<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 December 31, 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 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 January 31, 1998, Registrant had outstanding 8,972,324 shares of common
stock, exclusive of 1,960,400 shares held by the Registrant as treasury stock.
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COLLAGEN CORPORATION
INDEX
PART I. Financial Information Page No.
- --------------------------------------- --------
Consolidated Balance Sheets -
December 31, 1997 and June 30, 1997 3
Consolidated Statements of Operations -
Three and six months ended December 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows -
Six months ended December 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-18
PART II. Other Information
- -----------------------------------
Other Information 19- 20
Signatures 21
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COLLAGEN CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997 *
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,076 $ 18,481
Short-term investments 3,656 5,117
Accounts receivable, net 12,671 10,759
Inventories, net 12,687 14,293
Other current assets, net 11,645 9,314
--------- ---------
Total current assets 49,735 57,964
Property and equipment, net 15,453 15,260
Intangible assets and goodwill, net 13,273 14,764
Investment in Boston Scientific Corporation 55,411 83,874
Other investments and assets, net 25,105 13,049
--------- ---------
$ 158,977 $ 184,911
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,734 $ 2,638
Other accrued liabilities 14,683 13,638
Income taxes payable 9,060 9,376
Notes payable 64 70
--------- ---------
Total current liabilities 25,541 25,722
Long-term liabilities:
Deferred income taxes 28,179 35,448
Other long-term liabilities 1,762 3,795
--------- ---------
Total long-term liabilities 29,941 39,243
Commitments and contingencies
Minority Interest 20 49
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: 10,910,629 shares at December 31, 1997 (10,756,935
shares at June 30, 1997), outstanding: 8,962,729 shares at
December 31, 1997 (8,809,035 shares at June 30, 1997) 110 108
Additional paid-in capital 68,659 67,204
Retained earnings 40,699 47,999
Cumulative translation adjustment (2,017) (1,717)
Unrealized gain on available-for-sale investments 36,790 47,069
Treasury stock, 1,947,900 shares at December 31, 1997
and June 30, 1997 (40,766) (40,766)
--------- ---------
Total stockholders' equity 103,475 119,897
--------- ---------
$ 158,977 $ 184,911
========= =========
</TABLE>
* Amounts derived from audited financial statements at the date indicated.
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COLLAGEN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ ------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product Sales $ 22,551 $ 19,057 $ 42,953 $ 35,842
Costs and expenses:
Cost of sales 7,535 5,321 14,037 10,466
Selling, general and administrative 10,986 10,479 21,555 19,328
Research and development 5,767 4,525 11,493 8,686
Acquired in-process research and development 10,530 -- 10,530 --
-------- -------- -------- --------
34,818 20,325 57,615 38,480
-------- -------- -------- --------
Loss from operations (12,267) (1,268) (14,662) (2,638)
Other income (expense):
Net gain on investments, principally Boston
Scientific Corporation (Target Therapeutics,
Inc. in fiscal 1997) 2,843 3,038 8,775 9,222
Equity in losses of affiliates, net (76) (123) (149) (597)
Interest income 237 305 537 660
Interest expense (10) (146) (34) (231)
-------- -------- -------- --------
Income (loss) before income taxes and minority
interest (9,273) 1,806 (5,533) 6,416
Provision (benefit) for income taxes (857) 957 901 3,400
Minority interest 1 (162) (27) (302)
-------- -------- -------- --------
Net income (loss) $ (8,417) $ 1,011 $ (6,407) $ 3,318
======== ======== ======== ========
Net income (loss) per share-Basic $ (.95) $ .12 $ (.72) $ .38
======== ======== ======== ========
Net income (loss) per share-Diluted $ (.95) $ .11 $ (.72) $ .37
======== ======== ======== ========
Shares used in calculating earnings (loss) per share-Basic 8,895 8,691 8,857 8,827
======== ======== ======== ========
Shares used in calculating earnings (loss) per share-Diluted 8,895 8,841 8,857 8,963
======== ======== ======== ========
</TABLE>
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COLLAGEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (6,407) $ 3,318
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Acquired in-process research and development 10,530 --
Depreciation and amortization 3,423 3,107
Equity in losses of affiliates 149 597
Gain on investments, net of taxes paid of $0 and $5.2 million
in fiscal 1998 and 1997, respectively (8,775) (4,051)
Other adjustments related to changes in
assets and liabilities (5,085) (4,776)
-------- --------
Net cash used in operating activities (6,165) (1,805)
-------- --------
Cash flows from investing activities:
Proceeds from sale of Boston Scientific Corporation stock
(Target Therapeutics, Inc. in fiscal 1997), net of taxes paid 9,362 5,578
Proceeds from sale of other affiliate stock 704 --
Proceeds from sales and maturities of short-term investments 6,823 1,675
Purchases of short-term investments (5,324) (4,625)
Expenditures for property and equipment (2,345) (2,989)
Increase in intangible and other assets -- (99)
Expenditures for investments in and loans to affiliates, net of repayments (475) (1,491)
Acquisition of equity securities of Cohesion Corporation (10,530) --
-------- --------
Net cash used in investing activities (1,785) (1,951)
-------- --------
Cash flows from financing activities:
Repurchase of common stock -- (2,546)
Net proceeds from issuance of common stock 1,457 1,063
Cash dividends paid (881) (885)
Repayment of bank loans (2,031) 500
-------- --------
Net cash used in financing activities (1,455) (1,868)
-------- --------
Net decrease in cash and cash equivalents (9,405) (5,624)
Cash and cash equivalents at beginning of period 18,481 21,676
-------- --------
Cash and cash equivalents at end of period $ 9,076 $ 16,052
======== ========
</TABLE>
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COLLAGEN CORPORATION
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
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. Investments in companies in which the Company has less than 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, as a component of stockholders' equity.
The consolidated balance sheet as of December 31, 1997, the consolidated
statements of operations for the three and six months ended December 31,
1997 and 1996, and the condensed consolidated statements of cash flows for
the six months ended December 31, 1997 and 1996, 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 December 31, 1997 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, 1997 has been derived from
the audited consolidated financial statements at that date.
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, 1997.
New Accounting Standards & Required Disclosures
REPORTING COMPREHENSIVE INCOME AND DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. In June 1997, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income," and Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures About Segments of an
Enterprise and Related Information," which will be required to be adopted
by the Company in fiscal 1999. Adoption of these statements is not expected
to have a significant impact on the Company's consolidated financial
position, results of operations or cash flows.
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YEAR 2000. Some of the Company's older computer programs were written using
two digits rather than four to define the applicable year. As a result,
those computer programs have time-sensitive software that recognize a date
using "00" as the year 1900 rather than the year 2000. This could cause a
system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business
activities.
The Company has completed an assessment and will have to modify or replace
portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. The total
Year 2000 project cost is estimated at approximately $600,000 (which will
be incurred over the next two fiscal years) and substantially all costs are
expected to be capitalized. To date, the Company has incurred nominal
costs.
2. Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------- -------
<S> <C> <C>
Raw materials $ 1,803 $ 938
Work-in-process 2,928 7,188
Finished goods 7,956 6,167
------- -------
$12,687 $14,293
======= =======
</TABLE>
3. Investment in Boston Scientific Corporation
The Company accounts for its investment in Boston Scientific Corporation
("Boston Scientific") as an available-for-sale equity security, which
accordingly is carried at market value. During the three and six months
ended December 31, 1997, the Company sold 70,000 shares and 157,340 shares,
respectively, of Boston Scientific common stock for a pre-tax gain of
approximately $2.8 million and $8.8 million, respectively. Boston
Scientific common stock is quoted on the New York Stock Exchange under the
symbol BSX. The closing price of Boston Scientific common stock at December
31, 1997 was $45.88 per share. At December 31, 1997, the Company held
1,207,860 shares of Boston Scientific common stock and all holding
restrictions resulting from the acquisition of Target Therapeutics, Inc. by
Boston Scientific that were applicable at June 30, 1997, had expired.
Pursuant to a hedging strategy implemented by the Company in mid-August
1997, approximately half of the Company's position in Boston Scientific is
hedged, utilizing the purchase of puts and calls in combination to minimize
the downside risk of loss should the price of Boston Scientific stock
decline while allowing for limited upside participation should the stock
price rise. The call option is collateralized by shares of Boston
Scientific common stock held by the Company.
At December 31, 1997 and June 30, 1997, the Company's shares of Boston
Scientific common stock were recorded at $55.4 and $83.9 million,
respectively.
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The $50.2 million unrealized gain ($55.4 million estimated fair value less
$5.2 million cost) at December 31, 1997 and the $78.0 million unrealized
gain ($83.9 million estimated fair value less $5.9 million cost) at June
30, 1997, on these available-for-sale securities has been reported as a
separate component of stockholders' equity, net of tax.
