<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarter period ended September 30, 1998
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 AESTHETICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2300486
State of Incorporation I.R.S. Employer Identification No.
1850 Embarcadero Road, Palo Alto, California 94303
Telephone: (650) 856-0200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of October 31, 1998, Registrant had outstanding 8,706,588 shares of common
stock, exclusive of 2,263,900 shares held by the Registrant as treasury stock.
<PAGE> 2
COLLAGEN AESTHETICS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information Page No.
- ------------------------------------ --------
<S> <C>
Condensed Consolidated Balance Sheets -
September 30, 1998 and June 30, 1998 3
Condensed Consolidated Statements of Income -
Three months ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows -
Three months ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6-8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-18
PART II. Other Information
Other Information 19
Signatures 20
</TABLE>
2
<PAGE> 3
COLLAGEN AESTHETICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998*
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,094 $ 7,916
Short-term investments 5,359 8,011
Accounts receivable, net 12,799 13,764
Inventories, net 11,421 12,101
Inventories of discontinued operations, net 321 417
Other current assets, net 10,872 11,016
--------- ---------
Total current assets 49,866 53,225
Property and equipment, net 12,737 14,448
Intangible assets and goodwill, net 5,941 6,861
Investment in Boston Scientific Corporation -- 73,979
Other investments and assets, net 4,030 17,826
--------- ---------
$ 72,574 $ 166,339
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,396 $ 3,561
Accrued compensation 2,258 4,749
Accrued liabilities and other 9,119 14,020
Income taxes payable 11,863 10,606
Liabilities of discontinued operations, net 880 781
--------- ---------
Total current liabilities 28,516 33,717
Long-term liabilities:
Deferred income taxes -- 30,589
Other long-term liabilities 1,333 1,393
--------- ---------
Total long-term liabilities 1,333 31,982
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, authorized: 5,000,000 shares;
none issued and outstanding -- --
Common stock, $.01 par value, authorized: 28,950,000 shares,
issued: 10,970,488 shares at September 30, 1998 (10,937,830
shares at June 30, 1998), outstanding: 8,747,588 shares at
September 30, 1998 (8,864,930 shares at June 30, 1998) 110 109
Additional paid-in capital 55,205 69,619
Retained earnings 34,087 32,128
Other accumulated comprehensive income:
Cumulative translation adjustment (1,822) (2,030)
Unrealized gain on available-for-sale investments -- 43,833
Treasury stock, 2,222,900 shares at September 30, 1998
(2,072,900 shares at June 30, 1998) (44,855) (43,019)
--------- ---------
Total stockholders' equity 42,725 100,640
--------- ---------
$ 72,574 $ 166,339
========= =========
</TABLE>
*Amounts derived from audited financial statements at the date indicated.
3
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COLLAGEN AESTHETICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues:
Product sales $ 18,417 $ 19,297
Costs and expenses:
Cost of sales 4,986 5,487
Selling, general and administrative 10,164 9,747
Research and development 3,321 5,035
-------- --------
Total operating costs and expenses 18,471 20,269
-------- --------
Loss from operations (54) (972)
Other income (expense):
Net gain on investments, principally
Boston Scientific Corporation 3,406 5,932
Equity in losses of affiliates, net (35) (73)
Interest income 184 301
Interest expense (49) (25)
-------- --------
Income before income taxes and minority
interest 3,452 5,163
Provision for income taxes 1,493 2,197
Minority interest 1 (28)
-------- --------
Income from continuing operations 1,958 2,994
Discontinued operations:
Loss from operations -- (1,423)
Benefit for income taxes -- 439
-------- --------
-- (984)
Net income $ 1,958 $ 2,010
======== ========
Net income (loss) per share - Basic
Continuing operations $ 0.22 $ 0.34
Discontinued operations -- (0.11)
-------- --------
Net income (loss) per share - Basic $ 0.22 $ 0.23
======== ========
Net income (loss) per share - Diluted
Continuing operations $ 0.22 $ 0.34
Discontinued operations -- (0.11)
-------- --------
Net income (loss) per share -
Diluted $ 0.22 $ 0.23
======== ========
Shares used in calculating net income (loss)
per share-Basic 8,819 8,819
======== ========
Shares used in calculating net income (loss)
per share-Diluted 8,824 8,901
======== ========
</TABLE>
4
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COLLAGEN AESTHETICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
- --------------------------------------------------------------------------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,958 $ 2,010
Adjustments to reconcile net income to net cash
provided by (used in)
Operating activities:
Depreciation and amortization 1,266 1,245
Equity in losses of affiliates 35 73
Gain on investments, net of taxes paid of $1.5 million
and $0 in fiscal years 1999 and 1998, respectively (1,942) (5,932)
Net changes in assets and liabilities of discontinued
operations -- (391)
Other adjustments related to changes in assets and
liabilities (487) (1,466)
-------- --------
Net cash provided by (used in) operating activities 830 (4,461)
-------- --------
Cash flows from investing activities:
