-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NUOxPtp8kfhvRGluQimWfDps1TGxXBP9Umdv5AX9gX0DhsMwqGeWz74t3cHyrpRr SW0BK+F5eN0itmW6nLxjJA== 0000891618-97-000473.txt : 19970222 0000891618-97-000473.hdr.sgml : 19970222 ACCESSION NUMBER: 0000891618-97-000473 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970213 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLLAGEN CORP /DE CENTRAL INDEX KEY: 0000021686 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 942300486 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10640 FILM NUMBER: 97528371 BUSINESS ADDRESS: STREET 1: 2500 FABER PL CITY: PALO ALTO STATE: CA ZIP: 94303 BUSINESS PHONE: 4158560200 10-Q 1 FORM 10-Q FOR PERIOD ENDED 12/31/96 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, 1996 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. 2500 Faber Place, Palo Alto, California 94303 Telephone: (415) 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, 1997, Registrant had outstanding 8,766,077 shares of common stock, exclusive of 1,947,900 shares held by the Registrant as treasury stock. 2 COLLAGEN CORPORATION INDEX
PART I. Financial Information Page No. - ----------------------------------- -------- Consolidated Balance Sheets - December 31, 1996 and June 30, 1996. . . . . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Income - Three and six months ended December 31, 1996 and 1995. . . . . .. . . . . . .4 Consolidated Statements of Cash Flows - Six months ended December 31, 1996 and 1995 . . . . . . . . . . . . . . . . .5 Notes to 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . .19-22 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
2 3 COLLAGEN CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share and per share amounts)
December 31, June 30, 1996 1996 * ---------------- ---------------- ASSETS Current assets: Cash and cash equivalents $ 16,052 $ 21,676 Short-term investments 6,641 3,691 Accounts receivable, net 10,314 9,508 Inventories, net 11,826 9,563 Other current assets, net 9,102 11,496 ---------------- ---------------- Total current assets 53,935 55,934 Property and equipment, net 15,900 15,147 Intangible assets and goodwill, net 14,047 14,824 Investment in Target Therapeutics, Inc. 53,587 65,841 Other investments & assets, net 14,086 11,261 ---------------- ---------------- $ 151,555 $ 163,007 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,029 $ 3,824 Other accrued liabilities 12,333 11,869 Income taxes payable 4,779 7,588 Notes payable 5,075 5,079 ---------------- ---------------- Total current liabilities 25,216 28,360 Long-term liabilities: Deferred income taxes 23,859 27,674 Other long-term liabilities 3,973 3,444 Minority interest 326 528 ---------------- ---------------- Total long-term liabilities 28,158 31,646 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value, authorized: 5,000,000 shares; none issued and outstanding --- --- Common stock, $.01 par value, authorized: 28,950,000 shares, issued: 10,672,879 shares at December 31, 1996 (10,575,614 shares at June 30, 1996), outstanding: 8,724,979 shares at December 31, 1996 (8,775,614 shares at June 30, 1996) 107 106 Additional paid-in capital 65,906 64,844 Retained earnings 44,827 42,378 Cumulative translation adjustment (919) (656) Unrealized gain on available-for-sale investments 29,026 34,549 Treasury stock, at cost, 1,947,900 shares at December 31, 1996 (1,800,000 shares at June 30, 1996) (40,766) (38,220) ---------------- ---------------- Total stockholders' equity 98,181 103,001 ---------------- ---------------- $ 151,555 $ 163,007 ================ ================
* Amounts derived from audited financial statements. 3 4 COLLAGEN CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share amounts)
Three Months Ended Six Months Ended December 31, December 31, -------------------------- --------------------------- 1996 1995 1996 1995 ----------- ---------- ---------- ----------- Revenues: Product Sales $ 19,057 $ 18,883 $ 35,842 $ 33,823 Other --- --- --- 2,000 ----------- ---------- ---------- ----------- 19,057 18,883 35,842 35,823 ----------- ---------- ---------- ----------- Costs and expenses: Cost of sales 5,321 5,074 10,466 9,071 Selling, general and administrative 10,479 10,467 19,328 18,769 Research and development 4,525 2,925 8,686 5,504 Acquired in-process research and development --- --- --- 14,800 ----------- ---------- ---------- ----------- 20,325 18,466 38,480 48,144 ----------- ---------- ---------- ----------- Income (loss) from operations (1,268) 417 (2,638) (12,321) Other income (expense): Net gain on investments, principally Target Therapeutics, Inc. 3,038 20,921 9,222 31,387 Equity in earnings (losses) of affiliates, net (123) 415 (597) (93) Interest income 305 297 660 451 Interest expense (146) (40) (231) (52) ----------- ---------- ---------- ----------- Income before income taxes and minority interest 1,806 22,010 6,416 19,372 Provision for income taxes 957 12,540 3,400 18,453 Minority interest (162) --- (302) --- ----------- ---------- ---------- ----------- Net income $ 1,011 $ 9,470 $ 3,318 $ 919 =========== ========== ========== =========== Net income per share $ .11 $ 1.05 $ .37 $ .10 =========== ========== ========== =========== Shares used in calculating per share information 8,841 9,059 8,963 9,087 =========== ========== ========== ===========
4 5 COLLAGEN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents (Unaudited) (In thousands)
Six Months Ended December 31, ------------------------------ 1996 1995 ------------------------------ Cash flows from operating activities: Net income $ 3,318 $ 919 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Acquired in-process research and development -- 14,800 Depreciation and amortization 3,107 2,968 Equity in losses of affiliates 597 93 Gain on investments, net of taxes paid of $5.2 million and (4,051) (14,502) $16.9 million, respectively Other adjustments related to changes in assets and liabilities (4,776) 2,787 ------------- ---------- Net cash provided by (used in) operating activities (1,805) 7,065 ------------- ---------- Cash flows from investing activities: Proceeds from sale of Target Therapeutics, Inc. stock, net of taxes paid 5,578 25,188 Proceeds from sales and maturities of short-term investments 1,675 3,123 Purchases of short-term investments (4,625) (1,318) Expenditures for property and equipment (2,989) (1,332) Increase in intangible and other assets (99) (458) Expenditures for investments in and loans to affiliates (1,491) (6,198) Acquisition of LipoMatrix, Incorporated, net of cash balances -- (22,608) Accrued purchase consideration and other costs of acquisition of LipoMatrix -- 22,527 ------------- ------------ Net cash provided by (used in) investing activities (1,951) 18,924 ------------- ------------ Cash flows from financing activities: Repurchase of common stock (2,546) (3,034) Net proceeds from issuance of common stock 1,063 41 Cash dividends paid (885) (676) Net borrowing under bank loans 500 70 ------------- ------------ Net cash used in financing activities (1,868) (3,599) ------------- ------------ Net increase (decrease) in cash and cash equivalents (5,624) 22,390 Cash and cash equivalents at beginning of period 21,676 6,155 ------------- ------------ Cash and cash equivalents at end of period $ 16,052 $ 28,545 ============= ============
5 6 COLLAGEN CORPORATION NOTES TO 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 no readily determinable fair value are carried at cost or estimated realizable value, if less, and those with a readily determinable fair value are carried at market value. The consolidated balance sheet as of December 31, 1996, the consolidated statements of income for the three and six months ended December 31, 1996 and 1995, and the consolidated statements of cash flows for the six months ended December 31, 1996 and 1995, have been prepared by the Company, without audit. 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, 1996 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, 1996 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 consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 1996 included in the Company's Annual Report on Form 10-K for the year ended June 30, 1996. New Accounting Standard In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS#123"), which establishes a fair value method of accounting for stock options and other equity instruments. The Company adopted SFAS#123 beginning in fiscal year 1997 and will use the disclosure method as described in the statement. The required disclosure will be included in the Company's Annual Report on Form 10-K for the year ended June 30, 1997. 6 7 2. Inventories Inventories consist of the following (in thousands):
December 31, June 30, 1996 1996 -------------- --------------- Raw materials $ 1,090 $ 1,148 Work-in-process 4,456 3,630 Finished goods 6,280 4,785 -------------- --------------- $ 11,826 $ 9,563 ============== ===============
3. Investment in Target Therapeutics, Inc. (Boston Scientific, Inc.) The Company accounts for its investment in Target Therapeutics ("Target") under the cost method as an available-for-sale equity security, which is carried at market value. During the three and six months ended December 31, 1996, the Company sold 100,000 shares and 330,000 shares, respectively, of Target common stock for a pre-tax gain of approximately $3.0 million and $9.2 million, respectively. Target's common stock is quoted on The Nasdaq Stock Market. The closing price of Target's stock at December 31, 1996 was $42.00 per share. At December 31, 1996, the Company held 1,275,888 shares of Target's common stock, or approximately a 9% ownership position in Target. At June 30, 1996 and December 31, 1996, the Company's shares of Target common stock were recorded at the estimated fair value of $65.8 million and $53.6 million, respectively. The $58.4 million unrealized gain ($65.8 million estimated fair value less $7.4 million cost) at June 30, 1996, and the $47.7 million unrealized gain ($53.6 million estimated fair value less $5.9 million cost) at December 31, 1996, on these available-for-sale securities has been reported as a separate component of stockholders' equity, net of tax. On January 20, 1997, Boston Scientific Corporation (of Natick, Massachusetts) and Target jointly announced the signing of a definitive agreement to merge in a tax-free stock-for-stock transaction. Under the merger agreement, Target's stockholders will receive 1.07 shares of Boston Scientific Corporation ("Boston Scientific") common stock in exchange for each share of Target common stock. The merger is expected to close during the second calendar quarter of 1997. Assuming the planned merger is completed, the Company's 1,275,888 shares of Target's common stock will be exchanged for approximately 1,365,200 shares of Boston Scientific. Additionally, the Company may be unable to sell additional Boston Scientific/Target shares during the next six to nine months due to accounting, and tax matters and other restrictions pertaining to the merger. Boston Scientific is a leading manufacturer of catheter-based devices that can be inserted through small body openings and are used in heart surgery and other operations. Boston Scientific common stock is quoted on the New York Stock Exchange under the symbol BSX. 7 8 Its closing price on January 31, 1997 was $68.25 per share. 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. Effective October 1996, restrictions were no longer applicable on approximately 473,000 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 at market value or $3.7 million, reflecting an unrealized gain of $1.4 million, which has been included in a separate component of stockholders' equity, net of tax. The remaining 371,000 restricted shares of common stock continue to be valued at cost. During the three and six months ended December 31, 1996, the Company did not sell any of its shares of common stock of Innovasive Devices. Innovasive Devices' common stock is quoted on The Nasdaq Stock Market. The closing price of Innovasive Devices' common stock at December 31, 1996, was $7.75 per share. At December 31, 1996, the Company held approximately a 12% ownership position in Innovasive Devices. 5. Stock Repurchase Program In February 1993, the Company's Board of Directors authorized a stock repurchase program. Since the inception of the stock repurchase program in February 1993, the Company has repurchased 1,947,900 shares of its common stock at an average acquisition price of approximately $21 per share. During the six months ended December 31, 1996, 147,900 shares were repurchased and as of such date, the Company is authorized to repurchase an additional 352,100 shares under the program. The Company currently plans to keep the repurchased shares as treasury stock and may use this stock in various company stock benefit plans. 6. Income Taxes The provision for income taxes for the six months ended December 31, 1996 and 1995, was computed by applying the estimated annual income tax rates of approximately 53% and 54% (excluding the impact of the acquired in-process R&D charge for which no tax benefit was available), respectively, to income before income taxes. The lower effective tax rate in the current year was primarily a result of lower projected annual losses from foreign subsidiaries. 8 9 7. Per Share Information Net income per share for the three and six months ended December 31, 1996 and 1995, have been computed based upon the weighted average number of common stock and dilutive common stock equivalent shares outstanding. Shares used in the per share computations are as follows (in thousands):
Three Months Ended Six Months Ended Ended December 31, December 31, ---------------------- ----------------------- 1996 1995 1996 1995 -------- -------- -------- -------- Primary: Common stock 8,690 8,916 8,827 8,954 Stock options 151 143 136 133 -------- -------- -------- -------- Weighted average number of common stock and dilutive common stock shares equivalent shares outstanding 8,841 9,059 8,963 9,087 ======== ======== ======== ========
9 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for the historical information contained herein, the matters discussed in this report are forward=looking statements that involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward=looking statements. Potential risks and uncertainties include, without limitation, those mentioned in this report 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, 1996. The Company Collagen Corporation (the "Company") is a technology=based company that develops, manufactures and markets biomedical devices for the treatment of defective, diseased, traumatized or aging human tissues. The Company's revenues are derived primarily from the sale of products principally used in reconstructive and cosmetic applications for the face and breast, the treatment of stress urinary incontinence, and in bone repair. The Company markets its reconstructive and cosmetic 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. Aesthetic Technologies(TM) and Collagen Technologies Groups The Board of Directors and management have reviewed various strategic alternatives to improve the market's recognition of the intrinsic value of the Company. As a result, the Company announced on January 8, 1997, that it will formally separate the Aesthetic Technologies(TM) Group, its profitable aesthetic and reconstructive surgery business, and form a new company, Aesthetic Technologies(TM) Corporation. Aesthetic Technologies Corporation will focus on developing its profitable aesthetic and reconstructive surgery business with strong and growing product offerings that encompass many new exciting technologies in aesthetic medicine. Management and the Board of Directors will continue to evaluate strategies for Aesthetic Technologies Corporation, which may include a public offering, a "spin=off" or a "split=off", among other alternatives. The timing and nature of these actions will depend upon tax, legal, market and other considerations. 10 11 The Company's other business activities consist primarily of the Collagen Technologies Group, which develops novel collagen and polymer materials, as well as internal and affiliate company=sponsored product development programs in the fields of orthopedics, soft=tissue repair, vascular surgery and ophthalmology. The Collagen Technologies Group also manufactures and sells Collagraft(R) bone graft matrix and Collagraft(R) bone graft matrix strip ("Collagraft bone graft products") to the Company's marketing partner, Zimmer, Inc. ("Zimmer"), a division of Bristol Myers=Squibb Company. In addition, Collagen Technologies Group holds equity investments in and product development and supply agreements with four privately held affiliates and equity investments in two public companies, Target Therapeutics, Inc. ("Target") and Innovasive Devices, Inc. ("Innovasive Devices"). The planned formation of Aesthetic Technologies Corporation does not affect the presentation of the Company's financial results presented for the three and six months ended December 31, 1996. Results of Operations The following tables show for the periods indicated the percentage relationship to product sales of certain items in the Consolidated Statements of Income.
