-----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, Pzrl4UO9pe5o41TOXJH+v9FvD0kIwQEwXUpOqIU9vIRsH1bHmWJxs1Gw6OLCFkfZ +z0v9A6STqBHzapP0owusg== 0000891618-95-000569.txt : 19951003 0000891618-95-000569.hdr.sgml : 19951003 ACCESSION NUMBER: 0000891618-95-000569 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950928 SROS: NONE 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-10640 FILM NUMBER: 95577163 BUSINESS ADDRESS: STREET 1: 2500 FABER PL CITY: PALO ALTO STATE: CA ZIP: 94303 BUSINESS PHONE: 4158560200 10-K 1 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended JUNE 30, 1995, or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to _______________ Commission file number: 0-10640 COLLAGEN CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 94-2300486 (State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 2500 FABER PLACE, PALO ALTO, CA 94303 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 856-0200 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 month (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing price of the Common Stock on September 1, 1995, in the Nasdaq National Market, was approximately $120,941,818. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of September 1, 1995, Registrant had 8,970,732 shares of Common Stock outstanding. Parts of the following documents are incorporated by reference to Parts I, II, III and IV of this Form 10-K Report: (1) Proxy Statement for Registrant's 1995 Annual Meeting of Stockholders, and (2) Form 10-K Annual Report for the fiscal year ended March 31, 1995 of Registrant's unconsolidated affiliate, Target Therapeutics, Inc. Page 1 2 PART I ITEM 1. BUSINESS GENERAL Collagen develops, manufactures and markets on a worldwide basis high quality biocompatible products for the treatment of defective, diseased, traumatized or aging human tissues. Collagen has grown by identifying medical applications for its technology, developing innovative products and building markets with respected healthcare professionals, either directly or with marketing and technology partners. Collagen's core products are principally used in cosmetic and reconstructive applications, the treatment of stress urinary incontinence, and bone repair. Collagen focuses on development of new products based upon biomaterials, especially collagen, for sale in human healthcare markets worldwide. CORE TECHNOLOGY The foundation of Collagen's current business is the collagen protein family, around which Collagen has developed proprietary technology and patented materials, processes and uses. Collagen is a family of naturally occurring proteins that serve as the basic structural building blocks of the tissues found in skin, cartilage, bone, tendons, ligaments, arterial walls, nerve sheaths and other organs and tissues of the body. Collagen is present in all mammals in higher concentration than any other protein and is quite similar among species. There are at least fifteen types of collagen, the most common of which is the type primarily used in Collagen's commercial products and products under development. Collagen has developed proprietary processes to purify its bovine (cow)-source collagen on a commercial scale and to manufacture "tissue-like" implants from the resulting materials. These proprietary processes alter the immunological profile of the bovine-source collagen, thus minimizing the potential for causing an allergic reaction. The result is a purified and sterilized fibrous collagen material that can be easily injected or implanted into the human body. The potential for causing an allergic reaction arising from the injection of bovine-source collagen is relatively low. Based on Collagen's statistics, approximately 97% of men and women tested show no allergic reaction to a skin test and can be treated with the bovine-source collagen injection. The 3% that show an allergic reaction to the skin test display typical symptoms of hypersensitivity, which include redness, itchiness and swelling. An additional 1-2% of the people treated develop an allergic reaction after one or more injections. In August 1995, the Company entered into an agreement with certain of the stockholders of LipoMatrix, Incorporated ("LipoMatrix") under which the Company will acquire, subject to certain conditions, outstanding securities of LipoMatrix that will increase the Company's ownership position in LipoMatrix from approximately 40 percent to 90 percent on a fully diluted basis, for an aggregate of approximately $18 million. The transaction is scheduled to close in January 1996; however, due to the limited nature of the conditions on closing, this transaction is being treated for accounting purposes as if it were completed in the first quarter of fiscal 1995. Accordingly, for purposes of this report, this transaction shall be deemed to have been completed. LipoMatrix is developing a proprietary family of biocompatible