Net proceeds from sales of Boston Scientific Corp. stock,
net of taxes paid 2,065 6,216
Net proceeds from sale of other affiliate stock, net of
taxes paid -- 704
Proceeds from sales and maturities of short-term investments 4,459 2,650
Purchases of short-term investments (2,823) (5,324)
Expenditures for property and equipment (1,294) (1,374)
Increase in intangible and other assets (264) --
Equity investments and loans to affiliates -- 44
-------- --------
Net cash provided by investing activities 2,143 2,916
-------- --------
Cash flows from financing activities:
Repurchase of common stock (1,836) --
Net proceeds from issuance of common stock 391 94
Cash dividends paid (896) (881)
Cohesion Technologies, Inc. Spinoff 546 --
-------- --------
Net cash used in financing activities (1,795) (787)
-------- --------
Net increase (decrease) in cash and cash equivalents 1,178 (2,332)
Cash and cash equivalents at beginning of period 7,916 18,381
-------- --------
Cash and cash equivalents at end of period $ 9,094 $ 16,049
======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
5
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COLLAGEN AESTHETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Collagen
Aesthetics, Inc. (formerly Collagen Corporation) ("Collagen" or 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. Investments in
companies in which the Company has less than a 20% interest with either no
readily determinable fair value or with transfer restrictions are carried at
cost or estimated realizable value, if less, and those unrestricted
investments with a readily determinable fair value are carried at market
value with the unrealized gains or losses, net of tax, recorded as a
component of stockholders' equity.
The condensed consolidated balance sheet as of September 30, 1998, the
condensed consolidated statements of income for the three months ended
September 30, 1998 and 1997, and the condensed consolidated statements of
cash flows for the three months ended September 30, 1998 and 1997, have been
prepared by the Company and are unaudited. In the opinion of management, all
necessary adjustments (which include only normal recurring adjustments) have
been made to present fairly the financial position, results of operations,
and cash flows at September 30, 1998 and for all periods presented. Interim
results are not necessarily indicative of results for a full fiscal year.
The consolidated balance sheet as of June 30, 1998 has been derived from the
audited consolidated financial statements at that date.
On August 12, 1998, the stockholders of the Company approved a corporate
name change from Collagen Corporation to Collagen Aesthetics, Inc. which
better reflects the Company's focus on serving the facial aesthetic
marketplace. The name change has been reflected in the accompanying
financial statements.
On August 18, 1998, the Company spun off, in a one-for-one distribution (the
"Distribution") of common stock to the Company's stockholders (the
"Spinoff"), Cohesion Technologies, Inc. ("Cohesion"), which previous to the
Spinoff was a wholly-owned subsidiary of the Company. The transaction
resulted in the distribution of 100% of the outstanding shares of Cohesion.
The distribution of shares was declared tax-free for U.S. federal income tax
purposes in an IRS ruling. Subsequent to the distribution, Cohesion has been
traded on the NASDAQ National Market under the ticker symbol of CSON.
Net sales for the current quarter reflect a reduction of $1.2 million in
sales to end customers related to the repurchase of product inventory per
the terms of an
6
<PAGE> 7
agreement with Lederle, the Company's former distributor in Japan. A
remaining $1.1 million of product sales reduction is expected to be incurred
in the second quarter of fiscal 1999 to complete the repurchase of remaining
inventory held by Lederle.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and notes included in the Company's Annual
Report on Form 10-K for the year ended June 30, 1998.
New Accounting Standards
As of July 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income". Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's net income or
shareholders' equity. Statement 130 requires unrealized gains or losses on
the Company's available-for-sale securities and foreign currency translation
adjustments, which prior to adoption were reported separately in
shareholders' equity to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to the
requirements of Statement 130.
During the first quarter of fiscal years 1999 and 1998, total comprehensive
income amounted to losses of $41.7 million and $2.9 million. The components
of comprehensive income, net of related tax, for the three-month periods
ended September 30, 1998 and 1997 are as follows (in thousands):
----------------------------------------------------------------------------
<TABLE>
<CAPTION> Three Months Ended
September 30,
--------------------
1998 1997
------ ------
<S> <C> <C>
Net income $ 1,958 $ 2,010
Unrealized gains (losses) on securities (43,833) (4,639)
Foreign currency translation adjustments 208 (285)
-------- --------
Comprehensive income $(41,667) $ (2,914)
======== ========
</TABLE>
----------------------------------------------------------------------------
The movement in unrealized gains (losses) on securities in fiscal 1999
relates to the Spinoff of Cohesion as Cohesion retained the Company's
investments in Boston Scientific Corporation ("Boston Scientific") and
Innovasive Devices Inc. ("Innovasive Devices").