PERCENT OF PRODUCT SALES Three Months Ended Six Months Ended December 31, December 31, ------------------ ----------------- 1996 1995 1996 1995 ---- ---- ---- ---- Product sales 100% 100% 100% 100% Other revenues -- -- -- 6% Costs and expenses: Cost of sales 28% 27% 29% 27% Selling, general and administrative 55% 55% 54% 56% Research and development 24% 16% 24% 16%
Product sales. Product sales of $19.1 million in the three months ended December 31, 1996, increased approximately $.2 million or 1%, compared to product sales of $18.9 million for the same prior-year period. Product sales of $35.8 million in the six months ended December 31, 1996, increased approximately $2.0 million or 6%, compared to product sales of $33.8 million for the same prior-year period. The increase in sales for the six months ended December 31, 1996, was primarily due to the increase in international sales of plastic surgery and dermatological products (which includes injectable collagen products, Trilucent(TM) breast implant ("Trilucent"), and Hylaform(R) viscoelastic gel ("Hylaform gel") ) and an increase in revenue from direct sales of Contigen(R) implant ("Contigen") to physician customers by C.R. Bard, Inc. ("Bard"), the Company's marketing partner for Contigen. (See "Operating income/loss" below.) 11 12 Worldwide sales of plastic surgery and dermatological products for the three and six months ended December 31, 1996, were $16.8 million and $30.9 million, up 4% and 7%, from sales of $16.1 million and $29.0 million, respectively, for the same periods in the prior year. The increase in sales for the three and six months ended December 31, 1996, was a result of sales growth in all plastic surgery and dermatological product lines. The Company believes that the sales growth in injectable collagen products in the current fiscal quarter and year was a result of continued growth in distributor sales, increased demand by consumers for a wide variety of aesthetic procedures and continued physician interest in cosmetic procedures not reimbursed by third-party payers. The Company anticipates continued dollar growth in future worldwide product sales in these markets. Worldwide unit sales of plastic surgery and dermatological products for the three and six months ended December 31, 1996, increased approximately 11% and 12% over the same periods in the prior year. Domestically, implementation of United States marketing programs designed to increase average treatment volume per patient and to attract and retain new and existing patients, have favorably impacted overall unit sales, but have unfavorably impacted realized revenue per unit of product sold. The addition of Hylaform gel, which was launched in Europe in November 1996, has also favorably impacted overall unit sales. During the three and six months ended December 31, 1996, pursuant to terms of an agreement between the Company and Bard, the Company recorded revenue of $1.7 million and $3.2 million, respectively, from Bard based on Bard's direct sales of Contigen to physician customers. In June 1995, the Company announced that it expected to ship little, if any, Contigen to Bard due to excess inventory at Bard. The Company recorded minimal revenue from shipments of Contigen to Bard in the three and six months ended December 31, 1996, and December 31, 1995. Future revenue from shipments of Contigen to Bard is expected to resume in the fourth quarter of fiscal 1997. For the three and six months ended December 31, 1996, 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 $290,000 and $1.0 million, respectively, compared to $844,000 and $1.8 million in the same periods in the prior year. The decrease in sales in the current fiscal year period was due to lower than expected sales by Zimmer and a consequent decrease in shipments from the Company. The Company expects sales and shipments of Collagraft bone graft products for fiscal 1997 to be less than those recorded during fiscal 1996. A number of uncertainties exist surrounding the marketing and distribution of Contigen 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 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. Other revenues. Other revenues in the six months ended December 31, 1995 consisted of a final milestone payment of $2 million from Bard in accordance with an agreement between the Company and Bard. 12 13 Cost of sales. Cost of sales as a percentage of product sales was 28% and 29% for the three and six months ended December 31, 1996, compared with 27% for both periods in the prior year. The higher cost of sales as a percentage of product sales in the current fiscal quarter and year was primarily a result of the change in product mix (i.e., Trilucent and Hylaform gel) which has resulted in higher costs per unit. Due to the high fixed costs of the Company's Fremont, California manufacturing facility, unit cost of manufacturing for collagen-based injectable products is expected to remain highly dependent on the level of output at the Company's manufacturing facility and continued demand for the collagen-based injectable product lines. The Company anticipates that overall unit costs will be slightly lower in fiscal 1997 compared to fiscal 1996. SG&A. Selling, general and administrative ("SG&A") expenses were $10.5 million in the three months ended December 31, 1996, which were unchanged from the same prior-year period. SG&A expenses of $19.3 million in the six months ended December 31, 1996, increased approximately $.5 million or 3%, compared to SG&A expenses of $18.8 million for the same prior-year period. The increase in SG&A expenses in the current fiscal year period resulted primarily from the inclusion of six months of SG&A expenses of LipoMatrix, Incorporated ("LipoMatrix"), the developer and manufacturer of Trilucent, and amortization expenses on purchased intangibles and goodwill resulting from the acquisition of LipoMatrix compared to four months for the same period in the prior year. SG&A expenses as a percentage of product sales were 55% and 54% for the three and six months ended December 31, 1996, compared to 55% and 56% for the same periods in the prior year. The decrease in SG&A expenses as a percentage of product sales in the current year period was primarily due to lower sales and marketing launch costs for Trilucent combined with an increase in product sales. The Company expects its SG&A expenses to increase slightly over the next several quarters, approximately 1 to 2 percent per quarter, as a result of the expenses involved in exploring and evaluating strategies for the new company, Aesthetic Technologies Corporation. R&D. Research and development ("R&D") expenses, which include expenditures for regulatory compliance, were $4.5 million and $8.7 million (24% of product sales) for the three and six months ended December 31, 1996, an increase of 55% and 58% over $2.9 million and $5.5 million (16% of product sales), for the same periods in the prior year. The increase in R&D spending in the current fiscal year period was primarily attributable to the inclusion of six months of LipoMatrix R&D expenses compared to four months for the same period in the prior year, the inclusion of R&D expenses for Cohesion Corporation as a result of the Company increasing its ownership percentage to 81% in June 1996 and the costs associated with the commencement of Trilucent clinical trials in the United States and Europe. The Trilucent clinical trials in the United States and Europe are expected to take several years and may involve multiple product design changes and clinical studies. The Company expects internal R&D spending in fiscal 1997 to be at levels higher than fiscal 1996 due to the inclusion of expenses of Cohesion Corporation and a full year of expenses for LipoMatrix. Acquired in-process research and development. The charge for acquired in-process research and development ("in-process R&D") of $14.8 million in the six months ended December 31, 1995, was a non-recurring charge related to the acquisition of LipoMatrix. The value attributed to in-process R&D was determined by an independent appraisal. Substantial effort, including clinical trials and regulatory approval, still is required before Trilucent can be marketed in the United States. 13 14 Operating income/loss. Operating loss was $1.3 million for the three months ended December 31, 1996, compared with an operating income of $417,000 for the same prior-year period. The Company's consolidated operating loss was $2.6 million for the six months ended December 31, 1996, compared with a $12.3 million loss for the same prior-year period. The loss in the current fiscal year was primarily due to the inclusion of six months of LipoMatrix operating expenses compared to four months for the same period in the prior year, the inclusion of the operating results of Cohesion Corporation, the costs associated with commencing Trilucent clinical trials in the United States and Europe and costs incurred to increase the manufacturing capacity for Trilucent implant. The Company's consolidated $12.3 million operating loss for the six months ended December 31, 1995, was primarily due to the $14.8 million acquisition-related, non-recurring R&D charge related to LipoMatrix. 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 $156,000 on equivalent local currency basis, resulting from a decrease of approximately $251,000 in operating expenses, partially offset by a decrease of approximately $95,000 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 $181,000 on equivalent local currency basis, resulting from a decrease of approximately $323,000 in operating expenses, partially offset by a decrease of approximately $142,000 in revenue. Until December 1994, the Company's policy was to hedge material foreign currency transaction exposures. At June 30, 1996 and December 31, 1996, no foreign currency transaction exposures were hedged. Unhedged net foreign assets were $14.5 million and $17.0 million at June 30, 1996 and December 31, 1996, respectively. Gain on investments, net. In the three months ended December 31, 1996, the Company recorded a gain on investments of $3.0 million ($1.3 million after taxes of $1.7 million), resulting from the sale of 100,000 shares of Target Therapeutics, Inc. ("Target") common stock. In the six months ended December 31, 1996, the Company recorded a gain on investments of $9.2 million ($4.0 million after taxes of $5.2 million), resulting from the sale of 330,000 shares of Target common stock. As the planned merger between Boston Scientific and Target is completed, the Company may be unable to sell additional Boston Scientific/Target shares during the next six to nine months due to accounting and tax matters and other restrictions pertaining to the merger. Equity in earnings/losses of affiliate companies. Equity in losses of affiliate companies was approximately $123,000 for the three months ended December 31, 1996, compared to equity in losses of approximately $415,000 for the same prior-year quarter. For the six months ended December 31, 1996, equity in losses of affiliate companies was $597,000, compared with losses of $93,000 in the same prior-year period. 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 1997. These affiliate companies typically are in an early stage of development and may be expected to incur substantial losses, which in turn will have an adverse effect on the Company's operating results. There can be no assurance that these investments will result in positive returns nor can there be any assurance on the timing of any return on investment, or that the Company will not lose its entire investment. 14 15 Interest income. Interest income was $305,000 and $660,000 for the three and six months ended December 31, 1996, respectively, compared with $297,000 and $451,000 for the same periods in the prior year. The increase in the current fiscal year was primarily due to higher average short-term investment balances, resulting primarily from the sale of Target stock. Income tax. The provision for income taxes for the six months ended December 31, 1996 and 1995, was computed by applying the estimated annual income tax rates of approximately 53% and 54% (excluding the impact of the acquired in-process R&D charge for which no tax benefit was available), respectively, to income before income taxes. The lower effective tax rate in the current year was primarily a result of lower projected annual losses from foreign subsidiaries. Liquidity and Capital Resources At December 31, 1996, the Company's cash, cash equivalents and short-term investments were $22.7 million compared to $25.4 million at June 30, 1996. Net cash used in operating activities was approximately $1.8 million in the six months ended December 31, 1996, compared to approximately $7.1 million of net cash provided by operating activities for the same prior-year period. The $1.8 million of net cash used in operating activities in the six months ended December 31, 1996, was mainly attributable to a $2.8 million decrease in income taxes payable resulting from estimated payments made related to the sales of Target stock, a $2.3 million increase in inventory, a $.8 million increase in accounts receivable, a $.3 million decrease in accounts payable and accrued liabilities, a $.3 million unfavorable foreign currency translation impact, a $.2 million decrease in the minority interest liability, partially offset by $2.9 million of net income after adjusting for depreciation and amortization expense, equity in losses (earnings) and gain on investments (net of taxes paid) and a $2.0 million decrease in miscellaneous receivables related to the sales of Target stock. The $3.8 million of net cash used in investing and financing activities in the six months ended December 31, 1996, was primarily due to payments of $4.6 million to purchase short-term investments, capital expenditures of approximately $3.0 million, payments of approximately $2.5 million to repurchase 147,900 shares of the Company's common stock at an average acquisition price of approximately $17.00 per share, payments of approximately $1.5 million for additional investments in affiliates, and payment of cash dividends of approximately $.9 million to the Company's stockholders in July 1996, partially offset by proceeds of $5.6 million net of taxes paid ($10.8 million proceeds less taxes paid of $5.2 million ) from the sale of 330,000 shares of common stock of Target by the Company during the year, $1.7 million proceeds received from the sale of short-term investments, and $1.1 million from the issuance of approximately 97,000 shares of the Company's common stock. The Company anticipates capital expenditures, equity investments in, and loans to affiliate companies to be approximately $12 million in fiscal 1997. As of December 31, 1996, the Company's capital expenditures, equity investments in, and loans to affiliate companies totaled approximately $4.5 million. In November 1996, the Company's Board of Directors declared a cash dividend of 10 cents per share to stockholders of record on December 16, 1996. This dividend totaled approximately $869,000 and was paid to stockholders on January 15, 1997. The Company anticipates that the Board of Directors will review the possibility of declaring an 15 16 additional dividend before the end of the current fiscal year. Additionally, 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, 1996. The Company's principal sources of liquidity include cash generated from operations, sales of Target stock, and its cash, cash equivalents and short-term investments. During the fiscal quarter ended September 30, 1994, the Company's Board of Directors authorized the Company to sell portions of its holdings of Target's common stock. Between July 1, 1994 and December 31, 1996, the Company sold an aggregate