, Inc. where she held the positions of Assistant General
Counsel and Director, Regulatory Affairs-Allergan Pharmaceuticals.
Ms. Stirn joined the Company as Vice President, Global Marketing
Strategy in January 1996. From March 1995 to December 1995, prior to joining the
Company, Ms. Stirn provided consulting services to the Company. From January
1988 to February 1995, Ms. Stirn consulted and served on the board of directors
for several non-profit institutions. From September 1986 to December 1987, Ms.
Stirn served as Vice President of Marketing at CEMAX, Inc., a company engaged in
three-dimensional medical imaging and computer-aided design of custom implants.
From June 1981 to October 1985, Ms. Stirn was employed by CooperVision, Inc.
While employed by CooperVision, Inc., Ms. Stirn served as Vice President of
Marketing, Optics Division and in various other marketing positions.
Page 19
<PAGE> 20
ITEM 2. PROPERTIES
The Company's principal executive, marketing, and research activities
presently are located in three buildings in Palo Alto, California. The Company
has leased these buildings under various leases that expire between June 30,
1999 and November 30, 2004 and contain renewal options. The Company leases a
total of approximately 77,000 square feet, of which the Company subleases 22,000
square feet to certain of its affiliate companies. The Company's international
facilities, which amount to approximately 20,000 square feet in total, are
leased under various leases which contain renewal options.
In 1989, the Company completed a sale-leaseback transaction relating to
its 50,000 square foot manufacturing facility in Fremont, California. The
facility lease term extends for fifteen years with four five-year renewal
options. The Company commenced commercial manufacturing in this facility in
November 1990. In addition, the Company leases approximately 11,000 square feet
of warehouse space in Fremont, California.
LipoMatrix's administrative, research and development, manufacturing
and quality assurance functions are located in a 20,000 square foot facility in
Neuchatel, Switzerland. The facility is leased under various leases, which
expire on June 30, 2001 and contain renewal options.
The Company believes that its facilities are adequate to meet its
requirements for at least the next twelve months.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal actions arising in the
ordinary course of business, the majority of which involve product liability
claims alleging personal injuries as a result of injectable products. While the
outcome of such matters is currently not determinable, it is management's
opinion that these matters, including the matters discussed below, will not have
a material adverse effect on the Company's business, results of operations or
financial condition.
The Company faces an inherent business risk of exposure to product
liability claims alleging that the use of the Company's technology or products
has resulted in adverse effects. Such risks will exist even with respect to
those products that have received or in the future may receive regulatory
approval for commercial sale. There can be no assurance that the Company will
avoid significant product liability claims and negative publicity in the future.
Furthermore, there can be no assurance that present insurance coverage will be
adequate or that adequate insurance coverage will remain available at acceptable
costs, if at all, or that a product liability claim or recall would not
adversely affect the future business or financial condition of the Company. It
is possible that adverse product liability actions could negatively affect the
Company's ability to obtain and maintain regulatory approval for its products.
In May 1997, the Company settled its lawsuit with Matrix
Pharmaceutical, Inc. ("Matrix"), which had been pending since December 1994. The
lawsuit involved the Company's claims of trade secret misappropriation against
Matrix and two former Collagen Corporation employees hired by Matrix in 1992, as
well as cross-complaints against the Company by Matrix and the two employees for
defamation and violation of state unfair competition law. In exchange for
certain consideration, Matrix has agreed that for a period of five years it will
not manufacture or sell products that are directly competitive with the
Company's current core products. The Company has granted Matrix a nonexclusive
license to certain of the Company's intellectual property, for certain
nonmonetary consideration. The lawsuit was settled and dismissed with prejudice.
All claims by and against all parties have been released.
ITEM 4. RESULTS OF VOTES BY SECURITY HOLDERS
No matters were submitted to a vote of stockholders of Collagen
Corporation during its fourth fiscal quarter ended June 30, 1997.
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<PAGE> 21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
MARKET FOR COMMON STOCK
The Company's Common Stock is traded on The Nasdaq Stock Market under
the symbol CGEN. The following table presents the high and low sale prices for
the Company's Common Stock for each fiscal quarter for the fiscal years ended
June 30, 1997 and 1996, as reported by The Nasdaq Stock Market Summary of
Activity(TM).
<TABLE>
<CAPTION>
Fiscal year ended June 30 1997 1996
-------------------- --------------------
Quarter ended High Low High Low
------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
September 30 $ 20.25 $ 16.50 $ 21.50 $ 15.00
December 31 21.50 18.00 21.25 17.00
March 31 26.00 18.25 23.50 19.25
June 30 19.75 13.75 22.75 18.75
</TABLE>
HOLDERS OF RECORD
At September 5, 1997 there were approximately 851 holders of record of
the Company's Common Stock.
DIVIDENDS
The Company declared a cash dividend of $.10 per share on its common
stock payable to stockholders of record on June 30, 1997, in addition to a $.10
per share dividend declared and paid earlier in fiscal 1997. In fiscal 1996, the
Company declared a cash dividend of $.10 per share on its common stock payable
to stockholders of record on June 14, 1996, in addition to a $.075 per share
dividend declared and paid earlier in fiscal 1996. While the Company does not
expect to pay dividends in the near future, the Board of Directors will
re-evaluate the Company's dividend policy on a semi-annual basis.
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<PAGE> 22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended June 30, 1997(1) 1996(1) 1995(1) 1994(1) 1993(1)
- ------------------------------------------------- --------- --------- --------- --------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Revenues $ 71,812 $ 70,730 $ 72,560 $ 65,552 $ 49,743
Research and development expenses 18,840 12,170 9,943 9,366 8,767
Operating income(loss) (10,912) (17,592) 11,854 8,607 (3,859)
Gain from investments, net(1) 24,458 82,093 5,110 -- 20,323
Net income 7,371 26,652 8,760 4,920 8,743
Net income per share $ 0.83 $ 2.94 $ 0.93 $ 0.50 $ 0.85
Shares used in calculating income(loss) per
share information 8,930 9,075 9,460 9,896 10,267
FINANCIAL POSITION
Cash, cash equivalents and short-term investments $ 23,598 $ 25,367 $ 9,384 $ 12,736 $ 19,630
Total assets 184,911 163,007 76,906 74,505 76,206
Long-term obligations excluding minority interest 39,243 31,118 9,972 9,507 8,784
Total stockholders' equity 119,897(2) 103,001(2) 47,920 49,082 54,936
Book value per share at June 30 13.61(2) 11.74(2) 5.31 5.21 5.64
ADDITIONAL INFORMATION
Repurchase of common stock $ 2,546 $ 5,510 $ 11,282 $ 13,847 $ 7,581
Sales per employee 185 185 225 195 157
Net income(loss) per employee 19 72 28 15 28
Cash dividends declared per share 0.20 0.18 0.15 0.10 --
Total employees 389 371 318 336 316
</TABLE>
(1) The first five months in fiscal 1996 and 1995, 1994 and 1993 financial
information is presented with Target Therapeutics, Inc. ("Target")
accounted for under the equity method. Gains from sales of portions of the
Company's investment in Target contributed $9.1 million, $85.8 million,
$6.0 million, and $20.3 million, and $10.2 million to fiscal years 1997,
1996, 1995, and 1993 pre-tax earnings, respectively.
(2) Includes effect of adopting Statement of Financial Accounting Standard No.
115 ("SFAS #115"). The incremental book value per share as a result of
adopting SFAS #115 was approximately $1.42 and $3.94 in fiscal years 1997
and 1996, respectively, and the incremental long-term obligations excluding
minority interest were $32.5 million and $23.9 million in fiscal years 1997
and 1996, respectively.
(3) Includes in-process research and development charges of $17.8 million.
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<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE COMPANY
Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements, the accuracy of which
is necessarily subject to risks and uncertainties. Actual results may differ
significantly from the results discussed in the forward-looking statements and
may be affected by, among other things, uncertainties regarding timing of
regulatory approvals, new product introductions and market acceptance of new
products, product development cycles, results of clinical trials, potential
unfavorable publicity regarding the Company or its products, possible reversals
of sales trends and introduction of competitive products, as well as those
factors set forth under the heading "Factors That May Affect Future Results of
Operations."
Collagen Corporation (the "Company") designs, develops, manufactures
and markets on a worldwide basis biomedical devices for the treatment of
defective, diseased, traumatized or aging human tissues. The Company's core
products are used principally in aesthetic and reconstructive applications, the
treatment of stress urinary incontinence, and bone repair. The Company markets
its aesthetic and reconstructive products directly and through a network of
international distributors and its stress urinary incontinence and bone repair
products through marketing partners.
FORMATION OF AESTHETIC TECHNOLOGIES CORPORATION
The Board of Directors and management have reviewed various strategic
alternatives to improve the market's recognition of the intrinsic value of the
Company. As a result, the Company formally separated the Aesthetic
Technologies(TM) Group, its aesthetic and reconstructive surgery business, and
formed a new company, Aesthetic Technologies Corporation ("ATC") in June 1997.
ATC is a wholly-owned subsidiary of the Company and was incorporated in the
state of Delaware. ATC will focus on expanding its aesthetic and reconstructive
surgery business with new product offerings such as Hylaform(R) viscoelastic
gel, SoftForm(TM) facial implant, and Refinity(TM) Medical Skin Solutions. The
management and the Board of Directors of ATC and the Company will continue to
evaluate strategies for ATC, which may include a public offering, a "spin-off"
or a "split-off," among other alternatives. The timing and nature of these
actions will depend upon tax, legal, market and other considerations. The
formation of ATC does not affect the presentation of the Company's financial
position and results of operations for the fiscal year ended June 30, 1997.
COLLAGEN TECHNOLOGIES GROUP
The Company's other division, Collagen Technologies Group ("CTG"), will
continue to concentrate on research and development projects for recombinant
human collagen, the collagen polymer programs to develop biomaterials with
enhanced persistence, various orthopaedic programs, and supporting Cohesion
Corporation ("Cohesion"), an affiliate of the Company, which is developing new
biomaterials to be used as hemostatic agents, tissue sealants or adhesion
prevention barriers for surgical applications. Cohesion Corporation's first
product candidate, sprayable atraumatic CollaSeal(TM) Hemostatic Device,
completed a successful feasibility clinical trial in the United States during
the spring of 1997. This early clinical study focused on the cessation of
bleeding at donor graft sites. Cohesion is preparing to launch expanded clinical
trials in Europe to treat diffuse bleeding in major cardiovascular surgery.
Collagen's assessment of the size of the worldwide market for a sprayable
hemostatic device for the surgical market is approximately $200 million and
growing at a rate of up to 25 percent per annum. The Company believes Cohesion's
technology will offer a cost advantage, be easier to use, and stop bleeding more
quickly than products currently available. CTG also sells Collagraft(R) bone
graft matrix and Collagraft(R) bone graft matrix strip ("Collagraft bone graft
products") to the Company's marketing partner, Zimmer, Inc. ("Zimmer"), a
division of Bristol Myers-
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<PAGE> 24
Squibb Company. In addition, CTG holds investments in and product development
and supply agreements with a number of privately and publicly held companies.
INVESTMENTS, ACQUISITIONS AND LICENSING AGREEMENTS
In August 1995, as part of the Company's strategy to expand its
marketing franchise in aesthetic and reconstructive technology, the Company
entered into a stock purchase agreement with certain stockholders of LipoMatrix,
Incorporated of Neuchatel, Switzerland ("LipoMatrix"), a developer and the
manufacturer of the Trilucent(TM) breast implant ("Trilucent implant"), to
purchase approximately 50% of the outstanding securities of LipoMatrix on a
fully diluted basis. The Company also entered into a stock purchase agreement
with certain of LipoMatrix's management and employees to purchase the remaining
10% of the outstanding securities on a fully diluted basis. This purchase
increased the Company's ownership interest in LipoMatrix from approximately 40%
to 100% of the outstanding securities on a fully diluted basis. The acquisition
of LipoMatrix, which was completed in January 1996, was accounted for as a
purchase and had an aggregate purchase price of approximately $23.7 million (See
Note 7 of Notes to Consolidated Financial Statements).
The Trilucent implant is currently being sold in 13 European countries,
but is not being marketed in the United States. In late fiscal 1997, the Company
initiated design modifications to the Trilucent implant intended to address
United States physician and patient preferences. In addition, the Company began
to pursue strategies to reduce the manufacturing costs of the Trilucent implant,
including potentially out-sourcing the manufacture of the implant shells. As a
result of these two strategic issues, the Company has stopped enrolling patients
in its United States clinical trial program in support of United States Food and
Drug Administration ("FDA") approval of the Trilucent implant while the Company
investigates alternative measures to lower costs, and designs and develops
product line extensions which may be compatible with inflatable implant
technology. The Company is currently following 450 patients previously enrolled
in its European, United States and Canadian clinical trials. There can be no
assurance that clinical trials will resume.
In October 1995, the Company purchased approximately 844,000 shares of
common stock, currently representing approximately 9% of Innovasive Devices,
Inc. of Marlborough, Massachusetts ("Innovasive Devices") for $4.1 million and
entered into a collaborative product development agreement (the "Development
Agreement"). Innovasive Devices develops, manufactures, and markets tissue and
bone reattachment systems which are particularly relevant to the sports medicine
and arthroscopy segments of the orthopaedic surgery market. The Company and
Innovasive Devices are collaborating to develop certain resorbable mechanical
tissue-fixation devices utilizing collagen-based biomaterials for applications
in orthopaedic tissue repairs. Pursuant to the terms of the Development
Agreement, the Company is performing development activities in accordance with a
project plan agreed upon by the Company and Innovasive Devices and Innovasive
Devices is reimbursing the Company for such activities in accordance with the
project budget. Accordingly, over the next several years, the collaboration will
require the Company's expertise with collagen-based biomaterials and a small
percentage of the Company's research and development ("R&D") expenditures. In
the event that marketable products are developed as a result of this
collaboration, the Company will have the right to distribute such products for
plastic surgery and dermatology applications and also will have rights (but no
obligation) to manufacture such products.
Seeking to capitalize on recent technical successes in expressing
recombinant collagen in mouse milk, in February 1996, the Company made an
additional equity investment of approximately $4.5 million in Pharming, B.V. of
The Netherlands ("Pharming"), bringing the Company's ownership percentage in
Pharming to approximately 12%. At June 30, 1997, the Company's ownership
position in Pharming was approximately 11%. Pharming is dedicated to the
development and worldwide commercialization of human health care products
produced in transgenic animals. The Company and Pharming will attempt to produce
collagen in the milk of transgenic cattle.
The Company increased its ownership position in Cohesion Corporation of
Palo Alto, California ("Cohesion") from approximately 40% to 81% on May 29,
1996. The Company expects that it will increase its ownership position in
Cohesion during fiscal 1998. Cohesion is a privately-
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<PAGE> 25
held company developing proprietary products for hemostasis and tissue adhesion,
biosealants and adhesion prevention barriers for surgical applications. In
connection with the Company's May 1996 investment in Cohesion, $3.0 million of
the purchase price was allocated to in-process research and development, which
was expensed at the time of the investment. The Company will provide minimal R&D
support to Cohesion as needed.
In June 1996, the Company entered into a distribution agreement with
Biomatrix, Inc. of Ridgefield, New Jersey ("Biomatrix") to market a new
injectable product, Hylaform(R) viscoelastic gel ("Hylaform gel"), for facial
wrinkles. The Company paid $5.0 million for the distribution rights to market
Hylaform gel outside of the United States and has the option to purchase the
United States distribution rights in the future. Biomatrix received CE mark
approval for Hylaform gel in December 1995 and the Company launched Hylaform gel
in several international markets during fiscal 1997. The Company is required to
pay a transfer price for Hylaform gel shipments, as well as a royalty on all of
the Company's facial injectable product sales in the countries where Hylaform
gel is sold.
In June 1996, the Company entered into an exclusive worldwide
distribution and licensing agreement with Tissue Technologies, Inc. of San
Francisco, California ("Tissue Technologies") to market SoftForm(TM) facial
implant ("SoftForm implant") for subdermal reconstruction and augmentation of
soft tissue. The product received marketing clearance from the FDA in April 1996
under a 510(k) application and the Company introduced Softform implant to a
panel of six physician advisors in December 1996. The Company expects to launch
SoftForm implant in the United States in late 1997. The product is currently
approved for usage in Canada and an application for CE mark is pending in the
European Union ("EU"). (For disclosure with respect to future required minimum
purchases, see Note 8 of Notes to Consolidated Financial Statements.)
In September 1996, the Company entered into an exclusive worldwide
distribution and license agreement with Cosmederm Technologies, Inc. of La
Jolla, California ("Cosmederm") to develop Refinity(TM) Medical Skin Solutions
("Refinity skin solutions"), a line of alpha hydroxy acid-based skin care
products containing a proprietary anti-irritant licensed from Cosmederm. The
Company is required to pay Cosmederm a transfer price for product shipments, as
well as royalties on sales of Refinity skin solutions. The Company also
purchased preferred stock representing approximately a 7% ownership interest in
Cosmederm. In addition, the Company has obtained a non-exclusive license from
Tristrata, Inc. of Princeton, New Jersey ("Tristrata") for the use of certain
alpha hydroxy acids in the Refinity skin solutions product line and is required
to pay royalties on sales to Tristrata. The Company currently plans to introduce
Refinity skin solutions in the United States and selected international markets
in 1998. (For disclosure with respect to future required minimum purchases, see
Note 8 of Notes to Consolidated Financial Statements.)
In June 1997, the Company sold its investment in Prograft Medical, Inc.
of Palo Alto, California ("Prograft"), a privately held affiliate of the
Company, to W.L. Gore and Associates, Inc. and recorded a pre-tax gain of $15.4
million. Prograft was formed in July 1993 by the Company, Target Therapeutics,
Inc. ("Target") and Celtrix Pharmaceuticals, Inc. to develop vascular
prostheses, including stents, grafts, and stent-grafts for the treatment of
diseased and damaged blood vessels.
In addition to internal R&D and joint product development arrangements,
the Company has an active program for developing new products through affiliated
companies in which the Company makes equity and debt investments. The Company
believes the formation of new companies allows each to focus its technology on
select market segments to bring products to market efficiently and to expand its
proprietary knowledge.
SETTLEMENT OF LAWSUIT WITH MATRIX PHARMACEUTICAL, INC.
In May 1997, the Company settled its lawsuit with Matrix
Pharmaceutical, Inc. ("Matrix"), which had been pending since December 1994. The
lawsuit involved the Company's claims of trade
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<PAGE> 26
secret misappropriation against Matrix and two former Collagen Corporation
employees hired by Matrix in 1992, as well as cross-complaints against the
Company by Matrix and the two employees for defamation and violation of state
unfair competition law.
In exchange for certain consideration, Matrix has agreed that for a
period of five years it will not manufacture or sell products that are directly
competitive with the Company's current core products. The Company has granted
Matrix a nonexclusive license to certain of the Company's intellectual property,
for certain nonmonetary consideration. The lawsuit was settled and dismissed
with prejudice. All claims by and against all parties have been released.
RESULTS OF OPERATIONS
The following table shows, for the periods indicated, the percentage
relationship to product sales of certain items in the Consolidated Statements of
Income.
<TABLE>
<CAPTION>
Percent of Product Sales
----------------------------------------
Years ended June 30, 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Product sales 100% 100% 100%
Other revenue -- 3% 1%
-------- -------- --------
Costs and expenses:
Cost of sales 28% 28% 26%
Selling, general and administrative 61% 57% 45%
Research and development 26% 18% 14%
Purchased in-process research -- 26% --
and development
-------- -------- --------
Income (loss) from operations (15)% (26)% 17%
-------- -------- --------
</TABLE>
PRODUCT SALES. Product sales of $71.8 million in fiscal 1997 increased $3.1
million or 4% versus fiscal 1996 sales of $68.7 million, which in turn decreased
$2.9 million or 4% from fiscal 1995 sales of $71.6 million. The $3.1 million
increase in fiscal 1997 over fiscal 1996 was due primarily to an increase in
revenue from direct sales of Contigen(R) implant ("Contigen implant") to
physician customers by C.R. Bard, Inc. ("Bard"), the Company's marketing partner
for Contigen implant, an increase in international sales of plastic surgery and
dermatological products (including injectable collagen products, Trilucent
implant and Hylaform gel), and an increase in domestic sales of plastic surgery
and dermatological products (including injectable collagen products), partially
offset by a decrease in sales of Collagraft bone graft products to the Company's
marketing partner, Zimmer. The $2.9 million decrease in fiscal 1996 over fiscal
1995 was due primarily to a decrease in shipments of Contigen implant, partially
offset by a $7.4 million increase in worldwide sales of plastic surgery and
dermatological products.
Worldwide sales of plastic surgery and dermatological products in
fiscal 1997 were $61.4 million or 4% higher than fiscal 1996 sales of $58.9
million, compared to a 14% increase in fiscal 1996 from fiscal 1995 sales of
$51.5 million. The $2.5 million increase in worldwide sales of plastic surgery
and dermatological products in fiscal 1997 resulted from an 8% increase in units
sold, partially offset by decreases in average sales prices. The Company
believes that the improved unit sales performance in fiscal 1997 over fiscal
1996 resulted from the implementation of marketing programs in the United States
designed to increase average treatment volume per patient for injectable
collagen products and to attract and retain new and existing patients, the
addition of Hylaform gel, which was launched in Europe in November 1996, and
strong distributor sales. The Company believes that the sales growth in its
plastic surgery and dermatological products in fiscal 1997 resulted from
increased demand by consumers for a wide variety of aesthetic procedures and
continued physician interest in cosmetic procedures not reimbursed by
third-party payers. The $7.4 million increase in worldwide sales of plastic
surgery and dermatological products in fiscal 1996
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<PAGE> 27
over fiscal 1995 resulted from a 17% increase in units sold, partially offset by
a decrease of 6% in average sales prices. The Company believes that the increase
in unit sales in fiscal 1996 over fiscal 1995 resulted from strong distributor
sales, especially in Japan, successful international marketing and public
relations efforts by the Company's subsidiaries, the launch of new syringe
configurations, and continued improvement of economic conditions in Europe. The
implementation of United States marketing programs designed to both increase
average treatment volume per patient and to attract and retain new and existing
patients, favorably impacted overall unit sales in fiscal 1996. Exchange rates
unfavorably impacted international sales in United States dollars by $1.1
million in fiscal 1997 and favorably affected international sales by $457,000
and $1.6 million in fiscal 1996 and fiscal 1995, respectively. The Company
anticipates continued growth in worldwide sales of plastic surgery and
dermatological products in United States dollars during fiscal 1998.
Revenue recorded from Contigen implant sales was $7.9 million in fiscal
1997 or 27% higher than fiscal 1996 sales of $6.2 million, which in turn
decreased $10.3 million or 62% from fiscal 1995 sales of $16.5 million. Revenue
recorded from Contigen implant sales over the three year period included:
<TABLE>
<CAPTION>
Years ended June 30, 1997 1996 1995
- ------------------------------------------------------ -------- -------- --------
(In millions)
<S> <C> <C> <C>
Shipments of Contigen implant to Bard $ 1.2 $ 0.3 $ 13.4
Income from Bard's direct sales to physician customers 6.7 5.9 3.1
-------- -------- --------
$ 7.9 $ 6.2 $ 16.5
======== ======== ========
</TABLE>
The $1.7 million increase in fiscal 1997 over fiscal 1996 was due to the
resumption of shipments of Contigen implant to Bard during the fourth quarter of
fiscal 1997 in accordance with the Company's sales agreement with Bard. The
$10.3 million decrease in fiscal 1996 from fiscal 1995 was due to minimal
shipments made to Bard as a result of significant inventory levels of Contigen
implant held by Bard at the end of fiscal 1995.