7
<PAGE> 8
2. Inventories
Inventories consist of the following (in thousands):
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------- -------
<S> <C> <C>
Raw materials $ 1,620 $ 1,765
Work-in-process 2,567 3,948
Finished goods 7,234 6,388
------- -------
$11,421 $12,101
======= =======
</TABLE>
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3. Stockholders' Equity
In August 1998, the stockholders of the Company approved the amendment of
the Company's 1994 Stock Option Plan to increase the number of shares of
common stock reserved for issuance by 70,000 shares from 1,150,000 to
1,220,000 shares. The stockholders also approved the adoption of the
Company's 1998 Employee Stock Purchase Plan and the reservation of 125,000
shares of Company common stock for issuance thereunder, the adoption of the
1998 Directors' Stock Option Plan and the reservation of 250,000 shares of
common stock for issuance thereunder. The Company's 1990 Directors' Stock
Option Plan was terminated in August 1998. In addition, the Board of
Directors approved a continuation of the stock repurchase program previously
approved. Under this program, the Company is currently authorized to
repurchase up to 500,000 shares of its common stock having an aggregate
purchase price not in excess of $5,000,000. Four hundred thousand shares
remain to be purchased as of September 30, 1998.
4. Income Taxes
The provision for income taxes for the three months ended September 30,
1998, and 1997 was computed by applying the estimated annual income tax rate
to income before taxes. The estimated annual effective income tax rate
considers non-deductible items such as goodwill amortization and excludes
losses from certain foreign subsidiaries.
5. Subsequent Events-Sale of LipoMatrix, Inc.
On November 9, 1998 the Company announced the sale of its LipoMatrix, Inc.
("LipoMatrix") subsidiary, manufacturer of the Trilucent(R) breast implant
("Trilucent Implant"), to Sierra Medical Technologies of Carson City,
Nevada.
Consideration to the Company includes a cash payment and a royalty on future
worldwide breast implant sales. Sierra Medical Technologies was also granted
an option to purchase the U.S. Trilucent implant patent portfolio and
marketing rights for additional cash considerations. The Company has
accounted for LipoMatrix as a discontinued operation in fiscal 1998 and this
transaction is expected to have no material impact on the Company's fiscal
1999 business, operating results or financial condition.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for 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. These risks include among others, the timing
of product introductions, receipt of regulatory approvals, clinical efficacy of
and market demand for products, product development cycles, results of clinical
studies, development and rate growth of new markets, potential unfavorable
publicity regarding Collagen Aesthetics, Inc. (the "Company") or their products,
among other matters discussed in this report. Actual results are subject to
risks and uncertainties and actual events and results may differ significantly
from the discussion of such matters in the forward-looking statements. Such
differences may be based upon factors within the Company's control, such as
strategic planning decisions by management and reallocation of internal
resources, or on factors outside of the Company's control, such as scientific
advances by third parties, introduction of competitive products and delays by
regulatory and tax authorities, as well as those factors under the heading
"Factors That May Affect Future Results of Operations" set forth below and those
in the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1998.
The Company
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 facial
aesthetic applications and the treatment of stress urinary incontinence. The
Company markets its facial aesthetic products directly and through a network of
international distributors and its stress urinary incontinence product through a
marketing partner.
Spinoff and Name Change
On August 18, 1998, the Company spun off, in a one-for-one distribution (the
"Distribution") of common stock to the Company's stockholders (the "Spinoff"),
Cohesion Technologies, Inc. ("Cohesion"), which prior to the Spinoff was a
wholly-owned subsidiary of the Company. The transaction resulted in the
distribution of 100% of the outstanding shares of Cohesion. The distribution of
shares was declared tax-free for U.S. federal income tax purposes in an IRS
ruling. Subsequent to the distribution, Cohesion has been traded on the NASDAQ
National Market under the ticker symbol of CSON. On August 12, 1998, the
stockholders of the Company approved a corporate name change from Collagen
Corporation to Collagen Aesthetics, Inc. which better reflects the Company's
focus on serving the facial aesthetic medical marketplace. The name change has
been reflected in the accompanying financial statements.
For the first quarter of fiscal 1999 the Company included Cohesion's operating
results through August 18, 1998 (approximately six weeks) compared to the
inclusion of three months of Cohesion's operating results in fiscal 1998.