4. Investment in Innovasive Devices, Inc.
Prior to October 1996, the Company's 844,000 shares of common stock of
Innovasive Devices, Inc. ("Innovasive Devices") were valued at cost, or
$4,064,000, due to restrictions which prevented the sale of any of the
Company's shares of common stock of Innovasive Devices. At December 31,
1997, restrictions were no longer applicable on 93,000 shares of common
stock which the Company holds in Innovasive Devices. As a result, the
Company now carries the non-restricted portion of its investment in
Innovasive Devices as an available-for-sale investment at market value, or
$.8 million, reflecting an unrealized gain of $.4 million, which has been
included in a separate component of stockholders' equity, net of tax. The
remaining 751,000 restricted shares of common stock continue to be valued
at cost.
During the three and six months ended December 31, 1997, 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 under
the symbol IDEA. The closing price of Innovasive Devices common stock at
December 31, 1997, was $9.13 per share. At December 31, 1997, the Company
held approximately a 9% ownership position in Innovasive Devices.
5. Acquisitions
The Company increased its ownership position in Cohesion Corporation (of
Palo Alto, California) from approximately 81% to approximately 99% during
the month of December 1997. Cohesion Corporation is a privately-held
company that is developing novel biomaterials with superior performance
characteristics in the area of tissue adhesives, hemostats, biosealants,
and adhesion prevention barriers for surgical applications. In connection
with the Company's purchase of substantially all the remaining outstanding
shares of Cohesion Corporation, $10.5 million of the purchase price (which
includes compensatory amounts pertaining to the purchase of vested employee
stock options) was allocated to in-process research and development, and
was expensed at the time of the investment. The Company determined the
amounts to be allocated to in-process technology for Cohesion Corporation
based on initial studies of whether technological feasibility had been
achieved and whether there was any alternative future use for the
technology. Such studies are still preliminary and are subject to revision.
The Company has concluded that the in-process technology has no alternative
future use after taking into consideration the potential for both usage of
the technology in different products and for resale of the technology. At
December 31, 1997, there were additional unvested options outstanding
providing for the purchase of the remaining shares of Cohesion Corporation
common stock. The Company is currently determining the future activity, if
any, it will take with respect to these options.
6. Income Taxes
The provision for income taxes for the six months ended December 31, 1997,
and 1996 were computed by applying the estimated annual income tax rate to
income
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before income taxes excluding the impact of the acquired in-process R&D
charge. The estimated annual income tax rate considers non-deductible items
such as goodwill amortization and excludes losses from certain foreign
subsidiaries. The provision for income taxes for the three months ended
December 31, 1997 was reduced by approximately $1.1 million as a result of
tax benefits related to the in-process R&D charge.
7. Earnings per share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS#128"),
which was adopted on December 31, 1997. The Company was required to change
the method previously used to compute earnings per share and to restate all
prior periods. The impact of SFAS #128 resulted in no impact for the three
and six months ended December 31, 1997 and an increase of $0.01 per share
for the three and six months ended December 31, 1996, with respect to basic
earnings per share.
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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. The Company's actual activities with regard
to its Cohesion Technologies Inc. and Aesthetic Technologies Group may differ
significantly from those discussed in the forward-looking statements, given the
legal, tax, market and operational uncertainties associated with the separation
of these divisions. Actual results may differ significantly from the results
discussed in the forward-looking statements and may be affected by, among other
things, future results of operations, strategic decisions by management or the
Company's Board of Directors, 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, introduction of competitive products, changes in the delivery of
healthcare products to consumers, receipt of IRS rulings concerning the
anticipated tax-free spin-off of Cohesion Technologies, Inc., and, in particular
the factors described below under "Factors That May Affect Future Results of
Operations" as well as those under the same heading in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1997.
The Company
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.
In addition to internal research and development ("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.
Separation of Aesthetic Technologies Group and Cohesion Technologies Inc.
In October 1997, the Company announced that it had determined to proceed to
separate its Aesthetic Technologies Group and its Collagen Technologies Group
into two independent, publicly-traded companies. In December 1997, the Company
purchased substantially all of the outstanding shares of Cohesion Corporation
and integrated Cohesion Corporation into the Company's Collagen Technologies
Group. The Collagen Technologies Group is scheduled to be spun off as a separate
company, named Cohesion Technologies, Inc., to Collagen Corporation
shareholders via a tax-free distribution by mid-1998. The separation is subject
to a number of conditions, including, without limitation, receipt of a ruling
from the Internal Revenue Service ("IRS") that the transaction will be tax-free
to the Company and its stockholders. The Company is currently awaiting a
determination by the IRS. Actual timing of the distribution will depend upon
tax, legal, and other considerations.
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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 Operations.
PERCENT OF PRODUCT SALES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------- ---------------------
1997 1996 1997 1996
--- --- --- ---
<S> <C> <C> <C> <C>
Product sales 100% 100% 100% 100%
Costs and expenses:
Cost of sales 33% 28% 33% 29%
Selling, general and administrative 49% 55% 50% 54%
Research and development 26% 24% 27% 24%
Acquired in-process research and
development 47% -- 25% --
</TABLE>
Product sales. Product sales of $22.6 million in the three months ended December
31, 1997, increased approximately $3.5 million or 18%, compared to product sales
of $19.1 million for the same prior-year period. Product sales of $43.0 million
in the six months ended December 31, 1997, increased approximately $7.1 million
or 20%, compared to product sales of $35.8 million for the same prior-year
period. The increase in sales primarily was due to the increase in revenue from
direct sales of Contigen(R) Bard collagen implant ("Contigen implant") to
physician customers by C.R. Bard Inc. ("Bard"), the Company's marketing partner
for Contigen implant, increase in sales of Hylaform(R) viscoelastic gel
("Hylaform gel") in certain European countries, and United States sales of
plastic surgery and dermatological products (including SoftForm(R) facial
implant ("SoftForm implant") and injectable collagen products) for the three and
six months ended December 31, 1997 compared with the same periods in the prior
year. (See "Operating income/loss " below.)
Worldwide sales of plastic surgery and dermatological products for the three and
six months ended December 31, 1997 were $18.2 million and $33.6 million,
respectively,
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both up 9% from sales of $16.8 million and $30.9 million for the same periods in
the prior year. Worldwide unit sales of plastic surgery and dermatological
products for the three and six months ended December 31, 1997 increased
approximately 8% and 9% over the same periods in the prior year. The increase in
both worldwide sales and units primarily was due to the introduction of Hylaform
gel in certain European countries and SoftForm implant in the United States, an
increase in sales in Europe of Trilucent(TM) breast implant ("Trilucent
implant"), a triglyceride-filled breast implant, and strong collagen injectable
sales by the Company's Japanese distributor, partially offset by lower sales of
collagen injectable products by international subsidiaries. The Company believes
the increase in injectable collagen sales in the United States in the three and
six months ended December 31, 1997, was a result of the continuation of United
States marketing programs designed to increase average treatment volume per
patient and to attract and retain new and existing patients, the implementation
of a new sales incentive program for its sales force, and contact made with
physicians not previously purchasing collagen-injectable products as a result of
the introduction of SoftForm implant. The Company anticipates continued dollar
growth in worldwide product sales of plastic surgery and dermatological products
during fiscal 1998. The Company announced previously its plan to restructure
manufacturing of the Trilucent implant to achieve long-term manufacturing
efficiencies. This plan involves relocating shell manufacturing to a third party
and moving the filling process to its facilities in Fremont, California. To
implement this plan, the Company entered into an agreement in December 1997 with
Laboratoire Perouse Implant ("LPI") in France to manufacture the Trilucent
implant shell. The Company is electing to shift a portion of its selling and
marketing efforts away from this product during this interim transition in an
effort to avoid a short supply situation. As a result, the Company does not
anticipate growth in Trilucent implant sales in fiscal year 1998 over fiscal
year 1997.
During the three and six months ended December 31, 1997, pursuant to the
Company's sales agreement with Bard, the Company recorded revenue of $1.9
million and $3.5 million, respectively, from Bard based on Bard's direct sales
of Contigen implant to physician customers compared to revenue of $1.7 million
and $3.2 million, respectively, in the same periods in the prior year. In
addition, the Company recorded $1.9 million and $4.6 million, respectively, of
revenue from shipments of Contigen implant to Bard in the three and six months
ended December 31, 1997 and no comparable revenue for the same period in the
prior year due to excess inventory situation at Bard. 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.