products. Trilucent(TM) Breast Implant ("Trilucent implant"), recently commercially introduced in the U.K, achieves biocompatibility by utilizing soybean oil, which has a long history of parenteral use in human beings as a filler. Since the neutral triglycerides of the soybean oil have the same radiodensity as human fat, Trilucent implant permits meaningful mammograms to facilitate detection of breast cancer. Laminated into the implant shell is an electronic transponder, which will allow non-invasive implant identification. Page 2 3 STRATEGY Collagen's strategy consists of the following principal elements: Expand Existing Medical Franchise. Collagen has a 14-year involvement with the cosmetic procedure-oriented segments of the plastic surgery and dermatology markets. Medical procedures for cosmetic indications in those markets are generally paid for by the patient and therefore are not commonly subject to reimbursement constraints imposed by third party payors. The recently developed Trilucent implant is another example of a high value product for the cosmetic and reconstructive plastic surgery market. Collagen's objectives include developing, in-licensing, and acquiring additional products related to this market. Broaden Therapeutic Applications. Collagen has developed innovative medical products that take advantage of the physical and biological properties of collagen, and has developed proprietary collagen technology platforms that could lead to new applications for product development. In addition, Collagen has implemented an "affiliate" program to expand its new product development activities outside of the areas of its core competence, such as interventional cardiology, ophthalmology, and otology (treatment of ear disorders). Enhance Biomaterials Technology. Collagen has substantial research, pre-clinical, clinical and regulatory expertise in the development of collagen-based medical devices. Collagen's current objectives include improving the clinical persistence of current collagen materials and reducing or eliminating allergic reactions arising from the bovine source of current collagen products. PRODUCTS, MARKETS AND METHODS OF DISTRIBUTION Cosmetic and Reconstructive Surgery. Collagen has three principal products for the treatment of skin contour defects: Zyderm(R) I Implant ("Zyderm I implant"), Zyderm(R) II Implant ("Zyderm II implant"), a more concentrated form of injectable collagen, and Zyplast(R) Implant ("Zyplast implant"), a cross-linked collagen product. These products are sterile devices, composed of highly purified bovine dermal collagen, dispersed in a saline solution containing a small amount of lidocaine and packaged in a sterile syringe. They are injected with a fine gauge needle into depressed layers of skin to elevate the area to surface contour. Depending on the indication and the product (or product combination) used, most patients can achieve considerable correction in one to four treatment sessions, utilizing an average of 1.5 - 2.0 cc of collagen product. The implants take on the texture and appearance of normal host tissue and are subject to similar stresses and aging processes. Consequently, supplemental treatments are often necessary after initial treatment, depending on the location and original cause of the skin deformity. Collagen believes that opportunities exist in the market for injectable collagen implants based on potential new products and product applications, potential increases in patient awareness of the procedure and product price, demand among younger people for cosmetic procedures and increased physician interest in cosmetic procedures not reimbursed by third party payors. Factors such as negative publicity, adverse rulings by regulatory authorities or in connection with product liability lawsuits, introduction of competitive products by third parties or other loss of market acceptance for Collagen's principal products may significantly and adversely affect Collagen's business, financial condition and results of operations. Collagen markets Zyderm and Zyplast implants primarily to the approximately 11,000 dermatologists and plastic surgeons in the United States through a direct sales force. Approximately Page 3 4 4,000 of these medical professionals have purchased Zyderm and Zyplast implants from Collagen in the past year. United States sales of Zyderm and Zyplast implants, which represents approximately 49% of worldwide sales of Zyderm and Zyplast implants, increased 12% over prior year's sales. Collagen utilizes a variety of methods to market its dermatological products. Collagen sponsors a "Partners in Growth" program for plastic surgeons and dermatologists. This program is designed to identify and support a committed group of physicians who endorse the appropriate use of injectable collagen and are skilled in its proper use. Collagen conducts other physician marketing activities such as direct mail campaigns, physician