of 3,312,500 shares of Target common stock (adjusted for a two-for-one stock split in December 1995) for an aggregate pre-tax gain of approximately $101.1 million ($116.6 million proceeds less cost basis of $15.5 million). At December 31, 1996, the Company held 1,275,888 shares of Target's common stock. The Company anticipates that stock sales pursuant to the authorization will be made from time to time, under SEC Rule 144, with the objective of generating cash, for, among other things, further investments in both current and new affiliate companies. As the planned merger between Boston Scientific and Target is completed, the Company may be unable to sell additional Boston Scientific/Target shares during the next six to nine months due to accounting and tax matters and other restrictions pertaining to the merger. In addition, the Company established a $7.0 million revolving credit facility with a bank in November 1994, which was subsequently increased to $15.0 million in December 1995. As of December 31, 1996, $10.0 million of this credit facility remained unused. Additionally, the Company has a $3.1 million (4.1 million Swiss Francs) credit facility that was established by LipoMatrix prior to the Company's acquisition of LipoMatrix, of which $843,000 (1.1 million Swiss Francs) remained unused as of December 31, 1996. The Company's capital requirements will depend on numerous factors, including market acceptance and demand for the Company's products; the resources the Company devotes to the development, manufacture and marketing of its products; the progress of the Company's clinical research and product development programs; the extent to which the Company enters into collaborative relationships with third parties and the scope of the Company's obligations in such relationships; the receipt of, and the time required to obtain, regulatory clearances and approvals; the resources required to protect the Company's intellectual property and other factors. The timing and amount of such capital requirements cannot be accurately predicted. Funds may also be used for the acquisition of businesses, products and technologies that are complementary to those of the Company. The Company believes that its current sources of liquidity should be adequate to fund its anticipated capital requirements through at least the next 18 months. However, during this period or thereafter, the Company may require additional financing. There can be no assurance that such additional financing will be available on terms favorable to the Company or at all. Factors That May Affect Future Results of Operations 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 16 17 Company's operating strategy takes into account changes in these factors over time; however, the Company's results of operations could be significantly affected in the short term by fluctuations in foreign currency exchange rates or disruptions to shipments. All of the Company's manufacturing capacity for collagen products, the majority of its research and development activities, its corporate headquarters, and other critical business functions are located near major earthquake faults. In addition, all of the Company's manufacturing capacity for collagen-based products and Trilucent are located in two primary facilities (one for collagen-based products and one for Trilucent), with the Company currently maintaining only limited amounts of finished product inventory. While the Company has some limited protection in the form of disaster recovery programs and basic insurance coverage, the Company's operating results and financial condition would be materially adversely affected in the event of a major earthquake, fire or other similar calamity, affecting its manufacturing facilities. The Company is involved in various legal actions arising in the course of business, some of which involve product liability and intellectual property 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 be in the future 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. The Company is confident of the safety and effectiveness of its products; however, 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 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 U.S., 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 U.S. could adversely affect the Company. The Company is conducting Trilucent clinical trials in Europe and the United States, which are expected to take several years and may involve multiple product design changes and clinical studies. 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 17 18 trading price of the Company's common stock. Finally, the Company participates in a highly dynamic industry, which often results in significant volatility of the Company's common stock. 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, 1996. 18 19 PART II. OTHER INFORMATION COLLAGEN CORPORATION Item 1. Legal Proceedings On December 21, 1994, the Company filed suit against Matrix Pharmaceutical, Inc., ("Matrix") alleging fraud, misappropriation of trade secrets, unfair competition, breach of fiduciary duty, inducing breach of contract, breach of duty of loyalty and tortious interference. The Company alleges that Matrix, which uses collagen for certain drug delivery applications, unlawfully obtained the Company's confidential and proprietary information relating to Collagen's products and operations by hiring ten former employees that the Company alleges had access to or were knowledgeable about the Company's proprietary information. On February 12, 1995, Matrix denied the Company's allegations and filed a cross-complaint charging the Company with, among other things, unfair competition, defamation and restraint of trade. Matrix also has requested certain declaratory relief. Howard Palefsky, the Company's Chairman of the Board and Chief Executive Officer, was personally named as an additional defendant to the Matrix defamation charge. On September 24, 1996, a Demurrer and Motion to Strike Matrix's third amended complaint was sustained in Collagen's favor, dismissing Matrix's anti-trust and common law restraint of trade claims. A trial date has been scheduled for April 7, 1997. Collagen and Matrix currently are engaged in discovery. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders A. On October 30, 1996, 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). 19 20
No. of No. of No of No of No of Votes Votes Votes Votes Broker Non- Name of Nominee For Against Withheld Abstained Votes - --------------- --- ------- -------- --------- ----- Reid W. Dennis 7,697 0 492 0 0 Howard D. Palefsky 7,692 0 497 0 0 Anne L. Bakar 7,697 0 492 0 0 John R. Daniels, MD 7,679 0 510 0 0 William G. Davis 7,698 0 491 0 0 Craig W. Johnson 7,697 0 492 0 0 Rodney Perkins, MD 7,678 0 511 0 0 Gary S. Petersmeyer 7,675 0 514 0 0 Roger H. Salquist 7,694 0 495 0 0
C. The adoption of an amendment to the 1994 Stock Option Plan to increase the number of shares of common stock reserved for issuance thereunder by 400,000 shares was approved with 5,096,210 shares voting in favor, 2,948,817 shares voting against and 55,520 shares abstaining. D. The appointment of Ernst & Young LLP as independent auditors of the Company for the fiscal year ending June 30, 1997 was ratified with 8,118,886 shares voting in favor, 57,820 voting against and 12,543 shares abstaining. Item 5. Other Information On February 10, 1997, the Board of Directors made the following appointments: Gary Petersmeyer was appointed Chief Executive Officer of Collagen Corporation in addition to retaining the title of President, succeeding Howard D. Palefsky who will remain as Chairman of the Board of Directors; David Foster was promoted to Senior Vice President of Collagen Corporation and General Manager of Collagen Technologies Group; Norman Halleen was appointed Vice President, Finance and Chief Financial Officer and Jean-Pierre CapDevielle was appointed Vice President and Managing Director, International. 20 21 Item 6. Exhibits and Reports on Form 8-K A. Exhibits Exhibit 3.4 - By-Laws, as amended on August 9, 1996, effective October 30, 1996 Exhibit 10.67(e) - Eighth Amendment, dated December 31, 1996, to Credit Agreement dated November 15, 1994 by and between the Bank of New York and the Registrant Exhibit 10.86 * - License, Supply and International Distribution Agreement between Registrant and Cosmederm Technologies, Inc., dated September 6, 1996 Exhibit 27 - Financial Data Schedule B. Reports on Form 8-K None - -------- * Confidential treatment is requested for a portion of this document. 21 22 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 13, 1997 /s/ Norman Halleen ----------------- ------------------ Norman Halleen Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 23 COLLAGEN CORPORATION INDEX TO EXHIBITS Exhibit Number Description - -------------- ----------- Exhibit 3.4 By-Laws, as amended on August 9, 1996, effective October 30, 1996 Exhibit 10.67(e) Eighth Amendment, dated December 31, 1996, to Credit Agreement dated November 15, 1994 by and between the Bank of New York and the Registrant Exhibit 10.86* License, Supply and International Distribution Agreement between Registrant and Cosmederm Technologies, Inc., dated September 6, 1996 Exhibit 27 Financial Data Schedule - -------- * Confidential treatment is requested for a portion of this document. 22 EX-3.4 2 BY-LAWS OF COLLAGEN CORPORATION 1 EXHIBIT 3.4 BY-LAWS OF COLLAGEN CORPORATION 2 BY-LAWS OF COLLAGEN CORPORATION TABLE OF CONTENTS PAGE ---- ARTICLE I CORPORATE OFFICES.................................................1 1.1 REGISTERED OFFICE...............................................1 1.2 OTHER OFFICES...................................................1 ARTICLE II MEETINGS OF STOCKHOLDERS.........................................1 2.1 PLACE OF MEETINGS...............................................1 2.2 ANNUAL MEETING..................................................1 2.3 SPECIAL MEETING.................................................1 2.4 NOTICE OF STOCKHOLDERS' MEETINGS................................2 2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES..........................2 2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE....................3 2.7 QUORUM..........................................................3 2.8 ADJOURNED MEETING; NOTICE.......................................4 2.9 CONDUCT OF BUSINESS.............................................4 2.10 VOTING.........................................................4 2.11 WAIVER OF NOTICE...............................................5 2.12 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING........5 2.13 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS....5 2.14 PROXIES........................................................6 2.15 LIST OF STOCKHOLDERS ENTITLED TO VOTE..........................6 ARTICLE III DIRECTORS.......................................................7 3.1 POWERS..........................................................7 3.2 NUMBER OF DIRECTORS.............................................7 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS.........9 3.4 RESIGNATION AND VACANCIES.......................................9 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.......................10 3.6 REGULAR MEETINGS...............................................10 3.7 SPECIAL MEETINGS; NOTICE.......................................10 3.8 QUORUM.........................................................11 3.9 WAIVER OF NOTICE...............................................11 3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.............11 3 BY-LAWS OF COLLAGEN CORPORATION TABLE OF CONTENTS (continued) PAGE ---- 3.11 FEES AND COMPENSATION OF DIRECTORS............................11 3.12 APPROVAL OF LOANS TO OFFICERS.................................12 3.13 REMOVAL OF DIRECTORS..........................................12 3.14 CHAIRMAN OF THE BOARD OF DIRECTORS............................12 ARTICLE IV COMMITTEES......................................................12 4.1 COMMITTEES OF DIRECTORS........................................12 4.2 COMMITTEE MINUTES..............................................13 4.3 MEETINGS AND ACTION OF COMMITTEES..............................13 ARTICLE V OFFICERS.........................................................14 5.1 OFFICERS.......................................................14 5.2 APPOINTMENT OF OFFICERS........................................14 5.3 SUBORDINATE OFFICERS...........................................14 5.4 REMOVAL AND RESIGNATION OF OFFICERS............................14 5.5 VACANCIES IN OFFICES...........................................15 5.6 PRESIDENT......................................................15 5.7 VICE PRESIDENTS................................................15 5.8 SECRETARY......................................................15 5.9 CHIEF FINANCIAL OFFICER........................................16 5.10 REPRESENTATION OF SHARES OF OTHER CORPORATIONS................16 5.11 AUTHORITY AND DUTIES OF OFFICERS..............................16 ARTICLE VI INDEMNITY.......................................................17 6.1 THIRD PARTY ACTIONS............................................17 6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION..................17 6.3 SUCCESSFUL DEFENSE.............................................18 6.4 DETERMINATION OF CONDUCT.......................................18 6.5 PAYMENT OF EXPENSES IN ADVANCE.................................18 6.6 INDEMNITY NOT EXCLUSIVE........................................18 6.7 INSURANCE INDEMNIFICATION......................................18 6.8 THE CORPORATION................................................19 6.9 EMPLOYEE BENEFIT PLANS.........................................19 6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES...19 ARTICLE VII RECORDS AND REPORTS............................................20 7.1 MAINTENANCE AND INSPECTION OF RECORDS..........................20 7.2 INSPECTION BY DIRECTORS........................................20 -ii- 4 BY-LAWS OF COLLAGEN CORPORATION TABLE OF CONTENTS (continued) PAGE ---- 7.3 ANNUAL STATEMENT TO STOCKHOLDERS...............................20 ARTICLE VIII GENERAL MATTERS...............................................21 8.1 CHECKS.........................................................21 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS...............21 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES.........................21 8.4 SPECIAL DESIGNATION ON CERTIFICATES............................22 8.5 LOST CERTIFICATES..............................................22 8.6 CONSTRUCTION; DEFINITIONS......................................22 8.7 DIVIDENDS......................................................23 8.8 FISCAL YEAR....................................................23 8.9 SEAL...........................................................23 8.10 TRANSFER OF STOCK.............................................23 8.11 STOCK TRANSFER AGREEMENTS.....................................23 8.12 REGISTERED STOCKHOLDERS.......................................23 ARTICLE IX AMENDMENTS......................................................24 -iii- 5 BY-LAWS OF COLLAGEN CORPORATION ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. The name of the registered agent of the corporation at such location is The Corporation Trust Company. 1.2 OTHER OFFICES The board of directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the board of directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation. 2.2 ANNUAL MEETING The annual meeting of stockholders shall be held each year on a date and at a time designated by the board of directors. At the meeting, directors shall be elected and any other proper business may be transacted. 