For the three and six months ended December 31, 1997, sales of 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"),
were approximately $400,000 and $1.0 million compared to $300,000 and $1.0
million in the same periods in the prior year. The Company expects sales of
Collagraft bone graft products in fiscal 1998 to be at the same levels recorded
in 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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Cost of sales. Cost of sales as a percentage of product sales was 33% for the
three and six months ended December 31, 1997, compared with 28% and 29% for the
same prior-year periods. The higher cost of sales as a percentage of product
sales in the three and six months ended December 31, 1997, primarily was due to
the introduction of product line extensions from third parties, Hylaform gel and
SoftForm implant, and increased direct sales of Contigen implant to physician
customers by Bard. Both Hylaform gel and SoftForm implant are manufactured by
third parties and Contigen implant is distributed by a third party and as a
result, have higher costs per unit. Due to the high fixed costs of the Company's
Fremont, California manufacturing facility, unit cost of manufacturing is
expected to remain highly dependent on the level of output at the Company's
manufacturing facility, which is affected by incremental production of
collagen-based injectable products. The Company anticipates that cost of sales
as a percentage of sales will continue to 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.
SG&A. Selling, general, and administrative ("SG&A") expenses were $11.0 million
for the three months ended December 31, 1997, an increase of 5% over $10.5
million for the same prior-year period. SG&A expenses were $21.6 million in the
six months ended December 31, 1997, an increase of approximately $2.2 million or
12% compared to SG&A expenses of $19.3 million for the same prior-year period.
SG&A expenses as a percentage of product sales were 49% and 50% for the three
and six months ended December 31, 1997, compared to 55% and 54% for the same
prior-year periods. The increase in SG&A expenses, in absolute dollars, in the
three and six month ended December 31, 1997, primarily resulted from expenses
related to the separation of the Aesthetic Technologies Group and Cohesion
Technologies Inc. and marketing costs related to the SoftForm implant and
Hylaform gel, partially offset by lower international expenditures. 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.
R&D. Research and development ("R&D") expenses, which include expenditures for
regulatory compliance, were $5.8 million and $11.5 million (26% and 27% of
product sales) for the three and six months ended December 31, 1997, an increase
of 27% and 32% over $4.5 million and $8.7 million (24% of product sales), for
the same prior-year periods, respectively. The increase in R&D spending in the
three and six months ended December 31, 1997, primarily was attributable to the
ramp-up of expenses at Cohesion Corporation ("Cohesion", a controlled affiliate)
to support planned development programs, including clinical trials and the
ramp-up of the human recombinant program. In early 1997, the Company began a
feasibility study conducted with a polyethylene glycol-collagen ("PEG-collagen")
formulation, called "CP-1," for the treatment of facial wrinkles. The study of
CP-1 was conducted to determine CP-1's potential to lengthen the persistence of
wrinkle correction compared to Zyplast(R) collagen implant. Because the results
of the feasibility study did not meet the Company's pre-determined expectations,
the Company has decided not to pursue expanded clinical studies at this time.
The Company expects R&D spending in fiscal 1998 to be at levels higher than
fiscal 1997 primarily due to increased expenses for Cohesion, the human
recombinant program and orthopaedics programs.
Acquired in-process research and development. The charge for acquired in-process
research and development ("in-process R&D") of $10.5 million in the three and
six months ended December 31, 1997, was a non-recurring charge related to the
purchase of substantially all of the remaining shares of Cohesion Corporation,
including the purchase of certain vested employee stock options. (See Note 5 of
Notes to Condensed Financial Statements.)
13
<PAGE> 14
Loss from operations. Loss from operations was $12.3 million for the three
months ended December 31, 1997, compared with a loss from operations of $1.3
million for the same prior-year period. The Company's consolidated operating
loss was $14.7 million for the six months ended December 31, 1997, compared with
a $2.6 million loss for the same prior-year period. The losses in the three and
six months ended December 31, 1997 primarily were due to acquired in-process
R&D, representing the purchase of substantially all of the remaining shares of
Cohesion, the ramp-up of R&D expenses at Cohesion to support planned development
programs, including clinical trials, the ramp-up of the Company's human
recombinant program, and expenses related to the separation of the Aesthetic
Technologies Group and Cohesion Technologies, Inc., partially offset by higher
Contigen implant sales and sales from product line extensions.
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 increase of $85,000 on equivalent local currency basis, resulting from a
decrease of approximately $890,000 in operating expenses, partially offset by a
decrease of approximately $805,000 in revenue. Compared with foreign exchange
rates for the same prior-year period, the impact of foreign exchange rates in
the current fiscal year on operating income was a net increase of $269,000 on
equivalent local currency basis, resulting from a decrease of approximately
$1,737,000 in operating expenses, partially offset by a decrease of
approximately $1,468,000 in revenue. Until December 1994, the Company's policy
was to hedge material foreign currency transaction exposures. At June 30, 1997
and December 31, 1997, no foreign currency transaction exposures were hedged.
Unhedged net foreign assets were $7.0 million and $7.6 million at December 31,
1997 and June 30, 1997, respectively.
Net gain on investments, principally Boston Scientific Corporation. In the three
months ended December 31, 1997, the Company recorded a gain on investments of
$2.8 million primarily resulting from the sale of 70,000 shares of Boston
Scientific Corporation ("Boston Scientific") common stock compared to $3.0
million resulting from the sale of 100,000 shares of Target Therapeutics, Inc.
("Target") common stock in the three months ended December 31, 1996. In the six
months ended December 31, 1997, the Company recorded a gain on investments of
$8.8 million, primarily resulting from the sale of 157,340 shares of Boston
Scientific common stock compared to $9.2 million resulting from the sale of
330,000 shares of Target common stock in the six months ended December 31, 1996.
The Company may defer further sales of Boston Scientific common stock over the
next few quarters to optimize tax planning in connection with the anticipated
spin-off of Cohesion Technologies, although decisions concerning prospective
Boston Scientific common stock sales will also be affected by the then-current
market price for Boston Scientific common stock.
Equity in losses of affiliates, net. Equity in losses of affiliate companies was
approximately $76,000 for the three months ended December 31, 1997, compared to
equity in losses of approximately $123,000 for the same prior-year period. For
the six months ended December 31, 1997, equity in losses of affiliate companies
was $149,000 compared with losses of $597,000 in the same prior-year period. The
decrease in equity in losses of affiliates primarily was due to lower
CollOptics, Inc. ("CollOptics") losses as a result of CollOptics reducing its
R&D efforts until it obtains additional funding.
The Company intends to continue to expand its new product development activities
through more equity investments in or loans to affiliate companies during fiscal
year 1998. These affiliate companies typically are in an early stage of
development and may
14
<PAGE> 15
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. Interest income was $237,000 and $537,000 for the three and six
months ended December 31, 1997, respectively, compared to $305,000 and $660,000
for the same periods in the prior year. The decrease in the three and six months
ended December 31, 1997, primarily was due to lower average cash, cash
equivalents and short-term investment balances and a lower average interest
rate.
Provision for income taxes. The provision for income taxes for the six months
ended December 31, 1997 prior to the in-process R&D charge was approximately 40%
as compared to 53% for the corresponding period in 1996. The decrease in the
estimated annual tax rate results primarily from fluctuations in estimated
annual pretax income without similar changes in non-deductible goodwill
amortization in addition to reduced losses from foreign subsidiaries which
previously could not be offset against U.S. federal taxable income. The
provision for income taxes for the three months ended December 31, 1997 was
reduced by approximately $1.1 million as a result of tax benefits related to the
in-process R&D charge.
Liquidity and Capital Resources
At December 31, 1997, the Company's cash and cash equivalents were $9.1 million
compared to $18.5 million at June 30, 1997. Net cash used in operating
activities was approximately $6.2 million in the six months ended December 31,
1997, compared to approximately $1.8 million of net cash provided by operating
activities for the same prior-year period.
The $6.2 million of net cash used in operating activities in the six months
ended December 31, 1997, mainly was attributable to a $3.2 million increase in
miscellaneous receivables related to the sale of Boston Scientific common stock,
a $1.9 million increase in accounts receivable resulting from the resumption of
Contigen implant shipments to Bard, a $1.8 million increase in prepaid expenses,
a $900,000 net loss after adjusting for gain on investments (net of taxes paid),
depreciation and amortization expense, equity in losses of affiliates, and
acquired in-process research and development, partially offset by a $1.6 million
decrease in inventory.
The $3.2 million of net cash used in investing and financing activities in the
six months ended December 31, 1997, primarily was due to payments totaling $10.5
million for the purchase of substantially all of the remaining equity interests
in Cohesion Corporation, a payment of $5.3 million to purchase short-term
investments, capital expenditures of approximately $2.3 million, repayment of
$2.0 million of the Company's credit facility, payment of cash dividends of
approximately $900,000 to the Company's stockholders in July 1997, and net
payments of approximately $500,000 for additional investments made in and loans
to affiliates, partially offset by proceeds of $9.4 million (net of taxes paid)
from the sale of 157,340 shares of common stock of Boston Scientific by the
Company, proceeds of $6.8 million received from the sale of short-term
investments, proceeds of $1.4 million from the issuance of 153,694 shares of the
Company's common stock and proceeds of approximately $700,000 from the sale of
the Company's shares in affiliates.