education, in-office merchandising and patient seminars. Collagen has emphasized physician education to ensure proper training in the use of its products and timely communication of clinical and product use information. To stimulate demand at the patient level, Collagen also conducts consumer marketing awareness programs such as public relations events, health and beauty magazine advertising and direct mailing campaigns. Collagen markets its Zyderm and Zyplast implants directly to physicians in 10 European countries, Canada, Australia and New Zealand. Collagen markets its products through distributors in all other international markets. Collagen has granted exclusive distribution rights for Zyderm and Zyplast implants in Japan. Over the past two years, Collagen has appointed a number of new foreign distributors for its injectable collagen products. A large portion of Collagen's revenues in recent years has come from its international operations. Consolidated export sales of Zyderm and Zyplast implants totaled $26.1, $20.8 and $21.3 million in fiscal 1995, 1994 and 1993 respectively. Export sales for Zyderm and Zyplast implants represented 36%, 32% and 43% of Collagen's revenues for those fiscal years. Collagen has expanded and intends to further expand its direct selling efforts in certain international markets. There can be no assurance that difficulties associated with a transition to direct marketing efforts would not have an adverse effect on Collagen's results of operations. In 1992, Collagen participated in the formation of LipoMatrix, which intended to research, develop, manufacture, and market medical devices designed to replace, restore, or augment body structures that consist largely of adipose (fat) tissues, including the human breast. LipoMatrix recently received clearance from the FDA to commence clinical studies in the U.S., and in August 1995, introduced the Trilucent implant into the United Kingdom market through Collagen's U.K subsidiary. LipoMatrix already has gathered clinical data on its breast implants from more than 100 patients treated in Europe. Incontinence. According to the National Institutes of Health, more than ten million Americans suffer from urinary incontinence, or the involuntary loss of urine. While comprehensive data are not available as to the incidence of a form of stress urinary incontinence called intrinsic sphincter deficiency ("ISD"). Collagen has estimated, based upon physician survey information, that as many as one million of these persons suffer from ISD, a poor or nonfunctioning bladder outlet mechanism that may be helped by a locally injected bulking agent. Collagen and its marketing and distribution partner, C.R. Bard, Inc. ("Bard"), received approval from the FDA to produce and market Contigen(R) Bard collagen implant ("Contigen implant") in September, 1993 for the treatment of ISD. ISD occurs among all demographic groups, but its incidence increases with age and is twice as high in women as men. Management and treatment alternatives have historically included absorbent products, behavior modification, medication and surgery. Contigen implant injections may improve stress incontinence caused by stretched pelvic muscles from childbirth, decreased tone in the pelvic muscles supporting the bladder (often associated with menopause and aging) and prostate surgery. Contigen implant is a sterile, highly purified bovine dermal collagen that is lightly crosslinked and dispersed in a saline solution. Contigen implant is injected into the submucosal tissues of the urethra and/or bladder neck, and into the tissues adjacent to the urethra. The injection of Contigen implant creates increased tissue bulk and subsequent coaptation (joining) of the urethral lumen. After Page 4 5 injection, the suspended collagen forms a soft cohesive network of fibers. Over time, the implant takes on the appearance of normal host tissue. Pursuant to the terms of an agreement between Collagen and Bard, Bard purchases commercial products, including Contigen implant, developed under this agreement. In addition, Collagen receives a percentage of Bard's direct sales to physician customers. Bard holds exclusive worldwide marketing and distribution rights to Contigen Implant. Collagen recorded approximately $16.5 million and $16.7 million of revenue from sales of Contigen Implant in fiscal 1995 and 1994 respectively. Of such revenue, $13.4 million and $15.9 million was derived from sales of Contigen implant to Bard and $3.1 million and $789,000 from Bard's direct sales to physicians in 1995 and 1994 respectively, compared to $4.4 million of sales of Contigen implant to Bard recorded in fiscal 1993 (See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Product Sales"). Orthopaedics. Collagen and its orthopaedic marketing partner, Zimmer Inc., a wholly-owned subsidiary of Bristol-Myers Squibb ("Zimmer"), received approval from the FDA in May 