2.3 SPECIAL MEETING A special meeting of the stockholders may be called at any time by the board of directors, or by the chairman of the board, or by the president or by one or more stockholders holding shares in the aggregate entitled to cast not less than ten percent of the votes at that meeting. 6 If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president, or the secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The officer receiving the request shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with the provisions of Sections 4 and 5 of this Article II, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after the receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 3 shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the board of directors may be held. 2.4 NOTICE OF STOCKHOLDERS' MEETINGS All notices of meetings with stockholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.5 of these by-laws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES Only persons who are nominated in accordance with the procedures set forth in this Section 2.5 shall be eligible for election as Directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the corporation entitled to vote for the election of Directors at the meeting who complies with the notice procedures set forth in this Section 2.5. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 60 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (a) as to each person -2- 7 whom the stockholder proposes to nominate for election or re-election as a Director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the corporation which are beneficially owned by such person and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including without limitation such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the corporation's books, of such stockholder and (ii) the class and number of shares of the corporation which are beneficially owned by such stockholder. At the request of the Board of Directors any person nominated by the Board of Directors for election as a Director shall furnish to the Secretary of the corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a Director of the corporation unless nominated in accordance with the procedures set forth in this Section 2.5. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the By-Laws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. 2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.7 QUORUM The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (i) the Chairman of the meeting or (ii) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. -3- 8 2.8 ADJOURNED MEETING; NOTICE When a meeting is adjourned to another time or place, unless these by-laws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.9 CONDUCT OF BUSINESS The Chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of business. 2.10 VOTING The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.14 of these by-laws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). Except as provided in the last paragraph of this Section 2.11, or as may be otherwise provided in the certificate of incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. At a stockholders' meeting at which directors are to be elected, each stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such stockholder normally is entitled to cast) if the candidates' names have been properly placed in nomination (in accordance with these by-laws) prior to commencement of the voting and the stockholder requesting cumulative voting has given notice prior to commencement of the voting of the stockholder's intention to cumulate votes. If cumulative voting is properly requested, each holder of stock, or of any class or classes or of a series or series thereof, who elects to cumulate votes shall be entitled to as many votes as equals the number of votes which (absent this provision as to cumulative voting) he would be entitled to cast for the election of directors with respect to his shares of stock multiplied by the number of directors to be elected by him, and he may cast all of such votes for a single director or may distribute them among the number to be voted for, or for any two or more of them, as he may see fit. -4- 9 2.11 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these by-laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these by-laws. 2.12 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise provided in the certificate of incorporation, any action required by this chapter to be taken at any annual or special meeting of stockholders of the corporation, or any action that may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice, and without a vote if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of Delaware if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written notice and written consent have been given as provided in Section 228 of the General Corporation Law of Delaware. 2.13 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for -5- 10 the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If the board of directors does not so fix a record date: (i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (ii) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the board of directors is necessary, shall be the day on which the first written consent is expressed. (iii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. 2.14 PROXIES Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by a written proxy, signed by the stockholder and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(c) of the General Corporation Law of Delaware. 2.15 LIST OF STOCKHOLDERS ENTITLED TO VOTE The officer who has charge of the stock ledger of a corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each -6- 11 stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Such list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these by-laws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS The Board of Directors shall consist of eight persons until changed by a proper amendment of this Section 3.2.* No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. -7- 12 * See amendments to this section at end of document. -8- 13 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS Except as provided in Section 3.4 of these by-laws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Directors need not be stockholders unless so required by the certificate of incorporation or these by-laws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to fill a vacancy, shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Elections of directors need not be by written ballot. 3.4 RESIGNATION AND VACANCIES Any director may resign at any time upon written notice to the attention of the Secretary of the corporation. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies. Unless otherwise provided in the certificate of incorporation or these by-laws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these by-laws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. -9- 14 If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE The board of directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these by-laws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 REGULAR MEETINGS Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board. 3.7 SPECIAL MEETINGS; NOTICE Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two (2) directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or by telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice -10- 15 need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.8 QUORUM At all meetings of the board of directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these by-laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these by-laws. 3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise restricted by the certificate of incorporation or these by-laws, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. 3.11 FEES AND COMPENSATION OF DIRECTORS Unless otherwise restricted by the certificate of incorporation or these by-laws, the board of directors shall have the authority to fix the compensation of directors. -11- 16 3.12 APPROVAL OF LOANS TO OFFICERS The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.13 REMOVAL OF DIRECTORS Unless otherwise restricted by statute, by the certificate of incorporation or by these by-laws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; provided, however, that, so long as shareholders of the corporation are entitled to cumulative voting, if less than the entire board is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire board of directors. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. 3.14 CHAIRMAN OF THE BOARD OF DIRECTORS The corporation may also have, at the discretion of the board of directors, a chairman of the board of directors who shall not be considered an officer of the corporation. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, -12- 17 whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors or in the by-laws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (ii) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amend the bylaws of the corporation; and, unless the board resolution establishing the committee, the by-laws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 COMMITTEE MINUTES Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. 4.3 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these by-laws, Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and Section 3.10 (action without a meeting), with such changes in the context of those by-laws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by -13- 18 resolution of the board of directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these by-laws. ARTICLE V OFFICERS 5.1 OFFICERS The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these by-laws. Any number of offices may be held by the same person. 5.2 APPOINTMENT OF OFFICERS The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these by-laws, shall be appointed by the board of directors, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS The board of directors may appoint, or empower the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these by-laws or as the board of directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the board of directors at any regular or special meeting of the board or, except in the case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance -14- 19 of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES Any vacancy occurring in any office of the corporation shall be filled by the board of directors. 5.6 PRESIDENT Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or these by-laws. 5.7 VICE PRESIDENTS In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these by-laws, the president or the chairman of the board. 5.8 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share -15- 20 register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these by-laws. He shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these by-laws. 5.9 CHIEF FINANCIAL OFFICER The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all his transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the board of directors or the by-laws. 5.10 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, the president, any vice president, the treasurer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. 5.11 AUTHORITY AND DUTIES OF OFFICERS In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the board of directors or the stockholders. -16- 21 ARTICLE VI INDEMNITY 6.1 THIRD PARTY ACTIONS The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. 6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. -17- 22 6.3 SUCCESSFUL DEFENSE To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 6.1 and 6.2, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. 6.4 DETERMINATION OF CONDUCT Any indemnification under Sections 6.1 and 6.2 (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that the indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 6.1 and 6.2. Such determination shall be made (1) by the Board of Directors or the Executive Committee by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding or (2) or if such quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. 6.5 PAYMENT OF EXPENSES IN ADVANCE Expenses incurred in defending a civil or criminal action, suit or proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Article VI. 6.6 INDEMNITY NOT EXCLUSIVE The indemnification and advancement of expenses provided or granted pursuant to the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. 6.7 INSURANCE INDEMNIFICATION The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation, as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any -18- 23 liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article VI. 6.8 THE CORPORATION For purposes of this Article VI, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, office, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under and subject to the provisions of this Article VI (including, without limitation the provisions of Section 6.4) with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. 6.9 EMPLOYEE BENEFIT PLANS For purposes of this Article VI, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Article VI. 6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VI shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. -19- 24 ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS The corporation shall, either at its principal executive offices or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these by-laws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. 7.2 INSPECTION BY DIRECTORS Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 ANNUAL STATEMENT TO STOCKHOLDERS The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. -20- 25 ARTICLE VIII GENERAL MATTERS 8.1 CHECKS From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS The board of directors, except as otherwise provided in these by-laws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES The shares of a corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the chief financial officer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or -21- 26 back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 SPECIAL DESIGNATION ON CERTIFICATES If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.5 LOST CERTIFICATES Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these by-laws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. -22- 27 8.7 DIVIDENDS The directors of the corporation, subject to any restrictions contained in (i) the General Corporation Law of Delaware or (ii) the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. 8.8 FISCAL YEAR The fiscal year of the corporation shall be fixed by resolution of the board of directors and may be changed by the board of directors. 8.9 SEAL The corporation may adopt a corporate seal, which may be altered at pleasure, and may use the same by causing it or a facsimile thereof, to be impressed or affixed or in any other manner reproduced. 8.10 TRANSFER OF STOCK Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 8.11 STOCK TRANSFER AGREEMENTS The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. 8.12 REGISTERED STOCKHOLDERS The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such -23- 28 owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE IX AMENDMENTS The by-laws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal by-laws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal by-laws. -24- 29 AMENDMENT TO THE BY-LAWS OF COLLAGEN CORPORATION On November 16 and 17, 1990 the Board of Directors of Collagen Corporation (the "Company") amended the Company's By-laws as follows: RESOLVED: That the first sentence of Section 3.2 of the By-Laws of the Company is amended to read as follows: "The Board of Directors shall consist of nine persons until changed by a proper amendment of this Section 3.2." 