15
<PAGE> 16
The Company anticipates capital expenditures, equity investments in, and loans
to affiliate companies to be approximately $20.9 million in fiscal 1998. As of
December 31, 1997, the Company's capital expenditures, equity investments in,
and loans to affiliate companies totaled approximately $13.4 million. 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 December 31, 1997. After December
31, 1997, however, the Company began repurchasing stock in the open market.
Approximately 327,100 shares remain to be repurchased according to the Board of
Directors authorization. In November 1997, the Board of Directors declared a
dividend of ten cents per share for stockholders of record as of December 15,
1997 with a payment on or about January 15, 1998.
The Company's principal sources of liquidity include cash generated from
operations, sales of Boston Scientific common stock, and the Company's cash,
cash equivalents, and short-term investments. At December 31, 1997, the Company
held 1,207,860 shares of Boston Scientific common stock and all holding
restrictions resulting from the acquisition of Target by Boston Scientific that
were applicable at June 30, 1997, had expired. The Company's Board of Directors
has authorized the Company to sell portions of its holdings in Boston
Scientific. The Company anticipates that stock sales pursuant to this
authorization will be made from time to time with the objective of generating
cash, for among other things, further investments in both current and new
affiliate companies.
The Company believes that the above sources of liquidity should be adequate to
fund its anticipated cash needs through at least the next twelve months.
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, changes in foreign currency exchange rates and
foreign economic and political conditions generally. The Company's results of
operations could be significantly affected by fluctuations in foreign currency
exchange rates or disruptions to shipments.
Sales of the Company's collagen-based injectable products, Zyderm(R) I implant,
Zyderm(R) II implant and Zyplast(R) implant, as well as Trilucent implant and
Contigen implant, accounted for approximately 84% of consolidated product sales
for the quarter ended December 31, 1997 and 87% of consolidated product sales
for the six months ended December 31, 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.
The Company's quarterly operating results may vary significantly in the future
depending upon factors such as 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
16
<PAGE> 17
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
facility.
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 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
17
<PAGE> 18
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.
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, 1997.
18
<PAGE> 19
PART II. OTHER INFORMATION
COLLAGEN CORPORATION
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
A. On October 29, 1997, the Registrant held its Annual Meeting of
Stockholders.
B. As listed below, all of management's nominees for directors were
elected at the meeting pursuant to proxies solicited pursuant to
Regulation 14 under the Securities and Exchange Act of 1934 (in
thousands).
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
No. of No. of No of No of No of
Votes Votes Votes Votes Broker Non-
Name of Nominee For Against Withheld Abstained Votes
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gary S. Petersmeyer 7,240 0 193 0 0
Anne L. Bakar 7,259 0 174 0 0
John R. Daniels, MD 7,320 0 113 0 0
William G. Davis 7,323 0 111 0 0
Reid W. Dennis 7,318 0 116 0 0
Craig W. Johnson 7,265 0 168 0 0
-----------------------------------------------------------------------------------------------------
</TABLE>
C. The adoption of an amendment to the 1995 Employee Stock Purchase
Plan to increase the number of shares of common stock reserved
for issuance thereunder by 100,000 shares and to permit
participants to purchase up to 3,000 shares during any offering
period, was approved with 6,034,083 shares voting in favor,
1,300,778 shares voting against, 51,268 shares abstaining and
46,930 broker non-votes.
D. The appointment of Ernst & Young LLP as independent auditors of
the Company for the fiscal year ending June 30, 1998 was ratified
with 7,357,482 shares voting in favor, 65,679 voting against and
9,898 shares abstaining.
19
<PAGE> 20
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 10.94 - Manufacturing agreement between Registrant and LPI,
dated December 16, 1997.
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K
None
20
<PAGE> 21
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 CORPORATION
Date: February 12, 1998 /s/ Norman Halleen
----------------- ------------------------------
Norman Halleen
Vice President Finance
Chief Financial Officer
21
<PAGE> 22
COLLAGEN CORPORATION
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
Exhibit 10.94 Manufacturing Agreement between Registrant and
- ------------- LPI, dated December 16, 1997.
Exhibit 27 Financial Data Schedule
- ----------
22
<PAGE> 1
EXHIBIT 10.94
MANUFACTURING AGREEMENT
This MANUFACTURING AGREEMENT (the "Agreement") is entered into effective
as of December 16, 1997 (the "Effective Date"), by and between COLLAGEN
CORPORATION, a Delaware corporation, with an office at 2500 Faber Place, Palo
Alto, California 94303 ("Collagen"), and LABORATOIRE PEROUSE IMPLANT, a company
of France, with an office at B.P. 6-Z.A. D'Outreville 60540
Bornel France ("LPI").
WHEREAS, Collagen wishes LPI to manufacture Products (as defined below)
for Collagen in accordance with specifications provided by Collagen;
WHEREAS, LPI is willing to act as Collagen's subcontractor for
manufacture of such Products:
NOW, THEREFORE, the parties agree as follows:
ARTICLE 1: DEFINITIONS
1.1 "Affiliate" shall mean an entity that controls, is controlled by or
is under common control with such party. For purposes of this definition,
"control" shall mean the possession, directly or indirectly, of a majority of
the voting power of such entity or the power to direct or cause the direction of
the management and policies of such entity (whether through ownership of
securities or partnership or other ownership interests, by contract or
otherwise).
1.2 "Regulatory Agency" shall mean, collectively, the U.S. Food and Drug
Administration, local regulatory administration competent for medical devices
and appointed local controlling entities ("organismes notifies") and the
European Standards and Medical Device Directives.
1.3 "Latent Defect" means any defect in a Product, not discoverable by
reasonably careful inspection using normal inspection procedures, which arises
from a defect in the manufacturing of such Product, the materials used in such
Product, or noncompliance with the Proprietary Specifications for such Product.
1.4 "Net Sales" shall mean the gross invoiced price for all Products
sold by Collagen, its Affiliates or sublicensees to third party customers, less
deductions made in the normal course of business for: (a) commercially
reasonable quantity, trade and cash discounts or rebates, recalls, credits or
allowance and adjustments separately and actually credited to customers for
rejections and returns of Products; (b) charges for freight, postage,
transportation, import or export taxes, excise taxes and other similar taxes,
insurance and other delivery costs not otherwise charged to the customer and
actually paid by Collagen; and (c) any tax or other government charges (other
than income tax) levied on the use, sale, transportation or delivery of Product
and borne by Collagen and its Affiliates.
*** Confidential treatment has been requested
-1-
<PAGE> 2
1.5 "Products" shall mean the products set forth in Exhibit A.
1.6 "Proprietary Specifications" shall mean the design, specifications
and drawing for the Products as provided by Collagen and to be agreed upon by
the parties and attached hereto as Exhibit A within thirty (30) days of the
Effective Date.
ARTICLE 2: SUPPLY, OWNERSHIP, AND DISTRIBUTION RIGHTS
2.1 Manufacture of Products. Commencing on the Effective Date, and for
the term of this Agreement, LPI shall manufacture Products in strict conformity
with the Proprietary Specifications for Collagen, in quantities sufficient to
meet Collagen's requirements for Products for the entire world except the United
States and Canada; provided, however, with respect to the United States and
Canada, LPI shall be obligated to manufacture for Collagen its requirements for
Products for clinical and preclinical applications and uses only. Collagen shall
be obligated to purchase its requirements for Product from LPI, except Collagen
shall have the right to purchase its requirements from a manufacturer other than
LPI: (i) such quantity of Products required by Collagen in excess of [***] in
each calendar year; or (ii) Products for incorporation into finished products
for commercial sale in the United States and Canada. Collagen shall grant to LPI
a first right of refusal to manufacture for Collagen its requirements for
Products under conditions (i) or (ii) above, provided that Collagen may, at its
discretion, require LPI to implement an alternate manufacturing facility outside
of France as a condition to LPI manufacturing Product for Collagen under
condition (i).
2.2 Intellectual Property Ownership and Distribution Rights. The
Proprietary Specifications and information contained therein shall be deemed the
confidential information of Collagen and/or its Affiliates, and LPI agrees to
use such confidential information solely in connection with performing this
agreement and exercise due care to prevent the disclosure thereof to any third
parties; provided, however, this Section 2.2 shall not apply, or shall cease to
apply, to information contained in the Proprietary Specifications to the extent
that LPI can demonstrate that such information (i) became or was publicly known
and available through no fault of LPI; (ii) was in LPI's possession prior to
disclosure by Collagen as evidenced by written instrument; (iii) comes into
LPI's possession through a third party without restrictions or breach of
confidence by such third party; or (iv) is disclosed by LPI with Collagen's
prior written authorization. Subject to the foregoing provisions of this Section
2.2 and Section 2.5, Collagen shall own all right, title and interest to any
intellectual property rights in and to the Products or the Proprietary
Specifications. Collagen's rights shall include, without limitation, the right
in its sole discretion, subject to the provisions of this Agreement, to label
and sell or otherwise distribute such Products worldwide, under Collagen's name,
logo and/or trade names.