1993 to produce and market Collagraft(R) bone graft matrix implant ("Collagraft implant"). Collagraft(R) bone graft matrix strip ("Collagraft strip"), a "premixed" formulation which is an early "ready-to-mix" Collagraft implant formulation, was subsequently approved in January 1994. Collagraft implant and Collagraft strip, when used with autogenous bone marrow, is indicated for use in acute long bone fractures and traumatic osseous defects to provide a matrix for the repair process of bone. Bone graft substitute eliminates the need for patients to undergo a painful autograft bone grafting procedure, which involves harvesting patients' own bone from another site, and it prevents the transmission of human infectious agents and inconsistent results from allograft procedures (bone graft supplied through a bone bank). During surgery Collagraft strip or Collagraft implant is mixed with the patient's own bone marrow and is placed into the fracture site providing a scaffolding around which new bone will grow. Medical conditions which may require bone grafting include acute long bone fractures and certain tumors and cysts. Collagraft implant and Collagraft strip are a mixture of purified fibrillar collagen and hydroxyapatite/tricalcium phosphate ceramic ("HA/TCP"), and is supplied sterile in both a strip form (premixed) and a ready-to-mix form. Hydroxyapatite is a substance which is biocompatible and is minimally resorbed. Tricalcium phosphate is radiopaque, biocompatible and biodegradable. Its degradation products can be reconstituted by the body to form new bone mineral allowing for bone deposition. An agreement between Collagen and Zimmer provides for the development and distribution of collagen and other biologically-based products for orthopaedic applications. Collagen will manufacture approved products and sell them to Zimmer, which has exclusive marketing rights for Collagraft implant and Collagraft strip in the United States and Asia. Collagen holds marketing rights for Collagraft implant and Collagraft strip in Europe, Canada, Africa and the Middle East. Collagraft implant and Collagraft strip are currently sold only in the United States, and Collagen does not anticipate substantial sales outside the United States for the foreseeable future. Sales of Collagraft implant and Collagraft strip to Zimmer in fiscal 1995 totaled $3.0 million compared with $2.7 million in fiscal 1994, the first full year of sales for these products. The Company had approximately $150,000 of combined Collagraft implant and Collagraft strip sales in fiscal 1993. A number of uncertainties exist surrounding the marketing and distribution of Collagen's new products, Contigen implant, Collagraft implant and Collagraft strip. Collagen's business and financial results could be adversely affected in the event that either or both of Bard and Zimmer, or Collagen, Page 5 6 are unable to effectively market the product, accurately anticipate customer demand, or effectively manage industry-wide pricing and cost containment pressures in health care. Other Medical Products. During fiscal 1995, the Company expanded its product offerings to include aline of collagen-based materials for research applications and other custom needs. Sales of these products were not material. COMPETITION The medical device industry is characterized by rapidly evolving technology and increasing competition under the recent changes in the health care environment. Collagen faces competition in each of its target product markets. Zyderm and Zyplast Implants. Collagen is aware of one commercial product in the United States that is directly competitive with Zyderm and Zyplast implants. This product is a gelatin-based (denatured collagen) product for soft tissue augmentation presently being marketed in the U.S. and Canada. Collagen is also aware of one foreign company which is marketing a collagen-based material for soft tissue augmentation internationally. Indirect competitors to Zyderm and Zyplast implants include, among others, chemical peels, fat injections, dermabrasion, laser treatment and face lifts. In addition, several companies are engaged in research and development activities examining the use of collagen and other biomaterials for the correction of soft tissue defects. There can be no assurance that Collagen will not face increased direct and indirect competition in the soft-tissue augmentation market. Trilucent implant. The principal competitiors of Trilucent implant are saline implants worldwide, and silicone gel implants outside the U.S. These products are generally marketed by a few companies wielding greater resources than the Company, and having substantially more experience in manufacturing and marketing in the breast implant market. Contigen. At the present time, autologous fat, silicon micro-implants and polytetrafluorethane (Teflon paste, or PTFE) are directly competing with Contigen implant for the