In fiscal 1997, the Health Care Financing Administration ("HCFA") made
several favorable changes to the rules under which an incontinence patient can
be reimbursed by Medicare for treatment with Contigen implant. HCFA also raised
the reimbursement amount to physicians for each Contigen implant syringe
administered. Because HCFA policies are generally adopted by private insurance
companies, these changes may have a positive effect on coverage by private
insurers. The Company believes that the outcome of these changes will allow more
patients to have treatment with Contigen implant paid for by their insurer,
resulting in increased revenues recorded in the future by the Company from
Contigen implant sales. In addition, the Company expects that revenues from
Contigen implant sales in fiscal 1998 will increase as a result of the
resumption of shipments of Contigen implant to Bard.
Sales of Collagraft bone graft products in fiscal 1997 were $1.9
million or 38% lower than fiscal 1996 sales of $3.1 million, compared to a
$100,000 increase in fiscal 1996 from fiscal 1995 sales of $3.0 million. The
$1.2 million decrease in fiscal 1997 over fiscal 1996 was due to lower sales by
Zimmer and a consequent decrease in shipments from the Company. The Company
expects sales and shipments of Collagraft bone graft products for fiscal 1998 to
approximate the same level as fiscal 1997.
A number of uncertainties exist surrounding the marketing and
distribution of Contigen implant and Collagraft bone graft products. The
Company's primary means of distribution for these products is through third
party firms - Bard, in the case of Contigen implant, and Zimmer, in the case of
Collagraft bone graft products. The Company's business and financial results
could be adversely affected in the event that either or both of these parties
are unable to market the products effectively, anticipate customer demand
accurately, or effectively manage industry-wide pricing and cost containment
pressures in health care.
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OTHER REVENUE. Other revenue in fiscal years 1996 and 1995 consisted of
milestone payments of $2.0 million and $1.0 million, respectively, from Bard in
accordance with the Company's agreement with Bard. The final milestone payment
of $2.0 million was paid to the Company on September 30, 1995.
COST OF SALES. Cost of sales as a percentage of product sales averaged 28% in
both fiscal years 1997 and 1996, due primarily to a lower per unit cost in
fiscal 1997 offset by an overall increase in units shipped. Cost of sales as a
percentage of product sales averaged 26% in fiscal 1995. The increase in fiscal
1996 over fiscal 1995 in cost of sales as a percentage of product sales was due
primarily to the inclusion of start-up manufacturing costs for Trilucent
implant. Unit cost of manufacturing collagen-based injectable products was
considerably higher in fiscal 1996 than in fiscal 1995 due to decreased
production volumes, primarily for Contigen implant. Due to the high fixed costs
of the Company's manufacturing facility, unit cost of manufacturing
collagen-based injectable products is expected to remain highly dependent on the
level of output at the Company's manufacturing facility and accordingly, on the
demand for collagen-based injectable products. In addition, cost of sales as a
percentage of product sales is contingent on the product mix of future sales,
for which demand and pricing characteristics may vary. The Company anticipates
that cost of sales as a percentage of sales will increase slightly as a result
of introducing new product line extensions, with higher costs per unit,
partially offset by lower manufacturing costs per unit for collagen-based
injectable products.
SG&A. Selling, general and administrative ("SG&A") expenses totaled $43.6
million in fiscal 1997, $39.0 million in fiscal 1996 and $32.2 million in fiscal
1995, representing 61%, 57%, and 45% of product sales, respectively. The $4.6
million, or 12%, increase in fiscal 1997 over fiscal 1996 was due primarily to
payments made to the Company's former Chief Executive Officer, Howard Palefsky,
in accordance with Mr. Palefsky's separation agreement and costs associated with
existing loans to Mr. Palefsky, legal expenses incurred in connection with the
Matrix lawsuit, and higher international sales and marketing costs associated
with additional launches of Trilucent implant and commercial introduction of
Hylaform gel. SG&A expenses increased $6.8 million, or 21%, in fiscal 1996 over
fiscal 1995, primarily due to the operating results of LipoMatrix and
amortization of intangibles resulting from the acquisition of LipoMatrix.
Additionally, higher U. S. advertising and public relation campaign expenses,
costs of launching Trilucent implant in Europe, higher international spending
related to an overall increase in sales and expanded international
infrastructure, contributed to this increase in fiscal 1996. The Company expects
SG&A expenses in fiscal 1998 as a percentage of product sales to be at levels
lower than those of fiscal 1997, primarily due to anticipated lower legal
expenses after the settlement of the Matrix lawsuit in May 1997 and lower
officer separation costs. By agreement, Mr. Palefsky will continue to serve as a
consultant to the Company during the next two years and as a result, the Company
will make cash payments to Mr. Palefsky during fiscal 1998 and fiscal 1999
totaling $575,000 and $233,000, respectively. In addition, the Company has
agreed to forgive all indebtedness owed by Mr. Palefsky to the Company subject
to certain conditions (See Note 1 of Notes to Consolidated Financial
Statements).
R&D. R&D expenses, which include expenditures for regulatory compliance, were
$18.8 million in fiscal 1997, $12.2 million in fiscal 1996 and $9.9 million in
fiscal 1995. The $6.6 million increase in R&D spending in fiscal 1997 over
fiscal 1996 was primarily attributable to the inclusion of a full year of R&D
expenses for Cohesion as a result of the Company increasing its ownership
percentage to 81% in June 1996, the costs associated with the Trilucent implant
clinical trial program in the United States and Europe, and the inclusion of a
full year of LipoMatrix R&D expenses in fiscal 1997 compared to ten months in
fiscal 1996. The increase in R&D spending in fiscal 1996 over fiscal 1995 was
primarily attributable to R&D spending incurred by LipoMatrix, partially offset
by completion of soft tissue programs and lower expenses related to ISO 9000
certification. The Company expects internal R&D spending in fiscal 1998 to be at
levels higher than fiscal 1997, primarily due to increased expenses for Cohesion
and orthopaedics projects.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. The charge for purchased
in-process research and development ("in-process R&D") of $17.8 million in
fiscal 1996 was due to the $14.8 million non-recurring charge related to the
acquisition of LipoMatrix and the $3.0 million non-recurring charge
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related to the increase in ownership from approximately 40% to 81% in Cohesion.
The value attributed to LipoMatrix in-process R&D was determined by an
independent appraisal. Substantial effort, including clinical trials and
regulatory approval, still is required over the next several years before
Trilucent implant can be marketed in the United States.
INCOME (LOSS) FROM OPERATIONS. Operating loss was $10.9 million in fiscal 1997
and $17.6 million in fiscal 1996, compared to operating income of $11.9 million
in fiscal 1995. The loss in fiscal 1997 was due primarily to costs associated
with commencing Trilucent implant clinical trials in the United States and
Europe, the inclusion of the operating results of Cohesion, expenses in
connection with the Matrix lawsuit, a charge for officer separation costs, and
the inclusion of a full year of LipoMatrix operating expenses compared to ten
months in fiscal 1996. The loss in fiscal 1996 was due primarily to the
acquisition-related, non-recurring, in-process R&D charges of $17.8 million
related to LipoMatrix and Cohesion. Excluding these acquisition related,
non-recurring R&D charges, operating income would have been approximately
$208,000 in fiscal 1996. Additionally, the decrease in operating income in
fiscal 1996 was to a large extent due to the inclusion of the operating expenses
of LipoMatrix subsequent to the acquisition in August 1995 and no shipments of
Contigen implant to Bard in fiscal 1996.
IMPACT OF FOREIGN EXCHANGE RATES. The impact of foreign exchange rates from
fiscal 1996 to fiscal 1997 resulted in a decrease in revenue of approximately
$1.1 million and a decrease in operating expenses of approximately $1.7 million,
resulting in a net increase in operating income of approximately $600,000 on
equivalent local currency basis. The impact of foreign exchange rates from
fiscal 1995 to fiscal 1996 resulted in an increase in revenue of approximately
$457,000 and an increase in operating expenses of approximately $440,000,
resulting in a net increase in operating income of approximately $17,000.
Until December 1994, the Company's policy was to hedge material foreign
currency transaction exposures. At June 30, 1997, 1996 and 1995, no foreign
currency transaction exposures were hedged. Unhedged net foreign assets were
$7.6 million, $14.5 million and $10.4 million at June 30, 1997, 1996 and 1995,
respectively. The Company plans to investigate hedging options in fiscal 1998 in
order to minimize the effect of currency fluctuations on the Company's results
of operations.
NET GAIN ON INVESTMENTS, PRINCIPALLY BOSTON SCIENTIFIC (FORMERLY TARGET). In
fiscal 1997, the Company recorded a net pre-tax gain on investments of $9.1
million, resulting from the sale of 330,000 shares of Target common stock. In
fiscal 1996, the Company recorded a net pre-tax gain on investments of $82.1
million (after the recording of a $4.0 million reduction in the carrying value
of certain equity investments due to a decline in value determined to be other
than temporary), resulting primarily from the sale of 1,792,000 shares of Target
common stock. In fiscal 1995, the Company sold 245,000 shares of common stock of
Target and recorded a net pre-tax gain on investments of $6.0 million (after the
recording of a $925,000 reduction in the carrying value of certain equity
investments due to a decline in value determined to be other than temporary).
On January 20, 1997, Boston Scientific Corporation of Natick,
Massachusetts ("Boston Scientific") and Target jointly announced the signing of
a definitive agreement to merge in a tax-free stock-for-stock transaction. On
April 8, 1997, the merger was completed and, as a result, the Company received
approximately 1,365,200 shares of Boston Scientific common stock in exchange for
the Company's 1,275,888 shares of Target common stock. Pursuant to the merger
agreement, the Company was restricted from selling its shares of Boston
Scientific common stock until the expiration of applicable pooling-of-interests
restrictions, which will occur during the first quarter of fiscal 1998. The
Company expects to sell a portion of its shares of Boston Scientific common
stock in fiscal 1998 in order to utilize net gains for investment in new
affiliate companies, corporate development programs, and other purposes.
NET GAIN ON INVESTMENT IN PROGRAFT. In fiscal 1997, the Company recorded an
additional net pre-tax gain on investments of $15.4 million, resulting from the
sale of its holdings in Prograft to W.L. Gore and Associates, Inc.
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EQUITY IN EARNINGS/LOSSES OF AFFILIATE COMPANIES. Equity in earnings of Target
was $1.4 million in fiscal 1996 compared to $2.4 million in fiscal 1995. Equity
in Target's earnings decreased in fiscal 1996 over fiscal 1995 due to the
Company's ownership percentage falling from approximately 29% at June 30, 1995
to approximately 11% at June 30, 1996. In December 1995, when the Company's
ownership interest fell below 20%, the Company changed from the equity to the
cost method of accounting for its investment in Target.
Equity in losses of other affiliate companies in fiscal 1997 was $1.0
million compared to $2.3 million in fiscal 1996 and $3.6 million in fiscal 1995.
The decrease in equity in other affiliates' losses in fiscal 1997 over fiscal
1996 was due primarily to recording no LipoMatrix equity losses in fiscal 1997
as a result of the Company acquiring LipoMatrix in August 1995 and no Cohesion
equity losses as a result of the Company increasing its ownership percentage to
81% in June 1996. The decrease in equity in other affiliates' losses in fiscal
1996 over fiscal 1995 was due primarily to lower LipoMatrix equity losses as a
result of the Company acquiring LipoMatrix in August 1995, partially offset by
increased losses of other affiliates. The Company intends to continue to expand
its new product development activities through equity investments in or loans to
affiliate companies during fiscal 1998. These affiliate companies typically are
in an early stage of development and may be expected to incur substantial
losses, which in turn will have an adverse effect on the Company's operating
results. There can be no assurance that these investments will result in
positive returns nor can there be any assurance on the timing of any return on
investment, or that the Company will not lose its entire investment.
INTEREST INCOME AND EXPENSE. Interest income was $1.1 million in fiscal 1997,
$1.1 million in fiscal 1996 and $500,000 in fiscal 1995. The increase in fiscal
1996 over fiscal 1995 was due primarily to higher average short-term investment
balances, resulting primarily from the sale of Target stock, and higher interest
rates.
Interest expense was $473,000 in fiscal 1997, $296,000 in fiscal 1996
and $91,000 in fiscal 1995. Interest expense in fiscal 1997 and fiscal 1996
related primarily to borrowings under the Company's $15 million revolving credit
facility, which was paid in full and canceled in June 1997, and the $2.9 million
credit facility (4.1 million Swiss Francs) established by LipoMatrix prior to
its acquisition by the Company (see Note 7 of Notes to Consolidated Financial
Statements). Interest expense of $91,000 in fiscal 1995 was related primarily to
the revolving credit facility. The increase in interest expense in fiscal 1997
over fiscal 1996 was due primarily to a full year of interest expense on the
revolving credit line compared to six months in fiscal 1996. The increase in
fiscal 1996 over fiscal 1995 was due primarily to the $8 million increase in the
amount available under the revolving credit facility and the $2.9 million
LipoMatrix credit facility (4.1 million Swiss Francs) acquired by the Company in
August 1995. The Company expects interest expense to be lower in fiscal 1998, as
a result of repayment and cancellation of the revolving line of credit in June
1997.
INCOME TAXES. The Company's effective income tax rate was approximately 50% for
fiscal 1997 compared to 46% for fiscal 1996 and 46% for fiscal 1995. The higher
effective tax rate in fiscal 1997 primarily was due to the impact of
non-deductible items such as losses from foreign subsidiaries, the amortization
of a full year of goodwill associated with the LipoMatrix acquisition and equity
losses in affiliates.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company's cash, cash equivalents and short-term
investments were $23.5 million compared to $25.4 million at June 30, 1996. Net
cash used in operating activities was $1.2 million for fiscal 1997, compared
with $3.3 million of net cash provided by operating activities for fiscal 1996.
For fiscal 1997, the $1.2 million of net cash used in operating
activities was mainly attributable to a $4.7 million increase in inventory and a
$1.3 million increase in accounts receivable,
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partially offset by a $1.6 million decrease in miscellaneous receivable related
to the sales of Target stock, $1.6 million of net income after adjusting for
depreciation and amortization expense, equity in losses (earnings) of affiliate
companies, gain on investments (net of taxes paid) and loss on disposal of fixed
assets and intangibles, and a $1.6 million provision for costs associated with a
senior officer's loan. The inventory increase resulted primarily from lower than
expected sales of Trilucent implant and injectable collagen products and
inventory build-up for the Company's new product, Hylaform gel. In response to
the lower than expected Trilucent implant sales, the Company has decreased its
annual production level of Trilucent implant. The $2.0 million of net cash used
in investing and financing activities in fiscal 1997 primarily was due to
payments of $8.0 million to purchase short-term investments, capital and
intangible asset expenditures of approximately $7.1 million, repayment of the
revolving line of credit of approximately $5.0 million, payments of
approximately $2.5 million to repurchase 147,900 shares of the Company's common
stock at an average acquisition price of approximately $17.00 per share,
payments of approximately $1.9 million for additional investments in and loans
to affiliates, and payment of cash dividends of approximately $900,000 to the
Company's stockholders in both July 1996 and January 1997, partially offset by
net pre-tax proceeds of $15.3 million from the sale of 330,000 shares of common
stock of Target and the Company's holdings in Prograft, $6.6 million proceeds
received from the sale of short-term investments, $1.9 million from the issuance
of 181,321 shares of the Company's common stock and $500,000 in additional funds
received from the Company's term loan.
The Company anticipates capital expenditures, equity investments in,
and loans to affiliate companies to be approximately $9.0 million in fiscal
1998. In June 1996, the Board of Directors authorized the Company to repurchase
an additional 500,000 shares of the Company's common stock in the open market,
of which the Company has repurchased 147,900 shares as of June 30, 1997. In June
1997, the Board of Directors declared a dividend of ten cents per share for
stockholders of record as of June 30, 1997.
The Company's principal sources of liquidity include cash generated
from operations, sales of Boston Scientific stock, and its cash, cash
equivalents and short-term investments. During the fiscal quarter ended
September 30, 1994, the Company's Board of Directors authorized the Company to
sell portions of its holdings of Target's common stock. During fiscal 1995, 1996
and 1997, the Company sold an aggregate of 3,312,500 shares of Target common
stock (adjusted for a two-for-one stock split) for an aggregate pre-tax gain of
approximately $101.1 million ($116.6 million proceeds less cost basis of $15.5
million). As a result of the acquisition of Target by Boston Scientific in April
1997, the Company received approximately 1,365,200 shares of Boston Scientific
common stock in exchange for the Company's 1,275,888 shares of Target common
stock. The Company anticipates that stock sales pursuant to the authorization
will be made from time to time, under SEC Rules 144 and 145, with the objective
of generating cash, for, among other things, further investments in both current
and new affiliate companies. The Company was restricted from selling its shares
of Boston Scientific common stock until the expiration of applicable
pooling-of-interests restrictions, which will occur during the first quarter of
fiscal 1998. The Company expects to sell a portion of its shares of Boston
Scientific common stock in fiscal 1998 in order to utilize net gains for
investment in new affiliate companies, corporate development programs, and other
purposes. The Company has a $2.9 million (4.1 million Swiss Francs) credit
facility that was established by LipoMatrix prior to the Company's acquisition
of LipoMatrix, of which $800,000 (1.2 million Swiss Francs) remained unused as
of June 30, 1997.
The Company's capital requirements will depend on numerous factors,
including market acceptance and demand for the Company's products; the resources
the Company devotes to the development, manufacture and marketing of its
products; the progress of the Company's clinical research and product
development programs; the extent to which the Company enters into collaborative
relationships with third parties and the scope of the Company's obligations in
such relationships; the receipt of, and the time required to obtain, regulatory
clearances and approvals; the resources required to protect the Company's
intellectual property and other factors. The timing and amount of such capital
requirements cannot be accurately predicted. Funds may also be used for the
acquisition of businesses, products and technologies that are complementary to
those of the Company. The Company believes that its current sources of liquidity
should be adequate to fund its anticipated capital requirements through at least
December 31, 1998. However, during this period or
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thereafter, the Company may require additional financing. There can be no
assurance that such additional financing will be available on terms favorable to
the Company or at all.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
RELIANCE ON LIMITED NUMBER OF KEY PRODUCTS. Sales of the Company's
collagen-based injectable products, Zyderm(R) I collagen implant and Zyderm(R)
II collagen implant (collectively, "Zyderm implants") and Zyplast(R) implant
("Zyplast implant"), as well as Trilucent implant and Contigen implant,
accounted for approximately 92% of consolidated product sales for the fiscal
year ended June 30, 1997. The Company's product sales may continue to consist
primarily of sales of these principal products. Factors such as adverse rulings
by regulatory authorities, product liability lawsuits, introduction of
competitive products by third parties, other loss of market acceptance or other
adverse publicity for these principal products may significantly and adversely
affect the Company's sales of these products and, as a result, also adversely
affect the Company's business, financial condition and results of operations.
SUBSTANTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS, FUTURE OPERATING
RESULTS UNCERTAIN. The Company's quarterly operating results may vary
significantly depending upon factors such as the timing of significant orders
and shipments, changes in pricing policies by the Company or its competitors,
increased competition, demand for the Company's products, the number, timing and
significance of new product and product enhancement announcements by the Company
and its competitors, the ability of the Company to develop, introduce and market
new and enhanced versions of the Company's products on a timely basis, the mix
of direct and indirect sales, the timing of investments in affiliate companies
and general economic factors, among others. The Company's expense levels are
based, in part, on its expectations of future revenue levels. If revenue levels
are below expectations, operating results are likely to be materially adversely
affected. In particular, because only a small portion of the Company's expenses
varies with revenue in the short term, net income may be disproportionately
affected by a reduction in revenue. Due to the foregoing factors, quarterly
revenue and operating results have been and will continue to be difficult to
forecast.
Based upon all of the foregoing, the Company believes that quarterly
revenues and operating results may vary significantly in the future and that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
There can be no assurance that the Company's revenue will increase or be
sustained in future periods or that the Company will be profitable in any future
period. Any shortfall in revenue or earnings from levels expected by securities
analysts could have an immediate and significant adverse effect on the trading
price of the Company's Common Stock in any given period. Additionally, the
Company may not learn of, or be able to confirm, such shortfalls until late in
the fiscal quarter, or following the end of the quarter, which could result in
an even more immediate and adverse effect on the trading price of the Company's
Common Stock. Finally, the Company participates in a highly dynamic industry,
which may result in significant volatility in the price of the Company's Common
Stock.
MANUFACTURING RISKS AND INVENTORY SHORTAGES. Certain of the Company's products,
including Hylaform gel, SoftForm implant and Refinity skin solutions, are
manufactured for the Company by third parties. As a result, the Company is
dependent on these third parties to manufacture and supply products to the
Company as required. While the Company has distribution agreements with these
third parties, there can be no assurances that these third parties will
manufacture and supply quality products on a timely basis or in adequate
quantities. Any failure of these third parties to manufacture sufficient
quantities of these products or to deliver products that meet the Company's
specifications or quality control standards would adversely affect the Company's
sales of these products, and as a result, could also adversely affect the
Company's business, financial condition and results of operations. The Company
relies on a "closed herd" of cattle in order to produce its bovine
collagen-based products, including Zyderm implants, Zyplast implant and Contigen
implant. In the event of any material diminution in the size of the Company's
herd for any reason, including accident or disease, the Company would have a
limited ability to quickly increase supply of acceptable cattle.
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Any such diminution would have a material adverse effect on the Company's
ability to sell bovine collagen-based products and, as a result, the Company's
business, financial condition and results of operations.
In order to lower its costs of manufacturing Trilucent implant, the
Company is seeking to outsource the manufacture of the implant shells. The
Company has only limited supply of breast implant shells. Therefore, any
material delay or inability to outsource manufacture of the shells could limit
the Company's ability to meet customer requirements. Any failure to outsource
shell manufacturing on a cost-effective basis or to otherwise lower the
manufacturing costs of Trilucent implant on a timely basis or at all would have
a material adverse effect on the Company's business, financial condition and
results of operations.
COMPETITION. The medical device industry is characterized by rapidly
evolving technology and increasing competition under the recent changes in the
health care environment. The Company faces intense competition in each of its
target product markets. The Company faces direct and indirect competition for
its Zyderm implants and Zyplast implant products. At the present time, there is
a commercial product in the United States that is directly competitive with
Zyderm implants and Zyplast implant, the Company's collagen-based products for
plastic surgery and dermatology. This product is a gelatin-based (denatured
collagen) injectable commercial product, presently being marketed in the United
States and Canada that is directly competitive with Zyderm implants and Zyplast
implant. The Company also competes with products derived from human tissue.