30 AMENDMENT TO THE BY-LAWS OF COLLAGEN CORPORATION On May 10, 1991 the Board of Directors of Collagen Corporation (the "Company") amended the Company's By-Laws as follows: RESOLVED: That Article III, Section 3.2 of the By-Laws of the Company is amended to increase the authorized number of the Company's directors to ten. 31 AMENDMENT TO THE BY-LAWS OF COLLAGEN CORPORATION On November 12, 1993 the Board of Directors of Collagen Corporation (the "Company") amended the Company's By-Laws as follows: RESOLVED: That Article III, Section 3.2 of the By-Laws of the Company is amended to increase the authorized number of the Company's directors to eleven. 32 AMENDMENT TO THE BY-LAWS OF COLLAGEN CORPORATION On November 12, 1993, the Board of Directors of Collagen Corporation (the "Company") amended the Company's By-Laws as follows: RESOLVED: That the Bylaws of the Company are amended to increase the size of the Board of Directors to eleven persons. 33 AMENDMENT TO THE BY-LAWS OF COLLAGEN CORPORATION On February 9 and 10, 1995, the Board of Directors of Collagen Corporation (the "Company") amended the Company's By-Laws as follows: RESOLVED: That the Bylaws of the Company are amended to increase the size of the Board of Directors to twelve persons. 34 AMENDMENT TO THE BYLAWS OF COLLAGEN CORPORATION On February 9 and 10, 1995, the Board of Directors of Collagen Corporation (the "Company") amended the Company's Bylaws as follows: RESOLVED: That the Bylaws of the Company are amended to increase the size of the Board of Directors to twelve persons. 35 AMENDMENT TO THE BYLAWS OF COLLAGEN CORPORATION On August 9, 1996, the Board of Directors of Collagen Corporation (the "Company") amended the Company's Bylaws as follows, effective immediately prior to the Annual Meeting of Stockholders to be held on October 30, 1996: RESOLVED: That the Bylaws of the Company are amended to set the authorized number of directors at nine. EX-10.67.E 3 8TH AMENDMENT TO THE CREDIT AGREEMENT 1 EXHIBIT 10.67(E) EIGHTH AMENDMENT TO THE CREDIT AGREEMENT This EIGHTH AMENDMENT TO THE CREDIT AGREEMENT (this "Amendment") is dated as of December 31, 1996 and entered into by and among Collagen Corporation, a Delaware corporation (the "Borrower"), and The Bank of New York (the "Bank"), and is made with reference to that certain Credit Agreement dated as of November 15, 1994, by and among the Borrower and the Bank, as amended (the "Credit Agreement"). Capitalized terms used herein without definition shall have the same meanings herein as set forth in the Credit Agreement. RECITALS WHEREAS, the Borrower and the Bank desire to amend the certain financial covenants set forth in the Credit Agreement, and to make certain other amendments to the Credit Agreement hereinafter set forth; and WHEREAS, the Bank is willing to agree to the requested amendments, subject to the terms of this Amendment. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein, the parties hereto agree as follows: SECTION 1. AMENDMENT TO SECTION 1.1 OF THE CREDIT AGREEMENT 1.1. AMENDMENT TO SECTION 1.1 (REVOLVING CREDIT LOANS). Section 1.1 of the Credit Agreement is hereby amended by adding thereto the following new subsection (g) at the end thereof: (g) Margin Loan Collateral. At the Borrower's option, so long as no Event of Default has occurred and remains uncured hereunder or under any other Loan Document, a portion of the Eligible Margin Loan Collateral may be released from the Lien of the Security Agreement upon the Borrower's written request to the Bank, provided that at the time of such request and after giving effect thereto (i) the principal amount of the Margin Loans shall not exceed the Margin Loan Borrowing Base, (ii) the Borrower shall not be in default under Section 5.21, and (iii) the Bank deems that the Borrower is in compliance with this Agreement and the other Loan Documents. Such requests shall not be submitted more frequently than quarterly and shall be accompanied by a certificate executed by the Borrower's chief financial officer certifying that no Event of Default has occurred and remains uncured under this Agreement or any other Loan Document. 2 SECTION 2. AMENDMENTS TO SECTION 5.14 AND 5.15 OF THE CREDIT AGREEMENT APPLICABLE THROUGH THE FISCAL QUARTER OF THE BORROWER ENDING DECEMBER 31, 1996 2.1. AMENDMENT TO SECTION 5.14 (DEBT/OPERATING CASH FLOW RATIO). The Bank hereby suspends the applicability of Sections 5.14 of the Credit Agreement (Debt/Operating Cash Flow Ratio) for the fiscal quarter of the Borrower ending December 31, 1996. 2.2. AMENDMENT TO SECTION 5.15 (INTEREST COVERAGE RATIO). The Bank hereby suspends the applicability of Section 5.15 of the Credit Agreement (Interest Coverage Ratio) for the fiscal quarter of the Borrower ending December 31, 1996. 2.3. APPLICABILITY OF THE AMENDMENTS TO SECTIONS 5.14 AND 5.15 SET FORTH IN SECTION 1.1 AND 1.2 HEREOF. The amendments in Sections 1.1 and 1.2 hereof shall be effective only for the fiscal quarter of the Borrower ending December 31, 1996. SECTION 3. AMENDMENTS TO SECTION 5.14 AND 5.15 OF THE CREDIT AGREEMENT APPLICABLE AFTER DECEMBER 31, 1996 3.1. AMENDMENT TO SECTION 5.14 (DEBT/OPERATING CASH FLOW RATIO). Section 5.14 of the Credit Agreement is hereby deleted in its entirety and in its place and stead shall appear the following: Section 5.14. Debt/Operating Cash Flow Ratio On any Collateral Shortfall Date, permit the Debt/Operating Cash Flow Ratio to exceed 1.5:1 on such date. 3.2. AMENDMENT TO SECTION 5.15. Section 5.15 of the Credit Agreement is hereby deleted in its entirety and in its place and stead shall appear the following: Section 5.15 Interest Coverage Ratio On any day on Collateral Shortfall Date, permit the Interest Coverage Ratio to be less than 3.0:1 on such date. 3 3.3. APPLICABILITY OF THE AMENDMENTS TO SECTIONS 5.14 AND 5.15 SET FORTH IN SECTION 3.1 AND 3.2 HEREOF. The amendments in Sections 3.1 and 3.2 hereof shall be effective at all times after December 31, 1996. SECTION 4. ADDITIONAL AMENDMENTS TO ARTICLE 5 OF THE CREDIT AGREEMENT 4.1. NEW SECTION 5.21. Article 5 of the Credit Agreement is hereby amended by adding thereto the following new Section 5.21: Section 5.21. Minimum Pledged Target Stock. Permit the number of shares of Target included in the Pledged Stock (as such term is defined in the Pledge Agreement) to be less than 530,000 shares. 4.2. NEW SECTION 5.22. Article 5 of the Credit Agreement is hereby further amended by adding thereto the following new Section 5.22: Section 5.22. Minimum Cash Equivalents. Permit at any time the Value of the Eligible Cash Equivalents be less than one-half of the principal amount of the Loans outstanding at such time. SECTION 5. AMENDMENTS TO SECTION 9.1(A) (DEFINITIONS) 5.1. AMENDMENT TO SECTION 9.1(A). Section 9.1(a) of the Credit Agreement is hereby amended by adding thereto the following new definition: "Collateral Shortfall Date" means any date on which the sum of (i) 100% of the Value of Eligible Cash Equivalents, plus (ii) 50% of the Value of Eligible Margin Loan Collateral shall be less than the total Loans outstanding on such date. 5.2. ADDITIONAL AMENDMENTS TO SECTION 9.1(A). Section 9.1(a) of the Credit Agreement is hereby further amended by deleting the definitions of "Collateral Value" and "Eligible Collateral" and substituting therefor the following new definitions thereof: 4 "Collateral Value" means the Value of each item of Eligible Collateral multiplied by the percentage set forth below for each such item of Eligible Collateral: Item of Eligible Collateral Percentage ------------------- ---------- Eligible Cash Equivalents 100% Eligible Margin Loan Collateral 50% "Eligible Collateral" means, collectively, and at any time, all Eligible Cash Equivalents and Eligible Margin Loan Collateral in which, at such time, the Bank has a perfected pledge and security interest subject to no Liens other than Permitted Liens. SECTION 6. EFFECTIVENESS OF THIS AMENDMENT This Amendment shall be effective upon the Bank's receipt of a duly executed counterpart of this Amendment. SECTION 7. BORROWER'S REPRESENTATIONS AND WARRANTIES In order to induce the Bank to enter into this Amendment and to amend the Credit Agreement in the manner provided herein, the Borrower represents and warrants to the Bank that the following statements are true, correct and complete: 7.1. CORPORATE POWER AND AUTHORITY. The Borrower has all requisite corporate power and authority to enter into this Amendment and to carry out the transactions contemplated by, and perform its obligations under, the Credit Agreement. 7.2. AUTHORIZATION OF AGREEMENTS. The execution, delivery and performance of this Amendment and the performance of the Credit Agreement have been duly authorized by all necessary corporate action by the Borrower. 7.3. NO CONFLICT. The execution, delivery and performance by the Borrower of this Amendment and the performance by the Borrower of the Credit Agreement do not and will not (i) violate any provision of any law, rule or regulation applicable to the Borrower or any of its Subsidiaries, the Certificate of Incorporation or Bylaws of the Borrower or any of its Subsidiaries or any order, judgment or decree of any court or other agency of the government binding on the Borrower or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any Contract of the Borrower or any of its Subsidiaries, (iii) result in or require the creation or imposition of any Lien upon any of their properties or assets, or (iv) require any approval of stockholders or any approval or consent of any Person under any Contract of the Borrower or any of its Subsidiaries except for such approvals or consents which have been obtained on or before the date hereof and disclosed in writing to the Bank. 5 7.4. GOVERNMENTAL CONSENTS. The execution and delivery by the Borrower of this Amendment and the performance by the Borrower of the Credit Agreement do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any Federal, state or other governmental authority or regulatory body or other Person. 7.5. BINDING OBLIGATION. This Amendment, when executed and delivered, will be, and the Credit Agreement is, the legally valid and binding obligations of the Borrower, enforceable against it in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. 7.6. INCORPORATION OR REPRESENTATIONS AND WARRANTIES FROM CREDIT AGREEMENT. The representations and warranties contained in Article 4 of the Credit Agreement are and will be true, correct and complete in all material respects on and as of the date hereof to the same extent as though made on and as of that date, except to the extent that such representations and warranties specifically relate to an earlier date, in which case they are true, correct and complete in all material respects as of such earlier date. 7.7. ABSENCE OF DEFAULT. No event has occurred and is continuing or will result from the execution of this Amendment which would constitute an Event of Default or a Potential Event of Default. SECTION 8. MISCELLANEOUS 8.1. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS. (a) On and after the date hereof, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import referring in the other Loan Documents to the "Credit Agreement", "thereunder", "thereof" or words of like import referring to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended by this Amendment. (b) Except as specifically amended by this Amendment, the Credit Agreement, Pledge Agreement and the other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. (c) The execution, delivery and performance of this Amendment shall not, constitute a waiver of any provision of, or operate as a waiver of any right, power or remedy of the Bank under, the Credit Agreement, the Pledge Agreement or any of the other Loan Documents except as may be expressly provided for herein. 8.2. FEES AND EXPENSES. Borrower acknowledges that all costs, fees and expenses as described in Section 8.2 of the Credit Agreement incurred by the Bank and its counsel with respect to this Amendment and the documents and transactions contemplated hereby shall be for the account of the Borrower. 6 8.3. EXECUTION IN COUNTERPART. This Amendment may be executed in any number of counterparts, and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts taken together shall constitute but one and the same instrument. 8.4. HEADINGS. Section and subsection headings in this Amendment are included herein for convenience of reference only and shall not constitute a apart of this Amendment for any other purpose or be given any substantive effect. 8.5. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO AND ALL OTHER ASPECTS HEREOF SHALL BE DEEMED TO BE MADE UNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 7 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first above written by their respective officers thereunto duly authorized. COLLAGEN CORPORATION By: /s/ David Foster ---------------------------- Name: David Foster -------------------------- Title: Vice President and Chief Financial Officer ------------------------- THE BANK OF NEW YORK By: /s/ Elizabeth Ying ---------------------------- Name: Elizabeth Ying -------------------------- Title: Vice President ------------------------- EX-10.86 4 LICENSE, SUPPLY & INTL. DISTRIBUTION AGREEMENT 1 EXHIBIT 10.86 LICENSE, SUPPLY AND INTERNATIONAL DISTRIBUTION AGREEMENT This License, Supply and International Distribution Agreement (the "Agreement") is entered into effective as of September 6, 1996 (the "Effective Date") by and between Collagen Corporation, a Delaware corporation with offices at 2500 Faber Place, Palo Alto, CA 94303 ("Collagen"), and Cosmederm Technologies, Inc., a Delaware corporation with offices at La Jolla Corporate Center, 3252 Holiday Court, La Jolla, CA 92037 ("Cosmederm"). The parties agree: 1.0 Background. 1.1 Collagen is in the business of researching, developing, manufacturing, and marketing biocompatible products for the treatment of defective, diseased, traumatized, and aging tissues. 1.2 Cosmederm is in the business of researching, developing and manufacturing cosmetic and dermatologic products. 1.3 Cosmederm desires Collagen, and Collagen agrees, to market certain of Cosmederm's proprietary cosmetic and dermatologic products pursuant to the terms and conditions of this Agreement. 2.0 Definitions. 2.1 "Affiliate" shall mean any entity which controls, is controlled by, or is under common control with Collagen. 2.2 "Collagen Field" shall mean throughout the Territory the sale of the Licensed Products for in-office dispensing under the supervision of a licensed physician, including, but not limited to, dermatologists, plastic surgeons, general practitioners, and gynecologists and the free distribution of samples of Licensed Products to medical professionals. For purposes of this Agreement, the words "sell" and "sale" shall be deemed to include the free distribution of samples of Licensed Products to medical professionals. 2.3 "Licensed Know How" shall mean any and all unpatented inventions, data, processes, compositions, techniques, improvements, derivatives, formulations, and other technical information proprietary to Cosmederm which are useful and/or necessary to the sale of Licensed Products in existence as of the Effective Date or created or acquired (including by license to the greatest extent permitted under the terms of any such license) by Cosmederm during the term of this Agreement, including any and all methods proprietary to Cosmederm for the use or, in the event Collagen exercises a right to manufacture under Section 4.1, manufacture of the Licensed Products. 