2.3 Exclusivity. LPI hereby grants Collagen for the duration of [***],
an exclusive, worldwide, license to use, make, have made, distribute, have
distributed, import, export, have imported and exported, sell, and have sold
finished products incorporating such Products, under any intellectual property
rights LPI may have or obtain (under Section 2.5 below) with respect to the
manufacture of the Products.
*** Confidential treatment has been requested
-2-
<PAGE> 3
2.4 No Use of the Other Party's Name or Trademarks. Neither party shall
use the other party's name or trademarks in connection with the manufacture or
distribution of Products without the prior written consent of such other party.
2.5 Ownership of Inventions. Each party shall own any technology
associated with the Products, including any processing methods, manufacturing
methods or related know-how, that it developed prior to the Effective Date or
that it independently develops after the Effective Date. Subject to the
foregoing and Collagen's ownership rights set forth in Section 2.2, and
notwithstanding any French law to the contrary, the parties shall jointly own,
without duty to account to each other, any manufacturing technology which is
jointly developed in the course of the manufacture of Products hereunder. The
parties shall discuss in good faith the appropriate method of protecting such
jointly owned technology and of enforcing their rights in such jointly owned
technology against infringers.
ARTICLE 3: TERMS AND CONDITIONS FOR SUPPLY OF PRODUCTS
3.1 Forecasts. During the term of this Agreement, Collagen or its
subsidiaries or agents shall provide LPI annually with a rolling written
forecast (the "Long Range Forecast"), which shall extend for the shorter of
twelve (12) months or the remainder of the term of this Agreement, for the
Products to be manufactured and supplied by LPI in the forecast period. Such
Long Range Forecast shall be updated quarterly, and shall set forth Collagen's
estimated requirements and required delivery dates for the Products. Collagen
shall be required to submit purchase orders for Product in quantities no less
than the quantities forecasted for the first six (6) months of such Long Range
Forecast; the remaining portion of such Long Range Forecast shall not be binding
on Collagen. The parties agree that Collagen shall provide to LPI a non-binding
[***] forecast at the end of the Initial Term.
3.2 Orders. Collagen or its subsidiaries or agents shall initiate
purchases under this Agreement by submitting written purchase orders on a
monthly basis to LPI at least [***] prior to the required delivery date.
Purchase orders shall state unit quantities, unit descriptions, requested
delivery dates and shipping instructions. Such orders shall not be binding until
accepted by LPI. LPI shall notify Collagen in writing of the acceptance or
rejection of any purchase order submitted by Collagen within ten (10) business
days after receipt of such order. In the event that Collagen has not received
such notification from LPI with regard to any purchase order by the end of such
ten (10) business day period, LPI shall be deemed to have accepted such purchase
order.
3.3 Capacity. LPI agrees to develop manufacturing capacity sufficient to
meet the Long Range Forecast, and will use its commercially reasonable efforts
to provide increased capacity of up to [***] above such Long Range Forecast;
provided, however, that Collagen place its purchase orders in accordance with
Section 3.2. In any event, LPI agrees to develop manufacturing capacity to meet
the initial forecast set forth in Exhibit B attached hereto.
3.4 Packing, Shipping, Title, Risk of Loss. All Products shall be
shipped F.O.B. (ICC Incoterms (1990 Edition)) to Collagen's address as set forth
in purchase orders provided by
*** Confidential treatment has been requested
-3-
<PAGE> 4
Collagen pursuant to Section 3.2 or to such other address as may be specified by
Collagen, except that Collagen shall reimburse LPI for all shipping costs for
Products. All Products delivered under this Agreement shall be packed for
shipment in: (i) LPI's standard containers; or (ii) in container's which at
Collagen's discretion are designed and specified by, or provided by, Collagen.
All packaging expenses incurred by LPI shall be borne by LPI. Any incremental
packing expenses in addition to the costs of shipment in LPI's standard
containers which are incurred as a result of Collagen's container specifications
shall be borne by Collagen. Legal title to and risk of loss of all quantities of
Product shall remain with LPI until delivery of the Product to Collagen's
address or to other such address specified by Collagen. Upon such delivery,
title to such Products shall, without further action, be transferred to and
vested in Collagen.
3.5 Inspection and Acceptance. All units of Products delivered to
Collagen pursuant to this Agreement shall be accompanied by, and upon delivery
be deemed accepted subject to, a Certificate of Conformity issued by LPI
certifying that each such Product meets, and will continue to meet throughout
the labeled shelf-life of such Product, the Proprietary Specifications. Collagen
shall have fifteen (15) business days (the "Inspection Period") after delivery
of a Product shipment to inspect and test the Products in such shipment
according to the Proprietary Specifications. Any non-conformity with the
Proprietary Specification or Latent Defect which arises after acceptance by
Collagen shall be the responsibility of LPI, unless such non-conformity or
defect is due to improper handling or storage conditions subsequent to delivery
of the Product. LPI and Collagen agree to consult with each other to resolve the
discrepancy between each other's determinations. If such consultation does not
resolve the discrepancy within one (1) month after identification of such
discrepancy, then parties shall nominate a mutually agreeable reputable
independent laboratory to test representative samples taken from such shipment.
The expense of such tests shall be shared equally between the parties, and the
results of such tests shall be binding on the parties. LPI shall, at its
expense, replace any such shipment to the extent that it does not conform to the
Proprietary Specifications. All non-conforming or defective Products shall be
returned to LPI at the address set forth herein, accompanied or preceded by a
reasonably detailed statement of the claimed defect or non-conformity, and
packed and shipped according to instructions provided by LPI. The shipping costs
of any such returned units shall be borne by LPI, unless such Products are
determined not to be defective under the terms of this Agreement, in which case
such shipping costs shall be borne by Collagen.
ARTICLE 4: PRICE AND PAYMENT
4.1 Investments by Collagen. Collagen shall pay to LPI the following
amounts for improvements to LPI's manufacturing facilities to enable LPI to
manufacture the Products pursuant to the terms of this Agreement as follows:
(i) For LPI to build a maximum production capacity of [***] units of
Product per year, corresponding to a monthly forecast by Collagen of [***] units
of Product (including the increased capacity of [***] of the Long Range
Forecast):
- [***] upon execution of this Agreement; and
*** Confidential treatment has been requested
-4-
<PAGE> 5
- [***] on the date of acceptance by Collagen of the first
shipment of Product delivered by LPI to Collagen in accordance with Article 3.
In addition, provided that: (a) LPI has met the quantity, quality, and
delivery date requirements for all previous purchase orders placed by Collagen
pursuant to Section 3.2, and (b) LPI has no outstanding unfulfilled orders for
Products, Collagen shall pay LPI:
(ii) For a maximum production capacity of [***] units of Product per
year, corresponding to a monthly forecast by Collagen of [***] units of Product
(including the increased capacity of [***] of the Long Range Forecast):
- [***], on the date that the Long Range Forecast, as amended by
Collagen pursuant to Section 3.1, results in a monthly forecast of over [***]
units of Product; and
- an additional [***] within [***] thereof.
(iii) For a maximum capacity of [***] units of Product per year,
corresponding to a monthly forecast by Collagen of [***] units of Product
(including the increased capacity of [***] of the Long Range Forecast):
- [***], on the date that the Long Range Forecast, as amended by
Collagen pursuant to Section 3.1, results in a monthly forecast of over [***]
units of Product; and
- an additional [***] within [***] thereof.
4.2 Pricing. Collagen agrees to pay LPI for Products delivered under a
purchase order submitted pursuant to Section 3.2 hereto, in accordance with the
prices and volume discount schedule in Exhibit C, which prices do not include
shipping costs. All prices for Products shall be in French Francs.
4.3 Price Changes. The parties agree to negotiate in good faith new
pricing at the end of the Initial Term; provided, however, that the price shall
not increase more than [***] over the price in effect during the last year of
the Initial Term. In the event that the cost of raw materials actually paid by
LPI and required for LPI to perform its obligations hereunder increases, then
LPI may increase the price for the Products by the lesser of: (i) such
documented actual percentage increase; or (ii) [***] over the then-current
price. Such additional price increases shall apply to all purchase orders
received after the effective date of such price increases.