treatment of stress incontinence due to ISD. Neither silicon micro-implants nor PTFE have been approved by the FDA for use in the United States. Other methods of treatment or amelioration of ISD may be considered competitive with Contigen implant. These include surgery, medication, absorbent products and behavior modification. Collagraft. Bone graft substitutes currently are used in a small fraction of bone grafting procedures. The vast majority of bone grafting procedures currently use autograft (autologous bone) taken from the patient's own body and allograft (bone bank bone taken from deceased donors). Collagraft implant and Collagraft strip belong to a new family of products called bone graft substitutes. The most direct competitor to Collagraft implant and Collagraft strip is Pro-Osteon, a synthetic bone graft substitute made of a coral-like mineral. A less direct competitor to Collagraft implant and Collagraft strip is an allograft bone product called Grafton, which is packaged in a syringe and marketed and priced like a bone graft substitute. In addition, several companies and institutions are engaged in the development of collagen-based and other materials, techniques, procedures and products for use in medical applications anticipated to be addressed by Collagen's products, including Contigen implant and Collagraft implant products. Some of these companies and institutions may have substantially greater capital resources; research and development staffs and facilities; and experience in conducting clinical trials, obtaining regulatory approvals, and manufacturing and marketing products similar to those of Collagen. There can be no assurance that Collagen's competitors will not succeed in developing technologies and products that are more effective than any which have been or may be developed by Collagen or that would render Collagen's technology and products obsolete or non-competitive. There can be no assurance that such potential competition will not have an adverse effect on the future business or Page 6 7 financial condition of Collagen. Certain of Collagen's collagen-based products, including the Zyderm implants, were manufactured and sold pursuant to an exclusive license from Stanford University under a U.S. patent, which expired in April 1993, covering the use of native, solubilized collagen for soft-tissue augmentation. The expiration of this patent may result in increased competition in the market for injectable collagen implants if and as other companies enter that market. MANUFACTURING Collagen manufactures its collagen-based products utilizing readily available chemicals and enzymes. The source of its collagen is bovine (cow) dermis. In an attempt to ensure that the hides are free from any herd-threatening disease such as Bovine Spongiform Encephalopathy ("BSE"), the hides are sourced from a closed herd, which requires the physical separation of the herd from other herds, the tracking of the lineage of each animal and the maintenance of each animal under a veterinarian program. Collagen obtains HA/TCP solely from Zimmer for the manufacture of Collagraft Implant. Collagen believes that the supply of raw materials and processing materials for its manufacturing operations is and will continue to be adequate for the foreseeable future and that such materials are available from other sources. Collagen's principal products have various refrigerated shelf lives of 30 to 36 months. Collagen typically ships products to physicians as orders are received on an express delivery basis, and has no material backlog. It is Collagen's policy to maintain levels of finished goods inventory adequate to allow for the expeditious handling of orders received. Collagen believes its physician customers typically purchase products on an as-needed basis, while distributor customers purchase products based on inventory stocking levels. In November 1990, Collagen commenced manufacture of its collagen-based products in its facility located in Fremont, California, significantly increasing its capacity. Collagen has experienced and may continue to experience disruptions in its manufacturing schedule as it continues to manufacture products in increasingly larger quantities and with new process improvements. Collagen's manufacturing facilities are subject to regulatory requirements and periodic inspection by regulatory authorities such as the Food and Drug Administration ("FDA") in the United States, and in countries such as the United Kingdom, outside the United States. LipoMatrix produces Trilucent implant in Neuchatel, Switzerland, and its facility there was certified in compliance with ISO9001 and EN46001 by SQS and TUV Product Services in December 1994. LipoMatrix may experience disruptions in manufacturing schedules as a consequence of the normal transitional effects of producing its first product, and as it manufactures increasingly larger quantities of products. In