9
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Cancellation and Repricing of Outstanding Stock Options
In August 1998, each employee (including officers and directors) and consultant
of the Company or any subsidiary of the Company who, immediately prior to the
Distribution date held a vested stock option to purchase shares of Company
common stock, received two new options, in connection with the Distribution, in
replacement of the original option, one to acquire shares of Company common
stock and the other to acquire shares of Cohesion common stock. Each new option
gives the holder the right to purchase a number of shares equal to the number of
shares in the original option.
Each employee (including officers and directors) and consultant of the Company
or any subsidiary of the Company who, immediately prior to the Distribution date
held an unvested stock option to purchase shares of Company common stock,
received a new option, in replacement of the original option, to acquire the
same number of shares of common stock of the entity (the Company or Cohesion)
for which such optionee was employed or retained as a consultant following the
Distribution.
The exercise price of each new option was determined in accordance with Emerging
Issues Task Force Issue 90-9 as agreed upon by the Company's Board and the
Cohesion Board (or any committee thereof), after consultation with legal and
accounting advisors. The exercise price, as adjusted in light of the above
considerations, did not result in any compensation expense to the Company or
Cohesion. All other terms of the new options other than the exercise price are
substantially the same as those of the original options; provided, however, the
service as an employee or consultant of Cohesion, or its subsidiaries shall be
equivalent to providing service as an employee or consultant of the Company.
In August 1998, the stockholders of the Company approved the amendment of the
Company's 1994 Stock Option Plan to increase the number of shares of common
stock reserved for issuance by 70,000 shares from 1,150,000 to 1,220,000 shares.
The stockholders also approved the adoption of the Company's 1998 Employee Stock
Purchase Plan and the reservation of 125,000 shares of Company common stock for
issuance thereunder, the adoption of the 1998 Directors' Stock Option Plan and
the reservation of 250,000 shares of common stock for issuance thereunder. The
Company's 1990 Directors' Stock Option Plan was terminated in August 1998. In
addition, the Board of Directors approved a continuation of the stock repurchase
program previously approved. Under this program, the Company is currently
authorized to repurchase up to 500,000 shares of its common stock having an
aggregate purchase price not in excess of $5,000,000. Four hundred thousand
shares remain to be purchased as of September 30, 1998.
Sale of LipoMatrix, Inc.
On November 9, 1998 the Company announced the sale of its LipoMatrix, Inc.
("LipoMatrix") subsidiary, manufacturer of the Trilucent(R) breast implant
("Trilucent Implant"), to Sierra Medical Technologies of Carson City, Nevada.
Consideration to the Company includes a cash payment and a royalty on future
worldwide breast implant sales. Sierra Medical Technologies was also granted an
10
<PAGE> 11
option to purchase the U.S. Trilucent implant patent portfolio and marketing
rights for additional cash considerations.
Results of Operations
The following table shows for the periods indicated the percentage relationship
to product sales of certain items in the Condensed Consolidated Statements of
Income.
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF PRODUCT
SALES
Three Months Ended
September 30,
1998 1997
<S> <C> <C>
Product sales 100% 100%
Costs and expenses:
Cost of sales 27% 28%
Selling, general and administrative 55% 51%
Research and development 18% 26%
</TABLE>
----------------------------------------------------------------------------
Product sales. Product sales of $18.4 million in the three months ended
September 30, 1998, decreased approximately $880,000 or 5% compared to product
sales of $19.3 million for the same prior year period. The decrease in sales for
the three months ended September 30, 1998, compared with the same period in the
prior year, primarily was due to lower international sales of injectable
collagen products, resulting from a $1.2 million reduction in sales to end
customers by the Company related to the repurchase of inventory from the
Company's former Japanese distributor, the inclusion of approximately six weeks
of Cohesion product sales in fiscal 1999 compared to a full quarter in the prior
year period and lower Contigen(R) Bard Collagen implant ("Contigen implant")
product sales, partially offset by higher SoftForm(R) facial implant ("SoftForm
implant") sales.
Worldwide sales of facial aesthetic products for the three months ended
September 30, 1998 were $14.2 million, compared to $14.3 million for the same
period in the prior year. The decrease in worldwide sales for the current year
primarily was due to the reduction in sales by the Company related to the
repurchase of inventory from the Company's former Japanese distributor,
partially offset by increased sales of SoftForm implant in the United States and
by international subsidiaries, increased sales of Hylaform(R) viscoelastic gel
("Hylaform gel"), and strong collagen injectable sales in the United States.
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<PAGE> 12
A remaining $1.1 million of product sales reduction is expected to be incurred
in the second quarter of fiscal 1999 to complete the repurchase of remaining
inventory held by Lederle. The Company anticipates dollar growth in worldwide
product sales of facial aesthetic products during fiscal 1999.