Collagenesis, Inc. produces a product requiring a biopsy of the patient's
tissue, which tissue is then used to generate an injectable material. Fat
injections require surgical removal of the patient's fatty tissue. Implantable
cadaver tissue obtained through tissue banks is sold under the brand name
Alloderm and competes directly with the Company's SoftForm implant.
Internationally, direct competitors in the injectable product segment have
included both government approved and unapproved products which are primarily
derived from collagen, hyaluronic acid and silicone. The Company is aware of one
foreign company that is marketing internationally a collagen-based material for
soft tissue augmentation. The Company is aware of one company in Europe that
markets a hylauronic acid-based product called Restylane that is competitive
with Hylaform gel. In addition, W.L. Gore, Inc. markets an ePTFE product that is
directly competitive with SoftForm implant. The Company's injectable collagen
products also compete in the dermatology and plastic surgery markets with
substantially different alternative treatments, such as laser treatments,
chemical peels, fat injections, dermabrasion, botulinum toxin injections and
face lifts. The worldwide alpha hydroxy acid market in which Refinity skin
solutions compete is extremely competitive. Worldwide sales of alpha hydroxy
acid products total approximately $1.0 billion per year, with the medical
segment of this market accounting for approximately 6% to 7% of this total.
Large retailers and some door to door companies, as well as the prestige market,
such as salon and department stores, participate in the alpha hydroxy market.
During the last two years, several large pharmaceutical companies with high
product profiles within the dermatology market have purchased or solidified
distribution agreements with alpha hydroxy skin care lines. In addition,
physicians dispense a significant number of private label in-office peel and
take-home products.
The principal competitors of Trilucent implant are saline implants
worldwide, and silicone gel implants outside the United States, Canada and
France. The Company has identified Mentor Corporation ("Mentor") and McGhan
Medical Corporation ("McGhan"), which market both saline and silicone gel
implants, as being the Company's primary competitors for breast implants. Both
companies have greater financial, manufacturing and marketing resources than the
Company.
At the present time, autologous fat, silicone micro-implants and
polytetrafluoroethylene (Teflon paste, or PTFE) are directly competing with
Contigen implant for the treatment of stress incontinence due to intrinsic
sphincter deficiency ("ISD"). Neither silicone micro-implants nor PTFE have been
approved by the FDA for use in the United States. Other methods of treatment or
amelioration of ISD may be considered competitive with Contigen implant. These
include surgery, medication, absorbent products and behavior modification.
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In addition, several companies and institutions are engaged in the
development of collagen-based and other materials, techniques, procedures and
products for use in aesthetic and reconstructive applications anticipated to be
addressed by the Company's products. Some of these companies and institutions
are developing human-based collagen products which, when and if commercially
introduced, would have certain competitive advantages over the Company's bovine
collagen-based products, including increased biocompatibility. Some of these
companies and institutions may have substantially greater capital resources,
research and development staffs and facilities, experience in conducting
clinical trials and obtaining regulatory approvals, and manufacturing and
marketing products than the Company. There can be no assurance that the
Company's competitors will not succeed in developing technologies and products
that are more effective than any products that have been or may be developed by
the Company or that would render the Company's technology and products obsolete
or noncompetitive, or that the Company will be able to compete effectively
against such competitors based on its abilities to manufacture, market and sell
its products. There can be no assurance that such potential competition will not
have an adverse effect on the future business or financial condition of the
Company. See "Business -- Competition." Some of these companies and institutions
may have substantially greater capital resources, research and development
staffs and facilities, and experience in conducting clinical trials, obtaining
regulatory approvals, and manufacturing and marketing products similar to those
of the Company. These companies and institutions may represent significant
long-term competition for the Company. There can be no assurance that the
Company's competitors will not succeed in developing technologies and products
that are more effective than any which have been or may be developed by the
Company or that would render the Company's technology and products obsolete or
non-competitive or that the Company will be able to compete effectively against
such competitors based on its abilities to manufacture, market and sell its
products. There can be no assurance that such potential competition will not
have an adverse effect on the future business, financial condition or results of
operations of the Company.
RISKS ASSOCIATED WITH TRILUCENT IMPLANT BUSINESS. The Company has not yet
commenced sales of its Trilucent implant in the United States. Therefore, the
Company's strategy with respect to Trilucent implant sales in the United States
is unproven and subject to a number of risks. The Company has suspended
enrollment in all clinical trials of Trilucent implant until it is able to lower
its costs of manufacturing Trilucent implant and develop different versions of
the implant. If and when such clinical trials resume, there can be no assurance
that the trials will be successfully completed or that they will not yield
unfavorable clinical data which could prevent FDA clearance of Trilucent
implant. In particular, the Company will be required to submit an
Investigational Device Exemption ("IDE") to the FDA prior to recommencing
clinical trials. There can be no assurance that the IDE would be granted. Any
failure of the Company to complete development, obtain regulatory approval and
successfully market the Trilucent implant, in the United States, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
There are a number of uncertainties relating to the manufacturing and
marketing of breast implants, including how long such implants last in the human
body and the biocompatibility of implant fillers. In particular, while the
soybean oil-based implant filler in Trilucent has been used in intravenous
feeding, there is only limited animal data regarding the effect on the release
of large amounts of such material into the human body. The biocompatibility data
obtained by the Company to date is based on animal studies using peanut oil.
There can be no assurance that long-term clinical or other data will be
favorable in this regard. Other manufacturers of breast implants have been the
subject of sizable product liability judgments. There can be no assurance that
the Company will not be subject to products liability claims in the future
regarding the Trilucent implant.
RAPID TECHNOLOGICAL CHANGE. The Company's industry is characterized by
ongoing technological developments, evolving industry standards and rapid
changes in customer requirements. For example, during the past few years,
manufacturers of breast implants have changed the filler material from silicone
to saline. The Company's success depends and will depend upon its ability to
continue to develop and introduce in a timely manner new products that take
advantage of technological advances, to identify and adhere to emerging
standards, and to continue to improve the functionality of its products. There
can be no assurance that the Company will be successful in developing and
marketing, on a timely basis or at all, competitive products, product
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<PAGE> 35
enhancements and new products that respond to technological change, changes in
customer requirements and emerging industry standards, or that the Company's
enhanced or new products will adequately address the changing needs of the
marketplace. The inability of the Company, due to resource constraints,
technological or other reasons, to develop and introduce new products or product
enhancements in a timely manner would have a material adverse effect on the
Company's business, financial condition or results of operations.
UNDEVELOPED AND UNCERTAIN MARKETS. Certain of the Company's products are
intended for use in new markets the size of which are difficult to independently
verify. In particular, the potential market for the Company's Contigen implant
product is difficult to estimate because Contigen implant represents a
relatively new method of treatment, and the Company believes that most sufferers
of stress urinary incontinence do not seek medical treatment. Bard markets
Contigen implant exclusively to urologists, who may not be the only physicians
treating this disorder. Should the markets for such products be more limited
than the Company or its marketing partners currently estimate, or should the
Company, its distributors and/or its marketing partners fail to penetrate such
markets to the extent anticipated, the Company may experience lower than
anticipated revenues and a resulting adverse effect on its business, financial
condition and results of operations.
DEPENDENCE ON MARKETING PARTNERS AND THIRD PARTY DISTRIBUTORS; EFFECT OF
INVENTORY FLUCTUATIONS. The Company has entered into exclusive arrangements with
Bard for the marketing and distribution of Contigen implant and with Zimmer for
the marketing and distribution of the Collagraft bone graft products. As a
result, the Company's revenues and earnings for these products depend almost
entirely upon the continuing efforts of these marketing partners. The Company's
business, financial condition and results of operations could be adversely
affected in the event that either or both of these parties do not effectively
market the Company's products, accurately anticipate customer demand or
effectively manage industry-wide pricing and cost-containment pressures in
health care. The Company's revenues and earnings have in the past fluctuated and
are expected to continue to fluctuate based upon the levels of orders placed by
these parties, which are in turn affected by the levels of sales by these
distributors and the levels of their inventories. At June 30, 1995, Bard had a
significant inventory of Contigen implant and, as a result, took minimal
shipments of such product during fiscal 1996. While shipments to Bard resumed
during the fourth quarter of fiscal 1997, there can be no assurances that such
shipments will continue. The failure to continue shipments of Contigen implant
to Bard during fiscal 1998 and any significant decrease in purchases of
Collagraft bone graft products by Zimmer could have a material adverse effect on
the Company's results of operations.
In addition, the Company depends upon third party distributors to
market its other products in a number of international markets. There can be no
assurance that any of such distributors will not cease operations or be unable
to satisfy financial obligations to the Company. If a significant distributor
were to fail to adequately promote the Company's products or were to cease
operations, such failure or cessation could have a material adverse effect on
the Company's business, financial condition and results of operations.
GOVERNMENT REGULATION AND ADVERSE PUBLICITY. The Company's manufacturing
activities and products sold in the United States (other than Refinity skin
solutions) are subject to extensive and rigorous regulation by the FDA and by
comparable agencies in certain foreign countries where these products are
manufactured or distributed. The FDA regulates the manufacture, clinical
research and sale of medical devices, including labeling, advertising and record
keeping. In order to market products in the United States which are considered
by the FDA to be medical devices, the Company will be required to receive 510(k)
marketing clearance or premarket approval from the FDA for such products among
other regulatory requirements. In order to obtain 510(k) marketing clearance,
the Company must show that the product is substantially equivalent to a legally
marketed device not requiring FDA approval. In addition, the Company must
demonstrate that it is capable of manufacturing the product to the relevant
standards. To obtain premarket approval of a product, the Company must submit
extensive data, including pre-clinical and clinical trial data to prove the
safety and efficacy of the product. Clinical trials are normally done in three
phases over two to five years, but may take longer to complete as a result of
many factors, including slower than anticipated patient enrollment, difficulty
in finding a sufficient number of patients fitting the appropriate trial
profile,
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<PAGE> 36
difficulty in the acquisition of sufficient supply of clinical trial materials
or adverse events occurring during the trials. The Company's primary products
are currently classified as Class III medical devices, which require premarket
approval from the FDA. There can be no assurance that the FDA will not choose to
characterize future products of the Company as drugs or biologics rather than
medical devices, which have additional requirements for approval. Any such
change in FDA characterization would potentially lengthen and increase the cost
of the approval process.
While the Company's other primary products have been approved for sale
in the United States, neither Trilucent implant nor Hylaform gel have been
approved for domestic commercial sale. In particular, the Company has suspended
enrollment in United States clinical trials for Trilucent implant until it is
able to lower manufacturing costs and develop different versions of the implant.
FDA review of Trilucent implant will therefore not recommence until after such
clinical trials resume and clinical data supporting a premarket approval
application is generated. In order to recommence United States clinical trials
for Trilucent implant, the Company will be required to submit an IDE to the FDA.
There can be no assurance that such IDE will be granted. There also can be no
assurance that clinical trials for Trilucent implant, if recommenced, will be
completed or that the data from such clinical trials will be sufficient to
support a premarket approval application.
Medical products whose market applications have not yet been approved
by the FDA may be exported only with the specific approval of the FDA. Failure
to comply with applicable regulatory requirements can, among other things,
result in fines, suspensions of regulatory approvals, product recalls, seizure
of products, operating restrictions, injunctions and criminal prosecution. In
addition, government regulations may be established that could prevent or delay
regulatory approval of the Company's products. Furthermore, compliance with
current Good Manufacturing Practices regulations is necessary to receive FDA
approval to market new products and to continue to market current products.
The process of obtaining FDA and other required regulatory approvals
and clearances is lengthy and will require the expenditure of substantial
capital and resources. There can be no assurances that the Company or its
suppliers will be able to obtain the necessary approvals for its products,
including Trilucent implant and Hylaform gel. Moreover, if and when such
approval or clearance is obtained, the marketing, distribution and manufacture
of such products would remain subject to extensive regulatory requirements
administered by the FDA and other regulatory bodies. Failures to comply with
applicable regulatory requirements can result in, among other things, warning
letters, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, refusal of the government to grant
approvals, premarket clearance or premarket approval, withdrawal of approvals
and criminal prosecution. Many of the Company's products are marketed
internationally and are therefore subject to foreign regulatory requirements
governing the conduct of clinical trials, product licensing, pricing and
reimbursement, which vary from country to country and are becoming more
restrictive throughout the EU. The process of obtaining foreign regulatory
approvals can be lengthy and require the expenditure of substantial capital and
resources. In particular, the Company's SoftForm implant is not approved for
marketing in any international market. There can be no assurance that the
Company will be successful in obtaining such approval for SoftForm implant or
for the Company's other products. In addition, there can be no assurance that
the Company's Refinity skin solutions line will not become subject to FDA
regulations or other foreign regulatory requirements. Any delay or failure by
the Company or its suppliers to obtain regulatory approvals for its products
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The continuing trend of more stringent FDA oversight in product
clearance and enforcement activities has caused medical device manufacturers to
experience longer approval cycles, more uncertainty, greater risk and higher
expenses. Failure to obtain, or delays in obtaining, the required regulatory
approvals for new products, particularly with respect to Trilucent implant and
Hylaform gel, could adversely affect the Company's financial condition and
results of operations, as could product recalls. In addition, there can be no
assurance that the FDA will give approval to the Company to market its current
products for broader or different applications, or that it will grant approval
with respect to separate product applications which represent extensions of the
Company's basic technology, or that existing approvals or market clearances will
not be withdrawn. Further,
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<PAGE> 37
changes in governmental reimbursement systems, pursuant to which hospitals and
physicians are reimbursed for medical procedures at a fixed rate according to
diagnosis-related groups or other reimbursements, could have an economic impact
on the purchase and use of medical devices. In particular, a material decrease
in current reimbursement levels for Contigen implant and its application in the
treatment of intrinsic sphincter deficiency ("ISD") could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The collagen used in the Company's products is derived from cow hides.
Bovine Spongiform Encephalopathy ("BSE") is a disease, initially reported in
cattle in the United Kingdom, characterized by degenerative lesions of the
central nervous system. The source of infections in animals derives from eating
infected sheep-derived feed. While the disease has been reported in European
countries, the Company is not aware of any reports of BSE in United States
cattle to date. There can be no assurance that the various foreign or domestic
regulatory authorities will not raise issues regarding BSE or other matters
which may adversely affect the Company's ability to manufacture, market or sell
its bovine collagen-based products, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
In past years, the Company has been the subject of legislative and
regulatory investigations relating to, among other things, the safety and
efficacy of its injectable collagen products. There can be no assurance that
legislative and regulatory investigations or negative publicity from such
investigations or future investigations or from the news media will not result
in a material adverse effect on the Company's business, financial condition or
results of operations. In addition, significant negative publicity could result
in an increased number of product liability claims.
RISK OF INVESTMENTS IN AFFILIATES. The Company has made significant equity and
debt investments in affiliated companies that are involved in the development of
complementary or related technologies or products, and the Company currently
intends to continue to make significant additional investments in such companies
from time to time in the future. These affiliated companies typically are in an
early stage of development and may be expected to incur substantial losses. As a
result, the Company has recorded and expects to continue to record a share of
the losses in such affiliates attributable to the Company's ownership, which
losses have had and will continue to have an adverse effect on the Company's
results of operations. Furthermore, there can be no assurance that any
investments in affiliates will result in any return nor can there be any
assurance as to the timing of any such return, or that the Company will not lose
its entire investment.
EFFECT OF OWNERSHIP INTEREST IN BOSTON SCIENTIFIC. As of June 30, 1997, the
Company owned approximately 1,365,200 million shares of Boston Scientific common
stock, valued at over $83 million (based on a market price of $61.44 per share
on such date). The market price of Boston Scientific's common stock is highly
volatile and, as a medical device manufacture, Boston Scientific is subject to a
number of the same factors affecting its operations as the Company, as well as
additional factors not applicable to the Company. Readers are encouraged to
review Boston Scientific's public filings for a detailed understanding of the
nature of Boston Scientific's business and the risk and uncertainties associated
with it. Any significant downward fluctuation in the market price for Boston
Scientific common stock could adversely impact the Company's earnings (due to
lower returns per share on sales of such stock) as well as the value of the
Company's total assets as stated on its balance sheet (based on a lower carrying
value for the Boston Scientific investment, which as of June 30, 1997,
represented approximately 45% of the value of the Company's total assets).
During the first quarter of fiscal 1998, the Company initiated a "protect"
strategy for its investment in Boston Scientific common stock. Various market
instruments will be utilized as part of this strategy, including the purchase of
puts and calls either separately or in combination (known as an "equity
collar"). The protect strategy is designed to minimize downside risk of loss
should the stock price decline and allow for limited upside participation should
the stock price rise. However, there can be no assurance that the protect
strategy will be successful or that the Company will be able to sell shares of
Boston Scientific common stock at attractive prices.
PRODUCT LIABILITY; INSURANCE. The manufacture and sale of medical products
entails significant risk of product liability claims due to disease transmission
and other health factors, and product recalls. The Company is involved in
various legal actions arising in the ordinary course of business, the majority
of which involve product liability claims for personal injury allegedly caused
by the
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Company's products. Any product liability claim could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company faces an inherent business risk of exposure to product
liability claims alleging that the use of the Company's technology or products
has resulted in adverse effects, particularly with respect to claims regarding
Trilucent implant, which is sold in a medical field (breast augmentation,
reconstruction and replacement) in which there have been sizable product
liability claims. Such risks will exist even with respect to those products that
have received or in the future may receive regulatory approval for commercial
sale. There can be no assurance that the Company will avoid significant product
liability claims and attendant negative publicity. Furthermore, there can be no
assurance that present insurance coverage will be adequate or that adequate
insurance coverage will remain available at acceptable costs, if at all, or that
a product liability claim or recall would not adversely affect the future
business or financial condition of the Company. A successful claim brought
against the Company for which coverage is denied or in excess of its insurance
coverage could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, adverse product
liability actions could negatively affect the Company's ability to obtain and
maintain regulatory approval for its products.
PATENTS AND PROPRIETARY TECHNOLOGY. The Company depends substantially upon its
proprietary technological expertise in the extraction, purification, formulation
and manufacturing of collagen-based materials and other biomaterials into
biomedical products. The Company seeks patents on inventions concerning novel
manufacturing processes, compositions of matter, and applications for its
proprietary biomaterials.
Patent-related litigation is a risk in the medical device industry.
There can be no assurance the Company will be successful in the future in
obtaining patents or license rights, that patents will be issued for the
Company's current patent applications, that the Company will develop additional
proprietary technology that is patentable, that any issued patents will provide
the Company with any competitive advantages or will not be challenged by third
parties, or that patents of others will not have an adverse effect on the
Company. No assurance can be given that the processes or products of the Company
or its licensors will not infringe patents or proprietary rights of others or
that any licenses required under any such patents or proprietary rights would be
made available on terms acceptable to the Company. If the Company does not
obtain such licenses, it could encounter delays in product introductions while
it attempts to design around such patents, or it could find that the
manufacture, sale or use of products requiring such licenses could be enjoined.
In addition, the Company could incur substantial costs in defending itself in
suits brought against the Company on such patents or in bringing suits to
protect the Company's patents against infringement. In particular, although the
Company intends to seek international coverage for all patents held by it, the
Company's rights to one currently issued patent covering technology used in its
Trilucent breast implant extends only to the United States. Therefore, the
Company is not currently able to prevent others from using such technology
disclosed in such patent outside of the United States.
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The Company relies upon trade secret protection for certain unpatented
aspects of its proprietary technology. There can be no assurance that others
will not independently develop or otherwise acquire substantially equivalent
proprietary information or techniques, that others will not otherwise gain
access to the Company's proprietary technology or disclose such technology, or
that the Company can meaningfully protect its trade secrets. The Company
requires its employees and consultants to execute appropriate confidentiality
and proprietary information agreements upon the commencement of employment or
consulting relationship with the Company. These agreements generally provide
that all confidential information developed or made known to the individual by
the Company during the course of the individual's relationship with the Company
is to be kept confidential and not disclosed to third parties, except in
specific circumstances. The agreements generally provide that all inventions
conceived by the individual in the course of rendering services to the Company
shall be the exclusive property of the Company; however, certain of the
Company's agreements with consultants, who typically are employed on a full-time
basis by academic institutions or hospitals, do not contain assignment of
invention provisions. There can be no assurance, however, that these agreements
will provide meaningful protection or adequate remedies for the Company in the
event of unauthorized use, transfer or disclosure of such information or
inventions.
IMPACT OF CURRENCY FLUCTUATIONS; IMPORTANCE OF FOREIGN SALES. Approximately 48%
of the Company's revenues in fiscal 1997 were derived from its international
operations. Accordingly, any material decrease in foreign sales would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, because international sales of the Company's
products typically are denominated in local currencies, the Company's results of
operations have been and are expected to continue to be affected by changes in
exchange rates between certain foreign currencies and the United States dollar.
There can be no assurance that the Company will not experience unfavorable
currency fluctuation effects in future periods, which could have an adverse
effect on the Company's operating results. The Company's operations and
financial results also may be significantly affected by other international
factors, including the imposition of government controls, export license
requirements, political instability, trade restrictions, changes in tariffs and
difficulties in managing international operations. The Company plans to
investigate hedging options in fiscal 1998 in order to minimize the effect of
unfavorable currency fluctuations on the Company's operation results. However,
there can be no assurance that hedging options will favorably affect the
Company's results of operations.
USE OF HAZARDOUS MATERIALS. The Company's operations require the controlled use
of hazardous materials. Although the Company believes that its safety procedures
for handling such materials comply with the standards prescribed by federal,
state and local regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
incident, the Company could be held liable for any damages that result, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
LIMITED DIVERSITY OF FACILITIES. All of the Company's manufacturing capacity for
collagen products, the majority of its research and development activities, its
corporate headquarters, and other critical business functions are located near
major earthquake faults. In addition, all of the Company's manufacturing
capacity for collagen-based products and Trilucent implant are located in two
primary facilities (one for collagen-based products and one for Trilucent
implant), with the Company currently maintaining only limited amounts of
finished product inventory. While the Company has some limited protection in the
form of disaster recovery programs and basic insurance coverage, the Company's
operating results and financial condition would be materially adversely affected
in the event of a major earthquake, fire or other similar calamity affecting its
manufacturing facilities.
THIRD-PARTY REIMBURSEMENT. In the United States, hospitals, physicians and other
healthcare providers that purchase medical devices generally rely on third-party
payors, such as private health insurance plans, to reimburse all or part of the
costs associated with the treatment of patients. The Company's success will
depend upon, among other things, its ability to obtain satisfactory
reimbursement from healthcare payors for its products. Certain of the Company's
products, including Contigen implant, Collagraft bone graft products, and, in
certain circumstances, Trilucent implant, are purchased by hospitals or
physicians in the United States, which then bill various third-
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<PAGE> 40
party payors including Medicare, Medicaid and private insurers for the
healthcare services provided to patients. Third-party payors are increasingly
challenging the prices charged for medical products and services. There can be
no assurance that the reimbursement of treatments using the Company's products
will not be subject to such challenges in the future. Given the efforts to
control and decrease health care costs in recent years, there can be no
assurance that any reimbursement will be sufficient to permit the Company to
maintain profitability.