2 2.4 "Licensed Patents" shall mean any and all United States and foreign patents which are granted on the inventions described in: United States Date filed International Date filed ------------- ---------- ------------- ---------- Application No. Application No. --------------- --------------- * * * * * * * * * * * * * * * * * * * * * * * * * * having claims reading on any Licensed Product or methods for manufacture or use of any Licensed Product, owned by, or licensed (to the greatest extent permitted under the terms of any such license) to Cosmederm during the term of this Agreement, including any continuations, divisions, reissues, re-examinations, re-registrations, and all foreign counterparts thereof. 2.5 "Licensed Product(s)" shall mean the initial * products identified in Exhibit A and any and all products developed and sold pursuant to Section 7. 2.6 "Licensed Technology" shall mean Licensed Know How and Licensed Patents. 2.7 "Mark(s)" shall mean any and all trademarks, trade names, logos, and slogans which Cosmederm may at any time during the term of this Agreement own, adopt, use, or register with respect to the Licensed Products, other than the Cosmederm name and any trademarks, logos or slogans incorporating the Cosmederm name. 2.8 "Net Sales" shall mean * . 2.9 "Territory" shall mean all of the countries of the world. 3.0 Grants of Rights. 3.1 Cosmederm hereby grants Collagen and Affiliates * license under the Licensed Technology, to use (but only in performing development pursuant to a joint development plan as - --------- *Confidential treatment requested. -2- 3 agreed pursuant to Section 7 and testing pursuant to the final sentence of Section 13.1), make and/or have made (but in either case only pursuant to the second sentence of Section 4.1), and sell the Licensed Products within the Collagen Field throughout the Territory pursuant to the terms and conditions of this Agreement. The parties acknowledge that L'Oreal, S.A. may exercise its option * under the Licensed Technology within the Collagen Field (and other fields) throughout the Territory to sell products which incorporate the Licensed Technology; provided, that Cosmederm (i) shall at all times during the effective term of this Agreement use its best efforts to exclude from such co-exclusive license any and all formulations developed pursuant to Section 7.0 of this Agreement, and/or sold by Collagen, Affiliates and sublicensed subdistributors under this Agreement, expressly including, but not limited to, the Licensed Products identified on Exhibit A, and (ii) shall not at any time during the effective term of this Agreement reveal to L'Oreal, S.A. (or to any other third party licensee) any formulas or other proprietary technical information relating to any and all formulations developed pursuant to Section 7.0 of this Agreement and/or the Licensed Products identified on Exhibit A. Collagen further acknowledges that Cosmederm and any licensees shall be allowed to distribute free samples of any products (other than any Licensed Product) to medical professionals. Collagen and Affiliates shall have no right to sublicense, except Collagen may sublicense the license-to-sell in a particular foreign country to any subdistributor which is part of Collagen's standard system of distribution in that country and Collagen may sublicense the license-to-make to contract manufacturers to make Licensed Products for Collagen as may be allowed by the second sentence of Section 4.1. 3.2 Cosmederm hereby grants Collagen and Affiliates * license to use the Marks in making and/or having made (but in either case only pursuant to the second sentence of Section 4.1) and selling the Licensed Products within the Collagen Field throughout the Territory pursuant to the terms and conditions of this Agreement. Cosmederm shall not at any time use, and shall not at any time license, sell or otherwise transfer rights under the Marks to any third party, expressly including L'Oreal, S.A., for use in association with the sale of products which incorporate the Licensed Technology within the Collagen Field within the Territory. Collagen and Affiliates shall have no right to sublicense, except Collagen may sublicense with regard to use-in-selling in a particular foreign country to any subdistributor which is part of Collagen's standard system of distribution in that country and Collagen may sublicense with regard to use-in-making to contract manufacturers to make Licensed Products for Collagen as may be allowed by the second sentence of Section 4.1. 3.3 Cosmederm hereby grants Collagen and Affiliates * fully-paid-up license to use the COSMEDERM tradename and all intellectual property rights therein in making and/or having made (but in either case only pursuant to the second sentence of Section 4.1) and selling the Licensed Products within the Collagen Field throughout the Territory pursuant to the terms and conditions of this Agreement. Collagen and Affiliates shall have no right to sublicense, except Collagen may sublicense with regard to use-in-selling in a particular foreign country to any subdistributor which is part of Collagen's standard system of distribution in that country and Collagen may sublicense with regard to use-in-making to contract manufacturers to make Licensed Products for Collagen as may be allowed by the second sentence of Section 4.1. - --------- *Confidential treatment requested. -3- 4 Collagen acknowledges that Cosmederm and any licensees shall be allowed to distribute free samples of any products (other than any Licensed Product) to medical professionals. 3.4 Cosmederm shall not use, and shall not license, sell or otherwise transfer rights under the COSMEDERM tradename to any third party for use in association with the sale of the products which incorporate the Licensed Technology within the Collagen Field within the Territory during the term of this Agreement. Collagen acknowledges that Cosmederm and any licensees shall be allowed to distribute free samples of any products (other than any Licensed Product) to medical professionals. 3.5 Cosmederm represents and warrants to Collagen and Affiliates that Cosmederm owns the Licensed Technology and has any and all rights necessary to grant the rights granted to Collagen and Affiliates pursuant to this Agreement. 4.0 Supply. 4.1 Supply. The parties agree that Cosmederm shall manufacture and supply to Collagen the Licensed Products specified in Exhibit A during the effective term of this Agreement subject to the transfer price specified in Section 5.1 (but not subject to the royalty specified in Section 6.1). Notwithstanding the immediately preceding sentence, in the event that at any time during the effective term of this Agreement (i) Cosmederm materially fails to meet its supply obligations under * purchase orders issued by Collagen pursuant to Section 4.4 within * , or (ii) there is a change in the control of Cosmederm, thereafter, Collagen shall during the effective term of this Agreement have the right, but not the obligation, to manufacture, or have manufactured, any and all Licensed Product(s) subject to the royalty rate specified in Section 6.1 (but not subject to the transfer price specified in Section 5.1.) Further, in the event that at any time during the effective term of this Agreement Cosmederm elects not to supply any Licensed Product(s) to Collagen, specifically including, but not limited to, the failure to agree upon terms of Cosmederm's manufacture of Licensed Product(s) under Section 7.2, thereafter, Collagen shall during the effective term of this Agreement have the right, but not the obligation, to manufacture, or have manufactured, such Licensed Product(s) subject to the royalty rate specified in Section 6.1 (but not subject to the transfer price specified in Section 5.1.) 4.2 Performance Obligations. Cosmederm shall at all times during the effective term of this Agreement, use Cosmederm's reasonable best efforts to supply Collagen with Collagen's requirements for each and every Licensed Product except as Cosmederm may elect under Section 4.1(ii). Collagen shall at all times during the effective term of this Agreement use its reasonable best efforts to commercialize and sell each and every Licensed Product. 4.3 Marks. The parties shall mutually agree upon the Marks. Any and all Licensed Products sold or otherwise distributed pursuant to the terms and conditions of this Agreement shall be branded exclusively with the Marks, and shall bear both Cosmederm and Collagen tradenames. The exact usage and placement of such tradenames shall be mutually agreed by the parties in good faith. - --------- *Confidential treatment requested. -4- 5 4.4 Purchase Orders. All purchase orders for Licensed Products shall be initiated in writing by Collagen and shall include a requested delivery date. Such purchase orders should be received by Cosmederm at least * prior to such requested delivery date. The minimum aggregate purchase order size is * and the minimum purchase order size per SKU is * . All purchase orders shall be non-cancelable. All purchase orders, to the extent they would result in calendar quarter deliveries not in excess of * of the amount last forecasted by Collagen for such period, shall be shipped by the later of (i) * after receipt of such order, or (ii) by the shipment request date set forth on such purchase order. Any purchase order, to the extent it would result in calendar quarter deliveries in excess of * of the amount last forecasted by Collagen for such period and which is not (as to such excess amount) rejected by Cosmederm within * of receipt shall be deemed accepted by Cosmederm upon its receipt of such purchase order, and shall be shipped by the later of (i) * after receipt of such order, or (ii) by the shipment request date set forth on such purchase order. In any event, Cosmederm will use its reasonable best efforts to deliver Licensed Products at the times and in the amounts specified in Collagen's accepted purchase orders. Cosmederm agrees to promptly inform Collagen of any potential failure to meet the delivery time specified in a purchase order. 4.5 Forecasts. Commencing with Collagen's first order for Licensed Products, and at the beginning of each calendar quarter thereafter, Collagen shall provide Cosmederm rolling written forecasts of Collagen's estimated requirements of Licensed Products to be delivered for each of the * . Forecasts provided to Cosmederm by Collagen pursuant to this Section 4.5 shall be prepared in good faith by Collagen and represent Collagen's reasonable expectation of its purchase requirements for the forecasted period, but shall be advisory in nature only and shall not be binding on Collagen. Cosmederm shall be prepared to deliver at * of Collagen's last forecasted needs for a given calendar quarter. The "last" forecast refers to the forecast for a quarter delivered * before the first day of such quarter. Cosmederm and Collagen shall keep each other apprised in good faith of their respective requirements, projections, production capability limitations and similar matters. 4.6 Conflicting Terms. In ordering and delivering the Licensed Products hereunder, Cosmederm and Collagen may use their standard forms, but nothing in such form shall be construed to amend or modify the terms of this Agreement and, in the case of conflict herewith, the terms of this Agreement shall control. 4.7 Certificate of Conformity. All Licensed Products delivered by Cosmederm under this Agreement shall be accompanied by a Certificate of Conformity issued by Cosmederm warranting that all Licensed Products delivered under such Certificate of Conformity shall meet the acceptance specifications to be mutually agreed and called out in Exhibit B, including, but not limited to, labeling, packaging and product specifications (the "Acceptance Specifications.") Cosmederm will promptly replace (or, at Cosmederm's sole option in any particular case, give Collagen credit for such returns at Collagen's published wholesale prices) any and all Licensed Products returned by a customer or an enduser within * of purchase and forwarded by Collagen to Cosmederm within * of such return to the extent any such returns result from the formulation and/or manufacture by Cosmederm of Licensed Products which do not meet the Acceptance Specifications. - --------- *Confidential treatment requested. -5- 6 4.8 Acceptance. Acceptance by Collagen of Licensed Products delivered by Cosmederm shall be pursuant to the Certificate of Conformity issued by Cosmederm pursuant to Section 4.7 and visual inspection by Collagen. Collagen's failure to send a written rejection notice within * after delivery shall conclusively be deemed to constitute acceptance. In the event that any shipment, or part of any shipment, is found upon such visual inspection not to be in accordance with the Acceptance Specifications, Collagen shall have the right to reject such shipment, or part of shipment, within * after delivery by Cosmederm; provided, that such shipment, or part of shipment, has not been used up by Collagen or shipped to customers. A shipment, or part of a shipment, may be rejected by Collagen only upon written notice to Cosmederm stating the reason(s) for rejection. Upon receiving any such notice, Cosmederm shall use its reasonable best efforts to replace rejected Licensed Products, and to redeliver to Collagen replacement Licensed Products as soon as possible and in no event more than * after Cosmederm's receipt of Collagen's written notice of rejection (or, at Cosmederm's sole option in any particular case, give Collagen credit for such rejected Licensed Products at Collagen's published wholesale prices). 4.9 Shipment. All shipments will be FOB Collagen's manufacturing facility in Fremont, California and/or such other place(s) as Collagen shall direct. Risk of loss will pass to Collagen upon delivery to such facility. ** . Cosmederm will be responsible for filing any and all freight claims. Collagen may request a specific carrier and mode of shipment, but Cosmederm may arrange for an alternative carrier and mode of shipment, provided that Collagen consents to such alternative carrier and mode of shipment, such consent to not be unreasonably withheld. Notwithstanding the foregoing, if Collagen's choice of specific carriers, choice of mode of shipment, choice of ship-to location(s) outside the continental United States, and/or direction to ship to multiple locations results in higher freight, insurance and/or other shipping expenses than using Cosmederm's normal truck delivery to a single location in the continental United States, then Collagen shall pay the excess. 4.10 Payment. Collagen shall pay Cosmederm the transfer price specified in Section 5.1 within * after receiving an invoice covering an accepted order. 4.11 Inspection of Manufacturing Facilities and Process. At any time during the term of this Agreement, Collagen shall have the right to have, at Collagen's expense, and Cosmederm shall permit, Collagen's authorized representative(s) to inspect the manufacture of Licensed Products. Cosmederm agrees at all times to provide Collagen at least * notice in writing prior to the scheduled date of a manufacturing run of Licensed Products so that Collagen representative(s) may be present. 5.0 Transfer Prices and Payment of Transfer Prices. 5.1 Transfer prices for any and all Licensed Product(s) initially specified in Exhibit A which are manufactured by Cosmederm pursuant to the first sentence of Section 4.1 shall be calculated as * of Collagen's published wholesale price of such Licensed Product as of the date of delivery by Cosmederm. Collagen shall promptly notify Cosmederm of all changes in its - --------- *Confidential treatment requested. -6- 7 published wholesale prices. The parties shall mutually agree upon the transfer prices for any additional Licensed Products manufactured by Cosmederm pursuant to Sections 7.1 and 7.2. Collagen agrees upon Cosmederm's request to discuss in good faith adjusting the transfer price for the Licensed Product(s) initially specified in Exhibit A upon Cosmederm's demonstration of convincing evidence of commercial factors in support of such a proposed adjustment. The parties shall mutually agree upon the size, quantity, packaging and transfer price, if any, for sample products. 