During the three months ended September 30, 1998, pursuant to the Company's
sales agreement with C.R. Bard ("Bard"), the Company recorded revenue of $2.2
million from Bard based on Bard's direct sales of Contigen implant to physician
customers, compared to revenue of $1.7 million in the same period in the prior
year. In addition, the Company recorded $1.8 million of revenue from shipments
of Contigen implant to Bard in the three months ended September 30, 1998 and
$2.7 million for the same period in the prior year. The Company expects that
revenues from Contigen implant sales in fiscal 1999 will be similar to sales in
fiscal 1998.
A number of uncertainties exist surrounding the marketing and distribution of
Contigen implant. The Company's primary means of distribution for this product
is through a third party firm, Bard. The Company's business and financial
results could be adversely affected in the event that this party is unable to
market the product effectively, anticipate customer demand accurately, or
effectively manage industry-wide pricing and cost containment pressures in
health care.
Sales of Collagraft(R) bone graft matrix and Collagraft(R) bone graft matrix
strip ("Collagraft bone graft products") to Cohesion's marketing partner,
Zimmer, Inc. ("Zimmer"), were $45,000 for the quarter ended September 30, 1998,
compared to $542,000 for the same prior year period. The decrease in sales
resulted from recording six weeks of sales for the quarter ended September 30,
1998, compared to three months in the prior year period.
Cost of sales. Cost of sales as a percentage of product sales was 27% for the
three months ended September 30, 1998, compared with 28% for the same prior year
period. The lower cost of sales as a percentage of product sales in the three
months ended September 30, 1998, primarily was due to recording approximately
six weeks of cost of sales for Cohesion products, which have lower margins,
compared to a full quarter of cost of sales for Cohesion products in the same
prior year period. The Company anticipates that cost of sales as a percentage of
sales may increase slightly as a result of introducing additional product line
extensions, having higher costs per unit, partially offset by lower
manufacturing costs per unit for collagen-based injectable products and the
Spinoff.
SG&A. Selling, general, and administrative ("SG&A") expenses were $10.2 million
for the three months ended September 30, 1998, an increase of 4% over $9.7
million for the same prior year period. SG&A expenses as a percentage of product
sales was 55% for the three months ended September 30, 1998, compared to 51% for
the same prior year period. The increase in SG&A expenses in the three months
ended September 30, 1998, primarily resulted from expenses related to the
Spinoff of Cohesion, marketing costs related to SoftForm implant and the
pre-launch of Refinity Medical Skin Solutions ("Refinity skin solution
products"), partially offset by lower SG&A expenses included for Cohesion as a
result of recording approximately six weeks of Cohesion SG&A expenses compared
to a full quarter in the same prior year period. The Company expects SG&A
expenses in fiscal 1999 as a percentage of product sales to be at levels lower
than those of fiscal 1998.
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R&D. Research and development ("R&D") expenses, which include expenditures for
regulatory compliance, was $3.3 million (18% of product sales) for the three
months ended September 30, 1998, a decrease of 34% over $5.0 million (26% of
product sales), for the same prior year period. The decrease in R&D spending in
the three months ended September 30, 1998, primarily was attributable to the
inclusion of approximately six weeks of Cohesion R&D expenses, compared to three
months in fiscal 1998, partially offset by an increase in recombinant program
expenses. The Company expects R&D spending in fiscal 1999 to be at levels lower
than fiscal 1998 as a result of the Spinoff.
Loss from operations. Loss from operations was $54,000 for the three months
ended September 30, 1998, compared with a loss from operations of $972,000 for
the same prior year period. The loss in the three months ended September 30,
1998, primarily was due to increased SG&A expenses, partially offset by
recording approximately six weeks of Cohesion R&D expense for the quarter ended
September 30, 1998, compared to a full quarter for the same prior year period.
Compared with foreign exchange rates for the same prior year quarter, the impact
of foreign exchange rates in the current fiscal quarter on operating income was
a net $26,000 on an equivalent local currency basis, resulting from an increase
of approximately $28,000 in operating expenses, partially offset by a decrease
of approximately $54,000 in revenue. Until December 1994, the Company's policy
was to hedge material foreign currency transaction exposures. At September 30,
1998 and June 30, 1998, no foreign currency transaction exposures were hedged.
Unhedged net foreign assets were $6.4 million and $6.5 million at September 30,
1998 and June 30, 1998, respectively.
Net gain on investments, principally Boston Scientific Corporation. In the three
months ended September 30, 1998, the Company recorded a pre-tax gain on
investments of $3.4 million primarily resulting from the sale of approximately
50,000 shares of Boston Scientific Corporation ("Boston Scientific") common
stock compared to $5.9 million primarily resulting from the sale of
approximately 87,340 shares of Boston Scientific common stock in the three
months ended September 30, 1997. Cohesion retained the Company's investment in
Boston Scientific common stock subsequent to the Spinoff.