Reimbursement systems in international markets vary significantly by
country, and by region within some countries, and reimbursement approvals must
be obtained on a country-by-country basis. Many international markets have
government managed health care systems that govern reimbursement for new devices
and procedures. In most markets, there are private insurance systems as well as
government-managed systems. There can be no assurance that the Company will
obtain reimbursement in any country within a particular time, for a particular
amount, or at all. Failure to obtain such reimbursement approvals could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Regardless of the type of reimbursement system, the Company believes
that physician advocacy of its products will be required to obtain
reimbursement. Availability of reimbursement will depend on the clinical
efficacy and cost of the Company's products. There can be no assurance that
reimbursement for the Company's products will be available in the United States
or in international markets under either government or private reimbursement
systems, or that physicians will support and advocate reimbursement for use of
the Company's systems for all uses intended by the Company. Failure by
physicians, hospitals and other users of the Company's products to obtain
sufficient reimbursement from health care payors or adverse changes in
government and private third-party payors' policies toward reimbursement for
procedures employing the Company's products would have a material adverse effect
on the Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon a limited number of
key management and technical personnel, the loss of any one of which could have
a material adverse effect on the Company's business. The Company's future
success will depend in part upon its ability to attract and retain highly
qualified personnel. The Company competes for such personnel with other
companies, academic institutions, government entities and other organizations.
There can be no assurance that the Company will be successful in hiring or
retaining qualified personnel. Any inability to attract and retain key employees
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The foregoing factors are not meant to represent an exhaustive list of
the risks and uncertainties attendant to the Company's business. Due to the
factors noted above, as well as other factors that may affect the Company's
operating results, the Company's future earnings and stock price may be subject
to significant volatility, particularly on a quarterly basis. Any shortfall in
revenue or earnings from levels expected by securities analysts could have an
immediate and significant adverse effect on the trading price of the Company's
common stock in any given period. Additionally, the Company may not learn of, or
be able to confirm, such shortfalls until late in the fiscal quarter, or
following the end of the quarter, which could result in an even more immediate
and adverse effect on the trading price of the Company's common stock. Finally,
the Company participates in a highly dynamic industry, which often results in
significant volatility of the Company's common stock.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements:
Consolidated Balance Sheets at June 30, 1997 and 1996 42
Consolidated Statements of Income for the fiscal years
ended June 30, 1997, 1996 and 1995 43
Consolidated Statements of Stockholders' Equity for the
fiscal years ended June 30, 1997, 1996 and 1995 44
Consolidated Statements of Cash Flows for the fiscal
years ended June 30, 1997, 1996 and 1995 45
Notes to Consolidated Financial Statements 46
Report of Ernst & Young LLP, Independent Auditors 61
Supplementary Quarterly Consolidated Financial
Data (Unaudited) 62
Financial Statement Schedule:
For the years ended June 30, 1997, 1996 and 1995:
Schedule II - Valuation and Qualifying Accounts 63
</TABLE>
Schedules not listed above 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
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<PAGE> 42
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Years ended June 30, 1997 1996
- ------------------------------------------------------------------- ----------- -----------
(In thousands, except share and per share amounts)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,481 $ 21,676
Short-term investments 5,117 3,691
Accounts receivable, less allowance for doubtful accounts
($418 in 1997 and $375 in 1996) 10,759 9,508
Inventories 14,293 9,563
Other current assets 9,314 11,496
----------- -----------
Total current assets 57,964 55,934
Property and equipment, net 15,260 15,147
Intangible assets, net 8,687 7,231
Purchased intangibles and goodwill, net 6,077 7,593
Investment in Boston Scientific Corporation (Target
Therapeutics, Inc. in 1996) 83,874 65,841
Loans to officers and employees 1,865 2,024
Other investments and assets 11,184 9,237
----------- -----------
$ 184,911 $ 163,007
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,638 $ 3,824
Accrued compensation 4,227 2,387
Accrued liabilities 9,411 9,482
Income taxes payable 9,376 7,588
Notes payable 70 5,079
----------- -----------
Total current liabilities 25,722 28,360
Long-term liabilities:
Deferred income taxes 35,448 27,674
Other long-term liabilities 3,795 3,444
----------- -----------
Total long-term liabilities 39,243 31,118
Commitments and contingencies
Minority interest 49 528
Stockholders' equity:
Preferred stock, $.01 par value, authorized: 5,000,000
shares; none issued or outstanding -- --
Common shares, $.01 par value, authorized: 28,950,000 shares,
issued: 10,756,935 shares (10,575,614 shares in 1996),
outstanding: 8,809,035 shares (8,775,614 shares in 1996) 108 106
Additional paid-in capital 67,204 64,844
Retained earnings 47,999 42,378
Cumulative translation adjustment (1,717) (656)
Unrealized gain on available-for-sale investments 47,069 34,549
Treasury stock, 1,947,900 shares in 1997
(1,800,000 shares in 1996) (40,766) (38,220)
----------- -----------
Total stockholders' equity 119,897 103,001
----------- -----------
$ 184,911 $ 163,007
=========== ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
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CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended June 30, 1997 1996 1995
- -------------------------------------------------------------------- ---------- ---------- ----------
(In thousands, except per share amounts)
Revenues:
<S> <C> <C> <C>
Product sales $ 71,812 $ 68,730 $ 71,560
Other -- 2,000 1,000
---------- ---------- ----------
71,812 70,730 72,560
Costs and expenses:
Cost of sales 20,308 19,312 18,584
Selling, general and administrative 43,576 39,040 32,179
Research and development 18,840 12,170 9,943
Purchased in-process research and development -- 17,800 --
---------- ---------- ----------
82,724 88,322 60,706
---------- ---------- ----------
Income (loss) from operations (10,912) (17,592) 11,854
Other income (expense):
Net gain on investments, principally Boston Scientific Corporation
(Target Therapeutics, Inc. in 1996 and 1995) 9,063 82,093 5,110
Net gain on investment in Prograft Medical, Inc. 15,395 -- --
Equity in earnings of Boston Scientific Corporation
(Target Therapeutics, Inc. in 1996 and 1995) -- 1,430 2,417
Equity in losses of other affiliates (970) (2,325) (3,577)
Interest income 1,111 1,145 487
Interest expense (473) (296) (91)
---------- ---------- ----------
Income before income taxes and minority interest 13,214 64,455 16,200
Provision for income taxes 6,607 37,985 7,440
Minority interest (764) (182) --
---------- ---------- ----------
Net income $ 7,371 $ 26,652 $ 8,760
========== ========== ==========
Net income per share $ .83 $ 2.94 $ .93
========== ========== ==========
Shares used in calculating per share information 8,930 9,075 9,460
========== ========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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<PAGE> 44
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Gain on Total
Additional Cumulative Available- Stock-
Years ended June 30, Common Paid-In Retained Translation for-Sale Treasury holders'
1997, 1996 and 1995 Stock Capital Earnings Adjustment Investments Stock Equity
- ------------------------------------ ----------- ------------ ------------ ------------- --------------- ------------ -------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1994 $ 104 $ 61,172 $ 9,882 $ (648) $ -- $ (21,428) $ 49,082
Sale of common stock under
options and employee stock
purchase plan 2 2,300 -- -- -- -- 2,302
Tax benefit relating to stock
options -- 383 -- -- -- -- 383
Foreign currency translation
adjustment -- -- -- 44 -- -- 44
Dividends declared ($.15 per
share) -- -- (1,369) -- -- -- (1,369)
Treasury stock purchased -- -- -- -- -- (11,282) (11,282)
Net income -- -- 8,760 -- -- -- 8,760
--------- ----------- ----------- ---------- ------------ ------------ ------------
BALANCE AT JUNE 30, 1995 106 63,855 17,273 (604) -- (32,710) 47,920
Sale of common stock under
options and employee stock
purchase plan -- 963 -- -- -- -- 963
Tax benefit relating to stock
options -- 26 -- -- -- -- 26
Foreign currency translation
adjustment -- -- -- (52) -- -- (52)
Dividends declared ($.175 per
share) -- -- (1,547) -- -- -- (1,547)
Treasury stock purchased -- -- -- -- -- (5,510) (5,510)
Unrealized gain on available-for-
sale securities -- -- -- -- 34,549 -- 34,549
Net income -- -- 26,652 -- -- -- 26,652
--------- ----------- ----------- ---------- ------------ ------------ ------------
BALANCE AT JUNE 30, 1996 106 64,844 42,378 (656) 34,549 (38,220) 103,001
Sale of common stock under
options and employee stock
purchase plan 2 1,871 -- -- -- -- 1,873
Tax benefit relating to stock
options -- 489 -- -- -- -- 489
Foreign currency translation
adjustment -- -- -- (1,061) -- -- (1,061)
Dividends declared ($.20 per
share) -- -- (1,750) -- -- -- (1,750)
Treasury stock purchased -- -- -- -- -- (2,546) (2,546)
Unrealized gain on available-for-
sale securities -- -- -- -- 12,520 -- 12,520
Net income -- -- 7,371 -- -- -- 7,371
--------- ----------- ----------- ---------- ------------ ------------ ------------
BALANCE AT JUNE 30, 1997 $ 108 $ 67,204 $ 47,999 $ (1,717) $ 47,069 $ (40,766) $ 119,897
========= =========== =========== ========== ============ ============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
Page 44
<PAGE> 45
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Years ended June 30, 1997 1996 1995
- ---------------------------------------------------------------------------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 7,371 $ 26,652 $ 8,760
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Purchased in-process research and development -- 17,800 --
Depreciation and amortization 6,314 6,378 4,368
Equity in losses of affiliates 970 895 1,160
Gain on investments, net of taxes paid of $10.8 million, $39.5 million
and $2.2 million in 1997, 1996 and 1995, respectively (13,625) (42,547) (2,952)
Deferred income taxes (1,464) (6,660) 238
Tax benefits relating to stock options 489 26 383
Decrease (increase) in assets:
Accounts receivable (1,251) 4,033 (1,161)
Inventories (4,730) (4,150) (1,195)
Other 2,964 (1,828) (737)
Increase (decrease) in liabilities:
Accounts payable, accrued liabilities and other 583 874 1,709
Income taxes payable 1,788 1,686 1,651
Other long-term liabilities (605) 137 224
--------- --------- ---------
Total adjustments (8,567) (23,356) 3,688
--------- --------- ---------
Net cash provided by (used in) operating activities (1,196) 3,296 12,448
--------- --------- ---------
Cash flows from investing activities:
Net proceeds from sales of Target Therapeutics, Inc. stock, 5,578 57,950 6,221
net of taxes paid
Net proceeds from sale of other affiliate stock, 9,771 1,447 --
net of taxes paid
Proceeds from sales and maturities of short-term investments 6,634 4,043 7,366
Purchases of short-term investments (7,968) (4,505) (3,126)
Expenditures for property and equipment (4,403) (2,559) (4,385)
Increase in intangible and other assets (2,726) (6,807) (1,385)
Equity investments and loans to affiliates (1,928) (14,337) (5,737)
Acquisition of LipoMatrix, Inc., net of cash balances -- (21,709) --
Accrued purchase consideration and other costs of
acquisition of LipoMatrix -- 385 --
Acquisition of Cohesion Corporation, net of cash balances -- (1,256) --
--------- --------- ---------
Net cash provided by (used in) investing activities 4,958 12,652 (1,046)
--------- --------- ---------
Cash flows from financing activities:
Repurchase of common stock (2,546) (5,510) (11,282)
Net proceeds from issuance of common stock 1,873 963 2,302
Cash dividends paid (1,750) (1,340) (1,636)
Proceeds from (and repayments of) bank borrowings (4,534) 5,460 --
--------- --------- ---------
Net cash used in financing activities (6,957) (427) (10,616)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (3,195) 15,521 786
Cash and cash equivalents at beginning of period 21,676 6,155 5,369
--------- --------- ---------
Cash and cash equivalents at end of period $ 18,481 $ 21,676 $ 6,155
========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
Page 45
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Collagen
Corporation (the "Company"), a Delaware corporation, and its wholly-owned and
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The Company operates in one industry segment
focusing on the development, manufacturing and sale of medical devices.
Investments in unconsolidated subsidiaries, and other investments in which the
Company 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.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS AND OTHER
The Company considers all highly liquid investments with a maturity
from date of purchase of three months or less to be cash equivalents. Short-term
investments consist principally of bankers acceptances, commercial paper and
master notes and have maturities greater than 90 days, but not exceeding one
year.
The Company 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. The Company has not experienced any losses on its
money market investments.
The Company 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 the Company'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, 1997, 1996 and 1995 and for the years ended June
30, 1997, 1996 and 1995. Unrestricted available-for-sale equity securities in
which the Company has a less than 20% interest, which includes holdings in
Boston Scientific Corporation (holdings in Target Therapeutics prior to April
1997) and Innovasive Devices, Inc., are carried at fair value with the
unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity. Restricted equity securities in which the Company has less
than a 20% interest are carried at cost or estimated realizable value, if less,
and are included in "other investments and assets" in the accompanying balance
sheets. In fiscal 1996, the carrying value of certain investments were reduced
by $4.0 million to estimated net realizable value. (See Notes 5, 6 and 7). The
cost of securities sold is based on the specific identification method.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale
Page 46
<PAGE> 47
debt securities are included in interest income. Interest and dividends on
securities classified as available-for-sale are included in interest income.
INVENTORIES
Inventories are valued at the lower of cost, determined on a standard
cost basis which approximates average cost, or market.
PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment, which is
stated at cost, are provided on the straight-line method over estimated useful
lives as follows:
<TABLE>
<CAPTION>
<S> <C>
Machinery and equipment 3 - 7 years
Leasehold improvements Term of lease
</TABLE>
INTANGIBLE ASSETS
Intangible assets are amortized using the straight-line method. Patents
acquired prior to October 1996 are amortized over a seventeen-year period
beginning with the effective date or over the remainder of such period from the
date acquired and patents purchased thereafter are expensed when acquired.
Trademarks acquired prior to fiscal 1996 are amortized over a twenty-year period
beginning with the trademark filing dates and trademarks purchased thereafter
are expensed when acquired. The effect of changes in accounting for patents and
trademarks were not material to the accompanying financial statements. Purchased
product distribution rights and a non-compete covenant are amortized over the
lesser of the estimated useful life (generally five years) or the contract
period.
PURCHASED INTANGIBLES AND GOODWILL
The excess cost over the fair value of net assets acquired (goodwill)
is generally amortized on a straight-line basis over a period not exceeding
seven years. The cost of identified intangibles is generally amortized on a
straight-line basis over a period of seven years. The carrying value of goodwill
and intangible assets is reviewed on a regular basis for the existence of facts
or circumstances both internally and externally that may suggest impairment. To
date no such impairment has been indicated. Should there be indication of an
impairment in the future, the Company will confirm this by comparing the
undiscounted expected future cash flows from the impaired assets to the carrying
amount of the assets. If the sum of the estimated cash flows is lower, an
impairment loss, measured by comparing the fair value of the assets to their
carrying amounts, is recorded if significant. The cash flow estimates that will
be used in such calculations will be based on management's best estimates, using
appropriate and customary assumptions and projections at the time.
LOANS TO OFFICERS AND EMPLOYEES
Principal plus accrued interest due from current and former employees
totaled approximately $1.9 million and $378,000 at June 30, 1997 and 1996,
respectively, and principal plus accrued interest due from officers totaled
approximately $9,000 and $1.6 million at June 30, 1997 and 1996, respectively.
Included within the amounts due from current and former employees at
June 30, 1997, and within the amounts due from officers at June 30, 1996, are
four promissory notes totaling $1.6 million due from the Company's former
Chairman and Chief Executive Officer, Howard Palefsky. All such notes are
subject to interest at the lower of 10% per annum or the prime rate. Two loans
totaling $450,000 are to be forgiven on March 15, 1998 and two loans totaling
$1.1 million are to be forgiven on March 15, 1999, but are payable immediately
if Mr. Palefsky discontinues serving as a consultant to the Company prior to the
loan forgiveness dates. Loans to Mr. Palefsky were fully reserved as of June 30,
1997, and the associated expenses were recognized in fiscal 1997.
REVENUE RECOGNITION
Revenue from product sales is recognized at time of shipment, net of
allowances for estimated future returns.
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<PAGE> 48
CONCENTRATION OF CREDIT AND OTHER RISK
The Company sells its dermatological and plastic surgery products
primarily to physicians and pharmacies in North America, Europe and the Pacific
Rim. The Company sells Contigen(R) Bard collagen implant ("Contigen implant") to
C.R. Bard, Inc. ("Bard"), its marketing partner for Contigen implant, and
Collagraft(R) bone graft matrix implant and Collagraft(R) bone graft matrix
strip ("Collagraft bone graft products") to Zimmer, Inc. ("Zimmer"), the
Company's marketing partner for Collagraft bone graft products. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. The Company maintains reserves for potential credit losses
and such losses have been within management's expectations.
The Company 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 the Company 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 the Company's
working capital.
As of June 30, 1997, the Company owned approximately 1,365,200 million
shares of Boston Scientific common stock, valued at over $83 million (based on a
market price of $61.44 per share on such date). The market price of Boston
Scientific's common stock is highly volatile and, as a medical device
manufacture, Boston Scientific is subject to a number of the same factors
affecting its operations as the Company, as well as additional factors not
applicable to the Company. Any significant downward fluctuation in the market
price for Boston Scientific common stock could adversely impact the Company's
earnings (due to lower returns per share on sales of such stock) as well as the
value of the Company's total assets as stated on its balance sheet (based on a
lower carrying value for the Boston Scientific investment, which as of June 30,
1997, represented approximately 45% of the value of the Company's total assets).
All of the Company's manufacturing capacity for collagen products, the
majority of its research and development activities, its corporate headquarters,
and other critical business functions are located near major earthquake faults.
In addition, all of the manufacturing capacity for collagen-based products and
Trilucent implant are located in two primary facilities (one for collagen-based
products and one for Trilucent implant) with the Company currently maintaining
only limited amounts of finished product inventory. While the Company has some
limited protection in the form of disaster recovery programs and basic insurance
coverage, the Company's operating results and financial condition would be
materially adversely affected in the event of a major earthquake, fire or other
similar calamity affecting its manufacturing facilities.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Total advertising
expense was $900,000, $1.0 million and $800,000 for 1997, 1996 and 1995,
respectively.
EARNINGS PER SHARE
Earnings per share have been computed based upon the weighted average
number of common and dilutive common equivalent shares outstanding. Common
equivalent shares result from stock options.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS#128"), which is required to be adopted on December 31, 1997. At that
time, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under the new
requirements for calculating basic earnings per share, the dilutive effect of
stock options will be excluded. The impact of SFAS#128 is expected to result in
an increase to basic earnings per share for fiscal 1997 and 1996 of $0.01 and
$0.05 per share, respectively. The Company does not expect the impact on the
calculation of the Company's fully diluted earnings per share to be material.
Page 48
<PAGE> 49
FOREIGN CURRENCY TRANSLATION
The functional currency for each foreign subsidiary is its respective
foreign currency. Accordingly, all assets and liabilities related to these
operations are translated at the current exchange rates at the end of each
period. The resulting cumulative translation adjustments are recorded directly
to the accumulated foreign currency translation adjustment account included in
stockholders' equity. Revenues and expenses are translated at average exchange
rates in effect during the period. Foreign currency transaction gains and losses
are included in results of operations.
Until December 1994, the Company's policy was to hedge material foreign
currency transaction exposures. At June 30, 1997 and June 30, 1996, no foreign
currency transaction exposures were hedged. Unhedged net foreign assets were
$7.6 million and $14.5 million at June 30, 1997 and June 30, 1996, respectively.
2. BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
Years ended June 30, 1997 1996
- ------------------------------------------------- ---------- ----------
(In thousands)
<S> <C> <C>
Other current assets:
Deferred taxes $ 5,344 $ 5,104
Other 3,970 6,392
---------- ----------
$ 9,314 $ 11,496
========== ==========
Property and equipment:
Machinery and equipment $ 35,363 $ 32,107
Leasehold improvements 7,650 6,862
---------- ----------
43,013 38,969
Less accumulated depreciation and
amortization (27,753) (23,822)
---------- ----------
$ 15,260 $ 15,147
========== ==========
Intangible assets:
Patents, trademarks, distribution rights
and non-compete covenant $ 13,570 $ 8,802
Organization costs* 1,865 1,892
---------- ----------
15,435 10,694
Less amortization (6,748) (3,463)
---------- ----------
$ 8,687 $ 7,231
========== ==========
Accrued liabilities:
Dividends payable $ 881 $ 883
Treasury stock payable -- 976
Other accrued liabilities 8,530 7,623
---------- ----------
$ 9,411 $ 9,482
========== ==========
</TABLE>
- ----------
* Organization costs are primarily related to the formation of Collagen
International, Inc. and are fully amortized as of June 30, 1996.
Page 49
<PAGE> 50
3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale debt securities:
AMORTIZED COST WHICH APPROXIMATES ESTIMATED FAIR VALUE
<TABLE>
<CAPTION>
Years ended June 30, 1997 1996
- ---------------------------------------- ----------- -----------
(In thousands)
<S> <C> <C>
Cash Equivalents:
Money market funds $ 2,159 $ 3,693
Corporate obligations 12,009 8,836
United States Government obligations -- 1,988
----------- -----------
$ 14,168 $ 14,517
=========== ===========
Short-term investments:
Corporate obligations $ 5,117 $ 3,691
=========== ===========
</TABLE>
During the years ended June 30, 1997 and 1996, the Company sold
available-for-sale debt securities with a fair value at the dates of sale of
$6.6 million and $4.0 million, respectively. Both gross realized and unrealized
gains and losses on these securities were insignificant. The Company uses
amortized cost as the basis for recording gains and losses from securities
transactions. Contractual maturities of the debt securities do not exceed one
year at June 30, 1997.
4. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
Years ended June 30, 1997 1996
- -------------------------------------------- ---------- ----------
(In thousands)
<S> <C> <C>
Raw materials $ 938 $ 1,148
Work-in-process 7,188 3,630
Finished goods 6,167 4,785
========== ==========
$ 14,293 $ 9,563
========== ==========
</TABLE>
5. INVESTMENT IN BOSTON SCIENTIFIC CORPORATION (TARGET THERAPEUTICS, INC.)
The Company's investment in Target Therapeutics, Inc. of Fremont,
California ("Target") was accounted for under the equity method through November
1995. During December 1995, the Company's interest in Target fell below 20%.
Given that the Company did not have the ability to exercise significant
influence, the Company began accounting for its investment in Target under the
cost method beginning in December 1995. In fiscal 1997, the Company sold 330,000
shares of Target common stock for a pre-tax gain of approximately $9.2 million
and in fiscal 1996, the Company sold 1,792,000 shares of Target common stock for
a pre-tax gain of approximately $85.8 million.
On January 20, 1997, Boston Scientific Corporation of Natick,
Massachusetts ("Boston Scientific") and Target jointly announced the signing of
a definitive agreement to merge in a tax-free stock-for-stock transaction. On
April 8, 1997, the merger was completed and, as a result, the Company received
approximately 1,365,200 shares of Boston Scientific common stock in exchange for
the Company's 1,275,888 shares of Target common stock. Pursuant to the merger
agreement, the Company was restricted from selling its shares of Boston
Scientific common stock until the expiration of applicable pooling-of-interests
restrictions, which will occur during the first quarter of fiscal 1998.