6.0 Royalty. 6.1 Royalty Rates. In the event that Collagen manufactures or sublicenses the manufacture of Licensed Product(s) under the second sentence of Section 4.1, Collagen shall pay to Cosmederm royalties based on the Net Sales of such Licensed Product(s) and calculated at the rate of (i) * for each and every such Licensed Product(s) which is a prescription drug, (ii) * for each and every such Licensed Product(s) which is classified as an OTC drug, but does not require a physician's prescription, and (iii) * for each and every such Licensed Product(s) which is a cosmetic product. The parties acknowledge that each of the initial * Licensed Products specified in Exhibit A are cosmetic products and shall agree on the characterization of any additional Licensed Products prior to manufacture. 6.2 Royalty Rate Adjustment. In the event that in any given calendar year during the effective term of this Agreement, the cumulative Net Sales of all royalty-bearing Licensed Products sold throughout the Territory which are cosmetic products exceeds * , the applicable royalty rate for sales of such royalty-bearing, cosmetic Licensed Products in excess * for the remainder of such calendar year only shall be * . 6.3 Reports. After the first commercial sale of a Licensed Product manufactured by or on behalf of Collagen, Collagen shall make quarterly written reports to Cosmederm within *, stating in reasonably specific detail, on a country-by-country basis, (i) the number of units of each Licensed Product directly or indirectly sold by Collagen, Affiliates or sublicensed subdistributors during the reporting period and the calculation of Net Sales from such gross sales, (ii) the royalties payable under this Agreement on such sales of units of each Licensed Product during the reporting period, (iii) the exchange rates used in converting foreign currencies to United States dollars in the calculation of such royalties, and (iv) the withholding taxes, if any, required by law to be deducted from such royalties. With respect to royalties payable on sales of units of the Licensed Products invoiced in United States dollars, the gross sales, Net Sales, and royalties payable to Cosmederm shall be expressed in United States dollars. With respect to royalties payable on sales of units of the Licensed Products invoiced in a currency other than United States dollars, the gross sales, Net Sales and amounts payable to Cosmederm shall be expressed in the domestic currency of the country in which the sale was together with the United States dollar equivalent of the royalty payable, calculated using the average of the buying and selling exchange rates quoted by Bank of America (San Francisco) at the close of business on the last banking day of the calendar quarter prior to the date of payment. - --------- *Confidential treatment requested. -7- 8 6.4 Royalty Payments. Concurrently with the making of each such report, Collagen shall pay to Cosmederm the royalty payments due under Section 6.1 on sales of units of the Licensed Products during the quarter covered by such report. All payments shall be in United States dollars. 6.5 One Royalty. For purposes of this Agreement, each Licensed Product sold hereunder shall be sold only once in a royalty-generating transaction, and subsequent sales or transfers of such Licensed Product shall not result in any additional royalty payment hereunder. 6.6 Taxes. In the event that Collagen is required by law to deduct withholding taxes from royalty payments which would otherwise be payable to Cosmederm hereunder, Collagen will promptly provide Cosmederm with all documentation reasonably required by Cosmederm to obtain a corresponding reduction in Cosmederm's United States taxes. 6.7 Audits. Collagen shall keep, and cause each Affiliate and each sublicensed subdistributor to keep, true and accurate books of account and records in sufficient detail to properly determine the royalties payable to Cosmederm in connection with the distribution of the Licensed Products. Collagen shall keep, and cause each Affiliate and each sublicensed subdistributor to keep, such books and records for at least three (3) years following the end of the calendar quarter to which they pertain, and shall make available, and cause each Affiliate and each sublicensed subdistributor to make available, such books and records for inspection during such three (3) year period by a certified public accountant retained by Cosmederm for such purpose, solely for the purpose of verifying Cosmederm's royalty payments hereunder. Such inspections may be made no more than once in any twelve (12) month period, at reasonable times mutually agreed upon by the parties after at least five (5) days written notice to Collagen. The certified public accountant shall execute a confidentiality agreement reasonably acceptable to Collagen prior to commencing any such inspection. All such inspections conducted shall be at Cosmederm's expense, unless an underpayment exceeding * of the amount payable for the period covered by the inspection is established in the course of any such inspection, whereupon all costs relating to such inspection shall be paid by Collagen. 7.0 Rights of First Offer. 7.1 Cosmederm shall fully disclose to Collagen (to the greatest extent that Cosmederm is not contractually prohibited from doing so) in writing any additional human cosmetic and dermatologic products, including, but not limited to, acne products, therapeutic emollients and moisturizers, therapeutic shampoos, skin treatment products and pigment lightening creams which incorporate the Licensed Technology, Cosmederm contemplates developing with the Licensed Technology during the effective term of this Agreement. Collagen shall have * after Collagen's receipt of such disclosure to determine whether or not Collagen is interested in pursuing such new product - --------- *Confidential treatment requested. -8- 9 opportunity within the Collagen Field and to so inform Cosmederm. In the event that Collagen does not within * inform Cosmederm in writing that Collagen is interested in pursuing any such proposed product opportunity, then Cosmederm shall be able to pursue such new product opportunity by itself or with any third party. If Collagen informs Cosmederm in writing that Collagen is interested in pursuing such new product opportunity, the parties shall enter into good faith and exclusive negotiations for up to * regarding the possible terms of an agreement, including but not limited to the supply and transfer pricing terms, pursuant to which Cosmederm and Collagen may jointly develop, manufacture, and/or sell such new product. In the event the parties do not reach such an agreement within such * , then Cosmederm shall be able to pursue such new product opportunity with any third party (or by itself), but under terms and conditions no more favorable than those finally offered to Collagen. 7.2 Collagen shall fully disclose to Cosmederm in writing any additional cosmetic and dermatologic products for the Collagen Field, including, but not limited to, acne products, therapeutic emollients and moisturizers, therapeutic shampoos, skin treatment products and pigment lightening creams, Collagen desires to develop with the Licensed Technology during the term of this Agreement. Cosmederm agrees to negotiate with Collagen exclusively and in good faith regarding the joint development of such product, and to use Cosmederm's best efforts to conclude an agreement between the parties pursuant to which Cosmederm and Collagen may jointly develop, Collagen and/or Cosmederm may manufacture, and Collagen may sell such new product. In the event that Collagen does manufacture, directly or indirectly, any such additional Licensed Product(s) independently of Cosmederm, Cosmederm shall cooperate fully and diligently with Collagen's efforts to manufacture and commercialize such new product(s). For avoidance of doubt, (i) Collagen shall have the right, but not the obligation, to manufacture (or have manufactured) any Licensed Product proposed by Collagen and developed by the parties under this Section 7.2 in the event that the parties do not agree upon manufacturing terms pursuant to which Cosmederm would manufacture such Licensed Product, and (ii) Cosmederm shall be entitled to receive the royalty called for in Section 6.1 on each and every Licensed Product manufactured and sold by Collagen, Affiliates or sublicensees under this Agreement. If the parties are unable to mutually agree upon the terms and conditions of a development agreement, neither party shall develop, manufacture or sell such product. 8.0 Licensed Product Development 8.1 Cosmederm shall be responsible for * of all research, development, manufacturing and marketing claims support costs of the Licensed Products specified in Exhibit A. Collagen is responsible for * of all other marketing, sales and distribution costs for the Licensed Products specified in Exhibit A, including, but not limited to, consumer acceptance studies, focus groups, and test market studies. The parties may mutually agree upon the allocation of costs related to the joint development of any additional Licensed Product(s) proposed by either Collagen or Cosmederm pursuant to Sections 7.1 and 7.2. 9.0 Indemnities. 9.1 Collagen's Indemnity. Cosmederm shall defend, indemnify and hold Collagen harmless against all damages, costs (including reasonable attorneys' fees) or other liability, actually incurred by Collagen, or assessed against Collagen by a court, arbitrator or government agency of competent jurisdiction, arising from any claim, suit or proceeding based on a third party claim of intellectual property infringement related to the Licensed Technology or product - --------- *Confidential treatment requested. -9- 10 liability (to the extent such claim is related to Cosmederm's supplying Licensed Product(s) not meeting the Acceptance Specifications, and/or if such product liability arises from or is related to the product design of Licensed Products designed solely by Cosmederm) brought individually or severally against Collagen as a result of Collagen's distribution of Licensed Products. Collagen shall provide Cosmederm with prompt notification of any such claim, suit or proceeding, and shall provide Cosmederm with reasonable assistance, at Cosmederm's expense, in connection with the defense or settlement thereof. Cosmederm shall have sole control of the defense or settlement of any such claim, suit or proceeding, subject to Collagen's right to step in and assume control of such defense in the event Cosmederm refuses to conduct such defense. No settlement shall be binding on Collagen without Collagen's written consent. However, should Collagen refuse to consent to a settlement arranged by Cosmederm, then Cosmederm may (but shall not be obligated to) pay Collagen the indicated settlement amount; if Cosmederm does so, Cosmederm shall thereupon be relieved of all further responsibility to Collagen under this Section 9.1. 9.2 Cosmederm's Indemnity. Collagen shall defend, indemnify and hold Cosmederm harmless against all damages, costs (including reasonable attorneys' fees) or other liability, actually incurred by Cosmederm, or assessed against Cosmederm by a court arbitrator or government agency of competent jurisdiction, arising from any claim, suit or proceeding brought individually or severally against Cosmederm to the extent such claim, suit or proceeding is the result of Licensed Product(s) manufactured by Collagen (or Collagen's manufacturing sublicensees) which fail to meet the Acceptance Specifications, and/or arises from or is related to marketing claims made by Collagen and not approved by Cosmederm and/or product design of Licensed Products designed solely by Collagen. Cosmederm shall provide Collagen with prompt notification of any such claim, suit or proceeding, and shall provide Collagen with reasonable assistance, at Collagen's expense, in connection with the defense or settlement thereof. Collagen shall have sole control of the defense or settlement of any such claim, suit or proceeding, subject to Cosmederm's right to step in and assume control of such defense in the event Collagen refuses to conduct such defense. No settlement shall be binding on Cosmederm without Cosmederm's written consent. However, should Cosmederm refuse to consent to a settlement arranged by Collagen, then Collagen may (but shall not be obligated to) pay Cosmederm the indicated settlement amount; if Collagen does so, Collagen shall thereupon be relieved of all further responsibility to Cosmederm under this Section 9.2. 10.0 Limitation of Liability. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR LOST PROFITS OR ANY CONSEQUENTIAL, SPECIAL, INCIDENTAL, OR INDIRECT DAMAGES OF SUCH OTHER PARTY, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING OUT OF THIS AGREEMENT OR THE ACTIVITIES CONTEMPLATED BY THIS AGREEMENT. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. -10- 11 11.0 Confidentiality. 11.1 The parties may, from time to time and in connection with the work contemplated under this Agreement, disclose to each other Confidential Information. "Confidential Information" shall mean any confidential and proprietary information, disclosed either in writing or orally, and either obviously such or identified as such by the disclosing party within thirty (30) days of such disclosure. Each party shall keep strictly confidential and not use such Confidential Information except for the purposes set forth in this Agreement. Confidential Information shall not include information which: (i) the receiving party can by written records show has already lawfully come into its possession at the time of disclosure; (ii) is or later becomes part of the public domain through no fault of the receiving party; (iii) is later communicated lawfully to the receiving party by a third party not bound by confidentiality; (iv) the receiving party can show by written records is later developed independently by the receiving party without any use of the disclosing party's Confidential Information; or (v) is required by law or regulation to be disclosed; however, that the party subject to such disclosure requirement provides written notice to the other party promptly to enable such other party to seek a protective order or otherwise prevent or limit disclosure of such Confidential Information. Either party may disclose Confidential Information to any third party having a valid need to know so long as the disclosing party and such third party have entered into a written confidentiality agreement, of which the original disclosing party is a third party beneficiary, containing restrictions on further disclosure and use no less stringent than the provisions of this Section 11.1. 11.2 Upon expiration or termination of this Agreement, each party shall promptly deliver to the other party all records, notes and other documents, in whatever medium (and including all copies) in its possession or control containing Confidential Information belonging to the other party, except that each party may retain one copy of Confidential information to be held by its legal department solely for archival purposes. 12.0 Patent and Trademark Prosecution. 