Equity in losses of affiliates, net. Equity in losses of affiliate companies was
approximately $35,000 for the three months ended September 30, 1998, compared to
equity in losses of approximately $73,000 for the same prior year period.
Interest income. Interest income was $184,000 for the three months ended
September 30, 1998, compared to $301,000 for the same period in the prior year.
The decrease in the three months ended September 30, 1998, primarily was due to
lower average monthly cash balances of cash, cash equivalents and short-term
investments, partially offset by a higher average interest rate.
Provision for income taxes. The provision for income taxes was approximately 43%
for the three months ended September 30, 1998, as well as for the corresponding
period in 1997 excluding the tax effect of the loss from discontinued operations
of LipoMatrix.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company's cash and cash equivalents were $9.1 million
compared to $7.9 million at June 30, 1998. Net cash provided by operating
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<PAGE> 14
activities was approximately $0.8 million in the three months ended September
30, 1998, compared to approximately $4.4 million of net cash used in operating
activities for the same prior year period.
The $0.8 million of net cash provided by operating activities in the three
months ended September 30, 1998, primarily was attributable to: a $3.3 million
net income after adjusting for gain on investments (net of taxes paid),
depreciation and amortization expense, equity in losses of affiliates, and a
$0.6 million increase in accounts receivable resulting from the resumption of
Contigen implant shipments to Bard, partially offset by a $1.9 million increase
in other assets and a $1.2 million decrease in accounts payable and other
accrued expenses.
The $0.3 million of net cash provided by investing and financing activities in
the three months ended September 30, 1998, primarily was due to proceeds of $4.4
million received from the sale of short-term investments, proceeds of $2.1
million (net of taxes paid) from the sale of 50,000 shares of Common Stock of
Boston Scientific by the Company, proceeds of $0.5 million resulting from the
Spinoff of Cohesion Technologies, Inc., proceeds of $0.4 million from the
issuance of 32,658 shares of the Company's Common Stock, partially offset by
payments of $2.8 million to purchase short-term investments, a payment of
approximately $1.8 million to repurchase 150,000 shares of the Company's Common
Stock, capital expenditures of approximately $1.3 million, a payment of cash
dividends of approximately $0.9 million to the Company's stockholders in July
1998, and an increase in intangible and other assets of $0.3 million.
The Company anticipates capital expenditures, equity investments in, and loans
to affiliate companies to be approximately $6.2 million in fiscal 1999. as of
September 30, 1998, the Company's capital expenditures, equity investments in,
and loans to affiliate companies totaled approximately $1.6 million. In August
1998, 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 100,000 shares as of September 30, 1998. Approximately
400,000 shares remain to be repurchased according to the Board of Director's
authorization at September 30, 1998. In June 1998, the Board of Directors
declared a dividend of ten cents per share for stockholders of record as of June
30, 1998. This dividend totaled approximately $1.8 million and was paid to
stockholders on July 15, 1998. The Company does not anticipate paying dividends
after the Spinoff.
The Company's principal sources of liquidity include cash generated from
operations and its cash, cash equivalents, and short-term investments.
Factors That May Affect Future Results of Operations
A large portion of the Company's revenues in recent years has come from its
international operations. As a result, the Company's operations and financial
results could be significantly affected by international factors, including
numerous regulatory agencies.
14
<PAGE> 15
Sales of the Company's collagen-based injectable products, Zyderm(R) and
Zyplast(R) collagen implants ("Zyderm implants" and "Zyplast implants"),
SoftForm implant as well as Contigen implant, accounted for approximately 92% of
consolidated product sales for the quarter ended September 30, 1998. 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, the 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.
The Company's quarterly operating results may vary significantly in the future
depending upon factors such as the timing of significant orders and shipments,
changes in pricing policies by the Company and 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. 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.
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 is located in one primary facility 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 or other
facilities.
The Company is involved in various legal actions arising in the course of
business, some of which involve product liability claims. The Company operates
in an industry susceptible to claims that may allege that the use of the
Company's technology or products has resulted in adverse effects or infringes on
third-party technology. With respect to 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. It is possible that
adverse product liability or intellectual property actions could negatively
affect the Company's future results of operations.
The Company has been, and may in the future, be the subject of negative
publicity, which can arise from various sources, ranging from the news media on
cosmetic procedures in general to legislative and regulatory investigations
specific to the Company concerning, among other things, the safety and efficacy
of its products. There can be no assurance that such investigations or negative
publicity from such
15
<PAGE> 16
investigations or from the news media will not result in a material adverse
effect on the Company's future financial position, its results of operations or
the market price of its stock. In addition, significant negative publicity could
result in an increased number of product liability claims.