Page 50
<PAGE> 51
Boston Scientific is a leading manufacturer of catheter-based devices
that can be inserted through small body openings and are used in heart surgery
and other operations. Boston Scientific common stock is quoted on the New York
Stock Exchange under the symbol BSX. On June 30, 1997, the closing price of
Boston Scientific common stock was $61.44 per share.
At June 30, 1997, the Company's shares of Boston Scientific common
stock are classified as available-for-sale and have been recorded at the
estimated fair value of $83.9 million. The $78.0 million unrealized gain ($83.9
million estimated fair value less $5.9 million cost) on these available-for-sale
securities has been reported as a separate component of stockholders' equity,
net of tax.
6. INVESTMENT IN INNOVASIVE DEVICES, INC.
In October 1995, the Company purchased approximately 844,000 shares of
common stock, currently representing approximately 9% of Innovasive Devices,
Inc. of Marlborough, Massachusetts ("Innovasive Devices") for $4.1 million and
entered into a collaborative product development agreement (the "Development
Agreement"). Innovasive Devices develops, manufactures, and markets tissue and
bone reattachment systems which are particularly relevant to the sports medicine
and arthroscopy segments of the orthopaedic surgery market. The Company and
Innovasive Devices are collaborating to develop certain resorbable mechanical
tissue-fixation devices utilizing collagen-based biomaterials for applications
in orthopaedic tissue repairs. Pursuant to the terms of the Development
Agreement, the Company is performing development activities in accordance with a
project plan agreed upon by the Company and Innovasive Devices and Innovasive
Devices is reimbursing the Company for such activities in accordance with the
project budget. Accordingly, over the next several years, the collaboration will
require the Company's expertise with collagen-based biomaterials and a small
percentage of the Company's research and development ("R&D") expenditures. In
the event that marketable products are developed as a result of this
collaboration, the Company will have the right to distribute such products for
plastic surgery and dermatology applications and will also have rights (but no
obligation) to manufacture such products.
Prior to October 1996, the Company's 844,000 shares of common stock of
Innovasive Devices were valued at cost or $4.1 million due to restrictions which
prevented the sale of any of the Company's shares of common stock of Innovasive
Devices. At June 30, 1997, restrictions were no longer applicable on 232,000
shares of common stock which the Company holds in Innovasive Devices. As a
result, the Company now carries the portion of its investment in Innovasive
Devices, which can be sold within one year, as an available-for-sale investment
at market value, or $2.7 million, reflecting an unrealized gain of $1.6 million
($2.7 million estimated fair value less $1.1 million cost), which has been
included in a separate component of stockholders' equity, net of tax. The
remaining 612,000 restricted shares of common stock continue to be valued at
cost. The investment in Innovasive is included in "other investments and assets"
in the accompanying balance sheets.
During fiscal 1997 and 1996, the Company did not sell any of its shares
of common stock of Innovasive Devices. Innovasive Devices' common stock is
quoted on The Nasdaq Stock Market. The closing price of Innovasive Devices'
common stock at June 30, 1997, was $11.75 per share. At June 30, 1997, the
Company held approximately a 9% ownership position in Innovasive Devices. As of
August 1, 1997, Innovasive Devices's closing stock price was $9.25 per share,
resulting in a decrease of $800,000 in the estimated fair value of the
non-restricted portion of the Company's investment in Innovasive Devices.
7. AQUISITIONS
LipoMatrix
LipoMatrix, Incorporated ("LipoMatrix") is the developer and
manufacturer of Trilucent implant, which is the first commercially available
triglyceride-filled mammary implant in the world. In fiscal 1996, the Company
introduced Trilucent implant in most countries of Western Europe.
Page 51
<PAGE> 52
In August 1995, as part of the Company's strategy to expand its
marketing franchise in aesthetic and reconstructive technology, the Company
entered into a stock purchase agreement with certain stockholders of LipoMatrix,
Incorporated of Neuchatel, Switzerland ("LipoMatrix"), a developer and the
manufacturer of the Trilucent(TM) breast implant ("Trilucent implant"), to
purchase approximately 50% of the outstanding securities of LipoMatrix on a
fully diluted basis. The Company also entered into a stock purchase agreement
with certain of LipoMatrix's management and employees to purchase the remaining
10% of the outstanding securities on a fully diluted basis. This purchase
increased the Company's ownership interest in LipoMatrix from approximately 40%
to 100% of the outstanding securities on a fully diluted basis. The acquisition
of LipoMatrix, which was accounted for as a purchase, had an aggregate purchase
price of approximately $23.7 million, consisting of payments to LipoMatrix
stockholders, the balance of the Company's investment in LipoMatrix at the date
of purchase, direct costs and the assumption of LipoMatrix' net liabilities of
$926,000. The Company completed the closing of the aforementioned acquisition of
LipoMatrix in January 1996 at which time aggregate cash payments of
approximately $20.1 million were made by the Company to the selling LipoMatrix
stockholders, as well as certain of LipoMatrix's current and former employees.
The assets and liabilities assumed by the Company were recorded based on
their independently appraised fair values at the date of the acquisition. Of the
purchase price of $23.7 million, $14.8 million was allocated to in-process
research and development, $3.8 million to intangible assets and $5.1 million to
goodwill. The Company charged the $14.8 million allocated to in-process research
and development to expense at the date of acquisition in accordance with
Statement of Financial Accounting Standards No. 2, "Accounting for Research and
Development Costs" ("SFAS #2"). The in-process research and development
represented research and development projects where technological feasibility
had not yet been established, major regulatory marketing approvals had not yet
been obtained and where there were no alternative future uses or markets. The
Company's results of operations for fiscal 1996 include LipoMatrix' results from
August 22, 1995, through June 30, 1996.
The unaudited pro forma results of operations of the Company for fiscal
years 1996 and 1995, assuming the acquisition of LipoMatrix occurred on July 1,
1994, on the basis described above with all material intercompany transactions
eliminated, are as follows:
<TABLE>
<CAPTION>
Years ended June 30, 1996 1995
- ------------------------------------------- ---------- ----------
(In thousands, except income per share)
<S> <C> <C>
Total revenues $ 70,745 $ 72,560
Net income 40,436 3,054
Net income per share 4.46 .32
</TABLE>
The unaudited pro forma net income and per share amounts above do not
include a charge for in-process research and development of $14.8 million
arising from the acquisition of LipoMatrix. The pro forma results reflect
amortization of acquired goodwill and other intangible assets. 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 the Company's results of operations
for any future dates or periods.
Cohesion Corporation
The Company increased its ownership position in Cohesion Corporation of
Palo Alto, California ("Cohesion") from approximately 40% to 81% on May 29,
1996. The Company expects that it will increase its ownership position in
Cohesion during fiscal 1998. Cohesion is a privately-held company developing
proprietary products for hemostasis and tissue adhesion, biosealants and
adhesion prevention barriers for surgical applications. In connection with the
Company's May 1996 investment in Cohesion, $3.0 million of the purchase price
was allocated to in-process research and development, which was expensed at the
time of the investment. The Company will provide minimal R&D support to Cohesion
as needed.
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<PAGE> 53
The Company determined the amounts to be allocated to in-process
technology for Cohesion Corporation based on whether technological feasibility
had been achieved and whether there was any alternative future use for the
technology. The Company concluded that the in-process technology had no
alternative future use after taking into consideration the potential for both
usage of the technology in different products and for resale of the technology.
Proforma information related to the purchase acquisition of Cohesion
Corporation has not been presented as the results of operations of Cohesion are
not material to the Company's operating results.
8. COMMITMENTS
MINIMUM LEASE PAYMENTS
Future minimum lease payments under noncancelable operating leases at
June 30, 1997 are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C> <C>
1998 $ 5,090
1999 4,592
2000 3,677
2001 3,540
2002 3,159
Thereafter 7,725
--------------
Total minimum lease payments $ 27,783
==============
</TABLE>
Rental expense was $4.6 million, $5.3 million and $4.7 million in fiscal
1997, fiscal 1996 and fiscal 1995, respectively.
MINIMUM PURCHASES
Future minimum purchases required by the distribution agreements with
Tissue Technologies, Inc. and Cosmederm Technologies, Inc. at June 30, 1997 are
as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C> <C>
1998 $ 1,750
1999 3,250
2000 4,938
2001 6,653
2002 9,318
Thereafter 8,621
--------------
Total minimum purchases $ 34,530
==============
</TABLE>
REVOLVING LINE OF CREDIT AGREEMENT
In November 1994, the Company entered into a $7 million revolving line
of credit with a bank, secured by shares of Target common stock held by the
Company. The terms of this facility contained certain financial covenants and
restricted the aggregate amount of cash dividends payable by the Company. In
December 1995, the $7 million revolving line of credit was increased to $15
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<PAGE> 54
million. During fiscal 1996, $5.0 million was borrowed under this agreement. In
June 1997, the Company repaid the outstanding balance and canceled the revolving
line of credit agreement prior to its expiration date of November 15, 1997.
Interest associated with this agreement was, at the Company's option, based on
either the prime rate plus 1/2% or the Eurodollar rate plus the lesser of 1 1/4%
or the Alternate LIBOR applicable margin. Interest was payable monthly.
Additionally, the Company was required to pay, on a quarterly basis, a
commitment fee of 3/8 of 1% per annum of the unused portion. The weighted
average interest rate was 8.1% on the outstanding short-term borrowings at June
30, 1996.
TERM LOANS AND LINE OF CREDIT
Prior to the Company's acquisition of LipoMatrix, LipoMatrix
established three term loans and a general credit line with a major bank,
totaling $2.9 million (4.1 Swiss Francs). As of June 30, 1997, $800,000 (1.2
million Swiss Francs) of these credit facilities is unused. Borrowings under
these credit facilities bear interest at 7% per annum, payable semi-annually in
June and December. Interest subsidies totaling 5.075% are received on the term
loans annually, resulting in a net interest rate due on the term loans of
1.925%. Semi-annual repayment of these credit facilities began on June 30, 1996,
and continues over a period not to exceed ten years. Approximately one-half of
these credit facilities is guaranteed by the Swiss Confederation.
BONUS AGREEMENT
In February 1996, the Company entered into a cash bonus agreement with
the Company's Chairman and Chief Executive Officer whereby cash bonuses in the
amounts of $325,000, $305,000, $285,000, $265,000 and $245,000 would be paid to
him on February 13 of each of the following five years beginning in 1997,
providing that he continued to serve the Company on the applicable payment date.
On February 10, 1997, Mr. Palefsky resigned as Chief Executive Officer and
subsequently resigned as Chairman of the Board of Directors on June 20, 1997,
and as a result, the February 13, 1997 payment and future payments were not
required to be paid under this bonus agreement. The bonus agreement was replaced
by the officer separation agreement. Under the officer separation agreement, Mr.
Palefsky will continue to serve as a consultant to the Company during the next
two years and as a result, the Company will make payments to Mr. Palefsky during
fiscal 1998 and fiscal 1999 totaling $575,000 and $233,000, respectively.
9. LEGAL MATTERS
In May 1997, the Company settled its lawsuit with Matrix
Pharmaceutical, Inc. ("Matrix"), which had been pending since December 1994. The
lawsuit involved the Company's claims of trade secret misappropriation against
Matrix and two former Collagen Corporation employees hired by Matrix in 1992, as
well as cross-complaints against the Company by Matrix and the two employees for
defamation and violation of state unfair competition law.
In exchange for certain consideration, Matrix has agreed that for a
period of five years it will not manufacture or sell products that are directly
competitive with the Company's current core products. The Company has granted
Matrix a nonexclusive license to certain of the Company's intellectual property,
for certain nonmonetary consideration. The lawsuit was settled and dismissed
with prejudice. All claims by and against all parties have been released.
The Company is involved in other legal actions, including product
liability claims, arising in the ordinary course of business. While the outcome
of such matters is currently not determinable, it is management's opinion that
these matters will not have a material adverse effect on the Company's
consolidated financial position or results of its operations.
Page 54
<PAGE> 55
10. STOCKHOLDERS' EQUITY
STOCK OPTIONS
The Company has various stock option plans under which incentive stock
options or non-statutory stock options may be granted to officers, directors,
key employees and consultants to purchase the Company's common stock. The
options are granted at no less than the fair market value at the dates of grant
and generally expire after ten years. Incentive stock options become exercisable
at the rate of two percent each month beginning the first full month after the
date of grant unless accelerated by the Board of Directors. Non-statutory stock
options become exercisable on a monthly or yearly basis as determined by the
Board of Directors at the date of grant.
At June 30, 1997, the total number of shares of common stock reserved
for issuance under the Company's current stock option plans was 2,069,043.
Stock option activities under the stock option plans were as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE NUMBER
NUMBER OPTION EXERCISE PRICE PRICE PER OF SHARES
OF SHARES RANGE PER SHARE SHARE EXERCISABLE
----------- -------------------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at June 30, 1995 1,217,976 $ 4.69 - $ 28.25 $ 18.03 851,702
Granted 431,100 17.00 - 20.50 18.09
Exercised (22,154) 16.25 - 22.88 16.26
Forfeitures or expired (145,249) 6.38 - 26.50 20.10
----------- -------- -------- ---------- ---------
Outstanding at June 30, 1996 1,481,673 $ 4.69 - $ 28.25 $ 17.88 976,896
Granted 549,250 16.75 - 20.75 18.76
Exercised (146,552) 16.56 - 22.75 9.09
Forfeitures or expired (162,468) 7.25 - 28.25 20.22
----------- -------- -------- ---------- ---------
Outstanding at June 30, 1997 1,721,903 $ 4.69 - $ 28.25 $ 18.69 1,016,326
=========== ======== ========
Available for grant at
June 30, 1997 347,140
==========
</TABLE>
STOCK PURCHASE PLAN
In 1985, the Company established an employee stock purchase plan under
which 450,000 shares of the Company's common stock were reserved for issuance to
employees. Subsequently, the Company increased the authorization to 600,000
shares. The Board of Directors of the Company has authorized and submitted to
the Company's stockholders, a proposal to increase the authorization to 700,000
shares and to permit each participant to purchase up to 3,000 shares during any
offering period. Under the plan, the Company's employees, subject to certain
restrictions, may purchase shares at a price per share that is the lesser of 85
percent of the fair market value as of the beginning or close of the yearly
offering period.
Page 55
<PAGE> 56
For fiscal 1997, 1996 and 1995, shares issued under the plan were
34,769, 34,084, and 36,100, respectively. The average issuance price per share
was $15.52, $17.83 and $19.28 for fiscal years 1997, 1996 and 1995,
respectively. At June 30, 1997, 33,140 shares remained available for future
sales under this plan.
STOCK COMPENSATION
The Company has elected to follow Accounting Principles Board Statement
No. 25 ("APB No. 25") and related interpretations in accounting for its employee
stock options because, as discussed below, the alternative fair value accounting
provided for under Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS#123") requires the use of option valuation models that were not developed
for use in valuing employees stock options. Under APB No. 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of the grant, no compensation expense is
generally recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS#123 and determined as if the Company had accounted for its
employee stock options granted subsequent to June 30, 1995 under the fair value
method of that statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model for the multiple-option
approach, with the following weighted-average assumptions for 1997 and 1996:
risk-free interest rate of 6.34% and 5.82%, respectively; volatility factor of
the expected market price of the Company's Common Stock of 43% and 49%,
respectively; no dividend payments; and a weighted-average expected life of the
option of 4.0 years and 4.5 years, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's 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 Company's 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 Company's pro forma information follows:
<TABLE>
<CAPTION>
Years ended June 30, 1997 1996
- ----------------------------------------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C>
Pro forma net income $ 5,545 $ 25,685
Pro forma net income per share $ .62 $ 2.82
</TABLE>
Because SFAS#123 is applicable only to options granted subsequent to 1994, its
pro forma effect will not be fully reflected until 1998.
Page 56
<PAGE> 57
The following table summarizes information about stock options
outstanding at June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------- ------------------------------------
Weighted Average Number
Range of Number Outstanding Weighted Average Remaining Exercisable as Weighted Average
Exercise Prices as of June 30, 1997 Exercise Price Contractual Price of June 30, 1997 Exercise Price
- -------------------- --------------------- ----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 4.69 - $ 6.38 72,734 $ 5.65 $ .76 68,734 $ 5.66
7.25 - 10.00 78,269 7.51 .40 78,269 7.51
12.00 - 18.00 479,653 16.93 7.84 222,253 16.99
18.13 - 26.50 1,085,747 21.09 7.07 641,570 21.51
28.25 - 28.25 5,500 28.25 3.64 5,500 28.25
==================== ==================== ================ ================= ================ =================
$ 4.69 - $ 28.25 1,721,903 $18.69 $6.70 1,016,326 $ 18.41
==================== ==================== ================ ================= ================ =================
</TABLE>
The weighted-average fair values of options granted during the years ended June
30, 1997 and 1996 were $5.75 and $6.67 per share, respectively.
STOCK REPURCHASE PROGRAM
In February 1993, the Company's Board of Directors authorized a stock
repurchase program. In fiscal years 1997, 1996 and 1995, the Company repurchased
147,900, 300,000 and 562,500 shares at average acquisition prices of
approximately $17, $18 and $20 per share, respectively. In June 1996, the Board
of Directors authorized the repurchase of up to an additional 500,000 shares. As
of June 30, 1997, an additional 352,100 shares are authorized for repurchase.
The Company plans to retain repurchased shares as treasury stock, but may use a
portion of the stock in various company stock benefit plans.
STOCKHOLDER RIGHTS PLAN
In November 1994, the Board of Directors approved a stockholder rights
plan which would entitle stockholders to purchase stock in the Company or in an
acquirer of the Company at a discounted price in the event of certain hostile
efforts to acquire control of the Company. The rights may only be exercised, if
at all, upon the occurrence of certain events unless earlier redeemed pursuant
to the plan. The rights expire on November 28, 2004.
11. INTERNATIONAL SALES AND DISTRIBUTION RIGHTS
Export sales were $34.7 million in fiscal 1997, $32.6 million in fiscal
1996 and $26.1 million in fiscal 1995. These export sales are primarily in
Europe ($24.7 million, $23.8 million and $19.4 million in fiscal years 1997,
1996 and 1995, respectively) and the Pacific Rim ($7.6 million and $7.1 million
in fiscal 1997 and fiscal 1996, respectively). No other geographic region
accounted for ten percent or more of total sales in any fiscal year. The Company
markets its products internationally directly in Canada, ten European countries,
Australia and New Zealand and via distributors in other countries. During fiscal
1996, the Company paid commissions based upon a percentage of net sales to its
former European distributor, whose contract expired in December 1995.
Page 57
<PAGE> 58
12. MAJOR CUSTOMER AND PRODUCTS
During fiscal years 1997, 1996 and 1995, the Company realized product
sales from its marketing partner, Bard, of $7.9 million, $6.2 million and $16.5
million, respectively, which represented 11%, 9% and 23% of product sales. Bard
has exclusive worldwide marketing and distribution rights for Contigen implant,
a product introduced in fiscal 1994. These amounts were comprised of product
sales of Contigen implant of $1.2 million, $300,000 and $13.4 million of
Contigen implant as well as $6.7 million, $5.9 million and $3.1 million of
income from Bard's direct sales to physicians in fiscal years 1997, 1996 and
1995, respectively. In fiscal years 1996 and 1995, the Company also recorded
other revenue of $2.0 million and $1.0 million, respectively, which consisted of
milestone payments from Bard in accordance with an agreement between the Company
and Bard. The final milestone payment of $2.0 million was paid to the Company on
September 30, 1995. In fiscal years 1997, 1996 and 1995, 76%, 82% and 72% of
product sales, respectively, were derived from Zyderm implant/Zyplast implant
products.
13. INCOME TAXES
The Company uses the liability method of accounting for income taxes
required by SFAS No. 109.
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 the Company's deferred tax assets and liabilities as of June 30,
1997 and June 30, 1996 are presented below:
<TABLE>
<CAPTION>
June 30, 1997 1996
- ------------------------------------------------- ---------- ----------
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Unrealized gain on marketable securities $ 32,507 $ 23,860
Investments 2,507 3,154
Intangible assets 378 512
Property, plant & equipment -- 132
Foreign earnings and credits (net) 56 16
---------- ----------
Total deferred tax liabilities 35,448 27,674
---------- ----------
Deferred tax assets:
Equity in losses of affiliates 5,607 5,665
Non-deductible accruals 2,065 1,876
State income taxes 1,864 2,726
Accounts receivable 647 361
Inventories 501 472
Property, plant & equipment 176 --
Other 1,380 608
Valuation allowance (5,881) (5,940)
---------- ----------
Total deferred tax assets 6,359 5,768
---------- ----------
Net deferred tax liabilities $ 29,089 $ 21,906
========== ==========
</TABLE>
Page 58
<PAGE> 59
The valuation allowance decreased by $59,000 in fiscal 1997 and
increased by $2.3 million and $2.0 million in fiscal years 1996 and 1995,
respectively. Significant components of the provision for income taxes are as
follows:
<TABLE>
<CAPTION>
Years ended June 30, 1997 1996 1995
- ----------------------------------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ 5,442 $ 36,793 $ 6,358
Foreign 553 360 164
State 2,075 7,491 979
--------- --------- ---------
Total current 8,070 44,644 7,501
--------- --------- ---------
Deferred:
Federal (971) (5,971) (368)
State (492) (688) 307
--------- --------- ---------
Total deferred (1,463) (6,659) (61)
--------- --------- ---------
$ 6,607 $ 37,985 $ 7,440
========= ========= =========
</TABLE>
For financial reporting purposes, income before income taxes includes
the following components:
<TABLE>
<CAPTION>
Years ended June 30, 1997 1996 1995
- ------------------------------------ --------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Domestic operations $ 15,498 $ 85,816 $ 16,171
Foreign operations (2,284) (21,361) 29
--------- --------- ---------
$ 13,214 $ 64,455 $ 16,200
========= ========= =========
</TABLE>
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to income before taxes. The
sources and tax effects of the differences are as follows:
<TABLE>
<CAPTION>
Years ended June 30, 1997 1996 1995
- ----------------------------------------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Income before income taxes $ 13,214 $ 64,455 $ 16,200
========= ========= =========
Expected tax at 35% or 34% $ 4,625 $ 22,559 $ 5,670
State income tax, net of federal benefit 741 4,422 832
In-process research and development -- 6,230 --
Net operating losses of subsidiaries for
which no current benefit is realizable 1,176 2,166 80
Equity in losses of affiliates (222) 2,039 1,549
Goodwill / intangible amortization 530 442 --
Benefit from favorable tax settlement -- -- (543)
Other (243) 127 (148)
--------- --------- ---------
$ 6,607 $ 37,985 $ 7,440
========= ========= =========
</TABLE>
Page 59
<PAGE> 60
14. STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
Years ended June 30, 1997 1996 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Cash paid during the year for:
Interest (net of capitalized interest) $ 473 $ 296 $ 91
Income taxes (net of refunds) 5,068 42,817 5,518
Non-cash financing activity:
Dividends declared $ 881 $ 883 $ 676
</TABLE>
Page 60
<PAGE> 61
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Collagen Corporation
We have audited the accompanying consolidated balance sheets of Collagen
Corporation as of June 30, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended June 30, 1997. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Collagen
Corporation at June 30, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1997 in conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects, the information set forth therein.