4.4 Performance Premium. Provided that: (i) LPI meets the quantity,
quality, and delivery date requirements for the monthly purchase order placed by
Collagen pursuant to Section 3.2, and (ii) LPI has no outstanding unfulfilled
orders for Products, Collagen agrees to pay to LPI a premium equal to [***] of
the total amount of the purchase order, exclusive of Value Added Tax ("VAT"),
made by Collagen and fulfilled by LPI during such month (the "Premium Payment").
If LPI: (A) fails to meet any quantity, quality, or delivery date requirement
for any month; or (B) has outstanding unfulfilled orders for Products as of that
month, it shall be disqualified from receiving, and Collagen shall be relieved
from its obligation
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to pay, such Premium Payment for such month. Collagen shall pay LPI the Premium
Payments due LPI under this Section 4.4 on a [***],[***].
4.5 Taxes. All prices are exclusive of any export or import taxes, VAT,
duties or tariffs, or federal, state or local tax or excise, other than taxes
based on LPI's net income. Any such amounts collected by or paid by LPI shall be
reimbursed by Collagen, and shall appear as a separate item on Collagen's
invoice; provided, however, that LPI shall not collect or pay any such tax or
excise if LPI receives a valid tax exemption certificate from Collagen prior to
shipment.
4.6 Payment. LPI shall submit an invoice to Collagen upon shipment of
the Products. The invoice shall state the amount to be paid by Collagen for all
Products in the shipment, as well as any taxes and shipping costs paid by LPI
which shall be reimbursed by Collagen in accordance with Sections 4.5 and 3.4
respectively. The full invoiced amount for each shipment of Products by LPI
shall be paid net thirty (30) days. If a Product is returned in accordance with
Section 3.5, LPI will submit a supplemental invoice reflecting relevant credits
and adjustments once the returned Product has been replaced.
ARTICLE 5: CHANGES TO PRODUCTS OR LIST OF SUPPLIED PRODUCTS
5.1 Collagen Changes. If Collagen desires to change the Proprietary
Specifications or the design of the Products, Collagen shall notify LPI in
writing of such change (the "Change Order"). The Change Order shall specify all
such changes in the same detail as the original Proprietary Specifications or
Product design. As promptly as possible, but in no event more than thirty (30)
days after receipt of the Change Order, LPI shall provide to Collagen a
statement of any estimated nonrecurring engineering costs, together with a
"not-to-exceed" upper limit for such nonrecurring engineering costs, per Product
prices and volume discounts associated with manufacturing Products pursuant to
the Change Order, and an estimate of when LPI could begin conducting any
required nonrecurring engineering work and manufacturing such Products. Within
thirty (30) days thereafter, Collagen shall notify LPI of Collagen's acceptance
or rejection of LPI's response to the Change Order. Failure of Collagen to
deliver any such acceptance or rejection within such thirty (30) day period
shall be deemed a rejection of LPI's response. If Collagen accepts LPI's
response, LPI shall conduct any nonrecurring engineering work and produce
Products as may be required by Collagen pursuant to the Change Order and this
Agreement.
5.2 LPI Changes. LPI may not change the Proprietary Specifications or
the design of the Products without the written consent of Collagen; provided,
however, that LPI shall notify Collagen in writing of any changes to the
Products which are required for safety or regulatory reasons and shall begin
implementing such changes promptly after provision of such written notice.
5.3 Addition of Supplied Products. From time to time during the Term of
this Agreement, the parties may add mutually acceptable additional products to
the list of Products in Exhibit A. In the event that Collagen proposes an
addition to Exhibit A, LPI shall respond to
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such proposal within thirty (30) days of receipt of such proposal. The price and
payment terms set forth in Section 4.1 shall apply to such additional products,
except as otherwise agreed by the parties.
ARTICLE 6: REGULATORY MATTERS
6.1 LPI Obligations. LPI hereby certifies and represents that all
Products supplied to Collagen hereunder shall be manufactured in compliance with
Article L665-3 et seq. of the French Code of Public Health ("CPH") and in
accordance with accepted Good Manufacturing Practices under the guidelines of
the appropriate Regulatory Agency. LPI will have independent internal
verification of manufacturing procedures and documents relating to the Products,
as well as the adherence of the Products with the Proprietary Specifications. In
addition, LPI shall deliver to Collagen a Product fully in accordance with the
Proprietary Specifications, and that enables Collagen to maintain its CE mark
for finished products incorporating such Products. In addition, LPI agrees, upon
Collagen's request, to provide to Collagen, all manufacturing and other relevant
documents that Collagen requires for obtaining and maintaining its CE mark. The
parties shall meet, as soon as practicable after the Effective Date, to discuss
data requirements for obtaining and maintaining the CE mark for finished
products incorporating Products. LPI agrees to, at all times during the Term of
this Agreement: (i) maintain its certification under the ISO/MDD requirements;
(ii) permit an initial qualification audit by Collagen of both the Products and
LPI's manufacturing facility and procedures prior to the delivery by LPI of the
first Product to Collagen hereunder; (iii) permit Collagen to perform an annual
critical supplier audit after delivery by LPI of the first Product to Collagen
hereunder; (iv) upon Collagen's request, arrange with LPI's critical suppliers
to allow Collagen to audit such suppliers to assure that no changes have been
made to the Proprietary Specifications or manufacturing process for the Products
without the prior notification and approval of Collagen; and (v) use all
reasonable efforts to promptly respond to any findings by Collagen pursuant to
such critical supplier audit, or any Regulatory Agency, and to take prompt,
corrective action as necessary; provided, however, with respect to paragraphs
(iii)-(v) above, any critical supplier audit by Collagen shall be limited to
LPI's quality system. LPI shall retain all relevant documents needed to support
its obligations in this Section 6.1 for a period of at least ten (10) years.
6.2 Collagen Obligations. Collagen shall be responsible, at its sole
expense, for: (i) obtaining approval by any Regulatory Agency for the use of the
Products in finished product; (ii) conforming with the European certification
procedure and obtaining the CE mark for the finished product containing the
Product; and (iii) monitoring and responding to complaints relating to the use
of the Products in finished products.
6.3 Supplier Audits. Collagen shall have the right to perform annual
critical supplier audits, as defined by element 4.6 of the ISO 9001 Guidelines,
of the LPI facility producing Products and, in cooperation with LPI, any and all
suppliers to LPI of critical materials for the manufacture of the Products.
Collagen shall also have the right to inspect all documentation pertaining to
Products shipped to Collagen. LPI will be notified in writing by Collagen of the
audit ten (10) business days prior to the visit. Collagen shall be able to audit
on ten (10) days notice if Collagen rejects [***] consecutive Product shipments.
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6.4 Recall. Collagen shall be responsible for conducting any recalls of
finished product incorporating the Product, and shall interface with customers
who lodge complaints about such finished products. Collagen shall bear all
expenses incurred in such recalls; provided, however, that if the recall relates
to a Latent Defect to the Product or a non-conformity of the Product to the
Proprietary Specifications, LPI shall be responsible for all direct expenses
incurred by Collagen in connection with such recall. Collagen shall file all
reports required by applicable laws and regulations in connection with any
consumer complaints about finished products. Notwithstanding anything to the
contrary herein, LPI shall be bound by the provisions of Article L665-6 of the
CPH and shall immediately report to Collagen any information regarding any
potential harmful effect of the finished product of which it is aware.
ARTICLE 7: INDEMNIFICATION
7.1 By LPI. LPI shall defend, indemnify and hold harmless Collagen
against all damages, costs (including reasonable attorneys' fees) or other
liability resulting from any claim, suit or proceeding brought against Collagen
by a third party arising from any alleged: (i) negligent or intentional tortious
act or omission by LPI, or its employees, agents or other representatives in
relation to this Agreement; or (ii) nonconformance of any unit of Product
manufactured by LPI with the Proprietary Specifications or defect in any
finished product resulting from the incorporation of such non-conforming
Product; or (iii) infringement or misappropriation of any patent, trade secret
or other intellectual property right owned by such third party relating to
manufacture of the Products (except to the extent that such infringement or
alleged infringement arises from LPI's compliance with specific instructions
regarding the design or manufacturing processes or materials provided by
Collagen); provided that Collagen: (A) provides LPI with prompt notification of
any such claim, suit or proceeding; (B) allows LPI to control of the defense of
such claim, suit or proceeding, provided that LPI shall not settle any such
claim, suit or proceeding without the prior written consent of Collagen; and (C)
complies with any good faith request made by LPI for assistance in such defense,
provided that LPI will reimburse Collagen for any such assistance.