12.1 Cosmederm shall, at its sole expense, prosecute, maintain and defend the Licensed Technology throughout the Territory and the Marks throughout the countries specified in Exhibit C. Collagen shall, at its sole election and expense, prosecute, maintain and defend the Marks -11- 12 throughout the remainder of the Territory. Collagen and Cosmederm shall each provide the other reasonable assistance in any actions necessary for such prosecution, maintenance and defense. Collagen may, at its sole election and at Cosmederm's expense (and in Cosmederm's name and for Cosmederm's benefit), prosecute, maintain and/or defend any Licensed Patents, or Marks in the event that Cosmederm fails to promptly initiate, and diligently pursue, any prosecution, maintenance and/or defense of any such Licensed Patents, or Marks upon Collagen's written request throughout the countries specified in Exhibit C. Cosmederm shall fully and promptly cooperate with any such prosecution, maintenance and/or defense by Collagen. 13.0 Regulatory Approvals. 13.1 In the event that the approval or authorization of any regulatory agency or body is required to permit Collagen to lawfully sell as a cosmetic product any Licensed Product(s) specified in Exhibit A within the Collagen Field anywhere within the Territory, Cosmederm shall at its sole expense obtain such regulatory approval and authorization. Collagen shall fully and diligently cooperate with all such Cosmederm efforts. Collagen shall at its sole expense be primarily responsible for performing such tests as may be required for obtaining regulatory approvals and authorizations for any additional Licensed Product(s), for bearing all expenses in obtaining such regulatory approvals and authorizations, and for determining the manner in which such regulatory approvals and authorizations shall be sought. Cosmederm shall fully and diligently cooperate with all such Collagen efforts. 14.0 Term and Termination. 14.1 Initial Term. This Agreement shall become effective on the Effective Date and shall continue in effect for all Licensed Products, unless terminated in accordance with Sections 14.3, 14.4, 14.5 or 14.6, for an initial term of * from the date of Cosmederm's first delivery of a commercial lot of any Licensed Product (the "Initial Term") plus any renewal term(s) as provided in Section 14.2. 14.2 Renewal Terms. Collagen may at its sole election renew this Agreement , by giving written notice to Cosmederm at least * before the expiration of the Initial Term (or any Renewal Term) for another * ("Renewal Term(s)"), so long as the Net Sales of the Licensed Products sold by Collagen and Affiliates and sublicensed subdistributors during Year 5 of the Initial Term, or if applicable, Year 5 of the then-ending Renewal Term, throughout the Territory equal or exceed * (such amount shall be adjusted to the extent any deficit is attributable, in whole or in part, to any act or failure to act of Cosmederm, including, but not limited to, Cosmederm's failure to supply sufficient quantities of any Licensed Product(s) to Collagen and/or any action or requirement of the United States Food and Drug Administration or state regulatory equivalent). In the event that such Net Sales of the Licensed Products are less than * (or less than any applicable adjusted amount) and Collagen, at Collagen's sole election, desires to renew this Agreement for a Renewal Term, Collagen's right to renew shall be subject to Collagen, before or within * after sending the renewal notice: - --------- *Confidential treatment requested. -12- 13 (i) in the event that Cosmederm is then manufacturing one hundred percent (100%) of Licensed Products(s) being sold by Collagen, Affiliates and sublicensed subdistributors, placing a purchase order (for delivery in no less than * nor more than * for a sufficient total number of units of such Licensed Product(s) from Cosmederm to equal the deficiency in the Section 14.2 minimum Net Sales, (ii) in the event that Collagen is then manufacturing one hundred percent (100%) of Licensed Products(s) being sold by Collagen, Affiliates and sublicensed subdistributors, paying Cosmederm an additional payment equal to the incremental royalty which Cosmederm would have been entitled to if Collagen had sold sufficient total units of Licensed Product(s) to meet the Section 14.2 minimum Net Sales, or (iii) in the event that both Cosmederm and Collagen are then manufacturing Licensed Product(s), Collagen shall, in a proportion equal to the ratio of the dollar amount of such Licensed Product(s) manufactured by Cosmederm and Collagen, respectively, place a purchase order according to (i) above and pay to Cosmederm an additional incremental royalty payment according to (ii) above which together equal the total dollar amount to which Cosmederm would have been entitled to if Collagen had met the Section 14.2 minimum Net Sales. All such purchases and royalty payments shall be deemed made in the shortfall Year, not the following Year. In the event that and so long as a valid United States patent is not in effect at any time during Year 5, the Net Sales performance figure specified in this Section 14.2 shall be reduced by * . 14.3 Default. If either party defaults in the performance of any of its material obligations hereunder and if such default is not corrected within * after written notice thereof by the other party, then the nondefaulting party, at its option, may, in addition to any other remedies it may have, terminate this Agreement by giving written notice of termination to the defaulting party. 14.4 Insolvency. This Agreement may be terminated by either party, on notice, (i) upon the institution by the other party of insolvency, receivership or bankruptcy proceedings or any other proceedings for the settlement of its debts, (ii) upon the institution of such proceedings against the other party, which are not dismissed or otherwise resolved in its favor within sixty (60) days thereafter, (iii) upon the other party's making a general assignment for the benefit of creditors, or (iv) upon the other party's dissolution or ceasing to conduct business in the normal course. 14.5 Cosmederm's Right to Buy Collagen Out. Cosmederm may at its sole election terminate this Agreement at any time after the expiration of the Initial Term by providing Collagen * prior written notice and paying to Collagen an amount equal to * of Collagen, Affiliates and sublicensed subdistributors. 14.6 Failure to Meet Minimums. If Collagen, Affiliates and sublicensed subdistributors fail to sell in any Year at least the minimum Net Sales of all Licensed Product(s) - --------- *Confidential treatment requested. -13- 14 as set forth in Exhibit D (and so long as such failure is not attributable, in whole or in part, to any act or failure to act of Cosmederm, including, but not limited to, Cosmederm's failure to supply sufficient quantities of any Licensed Product(s) to Collagen and/or any action or requirement of the United States Food and Drug Administration or state regulatory equivalent), Cosmederm may, at its sole election, notify Collagen in writing of Cosmederm's intent to terminate this Agreement. Cosmederm may terminate this Agreement * after such notice unless Collagen has, at Collagen's sole election, within such * period done one of the following: (i) in the event that Cosmederm is then manufacturing one hundred percent (100%) of Licensed Products(s) being sold by Collagen, Affiliates and sublicensed subdistributors, place a purchase order (for delivery in no less than * nor more than * for a sufficient total number of units of such Licensed Product(s) from Cosmederm to equal the deficiency in the applicable minimum Net Sales, (ii) in the event that Collagen is then manufacturing one hundred percent (100%) of Licensed Products(s) being sold by Collagen, Affiliates and sublicensed subdistributors, pay to Cosmederm an additional payment equal to the incremental royalty which Cosmederm would have been entitled to if Collagen had sold sufficient total units of Licensed Product(s) to meet the applicable minimum Net Sales, or (iii) in the event that both Cosmederm and Collagen are then manufacturing Licensed Product(s), Collagen shall, in a proportion equal to the ratio of the dollar amount of such Licensed Product(s) manufactured by Cosmederm and Collagen, respectively, place a purchase order according to (i) above and pay to Cosmederm an additional incremental royalty payment according to (ii) above which together equal the total dollar amount to which Cosmederm would have been entitled to if Collagen had met the applicable minimum Net Sales. All such purchases and royalty payments shall be deemed made in the shortfall Year, not the following Year. 14.7 Marks. The parties each acknowledge that neither party shall be entitled to make any use of the Marks after the termination or expiration of this Agreement. 14.8 Survival. Sections 6.3, 6.4, 6.7, 9, 10, 11 and 14.7 shall survive any termination or expiration of this Agreement 15.0 Miscellaneous Provisions 15.1 Governing Law. This Agreement shall be construed in accordance with the laws of California without reference to its conflict of laws principles. 15.2 Further Acts and Instruments. Each party agrees to execute, acknowledge and deliver such further instruments and to do all such other acts as may be necessary or appropriate to carry out the purpose and intent of this Agreement. - --------- *Confidential treatment requested. -14- 15 15.3 Assignment. Neither this Agreement nor any interest hereunder shall be assignable by either party by operation of law or otherwise without the prior written consent or agreement of the other (which consent shall not be unreasonably withheld), except in connection with a sale or transfer of all or substantially all of its business unit to which this Agreement relates. It is agreed that, for this purpose, the smallest applicable Collagen business unit is the Aesthetics Technologies division, or its successor. This Agreement shall inure to the benefit of and shall be binding upon the parties and their successors and permitted assigns, and the name of a party appearing herein shall be deemed to include the names of such party's successors and permitted assigns to the extent necessary to carry out the intent of this Agreement. 15.4 Notices. Any notice required by this Agreement shall be deemed to have been fully given when sent by facsimile with a copy sent by express courier, addressed in the case of Collagen to: Collagen Corporation 2500 Faber Place Palo Alto, California 94303 Attention: President Facsimile: (415) 354-4752 or in the case of Cosmederm to: Cosmederm Technologies, Inc. La Jolla Corporate Center 3252 Holiday Court La Jolla, CA 92037 Attention: Chief Executive Officer Facsimile: (619) 550-7075 or at such other addresses as may be given from time to time in accordance with the terms of this notice provision. 15.5 Entire Agreement; Amendments. This Agreement constitutes the entire and only agreement between the parties relating to the subject matter hereof, and all prior and contemporaneous negotiations, representations, and understandings, except the Mutual Disclosure of Confidential Information Agreement dated April 12, 1996, are superseded hereby. No agreements altering or supplementing the terms hereof may be made except by means of a written document signed by the duly authorized representatives of the parties. 15.6 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. -15- 16 15.7 Independent Contractors. Nothing in this Agreement is intended or shall be deemed to constitute a partnership, agency, employer-employee or joint venture relationship between the parties. All activities by the parties hereunder shall be performed by them as independent contractors. No party shall incur any debts or make any commitments for or on behalf of the other party, unless specifically authorized in writing by an officer of the other party. 15.8 No Waiver for Failure to Enforce Compliance. Failure of any party to insist upon strict observance of or compliance with any of the terms of this Agreement in one or more instances shall not be deemed to be a waiver of its rights to insist upon observance of or compliance with such term thereafter, or with any of the other terms of this Agreement. 15.9 Force Majeure. No failure or omission of a party hereunder in the performance of any obligation according to this Agreement shall be deemed a breach of the Agreement or create any liability if the same shall arise from any cause or causes beyond the control of, and not resulting from the negligence of, such party, including, but not limited to, acts of God; acts or omissions of any government; any rule, regulation or order issued by any governmental authority or by any officer, department, agency or instrument thereof; fire; storm; flood; natural phenomenon; earthquake; accident; war; rebellion; insurrection; riot; invasion; strike; lockout; or other kind of force majeure. Each party agrees to notify the other promptly of any circumstance delaying its performance hereunder and to resume performance as soon thereafter as is reasonably practicable. 15.10 Press Release. Upon execution of this Agreement, the parties shall make a public announcement regarding the collaboration herein by issuing an agreed press release. Thereafter, neither party shall without the other's consent (such consent not to be unreasonably withheld) make any public release using the other party's name or referring to the other party, except that consent shall not be required for uses or references in product marketing materials or where such uses or references are affirmatively required by law. The undersigned are duly authorized to execute this Agreement on behalf of Cosmederm and Collagen effective as of the date first above written. COLLAGEN CORPORATION COSMEDERM TECHNOLOGIES, INC. BY: /s/ Howard D. Palefsky BY: /s/ Anne Crossway, Ph.D. ---------------------------- ------------------------------ PRINT NAME: Howard D. Palefsky PRINT NAME: Anne Crossway, Ph.D. -------------------- ---------------------- TITLE: Chief Executive Officer TITLE: Chief Executive Officer ----------------------- ------------------------- - 16 - 17 EXHIBIT A LICENSED PRODUCTS 1. One mutually agreed formulation of a facial treatment lotion with 15% lactic acid and with CT-746. 2. One mutually agreed formulation of a facial treatment hydrogel with 15% lactic acid and with CT-746. 3. One mutually agreed formulation of a facial treatment cream with 15% lactic acid and with CT-746. 4. One mutually agreed formulation of a facial treatment cleanser with 0.1% lactic acid and with CT-746. 5. One mutually agreed formulation of a facial treatment toner with 0.5% lactic acid and with CT-746. 18 EXHIBIT B ACCEPTANCE SPECIFICATIONS [TO BE MUTUALLY AGREED.] 19 EXHIBIT C COUNTRIES IN WHICH COSMEDERM SHALL PROSECUTE, MAINTAIN AND DEFEND THE MARKS * - --------- *Confidential treatment requested. 20 EXHIBIT D PERFORMANCE MINIMUMS For purposes of this Exhibit D, a "Year" of distribution of Licensed Products shall commence on the date of Cosmederm's first delivery of a commercial lot of any Licensed Product, or an anniversary of such date. Year 1 - Net Sales of * Year 2 - Net Sales of * Year 3 - Net Sales of * Year 4 - Net Sales of * Year 5 -- Net Sales of * * Year 6 and thereafter - Net Sales equal to * In the event that and so long as a valid United States patent is not in effect at any time during Year 3 or thereafter, the performance minimums specified above shall be reduced by *. * Assumes a Renewal Term is in effect. - --------- *Confidential treatment requested. EX-27.1 5 FINANCIAL DATA SCHEDULE
5 0000021686 COLLAGEN CORPORATION 6-MOS JUN-30-1997 JUL-01-1996 DEC-31-1996 16,052 0 10,314 0 11,826 53,935 15,900 0 151,555 25,216 0 0 0 107 98,074 151,555 35,842 35,842 10,466 10,466 28,014 0 231 6,416 3,400 3,318 0 0 0 3,318 .37 .37
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