addition, it may experience a significant shortage of manufacturing capacity if its facility fails to operate as planned. PRODUCT RESEARCH AND DEVELOPMENT Collagen maintains an active program of technology and new product development. Collagen intends to continue to devote a significant portion of revenues to research and product development activities throughout its product lines to generate significant returns to stockholders. Research and Development ("R & D") expenses for Collagen totaled $9.9 million, $9.4 million, and $8.8 million in fiscal 1995, 1994 and 1993, respectively. R & D expenses represented 14%, 15%, and 18% of product sales for those years. Collagen is pursuing a soft tissue augmentation product development program with the objective of developing new injectable products and enhancements to existing products for the treatment of skin contour defects. The types of improvements being focused on relate to one of two performance criteria: duration of treatment benefit and/or the elimination of local inflammatory reactions. Collagen is exploring human collagen, which may prove to be the alternative for the Page 7 8 potential collagen patients who are allergic to bovine-based products as well as first choice for patients who elect to minimize this possibility; in addition, human collagen could become the basis for numerous future products that currently rely on a bovine collagen foundation. There are two potential sources for human collagen: placental-sourced human collagen and recombinant human collagen through transgenic animals. Collagen has an ongoing collaboration with IMEDEX, a subsidiary of Rhone-Poulenc S.A., to develop new products based on the use of human placental-collagen. In addition, Collagen has made an equity investment in and is actively collaborating with GenPharm International, Inc. for the purpose of developing recombinant human collagen. LipoMatrix products are designed and developed at its Neuchatel, Switzerland facility in accordance with EN46001 and ISO9001 and other international standards, including risk analysis, design dossiers, validation and testing. An additional element of Collagen's product development strategy is the support of research at leading institutions in areas that may broaden Collagen's basic technology or suggest new clinical applications for Collagen's products. Collagen enters into contractual research agreements with various institutions throughout the United States and Europe in the normal course of business. These agreements typically provide for various levels of funding over time periods not exceeding two years. These agreements typically give Collagen rights of first refusal to develop and market any commercial products which may result from research performed and impose, in some cases, royalty and payment obligations and marketing restrictions. In addition to joint development arrangements, Collagen has an active program for developing new products through affiliated companies in which Collagen makes equity and debt investments. Collagen believes the formation of new companies allows each to focus its technology on select market segments, to bring products efficiently to market and to advance proprietary know-how at a rapid rate. However, there can be no assurance that these investments will result in positive returns nor can there be any assurance on the timing of any return on such investments. Collagen's product development and research strategy consists of the following principal elements: New Products in New Market Segments. In fiscal 1994, Collagen, together with Target, and Celtrix Pharmaceuticals, Inc., formed Prograft Medical Inc. ("Prograft"). Prograft focuses on the development of proprietary vascular grafts, vascular stents and vascular stent-graft combinations, which may use certain of Collagen's biomaterials, for use in the repair and replacement of diseased and damaged blood vessels. As of June 30, 1995, Collagen held approximately 21% of the equity of, and has also entered into license and supply agreements with, Prograft. Also in fiscal 1994, Collagen and its founder, Dr. Rodney Perkins, formed Otogen Corporation, a start-up company which is currently developing surgical tissue adhesives for use in general surgical applications in such areas as plastic surgery, neurology, thoracic surgery and cardiology. In fiscal 1993, Collagen participated in the formation of CollOptics, Inc. to develop collagen-based lenticules, which are custom- made contact lenses for refractive errors. Access to New Technology. In addition, Collagen has made an equity investment in and is actively collaborating with GenPharm International, Inc. for the purpose of developing recombinant human collagen. This technology could provide Collagen with a source of recombinant human collagen that is chemically identical to native human collagen. EMPLOYEES As of September 1, 1995, Collagen employed 312 full-time