7.2 By Collagen. Collagen shall defend, indemnify and hold harmless LPI
against all damages, costs (including reasonable attorneys' fees) or other
liability resulting from any claim, suit or proceeding brought by a third party
against LPI arising from any alleged: (i) negligent or intentional tortious act
or omission by Collagen, or its employees, agents or other representatives in
relation to this Agreement; (ii) any injury caused by use of a Product
manufactured by LPI hereunder, provided that (A) such Product is manufactured in
accordance with the Proprietary Specifications therefor; and (B) such injury is
not attributable to any negligent or intentional act or omission on the part of
LPI or its employees, agents or other representatives; or (iii) infringement or
misappropriation of any patent, trade secret or other intellectual property
right of such third party, if such alleged infringement arises solely from: (a)
LPI's compliance with specific instructions regarding the design or
manufacturing processes or materials provided by Collagen; or (b) the Product as
incorporated into the finished product by or for Collagen; provided that LPI:
(x) provides Collagen with prompt notification of any such claim, suit or
proceeding; (y) allows Collagen to control of the defense of such claim, suit or
proceeding, provided that Collagen shall not settle any such claim, suit or
proceeding without the prior
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written consent of LPI; and (z) complies with any good faith request made by
Collagen for assistance in such defense, provided that Collagen will reimburse
LPI for any such assistance.
7.3 No Other Remedy for Intellectual Property Infringement. COLLAGEN
AGREES THAT IT SHALL HAVE NO REMEDY AGAINST LPI FOR INFRINGEMENT OF THIRD PARTY
INTELLECTUAL PROPERTY RIGHTS BY THE PRODUCTS OTHER THAN THE REMEDY SET FORTH IN
SECTION 7.1. LPI AGREES THAT IT SHALL HAVE NO REMEDY AGAINST COLLAGEN FOR
INFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS BY THE PRODUCTS, BY
LPI'S COMPLIANCE WITH INSTRUCTIONS PROVIDED BY COLLAGEN, OR BY LPI'S CONFORMANCE
WITH PROPRIETARY SPECIFICATIONS, OTHER THAN THE REMEDY SET FORTH IN SECTION 7.2.
ARTICLE 8: LIMITATION OF LIABILITY
EXCEPT FOR BREACHES OF ARTICLE 9 OR SECTION 10.1 (ii) OR AS SET
FORTH IN ARTICLES 6 OR 7, IN NO EVENT SHALL EITHER PARTY HAVE ANY LIABILITY FOR
ANY SPECIAL, INDIRECT, OR CONSEQUENTIAL DAMAGES ARISING IN ANY WAY OUT OF THIS
AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES; PROVIDED, HOWEVER, LPI'S MAXIMUM LIABILITY TO COLLAGEN FOR ANY LOSS OF
BUSINESS OR LOSS OF PROFITS RESULTING FROM LPI'S BREACH OF THE WARRANTY MADE IN
SECTION 10.1 (ii) SHALL NOT EXCEED FIVE MILLION (5,000,000) FF, PROVIDED THAT
THIS LIMITATION SHALL IN NO WAY AFFECT LPI'S INDEMNITY OBLIGATIONS TO COLLAGEN
UNDER SECTION 7.1. THE LIMITATIONS SET FORTH IN THIS ARTICLE 8 SHALL APPLY
NOTWITHSTANDING THE FAILURE OF THE ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.
ARTICLE 9: CONFIDENTIAL INFORMATION; CONFIDENTIALITY OF AGREEMENT
9.1 Confidential Information. "Confidential Information" shall mean any
proprietary information which is specifically designated as such, which is
disclosed by one party to the other in any form in connection with this
Agreement. The receiving party shall treat as confidential all Confidential
Information provided by the disclosing party, shall not use such Confidential
Information except as expressly set forth herein or otherwise authorized in
writing, shall implement reasonable procedures to prohibit the disclosure,
unauthorized duplication, misuse or removal of the Confidential Information and
shall not disclose such Confidential Information to any third party. Without
limiting the foregoing, each party shall use at least the same procedures and
degree of care to prevent the disclosure of Confidential Information belonging
to the other party as it uses to prevent the disclosure of its own confidential
information of like importance, and shall in any event use no less than
reasonable procedures and a reasonable degree of care.
9.2 Exceptions. Notwithstanding the above, no party hereto shall have
liability to the other party hereto with regard to any Confidential Information
disclosed to it which: (i) was generally known and available in the public
domain at the time it was disclosed, or becomes
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generally known and available in the public domain through no fault of the
receiving party; (ii) was known to the receiving party at the time of disclosure
as shown by the receiving party's files in existence at the time of disclosure;
(iii) is disclosed with the prior written approval of the disclosing party; (iv)
was independently developed by the receiving party without any use of the
Confidential Information and by employees or other agents of the receiving party
who have not been exposed to the Confidential Information, provided that the
receiving party can demonstrate such independent development by documented
evidence prepared contemporaneously with such independent development; (v)
becomes known to the receiving party from a source other than the disclosing
party without breach of this Agreement by the receiving party and in a manner
which is otherwise not in violation of the disclosing party's rights; or (vi) is
disclosed pursuant to the order or requirement of a court, administrative
agency, or other governmental body; provided, however, that the party which
complies with such order shall first provide reasonable advance notice thereof
to enable the owner of the Confidential Information ordered to be disclosed to
seek a protective order or otherwise prevent such disclosure.
9.3 Confidentiality of Agreement. Each party shall be entitled to
disclose the existence of this Agreement, but agrees that the terms and
conditions of this Agreement shall be treated as confidential and shall not be
disclosed to any third party; provided, however, that each party may disclose
the terms and conditions of this Agreement: (i) as required by any court or
other governmental body; (ii) as otherwise required by law; (iii) to legal
counsel of the parties; (iv) under nondisclosure obligations at least as
restrictive as this Section 9.3, to accountants, banks, and financing sources
and their advisors; (v) in connection with the enforcement of this Agreement or
rights under this Agreement; provided, that the parties shall endeavor to obtain
a protective order in the discovery phase (if any) of such enforcement process
covering the terms and conditions of this Agreement; or (vi) under nondisclosure
obligations at least as restrictive as this Section 9.3, in connection with an
actual or proposed merger, acquisition, or similar transaction.
ARTICLE 10: REPRESENTATIONS AND WARRANTIES
10.1 By LPI. LPI represents and warrants that:
(i) it has full right, power and authority to enter into this
Agreement and to grant the rights granted to Collagen hereunder, and it has not
entered into, and during the Term of this Agreement will not enter into, any
agreement with any third party which is or would be inconsistent with its
obligations hereunder;
(ii) the Products shall comply with the Proprietary
Specifications and shall be free from all Latent Defects;
(iii) LPI's legal staff and management are not aware of any valid
claim that the manufacturing processes that will be used by LPI to manufacture
Products hereunder will infringe any third party's intellectual property rights;
provided, however, that the parties acknowledge and agree that LPI has not and
shall not be obligated to conduct any search in connection with its
representation in this subsection 10.1(iii); and
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(iv) it is not aware of any pending or threatened litigation that
may impact its supply of Products to Collagen hereunder.
10.2 By Collagen. Collagen represents and warrants that:
(i) it has full right, power and authority to enter into this
Agreement and to carry out its obligations hereunder, and it has not entered
into, and during the term of this Agreement will not enter into, any agreement
with any third party which is or would be inconsistent with its obligations
hereunder; and
(ii) to the best of its knowledge as of the Effective Date, LPI
will not be required to infringe any third party's intellectual property rights
in order to manufacture Products in accordance with the Proprietary
Specifications.
10.3 Disclaimer of Warranties. EXCEPT FOR THE WARRANTIES EXPRESSLY SET
FORTH IN THIS AGREEMENT, LPI AND COLLAGEN MAKE NO WARRANTIES IN CONNECTION WITH
THE PRODUCTS, AND IN PARTICULAR DISCLAIM ANY IMPLIED WARRANTIES OF QUALITY,
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. EXCEPT AS SPECIFICALLY
ASSUMED UNDER THIS AGREEMENT, BOTH PARTIES HEREBY DISCLAIM ANY IMPLIED
WARRANTIES ARISING OUT OF THEIR COURSE OF DEALING UNDER THIS AGREEMENT.
ARTICLE 11: TERM AND TERMINATION
11.1 Term. This Agreement shall become effective as of the Effective
Date and shall continue in force, unless earlier terminated in accordance with
this Section 11, for an initial period of [***] after the Effective Date (the
"Initial Term"), renewable upon mutual agreement of the parties for an
additional [***] period thereafter (the "Renewal Term"). The Initial Term and
the Renewal Term, collectively, are referred to herein as the "Term".