/s/ ERNST & YOUNG LLP
Palo Alto, California
August 1, 1997
Page 61
<PAGE> 62
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 1997
Product sales $ 19,443 $ 16,527 $ 19,057 $ 16,785
Cost of sales 5,381 4,461 5,321 5,145
Selling, general and administrative expenses 11,280 12,969 10,479 8,848
Research and development expenses 5,595 4,558 4,525 4,162
Operating loss (2,813) (5,461) (1,268) (1,370)
Net gain on investments, principally
Target Therapeutics, Inc. -- -- 3,038 6,184
Net gain on investments, Prograft
Medical, Inc. 9,063 -- -- --
Net income (loss) 7,614 (3,561) 1,011 2,307
Net income (loss) per share .86 (.41) .11 .25
Share price:
High $ 19.75 $ 26.00 $ 21.50 $ 20.25
Low 13.75 18.25 18.00 16.50
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
Quarters ended June 30 March 31 December 31 September 30
---------- --------- ----------- ------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
FISCAL 1996
Product sales $ 18,320 $ 16,587 $ 18,883 $ 14,940
Other revenue -- -- -- 2,000
Cost of sales 5,034 5,207 5,074 3,997
Selling, general and administrative expenses 10,220 10,051 10,467 8,302
Research and development expenses 3,242 3,424 2,925 2,579
Purchased in-process research and development 3,000(2) -- -- 14,800(1)
Operating income (loss) (3,176) (2,095) 417 (12,738)
Net gain on investments, principally
Target Therapeutics, Inc. 14,421 36,285 20,921 10,466
Net income (loss) 6,333 19,400 9,470 (8,551)
Net income (loss) per share .70 2.14 1.05 (.95)
Share price:
High $ 22.75 $ 23.50 $ 21.25 $ 21.50
Low 18.75 19.25 17.00 15.00
--------- --------- --------- ---------
</TABLE>
(1) Represents charge of $14.8 million for in-process research and development
costs in connection with the acquisition of LipoMatrix.
(2) Represents charge of $3.0 million for in-process research and development
costs in connection with the acquisition of Cohesion Corporation.
The common stock of the Company is traded over-the-counter on The
Nasdaq Stock Market under the symbol CGEN. The Company declared a cash dividend
of $.10 per share on its common stock payable to shareholders of record on June
30, 1997, in addition to a $.10 per share dividend declared and paid earlier in
fiscal 1997. In fiscal 1996, the Company declared a cash dividend of $.10 per
share on its common stock payable to shareholders of record on June 14, 1996, in
addition to a $.075 per share dividend declared and paid earlier in fiscal 1996.
While the Company does not expect to pay dividends in the near future, the Board
of Directors will re-evaluate the dividend policy on a semi-annual basis. See
Consolidated Statements of Stockholders' Equity.
Page 62
<PAGE> 63
SCHEDULE II
COLLAGEN CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Years ended June 30, 1995, 1996 and 1997
<TABLE>
<CAPTION>
Additions charged
Balance at to costs and Balance at end
Description beginning of Period expenses Deductions (1) of period
- ------------------------------------------- ------------------- ------------------ -------------- ------------------
(In thousands)
<S> <C> <C> <C> <C>
1995
Allowance for doubtful accounts $ 353 $ 46 $ 16 $ 383
1996
Allowance for doubtful accounts $ 383 $ 33 $ 41 $ 375
1997
Allowance for doubtful accounts $375 $71 $28 $418
</TABLE>
- ---------
(1) Write-off of uncollectible accounts
Page 63
<PAGE> 64
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT
The information required by this item concerning the Company's
directors is incorporated by reference from the information under the caption
"Election of Directors" of the Company's Proxy Statement for its Annual Meeting
of Stockholders filed on or about September 26, 1997 (the "Proxy Statement").
See "Business - Executive Officers" in Item I of this Annual Report Form 10-K
for information concerning the Company's executive officers.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the information under the caption "Compensation of Executive Officers" of 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 "Common Stock Ownership of Certain Beneficial
Owners and Management" of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
the information under the caption "Certain Relationships and Related
Transactions" of the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements and Schedules
Financial Statements and Financial Statement Schedule - See
Index to Consolidated Financial Statements at Item 8 of this
report
Schedules not listed above 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.
Page 64
<PAGE> 65
2. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NOTES DESCRIPTION
------ ----- -----------
<S> <C> <C>
3.1 (8) Certificate of Incorporation of Collagen Subsidiary, Inc.
3.2 Certificate of Merger of Collagen Corporation, a
California corporation, into Collagen Subsidiary, Inc.,
a Delaware corporation
3.3 (12) By-Laws of Collagen Corporation, as amended
3.4 (17) By-Laws of Collagen Corporation, as amended on August 9,
1996, effective October 30, 1996
3.5 (9) Preferred Shares Rights Agreement between the Registrant
and the Bank of New York dated November 29, 1994
10.24 (1) Collaborative Research and Distribution Agreement with
Zimmer, Inc. dated as of June 26, 1985
10.27 (1) Distribution Agreement between Registrant and Lederle
(Japan), Ltd. dated as of June 26, 1985
10.34 (2) Agreement for Sale and Leaseback of Manufacturing
Facility between Registrant and Heleasco Seven, Inc.
10.36 (3) Amended and Restated Development and Distribution
Agreement with C.R. Bard, Inc., dated as of August 4,
1989
10.38 (4) Agreement for Sale and Leaseback of Manufacturing
Facility between Registrant and Heleasco Seven, Inc.
dated September 25, 1989
10.39 (4) Agreement for Sale and Leaseback of Manufacturing
Facility between Registrant and Heleasco Seven, Inc.
dated December 29, 1989
10.40 (4) Amended and Restated Promissory Note of Dale A.
Stringfellow, dated September 7, 1990
10.41 (4) Amended and Restated Promissory Note Secured by Deed of
Trust by Dale A. Stringfellow, dated September 7, 1990
10.42 (4) 1984 Incentive Stock Option Plan, as amended
10.43 1985 Employee Stock Purchase Plan, as amended
10.44 (12) 1990 Directors' Stock Option Plan, as amended
10.46 (5) Agreement between Registrant and Essex Chemie, A.G.
dated November 19, 1990
10.56 (6) Lease Agreement dated June 1, 1992 by and between
Registrant and Harbor Investment Partners
10.58 (6) License and Option Agreement dated June 30, 1992 between
Registrant and Research Development Foundation
10.60 (7) Amendments dated February 16, 1993 and February 18, 1993
respectively, to the Product Development and
Distribution Agreement dated January 18, 1985 by and
between Registrant and Zimmer, Inc., originally filed as
Exhibit 10.24 to Registrant's Form 10K for the fiscal
year ended June 30, 1985
10.61* (7) Letter Agreement, dated April 26, 1991 and May 21, 1993
by and between Collagen Corporation and A. Neville
Pelletier
10.62 (16) 1994 Stock Option Plan, as amended
10.63 (8) Renewed Lease for 2500 Faber Place, Palo Alto,
California dated December 1, 1992 between Registrant and
Leonard Ely, Shirley Ely, Carl Carlsen and Mary L.
Carlsen
10.65* (8) Promissory Note of Howard D. Palefsky dated August 3,
1994
</TABLE>
- --------
* Constitutes a management contract or compensatory contract, plan or
arrangement.
Page 65
<PAGE> 66
<TABLE>
<S> <C> <C>
10.66 (8) Revised Form of Agreement Regarding Proprietary
Information and Inventions between Registrant and all
employees or consultants
10.67 (9) Credit Agreement, dated November 15, 1994, by and
between the Bank of New York and the Registrant, as
amended January 24, 1995
10.67(a) (12) Second Amendment, Third Amendment and Fourth Amendment
dated June 30, 1995, September 30, 1995, and December
26, 1995, respectively, to Credit Agreement dated
November 15, 1994 by and between the Bank of New York
and the Registrant
10.67(b) (13) Fifth Amendment, dated March 29, 1996, to Credit
Agreement dated November 15, 1994 by and between the
Bank of New York and the Registrant
10.67(c) (15) Sixth Amendment, dated June 28, 1996, to Credit
Agreement dated November 15, 1994 by and between the
Bank of New York and the Registrant
10.67(d) (16) Seventh Amendment, dated September 30, 1996, to Credit
Agreement dated November 15, 1994 by and between the
Bank of New York and the Registrant
10.67(e) (17) Eighth Amendment, dated December 31, 1996, to Credit
Agreement dated November 15, 1994 by and between the
Bank of New York and the Registrant
10.68 (9) Letter Agreement, dated October 7, 1994, by and between
C.R. Bard. Inc. and the Registrant, amending the Amended
and Restated Development and Distribution Agreement
dated August 4, 1989 between the Parties originally
filed as Exhibit 10.36 to the Registrant's Form 10K for
the fiscal year ended June 30, 1989
10.70* (11) Letter of Acceptance of Employment by and between Gary
Petersmeyer and the Registrant, dated December 19, 1994
10.71** (11) License, Supply and Option Agreement, dated March 24,
1995 by and between LipoMatrix, Incorporated and
Registrant
10.72** (11) Distributor Agreement dated March 24, 1995 by and
between LipoMatrix, Incorporated and the Registrant
10.73** (11) Coordination Agreement dated March 24, 1995, by and
between LipoMatrix Incorporated and the Registrant's
wholly owned subsidiary, Collagen International
Incorporated
10.74* (11) Promissory Note of Howard D. Palefsky dated June 5, 1995
10.75** (11) Letter Agreement, dated July 10, 1995 by and between
C.R. Bard, Inc. and the Registrant , amending the
Amended and Restated Development and Distribution
Agreement dated August 4, 1989 between the Parties
originally filed as Exhibit 10.36 to the Registrant's
Form 10K for the fiscal year ended June 30, 1989
10.76 (10) Stock Purchase Agreement dated August 22, 1995 between
the Registrant and certain stockholders of LipoMatrix,
Incorporated
10.77 (12) Promissory Note between Howard D. Palefsky and the
Registrant dated December 11, 1995
10.78 (14) Bonus Agreement between Howard D. Palefsky and the
Registrant dated February 20, 1996
</TABLE>
- --------
* Constitutes a management contract or compensatory contract, plan or
arrangement.
** Confidential treatment is requested for a portion of this document.
Page 66
<PAGE> 67
<TABLE>
<S> <C> <C>
10.79 (14) Promissory Note between Howard D. Palefsky and the
Registrant dated February 20, 1996
10.80 (13) Amended and Restated Secured Loan Agreement between Ross
R. Erickson and the Registrant dated December 31, 1995
10.81* (15) Letter of Acceptance of Employment by and Pierre Comte
and the Registrant dated March 21, 1995
10.82 (15) Loan Agreement between the Registrant and Cohesion
Corporation dated May 24, 1996
10.83** (15) Worldwide Medical Product Distribution Agreement between
Registrant and Tissue Technologies, Inc. dated June 4,
1996
10.84** (15) Distribution Agreement between Registrant and Biomatrix,
Inc. dated June 17, 1996
10.85 (16) Repaid Promissory Note from Reid W. Dennis to the
Registrant, dated July 22, 1996
10.86* (17) License, Supply and International Distribution Agreement
between Registrant and Cosmederm Technologies, Inc.,
dated September 6, 1996
10.88 (18) Agreement between Howard D. Palefsky and the Registrant
dated March 15, 1997
10.89 (18) Employment Agreement between Gary Petersmeyer and the
Registrant dated February 7, 1997
10.90 (18) Form of Management Continuity Agreement between certain
officers of the Company and the Registrant dated
February 7, 1997
10.91* Employment Contract between Registrant and Jean-Pierre
Capdevielle dated January 9, 1997
10.92** Distribution Agreement between Registrant and Lederle
(Japan), LTD. dated June 30, 1997
11.1 Statement Regarding Weighted Average Common and Common
Equivalent Shares Used in Computation of Per Share Income
21.1 List of Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 42)
27.1 Financial Data Schedule (EDGAR version only)
</TABLE>
Notes to Exhibits:
(1) Incorporated by reference to the same exhibits filed with the
Registrant's Annual Report on Form 10K for the fiscal year ended June
30, 1985.
(2) Incorporated by reference to the same exhibits filed with the
Registrant's Current Report on Form 8-K dated March 31, 1989.
(3) Incorporated by reference to the same exhibits filed with the
Registrant's Annual Report on Form 10K for the fiscal year ended June
30, 1989.
(4) Incorporated by reference to the same exhibits filed with the
Registrant's Annual Report on Form 10K for the fiscal year ended June
30, 1990.
(5) Incorporated by reference to the same exhibits filed with the
Registrant's Annual Report on Form 10K for the fiscal year ended June
30, 1991.
- ----------
* Constitutes a management contract or compensatory contract, plan or
arrangement.
** Confidential treatment is requested for a portion of this document.
Page 67
<PAGE> 68
(6) Incorporated by reference to the same exhibits filed with the
Registrant's Annual Report on Form 10K for the fiscal year ended June
30, 1992.
(7) Incorporated by reference to the same exhibits filed with the
Registrant's Annual Report on Form 10K for the fiscal year ended June
30, 1993.
(8) Incorporated by reference to the same exhibits filed with the
Registrant's Annual Report on Form 10K for the fiscal year ended June
30, 1994
(9) Incorporated by reference to the same exhibits filed with the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended December 31, 1994.
(10) Incorporated by reference to exhibit 2.1 filed with the Registrant's
Current Report on Form 8-K dated September 6, 1995.
(11) Incorporated by reference to the same exhibits filed with the
Registrant's Annual Report on Form 10K for the fiscal year ended June
30, 1995
(12) Incorporated by reference to the same exhibits filed with the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended December 31, 1995
(13) Incorporated by reference to exhibit 10.76 originally filed with the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended December 31, 1995
(14) Incorporated by reference to the same exhibits filed with the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1996
(15) Incorporated by reference to the same exhibits filed with the
Registrant's Annual Report on Form 10K for the fiscal year ended June
30, 1996
(16) Incorporated by reference to the same exhibits filed with the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1996
(17) Incorporated by reference to the same exhibits filed with the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended December 31, 1996
(18) Incorporated by reference to the same exhibits filed with the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1997
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(CONT'D)
b) Reports on Form 8-K. No reports on Form 8-K were filed by Registrant
during the fiscal quarter ended June 30, 1997.
Page 68
<PAGE> 69
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.
COLLAGEN CORPORATION
/s/ Gary S. Petersmeyer
----------------------------------------
Gary S. Petersmeyer
President, Chief Executive Officer, and
Director (Principal Executive Officer)
Dated: September 17, 1997
Page 69
<PAGE> 70
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/ Gary S. Petersmeyer President, Chief Executive Officer, and September 17, 1997
- ------------------------------------ Director (Principal Executive Officer)
Gary S. Petersmeyer
/s/ Norman L. Halleen Vice President and Chief Financial Officer September 18, 1997
- ------------------------------------ (Principal Financial and Accounting Officer)
Norman L. Halleen
/s/ Anne L. Bakar Director September 17, 1997
- ------------------------------------
Anne L. Bakar
/s/ John R. Daniels, MD Director September 18, 1997
- ------------------------------------
John R. Daniels, MD
/s/ William G. Davis Director September 18, 1997
- ------------------------------------
William G. Davis
/s/ Reid W. Dennis Director September 18, 1997
- ------------------------------------
Reid W. Dennis
/s/ Craig W. Johnson, Esq. Director September 18, 1997
- ------------------------------------
Craig W. Johnson, Esq.
/s/ Rodney Perkins, MD Director September 18, 1997
- ------------------------------------
Rodney Perkins, MD
/s/ Roger H. Salquist Director September 18, 1997
- ------------------------------------
Roger H. Salquist
</TABLE>
Page 70
<PAGE> 71
COLLAGEN CORPORATION
FORM 10K ANNUAL REPORT FOR THE YEAR ENDED JUNE 30, 1997
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Exhibit Numbered Page
------ ------- -------------
<S> <C> <C>
10.43 1985 Employee Stock Purchase Plan, as amended
10.91* Employment Contract between the Registrant and Jean-Pierre
Capdevielle dated January 9, 1997
10.92** Distribution Agreement between the Registrant and Lederle (Japan),
LTD. dated June 30, 1997
11.1 Statement Regarding Weighted Average Common and Common Equivalent
Shares Used in Computation of Per Share Income
21.1 List of Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 42)
27.1 Financial Data Schedule (EDGAR version only)
</TABLE>
- ----------
* Constitutes a management contract or compensatory contract, plan or
arrangement.
** Confidential treatment is requested for a portion of this document.
Page 71
<PAGE> 1
EXHIBIT 10.43
COLLAGEN CORPORATION
1985 EMPLOYEE STOCK PURCHASE PLAN
(AS AMENDED AUGUST 7, 1997)
The following constitute the provisions of the 1985 Employee Stock
Purchase Plan of Collagen Corporation.
1. Purpose. The purpose of the Plan is to provide employees of the Company
and its Designated Subsidiaries with an opportunity to purchase Common Stock of
the Company. It is the intention of the Company to have the Plan qualify as an
"Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of
1986, as amended . The provisions of the Plan shall, accordingly, be construed
so as to extend and limit participation in a manner consistent with the
requirements of that section of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" shall mean the Common Stock, $0.01 par value, of
the Company.
(d) "Company" shall mean Collagen Corporation, a Delaware
corporation.
(e) "Compensation" shall mean all regular straight time gross
earnings and commissions, exclusive of payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses or other compensation.
(f) "Continuous Status as an Employee" shall mean the absence of any
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of a leave of absence
agreed to in writing by the Company, provided that such leave is for a period of
not more than 90 days or reemployment upon the expiration of such leave is
guaranteed by contract or statute.
(g) "Contributions" shall mean all amounts credited to the account
of a participant pursuant to the Plan.
(h) "Designated Subsidiaries" shall mean the Subsidiaries which have
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
<PAGE> 2
(i) "Employee" shall mean any person, including an officer, who is
customarily employed for at least twenty (20) hours per week and more than five
(5) months in a calendar year by the Company or one of its Designated
Subsidiaries.
(j) "Exercise Date" shall mean the last day of each offering period
of the Plan.
(k) "Offering Date" shall mean the first day of each offering period
of the Plan.
(1) "Plan" shall mean this 1985 Employee Stock Purchase Plan.
(m) "Subsidiary" shall mean a corporation, domestic or foreign, of
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
3. Eligibility.
(a) Any person who is an Employee as of the Offering Date of a given
offering period shall be eligible to participate in such offering period under
the Plan, subject to the requirements of paragraph 5(a) and the limitations
imposed by Section 423(b) of the Code.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) if, immediately after the
grant, such Employee (or any other person whose stock would be attributed to
such Employee pursuant to Section 424(d) of the Code) would own stock and/or
hold outstanding options to purchase stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of the
Company or of any subsidiary of the Company, or (ii) which permits his rights to
purchase stock under all employee stock purchase plans (described in Section 423
of the Code) of the Company and its Subsidiaries to accrue at a rate which
exceeds Twenty-Five Thousand Dollars ($25,000) of fair market value of such
stock (determined at the time such option is granted) for each calendar year in
which such option is outstanding at any time.
4. Offering Periods. The Plan shall be implemented by a series of
offerings, each of which shall continue for a period of twelve (12) months. The
first offering period of the Plan shall commence on or about January 1, 1986.
Subsequent offering periods shall commence every twelve (12) months after the
commencement of the first offering period (or at such other time or times as may
be determined by the Board of Directors), and each such offering period shall
have a duration of twelve (12) months. The Plan shall continue until terminated
in accordance with paragraph 19 hereof. The Board of Directors of the Company
shall have the power to change the duration and/or the frequency of offering
periods with respect to future offerings without stockholder approval if such
change is announced at least fifteen (15) days prior to the scheduled beginning
of the first offering period to be affected.
-2-
<PAGE> 3
5. Participation.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement on the form provided by the Company and
filing it with the Company's Office of Human Resources prior to the applicable
Offering Date, unless a later time for filing the subscription agreement is set
by the Board for all eligible Employees with respect to a given offering. The
subscription agreement shall set forth the percentage of the participant's
Compensation (which shall be not less than 2% and not more than 15%) to be paid
as Contributions pursuant to the Plan.
(b) Payroll deductions shall commence on the first payroll following
the Offering Date and shall end on the last payroll paid on or prior to the
Exercise Date of the offering to which the subscription agreement is applicable,
unless sooner terminated by the participant as provided in paragraph 10.
6. Method of Payment of Contributions.
(a) The participant shall elect to have payroll deductions made on
each payday during the offering period in an amount not less than two percent
(2%) and not more than fifteen percent (15%) of such participant's Compensation
on each such payday; provided that the aggregate of such payroll deductions
during the offering period shall not exceed fifteen percent (15%) of the
participant's aggregate Compensation during said offering period. All payroll
deductions made by a participant shall be credited to his account under the
Plan. A participant may not make any additional payments into such account.
(b) A participant may discontinue his participation in the Plan as
provided in paragraph 10, or may lower, but not increase, the rate of his
Contributions during the offering period by completing and filing with the
Company a new subscription agreement within the ten (10) day period immediately
preceding the beginning of any calendar quarter during the offering period. The
change in rate shall be effective as of the beginning of the calendar quarter
following the date of filing of the new subscription agreement.
7. Grant of Option.
(a) On the Offering Date of each offering period, each eligible
Employee participating in the Plan shall be granted an option to purchase (at
the per share option price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's Contributions to be made during
such offering period (not to exceed an amount equal to fifteen percent (15%) of
his Compensation during the applicable offering period) by the lower of (i)
eighty-five percent (85%) of the fair market value of a share of the Company's
Common Stock on the Offering Date, or (ii) eighty-five percent (85%) of the fair
market value of a share of the Company's Common Stock on the Exercise Date,
subject to the limitations set forth in Sections 3(b) and 12 hereof, and
provided further that the number of shares of the Company's Common Stock subject
to any option granted to an Employee pursuant to this Plan shall not exceed one
thousand seven hundred (1,700) with respect to options granted prior to January
1, 1998 or three thousand (3,000) with respect to options granted on or after
January 1, 1998. Fair market value
-3-
<PAGE> 4
of a share of the Company's Common Stock shall be determined as provided in
Section 7(b) herein.
(b) The option price per share of the shares offered in a given
offering period shall be the lower of: (i) 85% of the fair market value of a
share of the Common Stock of the Company on the Offering Date; or (ii) 85% of
the fair market value of a share of the Common Stock of the Company on the
Exercise Date. The fair market value of the Company's Common Stock on a given
date shall be determined by the Board in its discretion based on the closing
price of the Common Stock for such date (or, in the event that the Common Stock
is not traded on such date, on the immediately preceding trading date), as
reported by the National Association of Securities Dealers Automated Quotation
(NASDAQ) National Market System or, if such price is not reported, the closing
asked price per share of the Common Stock as reported by NASDAQ or, in the event
the Common Stock is listed on a stock exchange, the fair market value per share
shall be the closing price on such exchange on such date (or, in the event that
the Common Stock is not traded on such date, on the immediately preceding
trading date), as reported in The Wall Street Journal.