The Company's manufacturing activities and products sold in the United States
are subject to extensive and rigorous regulations by the Food and Drug
Administration ("FDA") and by comparable agencies in certain foreign countries
where these products are manufactured or distributed. The FDA regulates the
manufacture and sale of medical devices in the United States, including
labeling, advertising and record keeping. Failure to obtain, or delays in
obtaining, the required regulatory approvals for new products, as well as
product recalls, both inside and outside of the United States could adversely
affect the Company.
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.
Year 2000. The "Year 2000" issue results from the use in computer hardware and
software of two digits rather than four digits to define the applicable year.
When computer systems must process dates both before and after January 1, 2000,
two-digit year "fields" may create processing ambiguities that can cause errors
and system failures. The results of these errors may range from minor undetected
errors to complete shutdown of an affected system. These errors or failures may
have limited effects, or the effects may be widespread, depending on the
computer chip, system or software, and its location and function. The effects of
the Year 2000 problem are exacerbated because of the interdependence of computer
and telecommunications systems in the United States and throughout the world.
Because of this interdependence, the failure of one system may lead to the
failure of many other systems even though the other systems are themselves "Year
2000 compliant".
The Company has reviewed the Year 2000 issue as it may affect the Company's
business activity. The Company is implementing a Year 2000 plan (the "Plan")
which is designed to cover all of the Company's activities, which will be
codified as circumstances change. Under the Plan, the Company is using a
five-phase methodology for addressing the issue. The phases are Awareness,
Assessment, Renovation, Validation and Implementation. A heightened emphasis on
completion will continue through the second quarter.
Awareness consists of defining the Year 2000 problem and gaining executive level
support and sponsorship. A Year 2000 program team has been established and an
overall strategy created. During Assessment, all internal systems, products and
supply chain partners are inventoried and prioritized for renovation. The
Company believes it has completed a majority of the Awareness and Assessment
phases, however, ongoing work will be required in these areas as the Company
completes its assessment of
16
<PAGE> 17
existing supply chain partners and enters into new supply chain relationships in
the ordinary course of business.
Renovation consists of converting, replacing, upgrading or eliminating systems
that have Year 2000 problems. Renovation has begun on mission-critical systems
and is targeted for completion by June 1999. Validation involves ensuring that
hardware and software fixes will work properly in 1999 and beyond and can occur
both before and after implementation. Validation will start in the second
quarter of fiscal 1999 and continue through June 1999 to allow for thorough
testing before the Year 2000. Implementation is the installation of hardware and
software components in a live environment. The Company is in the early stages of
the Implementation phase.
The Impact of Year 2000 issues on the Company will depend not only on corrective
actions that the Company takes, but also on the way in which Year 2000 issues
are addressed by governmental agencies, business and other third parties that
provide services or data to, or receive services or data from, the Company, or
whose financial condition or operational capability is important to the Company.
To reduce this exposure, the Company has an ongoing process of identifying and
contacting mission-critical third party vendors and other significant third
parties to determine their Year 2000 plans and target dates. Risks associated
with any such third parties located outside the United States may be higher
insofar as it is generally believed that non-U.S. businesses may not be
addressing their Year 2000 issues on as timely a basis as U.S. businesses.
Notwithstanding the Company's efforts, there can be no assurance that the
Company, mission-critical third party vendors or other significant third parties
will adequately address their Year 2000 issues.
The Company is developing contingency plans for implementation in the event that
the Company, mission-critical third party vendors or other significant third
parties fail to adequately address Year 2000 issues. Such plans principally
involve identifying alternative vendors or internal remediation. There can be no
assurance that any such plans will fully mitigate any such failures or problems.
Furthermore, there may be certain mission-critical third parties, such as
utilities, telecommunication companies, or material vendors where alternative
arrangements or sources are limited or unavailable.
Although it is difficult to estimate the total costs of implementing the Plan,
through June 1999 and beyond, the Company's preliminary estimate is that such
costs will total approximately $600,000. However, although management believes
its estimates are reasonable, there can be no assurance, for the reasons stated
in the next paragraph, that the actual costs of implementing the Plan will not
differ materially from the estimated costs. The Company has incurred
approximately $300,000 through September 30, 1998 on this project, which does
not include the costs to redeploy existing staff. The Company does not believe
that the redeployment of existing staff will have a material adverse effect on
it business, results of operations or financial position. Incremental expense
related to the Year 2000 project are not expected to materially impact operating
results in any one period.