11.2 Termination for Cause. This Agreement may be terminated
automatically (as of right - "de plein droit") by either party upon notice by
registered letter with receipt requested to the other party in the event that
the other party: (i) breaches any material term or condition of this Agreement
and fails to remedy the breach within a cure period of fifteen (15) days, for
nonpayment of amounts due hereunder, or thirty (30) days, for other breaches,
after being given written notice thereof; or (ii) is dissolved, liquidated, or
files a petition in bankruptcy; or (iii) ceases to be actively engaged in
business for a period of six (6) months. In the event that Collagen terminates
this Agreement pursuant to Section 11.2(ii) or (iii) hereto, then upon
Collagen's request, LPI shall grant to Collagen a non-exclusive, worldwide,
right and license, with the right to sublicense, solely to such LPI
manufacturing rights, including any trade secrets relating thereto, necessary
for Collagen to manufacture the Products, subject to payment of a royalty in the
amount of [***] of Net Sales of Products made by Collagen to its third party
customers. The license granted by LPI to Collagen pursuant to this Section 11.2
may be terminated by LPI subject to a notice period (a) sufficient to enable
Collagen to find an alternative source of supply for the Products and (b) of at
least [***].
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11.3 Return of Materials. Within ten (10) days after the expiration or
termination of this Agreement, each party shall return any Confidential
Information received from the other party in tangible form.
11.4 Effect of Termination. The provisions of Sections 2.2, 2.3, 2.5,
3.5, 11.2, 11.3 and 11.4 and Articles 6, 7, 8, 9, 10, and 12, and any payment
obligations accrued during the term of this Agreement, shall survive the
termination or expiration of this Agreement; provided, however, that Section 6.3
shall cease to have effect three (3) years after Collagen's last commercial sale
of Products. LPI shall fill all purchase orders outstanding at the date of
expiration or termination of this Agreement which were submitted by Collagen
prior to such date, and which were accepted by LPI, or are deemed to have been
accepted by LPI under Section 3.2, prior to such date. LPI shall be paid by
Collagen in accordance with Section 4.4 for Products received by Collagen
pursuant to such purchase orders.
ARTICLE 12: MISCELLANEOUS
12.1 Exclusivity. The parties hereto agree that, during the Term of this
Agreement, LPI will not manufacture or sell any Products manufactured in
accordance with the Proprietary Specifications for any third party.
12.2 Governing Law. Except as expressly provided herein to the contrary,
including but not limited to the provisions of Section 2.5, this Agreement shall
be governed by and interpreted under the laws of France.
12.3 Force Majeure. If the performance of this Agreement or any
obligations hereunder is prevented, restricted or interfered with by reason of
fire or other casualty or accident, strikes or labor disputes, war or other
violence, any law, order (including but not limited to any official decision of
any Regulatory Agency ordering withdrawal or prohibiting or limiting the
marketing of Collagen finished product), proclamation, ordinance, demand or
requirement of any government agency, or any other act or condition beyond the
control of the parties hereto, the party so affected, upon giving prompt notice
to the other party, shall be excused from such performance during such
prevention, restriction or interference.
12.4 Assignment. Neither party may assign its rights or obligations
under this Agreement without the prior written consent of the other party,
except to a successor in business or an acquirer of all or substantially all of
its business or assets relating to breast implants; provided, however, that in
the event all or substantially all of LPI's assets or securities is acquired by
a third party, then Collagen or its Affiliate, may at its option, create, at its
sole expense, a second manufacturing source for up to [***] of Collagen's
requirements for Product (excluding the U.S. and Canada). In the event that
Collagen creates such second manufacturing source, LPI will transfer such
technology and know-how to Collagen or its Affiliate as necessary for Collagen
to commence operation of such second manufacturing source and grant to Collagen
a non-exclusive, worldwide, right and license, with the right to sublicense,
solely to such LPI manufacturing rights, including trade secrets relating
thereto, necessary for Collagen to manufacture the Products; provided that
Collagen shall pay to LPI a royalty in the amount of
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[***] of Net Sales of Products made by Collagen to its third party customers.
The license granted by LPI to Collagen pursuant to this Section 12.4 may be
terminated by LPI subject to a notice period (a) sufficient to enable Collagen
to find an alternative source of supply for the Products and (b) of at least
[***]. In the event that Collagen elects not to exercise its option to create
the second source pursuant to this Section 12.4, then the terms of this
Agreement shall remain in full force and effect.
12.5 Notices. All notices, requests, consents and other communications
under this Agreement shall be in writing and (i) delivery by hand, or (ii)
mailed by first class registered mail, postage prepaid, return receipt
requested, or (iii) sent via facsimile transmission, followed by first class
registered mail, postage prepaid, return receipt requested, or (iv) shipped
through a private courier system designated for expedited delivery, and shall be
addressed as follows:
To Collagen:
Collagen Corporation
48490 Milmont Drive
Fremont, California 94538
U.S.A.
Attn: Director of Manufacturing Logistics
To LPI:
Laboratoire Perouse Implant
Zone d'activites d'Outreville
BP6 FRANCE-60540 Bornel
Attn: Eric Perouse
or to such other address or person as the parties may from time to time
designate by written notice delivered as specified above to the other. Notices
shall be effective upon tender, if delivered by hand, seven (7) days after
mailing if mailed by first class mail or if sent by private courier, or on the
day of transmission if sent by facsimile.
12.6 Severability. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision.
12.7 Waiver. The failure of either party to enforce at any time the
provisions of this Agreement shall in no way be constituted to be a present or
future waiver of such provisions, and shall not in any way affect the right of
either party to enforce each and every such provision thereafter.
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12.8 Independent Contractors. The relationship of LPI and Collagen
hereunder is that of independent contractors, and nothing herein shall be
construed to: (i) give either party the right to direct or control the
day-to-day activities of the other; or (ii) constitute the parties as partners,
joint venturers, co-owners or otherwise as participants in a joint or common
undertaking.
12.9 Entire Agreement. The terms and conditions in this Agreement
(including its Exhibits) constitute the entire agreement between the parties and
supersede all previous agreements and understandings, whether oral or written,
between the parties hereto with respect to the subject matter hereof, and no
agreement or understanding varying or extending the same shall be binding upon
either party hereto unless in a written document signed by both parties. In
particular, this Agreement shall supersede all purchase order or invoice terms
submitted by a party in connection with this Agreement, to the extent that such
purchase order or invoice terms are inconsistent with the terms and conditions
of this Agreement.
12.10 Section Headings; Controlling Language Version. The section
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. The
controlling language version of this Agreement shall be the English language
version of this Agreement.
12.11 Dispute Resolution. All claims, disputes, or controversies arising
under this Agreement, except under Article 9, not resolved between the parties
shall first be submitted to the principals for each party for resolution. In the
event that such principals cannot reach a resolution within thirty (30) days
after written notice of such dispute, then such dispute shall be submitted to
binding arbitration by an arbitrator appointed by the President of the
Commercial Court ("Tribunal de Commerce") of Paris upon the request of either
party. Such appointed arbitrator will have the experience and knowledge
appropriate to the nature of the dispute between the parties. Such arbitration
will take place in Paris, France and shall be conducted in English.
12.12 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute on instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by duly authorized officers or representatives as of the date first above
written.
COLLAGEN CORPORATION LABORATOIRE PEROUSE IMPLANT
By: /s/ Gary Petersmeyer By: /s/ Eric Perouse
----------------------- -----------------------
Name: Gary Petersmeyer Name: Eric Perouse
--------------------- ---------------------
Title: CEO Title:
-------------------- --------------------
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EXHIBIT A
PRODUCTS AND PROPRIETARY SPECIFICATIONS
I. Products
The finished shell for the Trilucent(TM) breast implant product marketed and
sold by Collagen.
II. Specifications
[See attached document.]
<PAGE> 16
EXHIBIT B
INITIAL FORECAST
Calendar Year Capacity (units of Product)
- ------------- ---------------------------
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
<PAGE> 17
EXHIBIT C
PRICING AND DISCOUNTS
Annual Volume Price (per unit)
------------- ----------------
[***] [***]
[***] [***]
[***] [***]
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,076
<SECURITIES> 0
<RECEIVABLES> 12,671
<ALLOWANCES> 0
<INVENTORY> 12,687
<CURRENT-ASSETS> 49,735
<PP&E> 15,453
<DEPRECIATION> 0
<TOTAL-ASSETS> 158,977
<CURRENT-LIABILITIES> 25,541
<BONDS> 0
0
0
<COMMON> 110
<OTHER-SE> 103,365
<TOTAL-LIABILITY-AND-EQUITY> 158,977
<SALES> 42,953
<TOTAL-REVENUES> 42,953
<CGS> 14,037
<TOTAL-COSTS> 14,037
<OTHER-EXPENSES> 43,578
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34
<INCOME-PRETAX> (5,533)
<INCOME-TAX> 901
<INCOME-CONTINUING> (6,407)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,407)
<EPS-PRIMARY> (0.72)
<EPS-DILUTED> (0.72)
</TABLE>