8. Exercise of Option. Unless a participant withdraws from the Plan as
provided in paragraph 10, his option for the purchase of shares will be
exercised automatically on the Exercise Date of the offering period, and the
maximum number of full shares subject to option will be purchased for him at the
applicable option price with the accumulated Contributions in his account. The
shares purchased upon exercise of an option hereunder shall be deemed to be
transferred to the participant on the Exercise Date. During his lifetime, a
participant's option to purchase shares hereunder is exercisable only by him.
9. Delivery. As promptly as practicable after the Exercise Date of each
offering period, the Company shall arrange the delivery to each participant, as
appropriate, of a certificate representing the shares purchased upon exercise of
his option. Any cash remaining to the credit of a participant's account under
the Plan after a purchase by him of shares at the termination of each offering
period, or which is insufficient to purchase a full share of Common Stock of the
Company, shall be returned to said participant.
10. Withdrawal; Termination of Employment.
(a) A participant may withdraw all but not less than all the
Contributions credited to his account under the Plan at any time prior to the
Exercise Date of the offering period by giving written notice to the Company.
All of the participant's Contributions credited to his account will be paid to
him promptly after receipt of his notice of withdrawal and his option for the
current period will be automatically terminated, and no further Contributions
for the purchase of shares will be made during the offering period.
(b) Upon termination of the participant's Continuous Status as an
Employee prior to the Exercise Date of the offering period for any reason,
including retirement or death, the Contributions credited to his account will be
returned to him or, in the case of his death, to the person or persons entitled
thereto under paragraph 14, and his option will be automatically terminated.
-4-
<PAGE> 5
(c) In the event an Employee fails to remain in Continuous Status as
an Employee of the Company for at least twenty (20) hours per week during the
offering period in which the employee is a participant, he will be deemed to
have elected to withdraw from the Plan and the Contributions credited to his
account will be returned to him and his option terminated.
(d) A participant's withdrawal from an offering will not have any
effect upon his eligibility to participate in a succeeding offering or in any
similar plan which may hereafter be adopted by the Company.
11. Interest. No interest shall accrue on the Contributions of a
participant in the Plan.
12. Stock.
(a) The maximum number of shares of the Company's Common Stock which
shall be made available for sale under the Plan shall be 600,000 shares, subject
to adjustment upon changes in capitalization of the Company as provided in
paragraph 18. If the total number of shares which would otherwise be subject to
options granted pursuant to Section 7(a) hereof on the Offering Date of an
offering period exceeds the number of shares then available under the Plan
(after deduction of all shares for which options have been exercised or are then
outstanding), the Company shall make a pro rata allocation of the shares
remaining available for option grant in as uniform a manner as shall be
practicable and as it shall determine to be equitable. In such event, the
Company shall give written notice of such reduction of the number of shares
subject to the option to each Employee affected thereby and shall similarly
reduce the rate of Contributions, if necessary.
(b) The participant will have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan will be
registered in the name of the participant or in the name of the participant and
his spouse.
13. Administration. The Board, or a committee named by the Board, shall
supervise and administer the Plan and shall have full power to adopt, amend and
rescind any rules deemed desirable and appropriate for the administration of the
Plan and not inconsistent with the Plan, to construe and interpret the Plan, and
to make all other determinations necessary or advisable for the administration
of the Plan. The composition of the committee shall be in accordance with the
requirements to obtain or retain any available exemption from the operation of
Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), pursuant to Rule 16b-3 promulgated thereunder.
14. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary
who is to receive any shares and cash, if any, from the participant's account
under the Plan in the event of such participant's death subsequent to the end of
the offering period but prior to delivery to him of such shares and cash. In
addition, a participant may file a written designation of a beneficiary
-5-
<PAGE> 6
who is to receive any cash from the participant's account under the Plan in the
event of such participant's death prior to the Exercise Date of the offering
period.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
15. Transferability. Neither Contributions credited to a participant's
account nor any rights with regard to the exercise of an option or to receive
shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and distribution
or as provided in paragraph 14 hereof) by the participant. Any such attempt at
assignment, transfer, pledge or other disposition shall be without effect,
except that the Company may treat such act as an election to withdraw funds in
accordance with paragraph 10.
16. Use of Funds. All Contributions received or held by the Company under
the Plan may be used by the Company for any corporate purpose, and the Company
shall not be obligated to segregate such Contributions.
17. Reports. Individual accounts will be maintained for each participant
in the Plan. Statements of account will be given to participating Employees
promptly following the Exercise Date, which statements will set forth the
amounts of Contributions, the per share purchase price, the number of shares
purchased and the remaining cash balance, if any.
18. Adjustments Upon Changes in Capitalization. Subject to any required
action by the stockholders of the Company, the number of shares of Common Stock
covered by each option under the Plan which has not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but have not yet been placed under option (collectively, the
"Reserves"), as well as the price per share of Common Stock covered by each
option under the Plan which has not yet been exercised, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issue by the Company of shares of stock
of any class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number or price of shares of Common Stock subject to an option.
-6-
<PAGE> 7
In the event of the proposed dissolution or liquidation of the Company,
the offering period will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Board. In the event of a
proposed sale of all or substantially all of the assets of the Company, or the
merger of the Company with or into another corporation, each option under the
Plan shall be assumed or an equivalent option shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation,
unless the Board determines, in the exercise of its sole discretion and in lieu
of such assumption or substitution, that the participant shall have the right to
exercise the option as to all of the optioned stock, including shares as to
which the option would not otherwise be exercisable. If the Board makes an
option fully exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Board shall notify the participant that the option
shall be fully exercisable for a period of thirty (30) days from the date of
such notice, and the option will terminate upon the expiration of such period.
The Board may, if it so determines in the exercise of its sole discretion,
also make provision for adjusting the Reserves, as well as the price per share
of Common Stock covered by each outstanding option, in the event that the
Company effects one or more reorganizations, recapitalizations, rights offerings
or other increases or reductions of shares of its outstanding Common Stock, and
in the event of the Company being consolidated with or merged into any other
corporation.
19. Amendment or Termination. The Board of Directors of the Company may at
any time terminate or amend the Plan. Except as provided in paragraph 18, no
such termination can affect options previously granted, nor may an amendment
make any change in any option theretofore granted which adversely affects the
rights of any participant, nor may an amendment be made without prior approval
of the stockholders of the Company (obtained in the manner described in
paragraph 21) if such amendment would:
(a) Increase the number of shares that may be issued under the Plan;
(b) Permit payroll deductions at a rate in excess of fifteen percent
(15%) of the participant's Compensation;
(c) Change the designation of the employees (or class of employees)
eligible for participation in the Plan; or
(d) Materially increase the benefits which may accrue to
participants under the Plan.
20. Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
21. Stockholder Approval. Continuance of the Plan shall be subject to
approval by the stockholders of the Company within twelve months before or after
the date the Plan is
-7-
<PAGE> 8
adopted. If such stockholder approval is obtained at a duly held stockholders'
meeting, it must be obtained by the affirmative vote of the holders of a
majority of the outstanding shares of the Company present or represented and
entitled to vote thereon, which approval shall be:
(a)(1) solicited substantially in accordance with Section 14 of the
Exchange Act and the rules and regulations promulgated thereunder, or (2)
solicited after the Company has furnished in writing to the holders entitled to
vote substantially the same information concerning the Plan as that which would
be required by the rules and regulations in effect under Section 14 of the
Exchange Act at the time such information is furnished; and
(b) obtained at or prior to the first annual meeting of stockholders
held subsequent to the first registration of Common Stock under Section 12 of
the Exchange Act.
In the case of approval by written consent, it must be
obtained by the unanimous written consent of all stockholders of the Company, or
by written consent of a smaller percentage of stockholders but only if the Board
determines, on the basis of an opinion rendered by the Company's legal counsel,
that the written consent of such a smaller percentage of stockholders will
comply with all applicable laws and will not adversely affect the qualifications
of the Plan under Section 423 of the Code.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company as described in paragraph 21. It shall continue in
effect for a term of twenty (20) years unless sooner terminated under paragraph
19.
-8-
<PAGE> 9
COLLAGEN CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
1. I, _________________________, hereby elect to participate in the
Collagen Corporation Employee Stock Purchase Plan (the "Plan") for the offering
period January 1, 19 ___ to December 31, 19 ____, and subscribe to purchase
shares of the Company's Common Stock in accordance with this Subscription
Agreement and the Plan.
2. I elect to have Contributions in the amount of ____% of my
Compensation, as those terms are defined in the Plan, applied to this purchase.
I understand that this amount must not be less than 2% and not more than 15% of
my Compensation during the offering period.
3. I hereby authorize payroll deductions from each paycheck during the
offering period at the rate stated in Item 2 of this Subscription Agreement. I
understand that all payroll deductions made by me shall be credited to my
account under the Plan and that I may not make any additional payments into such
account. I understand that all payments made by me shall be accumulated for the
purchase of shares of Common Stock at the applicable purchase price determined
in accordance with the Plan. I further understand that, except as otherwise set
forth in the Plan, shares will be purchased for me automatically on the Exercise
Date of the offering period unless I otherwise withdraw from the Plan by giving
written notice to the Company for such purpose.
4. I understand that I may discontinue at any time prior to the Exercise
Date my participation in the Plan as provided in Paragraph 10 of the Plan. I
also understand that I may lower, but not increase, the rate of my Contributions
during the offering period by completing and filing with the Company a new
Subscription Agreement within the ten (10) day period immediately preceding the
beginning of any calendar quarter during the offering period. The change in rate
shall be effective as of the beginning of the calendar quarter following the
date of filing of the new Subscription Agreement.
5. I have received a copy of the Company's most recent prospectus which
describes the Plan and a copy of the complete "Collagen Corporation 1985
Employee Stock Purchase Plan." I understand that my participation in the Plan is
in all respects subject to the terms of the Plan.
6. Shares purchased for me under the Plan should be issued in the name(s)
of:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 10
7. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due to me under the Plan:
NAME: (Please print)
--------------------------------------
(First) (Middle) (Last)
- ---------------------
(Relationship)
--------------------------------------
--------------------------------------
(Address)
8. I understand that if I dispose of any shares received by me pursuant to
the Plan within 2 years after the Offering Date (the first day of the offering
period during which I purchased such shares) or within 1 year after the date of
the end of the offering period, I will be treated for federal income tax
purposes as having received ordinary income at the time of such disposition in
an amount equal to the excess of the fair market value of the shares at the time
such shares were transferred to me over the price which I paid for the shares. I
hereby agree to notify the Company in writing within 30 days after the date of
any such disposition. However, if I dispose of such shares at any time after
expiration of the 2-year and 1 year holding periods, I understand that I will be
treated for federal income tax purposes as having received income only at the
time of such disposition, and that such income will be taxed as ordinary income
only to the extent of an amount equal to the lesser of (1) the excess of the
fair market value of the shares at the time of such disposition over the
purchase price which I paid for the shares under the option, or (2) the excess
of the fair market value of the shares over the option price, measured as if the
option had been exercised on the Offering Date. The remainder of the gain or
loss, if any, recognized on such disposition will be treated as capital gain or
loss.
9. I hereby agree to be bound by the terms of the Plan. The effectiveness
of this Subscription Agreement is dependent upon my eligibility to participate
in the Plan.
SIGNATURE:
---------------------------------------
SOCIAL SECURITY #:
------------------------------
DATE
-------------------------------------------
-2-
<PAGE> 11
COLLAGEN CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
I, _____________________, hereby elect to withdraw my participation in the
Collagen Corporation Employee Stock Purchase Plan (the "Stock Purchase Plan")
for the offering period _________. This withdrawal covers all Contributions
credited to my account and is effective on the date designated below.
I understand that all Contributions credited to my account will be paid to
me within ten (10) business days of receipt by the Company of this Notice of
Withdrawal and that my option for the current period will automatically
terminate, and that no further Contributions for the purchase of shares can be
made by me during the offering period.
I also understand that my withdrawal from this Offering will not affect my
eligibility to participate in a succeeding offering or in any similar plan which
may hereafter be adopted by the Company.
Dated:
------------------ --------------------------------------
Signature of Employee
--------------------------------------
Social Security Number
-3-
<PAGE> 1
EXHIBIT 10.91
[COLLAGEN LETTERHEAD]
EMPLOYMENT CONTRACT
between
COLLAGEN INTERNATIONAL, INC., World Trade Center, Avenue Gratta Paille 2/CP 430,
1000 Lausanne 30 Grey, Switzerland ("CII"), a wholly owned subsidiary of
Collagen Corporation, Inc., the Employer. In this agreement, references to
Collagen Corporation shall be understood, when the context so requires, as a
reference to the Employer.
and
JEAN-PIERRE CAPDEVIELLE, 25, rue Duvergler, 33200 Bordeaux, France.
The parties enter into the following Employment Contract governed also by
Articles 319 sq. of the Swiss Code of Obligations ("CO").
Article 1: POSITION
Collagen employs Mr. Capdevielle as Vice President Managing Director
International on a full-time basis, subject to obtaining the work permit.
Article 2: DESCRIPTION OF THE ACTIVITY
The duties are fully described in the job description attached hereto as
Attachment A.
Article 3: COMPENSATION
Collagen International shall pay Mr. Capdevielle as compensation for his
services:
- an annual base salary of SFr. 270'000.-- to be paid in thirteen
monthly installments;
- the thirteen month will be payable in December of each year,
pro-rated based on the number of months actually worked for that
calendar year;
- once a year, with effect as of July 1st, for the first time as
of July 1, 1997, the salary will be adapted based on a
performance and salary review by the Employer;
In case of commencement or termination of the employment in the course of a
year, the above payments are made on a pro-rata basis.
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<PAGE> 2
Mr. Capdevielle will also be entitled to the following:
- - hire on bonus : SFr. 33'750.- to be paid after three months of
employment;
- - an executive bonus plan based on corporate objectives threshold 15% up
to a maximum of 45% based on corporate performance and individual
performance. This bonus will be prorated according to the length of
service, in fiscal year 1997.
This bonus is completely discretionary - the Employer has no commitment to pay
this or any other level of bonus if objectives are not met or if the Employee
leaves the Employer. The bonus level and objectives will be periodically revised
by the Employer in accordance with changes in the Employer's business
objectives.
Article 4: STOCK OPTIONS
Mr. Capdevielle will be eligible to receive 25'000.-- Collagen stock options,
subject to board approval.
Article 5: CAR
Collagen will provide Mr. Capdevielle with a car.
Article 6: STARTING DATE OF THE EMPLOYMENT
The starting date of the employment is 1st February 1997. Until the work permit
is finalised Mr. Capdevielle will be paid by Collagen France office.
Article 7: TRAVEL ADVANCE
Mr. Capdevielle will receive a travel advance of SFr. 2'500.-- which will be
reimbursed upon termination of this agreement.
Article 8: TRIAL PERIOD
The trial period shall be of 3 months duration following the date of employment,
during which the employment may be terminated at any time with 7 days notice.
Article 9: WORKING HOURS
As Vice President Managing Director International, Mr. Capdevielle will be
employed in a position of confidence and responsibility and he will be required,
from time to time, to work beyond normal business hours. Mr. Capdevielle's
compensation has been fixed with this understanding, and he shall consequently
have no right to claim additional compensation for such overtime work.
Article IO: -RELOCATION
Collagen will reimburse the cost of relocation at reasonable cost. Before any
decision is made, Mr. Capdevielle should provide Collagen with 2 quotations.
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Article 11: MISCELLANEOUS EXPENSES
Collagen will pay Mr. Capdevielle SFr. 10'00O.- to cover miscellaneous expenses
in connection with his move.
Article 12: INSURANCES
Mr. Capdevielle will be responsible to take appropriate private insurance
coverage, i.e medical for himself and medical and accident for his family.
Article 13: ACCOMMODATION
Collagen will pay Mr. Capdevielle up to a maximum of 30 days temporary standard
business hotel accommodation until he finds adequate residence for him and his
family. Collagen will pay 1 trip for his wife to locate such accommodation.
Article 14: TRAVEL EXPENSES
Collagen will pay SFr. 1'120.-- each month corresponding to travel expenses from
Lausanne to Bordeaux and return (first class train) until the end of June 1997.
Article 15: SCHOOLING
Collagen will provide for the 1st year's cost of tuition for Mr. Capdevielle's
children and for 50% of the 2nd year's cost. The third year will be at his own
expense. Collagen must approve the cost of schooling prior to the enrollment of
his kids.
Article 16: PROFESSIONAL TRAINING
Collagen favours professional training. It will facilitate, from a timing and
financial point of view, the attendance of approved courses.
Article 17: DUTY OF CARE, RULES RELATING TO ACTIVITY
Mr. Capdevielle will exercise his activity faithfully and as directed by
Collagen and undertakes to carefully preserve the interests of Collagen;
pursuant to Art. 321 e CO, he is liable for any damage caused intentionally or
by negligence to Collagen.
Article 18: CONFIDENTIALITY
Mr. Capdevielle undertakes to read, sign and comply with Collagen's Agreement
regarding Proprietary Information provisions contained in Attachment C hereto,
which forms an integral part of this contract.
Mr. Capdevielle further recognizes that the disclosure of Collagen documentation
regarding new or proposed products can substantially impair Collagen's
competitive position and jeopardize research and development efforts. Under no
circumstances may such information be removed from company premises or disclosed
to third parties without prior written approval from Collagen management. Where
such information is disclosed outside
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<PAGE> 4
Collagen, appropriate confidential disclosure agreement must be executed prior
to disclosure.
Mr. Capdevielle shall also not discuss Collagen's "material" inside information
with anyone outside Collagen until the information has been fully disclosed to
the public. Information is "material" if it will influence investors to buy or
sell Collagen stock. Examples include impending announcements of major new
products, trends in sales, order of profitability (especially changes from
previously publicized information), an acquisition, financing or other major
commitments.
Employees possessing material inside information must refrain from trading in or
recommending purchase or sale of Collagen stock until there has been full public
disclosure of such information through properly authorized corporate channels.
Article 19: CONFLICT OF INTEREST
The employment will require the devotion of all Mr. Capdevielle's working hours;
and he may not perform any service to any other company, except as specifically
exempted in Attachment D, which is made an integral part of this Agreement
during the term of his employment.
Article 20: NON-COMPETITION
Mr. Capdevielle agrees during a period of one year, following the termination of
his employment, that he will refrain from accepting any employment by any direct
competitor of any company of Collagen, or its affiliates, or from engaging in
any activities competitive with Collagen's business.
If (i) Collagen International does not expressly release Mr. Capdevielle from
this noncompetition undertaking, and (ii) as a result of such non-competition
obligation Mr. Capdevielle cannot find new employment or can only find an
employment with a lower remuneration, Mr. Capdevielle shall be entitled, for a
maximum period of one year, to receive the difference between the lower salary
under his new employment and the higher salary under his employment with
Collagen International, but in any event not more than 50% of his last annual
salary with Collagen International under this Agreement. In addition to any
penalty for breach and any compensation for further damage, the Employer may
request the elimination of any situation violating this non-competition
undertaking.
Article 2l: HOLIDAYS/VACATION
Mr. Capdevielle is also entitled to the public holidays which are those of the
place where the Company is domiciled. Collagen undertakes to pay fixed salary to
Mr. Capdevielle during observed public holidays.
Mr. Capdevielle is entitled to four weeks vacation (20 workings days) during
each calendar year. If the employment starts or ends in the course of a calendar
year, he is entitled to vacation on a pro rata basis. Collagen undertakes to pay
a fixed salary to Mr. Capdevielle during his vacation.
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<PAGE> 5
The parties shall agree together on the timing of the vacation whereby they have
to take into account the business interests of Collagen and the desires of Mr.
Capdevielle.
Article 22: ACCIDENT INSURANCE, LOSS OF SALARY INSURANCE, PENSION PLAN
Mr. Capdevielle is covered in the frame of Collagen's Collective Insurance Plan,
including accident insurance, loss of salary insurance and pension plan. The
rules of the respective policies and plans are applicable. A summary description
of Collagen benefits is attached as Attachment B.
Article 23: GENERAL EXPENSES
In order to allow him to perform his activity, CII shall pay for all of his
reasonable business expenses against receipts submitted. CII undertakes to
indemnify Mr. Capdevielle for all costs incurred for travel outside his
domicile.
No significant expenses, and in particular no travel by plane, may be charged to
Collagen International unless approved by Collagen International in advance. If
Mr. Capdevielle takes the train, he is entitled to reimbursement of a first
class ticket.
The above expenses will be paid to Mr. Capdevielle within 15 working days
following the close of a calendar month, based on a written monthly report as of
the end of the previous month.
Article 24: AUTHORITY
Mr. Capdevielle shall be granted the necessary authority to carry out his
day-to-day duties as Vice President Managing Director Intemational. This
authority is granted to him and restricted as detailed in Collagen's Delegation
of Authority. Mr. Capdevielle undertakes to read, sign and comply with the
Delegation of Authority provisions contained in Attachment E hereto, which forms
an integral part of this contract.
Article 25: DURATION AND TERMINATION OF THE EMPLOYMENT
The present Agreement is concluded for an undetermined period of time and may be
terminated by either party for the end of a calendar month by giving three
months notice after the trial period.
The particular provision of Art. 336 sq. and 336 c sq. CO are reserved.
Article 26: IMMEDIATE TERMINATION
The employment may be terminated without notice for just cause, as provided for
by Art. 337 sq. CO.
Article 27: RIGHTS AND OBLIGATIONS AT TERMINATION OF EMPLOYMENT
At the end of the employment, all claims of Mr. Capdevielle relating to his
salary and expenses incurred are due.
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At the end of the contract, each party must remit to the other party all items
received from such other party or from third parties for the account of such
other party for the duration of the employment. The right of retention provided
for by law is reserved. In particular, Mr. Capdevielle undertakes to remit to
the employer, at the end of the employment, all products, price lists, customer
lists, vehicles, travel tickets, as well as any advances received which exceed
the remainder payable to him. He may, however, retain for his own use travel
tickets, provided he pays to Collagen International the amount which Collagen
International would otherwise receive.
Article 28: CONTRACT AMENDMENTS
All amendments to this contract have to be made in writing.
Article 29: APPLICABLE LAW
All matters that are not specifically governed by this contract or the
attachments referred to therein are submitted to Art. 319 sq. CO as well as to
all other applicable federal and cantonal laws.
Made in Lausanne on 9th January 1997.
Collagen International, Inc. Jean-Pierre Capdevielle
/s/ SERGE ZIVKOVIC /s/ JEAN-PIERRE CAPDEVIELLE
- ---------------------------- -----------------------------
Serge Zivkovic
<PAGE> 1
EXHIBIT 10.92
DISTRIBUTION AGREEMENT
This Agreement is made as of June 27, 1997, between COLLAGEN
INTERNATIONAL INC., a California corporation with offices at 2500 Faber Place,
Palo Alto, California 94303 ("Collagen"), and LEDERLE (JAPAN), LTD., a Japanese
joint stock company with offices at 10-3, Kyobashi, 1-chome, Chuo-ku, Tokyo,
Japan ("Distributor").