The extent and magnitude of the Year 2000 Problem as it will affect the Company,
both before and for some period after January 1, 2000, are difficult to predict
or quantify for a number of reasons. Among the most important are lack of
control over systems that are used by third parties who are critical to the
Company's operation, dependence on third party software vendors to deliver Year
2000 upgrades in a timely manner,
17
<PAGE> 18
complexity of testing inter-connected networks and applications that depend on
third party networks and the uncertainty surrounding how others will deal with
liability issues raised by Year 2000 related failures. There can be no assurance
for example, that systems used by third parties will be adequately remediated so
that they are Year 2000 ready by January 1, 2000, or by some earlier date, so as
not to create a material disruption to the Company's business. Moreover, the
estimated costs of implementing the Plan do not take into account the costs, if
any, that might be incurred as a result of Year 2000 related failures that occur
despite the Company's implementation of the Plan.
Although the Company is not aware of any material operational issues associated
with preparing its internal systems for the Year 2000, or material issues with
respect to the adequacy of mission-critical third party systems, there can be no
assurance that the Company will not experience material unanticipated negative
consequences and/or material costs caused by undetected errors or defects in
such systems or by the Company's failure to adequately prepare for the results
of such errors or defects, including costs of related litigation, if any. The
impact of such consequences could have a material adverse effect on the
Company's business, financial condition or results of operations.
For a more complete discussion of risks and uncertainties involving the
Company's business, please see the risks factors described under the heading
"Factors That May Affect Future Results of Operations" set forth in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1998.
18
<PAGE> 19
PART II. OTHER INFORMATION
COLLAGEN AESTHETICS, INC.
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On August 12, 1998, a Special Meeting of Shareholders Collagen Corporation was
held in Palo Alto, California.
The matters voted upon and approved at the meeting, and the number of
affirmative and negative votes cast with respect to each matter were as follows:
(1) The spinoff of Cohesion into a separate company, including the
following principal elements: (a) the distribution, on a one-for-one basis, of
all the outstanding shares of Cohesion common stock to the Company's
stockholders; (b) the ratification of the Cohesion 1998 Stock Option Plan; (c)
the ratification of the Cohesion 1988 Employee Stock Purchase Plan; and (d) the
ratification of the Cohesion 1998 Directors' Stock Option Plan (6,399,018 votes
in favor, 172,040 votes opposed, 16,882 abstaining, 1,632,799 votes withheld);
(2) The amendment of the Company's Certificate of Incorporation to change
the name of the Company from Collagen Corporation to Collagen Aesthetics, Inc.
(8,043,249 votes in favor, 159,057 votes opposed, 18,433 abstaining, 0 votes
withheld);
(3) The amendment of the Company's 1994 Stock Option Plan to increase the
number of shares of Company common stock for issuance thereunder by 70,000
shares from 1,150,000 to 1,220,000 shares (3,928,319 votes in favor, 2,622,221
votes opposed, 37,400 abstaining, 1,632,799 votes withheld);
(4) The adoption of the Company's 1998 Employee Stock Purchase Plan and
the reservation of 125,000 shares of Company common stock for issuance
thereunder (6,406,371 votes in favor, 140,895 votes opposed, 40,674 abstaining,
1,632,799 votes withheld); and
(5) The adoption of the Company's 1998 Directors' Stock Option Plan and
the reservation of 250,000 shares of Company common stock for issuance
thereunder (4,301,096 votes in favor, 2,195,891 votes opposed, 90,953
abstaining, 1,632,799 votes withheld).
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 27 Financial Data Schedule
B. Reports on Form 8-K
The Company filed the following report on Form 8-K/A during the fiscal
quarter Ended September 30, 1998, relating to the Company's Spinoff of
Cohesion Technologies, Inc.
Form 8-K/A
Report Date: August 18, 1998
Filing Date: November 2, 1998
Item 7 - Financial Statements, Pro Forma Financial Information and
Exhibits
Item 7a - Pro Forma Financial Statements
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COLLAGEN AESTHETICS, INC.
Date: November 16, 1998 /s/ Gary S. Petersmeyer
----------------- -----------------------
Gary S. Petersmeyer
President and Chief Executive Officer
20
<PAGE> 21
COLLAGEN AESTHETICS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
Exhibit 27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,094
<SECURITIES> 0
<RECEIVABLES> 12,799
<ALLOWANCES> 0
<INVENTORY> 11,421
<CURRENT-ASSETS> 49,866
<PP&E> 12,737
<DEPRECIATION> 0
<TOTAL-ASSETS> 72,574
<CURRENT-LIABILITIES> 28,516
<BONDS> 0
0
0
<COMMON> 110
<OTHER-SE> 42,615
<TOTAL-LIABILITY-AND-EQUITY> 72,574
<SALES> 18,417
<TOTAL-REVENUES> 18,417
<CGS> 4,986
<TOTAL-COSTS> 4,986
<OTHER-EXPENSES> 13,485
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49
<INCOME-PRETAX> 3,452
<INCOME-TAX> 1,493
<INCOME-CONTINUING> 1,958
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,958
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