WHEREAS, Collagen Corporation and Distributor entered into a
Distribution Agreement dated June 26, 1985 and a renewal of the Distribution
Agreement dated January 1, 1996 (the "Current Distribution Agreement") pursuant
to which Collagen Corporation granted Distributor the exclusive distribution
rights for the Products (as defined below) in the Territory (as defined below),
and
WHEREAS, pursuant to the terms of the Current Distribution Agreement
the parties have discussed the possibility of establishing a joint venture
company in Japan but Distributor has declined to participate in such a joint
venture company; and
WHEREAS, the Current Distribution Agreement is scheduled to expire on
June 30, 1997; and
WHEREAS, the parties wish to extend the grant of exclusive distribution
rights to Distributor in accordance with the terms and conditions provided
herein until June 30, 1998, unless earlier terminated in accordance with the
terms and conditions hereof,
NOW THEREFORE, in consideration of the mutual promises contained
herein, Collagen and Distributor agree as follows:
1. DEFINITIONS: As used in this Agreement:
(a) "Products" shall mean Zyderm(R) and Zyplast(R) Collagen
Implants as sold by Collagen in the United States and future
versions of Zyderm(R) and Zyplast(R) Collagen Implants which
are developed and marketed by Collagen during the term of this
Agreement for use in skin contour correction and dermal
augmentation using needle implantation.
(b) "Territory" shall mean Japan.
(c) "Best Efforts" shall mean a party's reasonable business efforts
consistent with its overall business objectives and
commensurate with products of like nature, volume and market
potential.
<PAGE> 2
2. Renewal of Appointment Distributor:
(a) Exclusive Distributor: Subject to the terms and conditions of
this Agreement, Collagen hereby renews the appointment of Distributor, and
Distributor accepts such renewed appointment, as Collagen's exclusive
distributor of the Products in the Territory.
(b) Independent Contractors: It is understood that both parties
hereto are independent contractors and are engaged in the operation of their own
businesses. Neither party hereto is to be considered the agent of the other
party for any purpose whatsoever, and neither party has any authority to enter
into any contracts or assume any obligations for the other party or make any
warranties or representations on behalf of the other party.
3. Obligations of Distributor:
(a) Marketing of Products, Etc.: Distributor agrees to use its Best
Efforts to investigate, maintain government approval for, promote and distribute
the Products, at its own expense, in the Territory using generally appropriate
channels and methods, exercising the same diligence and adhering to the same
standards which it employs with respect to its own pharmaceutical products. In
particular, Distributor shall at its own expense:
(i) Exercise due diligence promptly to initiate and carry
out clinical investigations as far as they may be required, to obtain and
maintain government approvals to import and market the Products in the Territory
and to diligently proceed to secure, as may be required from time to time,
customs clearances and currency authorizations and any permits necessary
therefore in the Territory. Distributor shall keep Collagen generally informed
of the regulatory requirements for the Territory.
(ii) Submit to Collagen regular monthly offtake forecasts for
the Products in the Territory and a complete annual marketing plan. Distributor
also agrees to update Collagen on a timely basis with information concerning
competitive products and procedures.
(iii) Use its Best Efforts to distribute and sell the Products
for use only by physicians for treatment of patients in the Territory in
compliance with local laws and regulations and good commercial practice and for
uses and applications approved by Collagen for the Products.
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<PAGE> 3
(iv) Should the requirements of the Japanese Ministry of
Health and Welfare or any other relevant governmental body related to or
affecting the Products change, the parties agree to review these procedures to
ensure continued conformity.
(b) Reports: Distributor shall at its expense submit regular
monthly reports to Collagen setting forth sales of the Products by distributor
in the Territory for the previous month (including prices, unit sales and other
information as may be reasonably requested by Collagen from time to time).
(c) Protocols: Distributor undertakes to continue to comply with
the following listed protocols previously provided to Distributor:
(i) International Marketing Recall Guideline
(ii) International Marketing Shipment to Customers Guideline
(iii) International Marketing Receiving of Collagen Products
Guideline
(iv) International Marketing Report of Technical and
Medical Complaints Guideline
(d) Performance of Obligations: Distributor understands,
acknowledges, and agrees that the continued maintenance of an image of
excellence and high level of ethical marketing of the Products is essential to
the continued success of both parties hereto. Accordingly, Distributor hereby
agrees it shall, at all times: (i) conduct business in a manner that reflects
favorably at all times on the Products and the good name, goodwill, and
reputation of Collagen; (ii) avoid deceptive, misleading or unethical practices
that are or might be detrimental to Collagen, the Products, or the public,
including without limitation the making or offering of any payment to any
government official for the purpose of influencing any act or decision of such
official in furtherance of this Agreement; (iii) make no false or misleading
representations, either orally or in any written material, with regard to
Collagen or the Products; (iv) not publish or employ, or cooperate in the
publication or employment of, any misleading or deceptive advertising material
with regard to Collagen or the Products; (v) make no representations,
warranties or guarantees to customers or to the trade with respect to the
specifications, indications, capabilities, or features of the Products that are
inconsistent with the literature distributed by Collagen and (vi) not enter into
any contract or engage in any practice detrimental to the interests of Collagen
in the Products. Violation of any of the provisions in this Section 3(d) shall
constitute a material breach of this Agreement, and specifically breach of
Sections 3(d)(ii) shall cause this Agreement to be void ab initio.
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<PAGE> 4
4. OBLIGATIONS OF COLLAGEN:
(a) Requirements of Distributor: Collagen shall supply Distributor's
requirements for the Products in the Territory, consistent with
commitments to its other customers and Distributor's forecasts of its
expected requirements for the Products described in Section 3 above. If
Collagen believes it will not be able to satisfy Distributor's
requirements for the Products, it shall promptly notify Distributor,
specifying the reasons for the expected delay and its duration.
(b) Marketing Support: To assist Distributor in marketing the Products in
the Territory, Collagen shall:
(i) Provide Distributor, free of charge, with information on
marketing and promotional plans of Collagen for the Products
as well as copies of all marketing, advertising, sales and
promotional literature concerning the Products.
(ii) Provide to Distributor, free of charge, training of key
personnel in reasonable amounts and upon reasonable prior
written notice at Collagen's facility in Palo Alto, California
at the request of Distributor, if such request is agreed to by
Collagen, concerning the quality control, storage,
transportation, marketing, advertising, promotion, distribution
and sale of the Products; provided that Distributor shall be
responsible for all transportation and lodging costs of
personnel attending such training.
(iii) Provide to Distributor, free of charge, certificates of
analysis concerning the Products purchased by Distributor,
certificates of free sale, trademark authorizations and any
other documents which Distributor may require for registration
purposes, at Distributor's request.
(c) Trademark License: Collagen hereby grants to Distributor for the
exclusive right and license to use Collagen's trademarks Zyderm(TM) and
Zyplast(TM) for the Products in the Territory for the term of this
Agreement, but only in connection with sales of the Products purchased
from Collagen in the Territory. Distributor shall be required to use
Collagen's trademark with respect to all sales of the Products. Such
trademark license shall continue in effect for the Territory while
Distributor retains its distribution rights in the Territory under this
Agreement. All right, title and interest to Collagen's trademark (except
the right to use such trademark set forth herein) shall remain with
Collagen. Distributor shall not have the right to use Collagen's name in
any advertising or promotion or otherwise without
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<PAGE> 5
Collagen's prior written consent. Upon Distributor's request
Collagen shall at its expense file trademark registrations in
the Territory.
5. Terms and Conditions of Sale:
(a) Terms of Orders: All purchases of the Products by Distributor
from Collagen during the term of this Agreement shall be subject
to the terms and conditions of this Agreement and to Collagen's
Terms and Conditions of Sale as Collagen may establish from time
to time, provided that in the event of any conflict between the
terms of this Agreement and the Terms and Conditions of Sale of
Collagen, this Agreement shall be controlling. Any printed or
standard terms and conditions contained in Distributor's
purchase order form shall be disregarded. All purchase orders
submitted by Distributor to Collagen shall be subject to
acceptance by Collagen at its offices at Palo Alto, California,
which acceptance shall not be unreasonably held.
(b) Packaging: All quantities of the products shall be in the form
of U.S. packaging with Japanese labeling and Japanese pack
inserts, to be shrink wrapped in Fremont, California. The
product will be shipped to Japan in this fashion and re-sold by
the Distributor who will not break the shrink wrapping.
(c) Quality Control: Distributor shall check the quality of the
Products in accordance with Collagen's instructions as may be
given from time to time and shall at all times comply with
applicable governmental regulations relating to the Products
including but not limited to quality and safety regulations.
(d) Price and Payment: Collagen shall sell the Products to
Distributor for the prices in accordance with Exhibit A
hereto. All taxes, fees, duties and other charges with respect
to the sale by Collagen to Distributor of the Products
(excluding income taxes, franchise taxes and taxes based on
income) shall be paid by Distributor or reimbursed by
Distributor to Collagen. All payments shall be made within sixty
(60) days after the date of shipment of the Products to
Distributor. If Distributor fails to make any payment to
Collagen when due, Collagen may, without affecting its rights
under this Agreement, cancel or delay any future shipments of
the Products to Distributor. All payments to Collagen pursuant
to this Agreement shall be made in United States currency.
(e) Warranty: Collagen warrants that the Products sold to
Distributor will at all times comply with the requirements of
and regulations adopted pursuant to the U.S. Federal Food Drug
and Cosmetic Act.
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<PAGE> 6
Collagen further represents and warrants and hereby agrees to
hold Distributor harmless from any and all liability, causes of
action, damages and/or judgments, including but not limited to
attorney's fees, costs and expenses, which may arise from or due
to Collagen's actions in not manufacturing the Products for
Distributor in accordance with applicable US Food and Drug
Administration ("FDA") rules and regulations and/or in
accordance with the IDE/PMA filed and amended by Collagen with
respect to the Products which have been approved by the FDA.
Collagen will provide, when requested by Distributor,
certification that to the best of its knowledge it is in
compliance with U.S. laws, statutes, rules, regulations and
relevant orders relating to the manufacture, use, distribution
and sale of the Products. If Distributor finds any deficiency in
quantity and/or any defect in quality of the Products delivered
hereunder, Distributor shall promptly give Collagen written
notice of such deficiency or defect, and Collagen, upon
receiving such notice shall discuss the deficiency or defect
with Distributor and will work with Distributor to insure
Collagen's obligations under this Agreement with regard to
quantity and quality of supply are being met. Distributor shall
not be obligated to pay for Products with any claimed
deficiencies or defects until such claims are resolved. In the
event Collagen agrees that such defect in quality and/or
quantity are its responsibility, Collagen shall promptly and
without charge to Distributor make up for such deficiency and/or
replace such defective Products with Products meeting
specifications for Products. Collagen shall bear the costs of
return of such defective Products to Collagen. EXCEPT AS SET
FORTH ABOVE, COLLAGEN MAKES NO WARRANTIES, EXPRESS OR IMPLIED,
WITH RESPECT TO THE PRODUCTS, INCLUDING WITHOUT LIMITATION ANY
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.
(f) Collagen will continue to furnish from time to time samples for
testing as may be requested by the Japanese authorities free of
charge.
6. CONFIDENTIAL INFORMATION: Collagen and Distributor agree that during
the term of this Agreement and any subsequent agreement under which
Distributor obtains distribution rights to the Products from Collagen or
any affiliate or subsidiary of Collagen and for a period of five years
thereafter each shall keep completely confidential and shall not publish
or otherwise divulge or use for its own benefit or for the benefit of
any third party any information of a proprietary nature furnished to it
(the "receiving party") by the other party (the "disclosing party")
without the prior written approval of the disclosing party in each
instance, except to the extent that it is necessary to divulge such
information for the purposes of this Agreement or the obtaining of
governmental approval for the investigation or marketing of the
Products. Nothing in this Section 6 shall prevent disclosure or use of
information (i) already known to the receiving party; (ii) which is or
become public knowledge; (iii) which is properly acquired by the
receiving party from a third party having the
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<PAGE> 7
right to convey such information. Information of a proprietary nature
shall include but not be limited to information concerning a party's
products, proposed products, marketing plans, methods of manufacture,
customers or any other information or materials in whatever form not
generally known to the public.
7. DEFENSE OF LEGAL ACTIONS AND INDEMNIFICATION:
(a) Legal Actions: Distributor agrees that Collagen shall have the
right to defend, or at its option to settle, any claim, suit or
proceedings brought against Distributor or its customers on the
issue of infringement of any United States or foreign patent or
trademark by reason of the Products sold hereunder or the use
thereof, subject to the limitations hereinafter set forth.
Collagen shall have sole control of any such action or
settlement negotiations, and Collagen agrees to pay, subject to
the limitations hereinafter set forth, any final judgment
entered against Distributor or its customers on such issue.
Distributor agrees that Collagen at its sole option shall be
relieved of the foregoing obligations unless Distributor or its
customers notifies Collagen in writing within fifteen (15) days
after it becomes aware of any such claim, suit or proceeding and
gives Collagen authority to proceed as contemplated herein, and,
at Collagen's expense, gives Collagen proper and full
information and assistance to settle and/or defend such claim,
suit or proceeding. Notwithstanding the foregoing, Collagen
assumes no liability for any modification or combination of the
Products with other products or for any unauthorized or improper
use or application of the Products.
(b) Indemnification: Collagen and Distributor each agree to
indemnify and hold the other party harmless from and against any
and all claims made by any person or entity arising out of the
manufacturing, testing, marketing, distribution and sale of the
Products, where and to such extent the damages are alleged to
have been caused by the fault of such party or its employees or
agents. Collagen hereby indemnifies and holds Distributor
harmless from and against any and all claims made against
Distributor where and to the extent that damages are alleged to
have been caused by previously unknown or undetected adverse
effects or counterindications disclosed by Collagen in its
package insert (as updated from time to time) or in U.S.
registration applications for the Products provided to
Distributor or as Collagen may otherwise notify distributor from
time to time without any fault of Distributor.
8. TERMINATION:
(a) Term: This Agreement shall commence on July 1, 1997, and shall
continue in effect until June 30, 1998, unless earlier
terminated in accordance with Article 8(b).
7
<PAGE> 8
(b) Termination:
(i) Either party may, at its option, terminate this Agreement
without cause by giving to the other party not less than one
hundred and twenty (120) days prior written notice.
(ii) Either party may terminate this Agreement upon thirty (30)
days written notice in the event that the other party shall at
any time commit a breach of any of its material obligations
hereunder and shall fail to correct such breach during the
period of said notice.
(iii) This Agreement shall terminate automatically without
further notice or action by either party if the other party
shall become insolvent, shall make or seek to make an
arrangement with or an assignment for the benefit of creditors,
or if proceedings in voluntary or involuntary bankruptcy shall
be instituted by, on behalf of or against such other party, or
if a receiver or trustee of such other party's property shall be
appointed.
(c) Effect of Termination:
(i) Distributor shall terminate all distribution activities in
the Territory immediately upon expiration, non-renewal or
termination (collectively, "Termination") of this Agreement and,
except as otherwise provided herein, all rights and obligations
of the parties hereunder shall cease; provided, however, that
Termination shall not relieve the parties of any obligations,
including Distributor's obligations to pay purchase prices,
accrued prior to said Termination. The obligations of Collagen
and Distributor pursuant to Sections 6 and 7 of this Agreement
shall survive any Termination of this Agreement. Nothing herein
shall limit any remedies which a party may have for the other's
default, except as set forth in Section 9(f).
(ii) Upon Termination, Distributor shall promptly sell to
Collagen all Products then in Distributor's inventory
considered, in Collagen's sole determination, to be in good
condition for sale. The price for any products repurchased by
Collagen shall be the prices Distributor paid Collagen for the
Products.
9. General Provisions:
(a) Governing Law: This Agreement shall be governed by and
interpreted in accordance with the laws of the State of
California and the United States
8
<PAGE> 9
excluding the Convention on Contracts for the Sale of Goods and
that body of laws known as conflicts of law.
(b) Arbitration: Any dispute or claim arising out of or in relation
to this Agreement shall be finally settled by binding
arbitration in San Francisco, California under the Commercial
Arbitration Rules of the American Arbitration Association by one
(1) arbitrator appointed in accordance with such Rules. Judgment
on the award rendered by the arbitrator may be enforced by any
court of competent jurisdiction.
(c) Entire Agreement: This Agreement represents the entire agreement
and understanding of Collagen and Distributor with respect to
distribution of the Products, supersedes all previous agreements
and understandings related thereto and may only be amended or
modified in writing signed by authorized representatives of
Distributor and Collagen.
(d) Assignment: Neither Collagen nor Distributor shall assign any of
its rights or obligations pursuant to this Agreement except to a
successor to substantially all of its business by merger or
other form of reorganization.
(e) Notices: Any notice required or permitted to be given hereunder
shall be in writing and in English and sent by facsimile (with
confirmation sent by regular airmail) or by pre-paid registered
air mail, return receipt requested, addressed to the parties at
their respective addresses as the parties may designate in
writing. Notice, including notice of change of address, shall be
deemed served on the business day following transmission in the
case of notice sent by facsimile or seven (7) days after deposit
in the mail for notice sent by pre-paid registered airmail.
(f) Limitation of Damages: In no event shall either party be liable
to the other for incidental, consequential or punitive damages,
even if such party shall have been advised of the possibility of
the same.
(g) Force Majeure: Each of the parties hereto shall be excused from
the performance of its obligations hereunder in the event such
performance is prevented by force majeure, and such excuse shall
continue so long as the condition constituting such force
majeure continues plus thirty (30) days after the termination of
such condition. For the purposes of this Agreement, force
majeure is defined to include causes beyond the control of
Distributor of Collagen, including without limitation acts of
God, acts, regulations or laws of any government, war, civil
commotion, destruction of production facilities or materials by
fire, earthquake or storm, labor disturbances, epidemic and
failure of public utilities or common carriers.
9
<PAGE> 10
(h) Shareholders not Liable: Shareholders of Distributor
and Collagen shall have no responsibility or liability with respect to rights
and obligations contained in this Agreement.
(i) Headings: Headings contained herein are for convenience
only and shall not affect the interpretation of any of the provisions of this
Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their authorized representatives as of the day and year first above
written.
COLLAGEN INTERNATIONAL INC. LEDERLE (JAPAN), LTD.
/s/ GARY S. PETERSMEYER /s/ JIRO HAYASHI
----------------------------- -------------------------------
Name: Gary S. Petersmeyer Name: Jiro Hayashi
Title: President/CEO Title: Senior Managing Director
/s/ JOHN SAMPSON
-----------------------------
Name: John Sampson
Title: Director of Distributor
Markets & Joint Ventures
10
<PAGE> 11
EXHIBIT A
Products Price (US$)
* *
* *
* *
* *
* *
* *
* *
* *
* *
11
<PAGE> 1
EXHIBIT 11.1
COLLAGEN CORPORATION
Statement Regarding Weighted Average Common
and Common Equivalent Shares Used in
Computation of Per Share Income
<TABLE>
<CAPTION>
Years Ended June 30, 1997 1996 1995
- ------------------------------------------------------- ---------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net income $ 7,371 $ 26,652 $ 8,760
========== ========== ==========
Primary
Common Stock 8,804 8,915 9,270
Stock Options (treasury stock method) 126 160 190
---------- ---------- ----------
Weighted average number of common and common equivalent
shares outstanding 8,930 9,075 9,460
========== ========== ==========
Earnings per share - primary $ .83 $ 2.94 $ .93
========== ========== ==========
Fully Diluted
Common Stock 8,804 8,915 9,270
Stock Options (treasury stock method) 128 189 211
---------- ---------- ----------
Weighted average number of common and common equivalent
shares outstanding 8,932 9,104 9,481
========== ========== ==========
Earnings per share - fully diluted NA* NA* NA*
========== ========== ==========
</TABLE>
- ----------
* Not applicable - dilution less than 3%
Page 72
<PAGE> 1
EXHIBIT 21.1
COLLAGEN CORPORATION
Subsidiaries* of Collagen Corporation
The Registrant owns the following percentages of the outstanding voting
securities of the following corporations, which are included in the Registrant's
consolidated financial statements.
<TABLE>
<CAPTION>
Percent Ownership
of Outstanding
Voting Securities @ Jurisdiction of
Name August 25, 1997 Incorporation
- --------------------------------------------------- ------------------- ----------------
<S> <C> <C>
Aesthetic Technologies, Inc. 100% Delaware
Cohesion Corporation 81% California
Collagen International, Inc. 100% Delaware
Collagen Biomedical Pty., Limited ** 100% Australia
Collagen Vertrieb Biomedizischer, Produkte GmbH ** 100% Austria
Collagen, S.A. ** 100% Belgium
Collagen Canada, Ltd. ** 100% Canada
Collagen SARL ** 100% France
Collagen GmbH ** 100% Germany
Collagen S.r.l. ** 100% Italy
Collagen Luxembourg S.A. ** 100% Luxembourg
Collagen B.V.** 100% Netherlands
Collagen Biomedical Iberica, S.A. ** 51% Spain
Collagen, S.A. ** 100% Switzerland
LipoMatrix, Incorporated 100% Virgin Islands
Collagen (U.K) Ltd. 100% United Kingdom
Collagen International Sales Corporation 100% Virgin Islands
*
</TABLE>
- ----------
* Excludes certain subsidiaries, which, considered in the aggregate as a
single subsidiary, did not constitute a significant subsidiary as of June
30, 1997.
** Subsidiary of Collagen International, Inc.
Page 73
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 2-93777, 33-21252, 33-39684, 33-73674, 33-80038 and 33-21213)
pertaining to the 1984 Incentive Stock Option Plan, 1985 Employee Stock Purchase
Plan, 1990 Directors' Stock Option Plan and 1994 Stock Option Plan of Collagen
Corporation of our report dated August 1, 1997, with respect to the consolidated
financial statements and schedule of Collagen Corporation included in this
Annual Report (Form 10K) for the year ended June 30, 1997.
/s/ ERNST & YOUNG LLP
Palo Alto, California
September 25, 1997
Page 74
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 18,481
<SECURITIES> 0
<RECEIVABLES> 11,177
<ALLOWANCES> 418
<INVENTORY> 14,293
<CURRENT-ASSETS> 57,964
<PP&E> 43,013
<DEPRECIATION> 27,753
<TOTAL-ASSETS> 184,911
<CURRENT-LIABILITIES> 25,722
<BONDS> 0
0
0
<COMMON> 108
<OTHER-SE> 119,789
<TOTAL-LIABILITY-AND-EQUITY> 184,911
<SALES> 71,812
<TOTAL-REVENUES> 71,812
<CGS> 20,308
<TOTAL-COSTS> 20,308
<OTHER-EXPENSES> 62,416
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 473
<INCOME-PRETAX> 13,214
<INCOME-TAX> 6,607
<INCOME-CONTINUING> 7,371
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,371
<EPS-PRIMARY> .83
<EPS-DILUTED> .83
</TABLE>