employees, of which 59 were engaged in research and development, 85 were engaged in sales and marketing, 91 were involved in production and quality control, and 77 were engaged in finance and administration. None of Collagen's Page 8 9 employees is covered by a collective bargaining agreement. Collagen also has a Board of Scientific Advisors which currently consists of five scientists, each of whom is prominent in his field and serves as a professor at a major academic institution. Collagen has a consulting agreement with each advisor which ranges from two to three years. Page 9 10 EXECUTIVE OFFICERS The executive officers of the Company as of September 1, 1995 who are elected by and serve at the discretion of the Board of Directors, are as follows:
OFFICER NAME AGE POSITION SINCE - --------------------------------------------------------------------------------------------------- Howard D. Palefsky 48 Chairman and Chief Executive Officer 1978 Gary S. Petersmeyer 48 President and Chief Operating Officer 1995 Frank A. DeLustro, Ph.D. 47 Senior Vice President, Scientific Affairs 1990 Ross R. Erickson 50 Vice President, Regulatory Affairs and Quality Assurance 1990 Deborah W. Berard 36 Vice President, Human Resources and Administrative Services 1991 David Foster 38 Vice President, Finance & MIS, and Chief Financial Officer 1990 A. Neville H. Pelletier 54 Vice President and Managing Director, Europe 1992 Michael Levitt 43 Vice President, Operations 1994
Except as set forth below, all of the officers have been associated with the Company in their present position for more than the past five years. Mr. Palefsky joined the Company as President, Chief Executive Officer and Director in March, 1978 and served in such capacities unt il February 1995, when he became the Chairman of the Board and Chief Executive Officer. From 1973 to March 1978, Mr. Palefsky was employed by Alza Corporation where his last position was Vice President, Marketing. Prior to 1973, Mr. Palefsky was employed by Whitehall Laboratories as Assistant to the President. Both Alza Corporation and Whitehall Laboratories are manufacturers of pharmaceutical products. Mr. Palefsky is also a director of Calgene, Inc., and Target Therapeutics, Inc. Mr. Petersmeyer joined Collagen as President, Chief Operating Officer and Director in February, 1995. Prior to joining Collagen, Mr. Petersmeyer was employed by Syntex Corporation, a manufacturer of pharmaceutical products, from 1991 to January 1995, where he served as Vice President of Managed Health Care from March 1993 to January 1995, as well as serving at various times as National Sales Director and Director of Corporate Development. From 1986 to 1990, he served as President and Chief Operating Officer of Beta Phase, Inc., a medical device manufacturer, and from 1982 to 1986 he was the Executive Vice President and General Manager, Ophthalmic Products Division, of CooperVision, Inc., a manufacturer and distributor of ophthalmic products. Dr. DeLustro joined the Company as Manager of Immunology in June 1983 and served in various positions in the Company. In 1991, Dr. DeLustro was promoted to Senior Vice President, Scientific Affairs. Prior to 1983, he was Assistant Professor of Medicine at the Medical University of South Carolina. Mr. Erickson joined the Company as Program Director in January 1987 and served in various senior regulatory positions. In 1990, Mr. Erickson was promoted to Vice President, Regulatory Affairs and Quality Assurance. From 1983 to 1986, Mr. Erickson was employed by Laserscope as Director of Biomedical Affairs. From 1977 to 1983, he was employed by Cobe Laboratories as Manager of Clinical Evaluations. Both Laserscope and Cobe Laboratories are medical device manufacturers. From 1970 to 1977, Mr. Erickson was employed by Alza Corporation. Mr. Foster joined the Company as Financial Analyst in November 1984 and served in various positions in the Company. In 1992, Mr. Foster was appointed Chief Financial Officer. From 1979 to 1984, Mr. Foster was employed by Brown, Vence and Associates, an energy and environmental consulting firm, as Engineering Project Manager. Page 10 11 Ms Berard joined the Company as a member of the Finance staff in February 1982 and served in various Human Resource positions. In 1991, Ms Berand was promoted to Vice President, Human Resources and Administrative services. Prior to 1982, Ms Berard held a position in medical development in the Stanford Medical School. Mr. Pelletier joined the Company in May of 1991 as Vice President of Collagen International, Inc. In 1992, he was appointed Vice President and Managing Director, Europe. From 1979 to 1991, Mr. Pelletier was employed by Sandoz AG, a manufacturer of food products, where his most recent position was Senior Vice President, Sandoz Nutrition, Inc. During his time at Sandoz, Mr. Pelletier was based in Minnesota in the U.S., Australia and Switzerland. Prior to 1979, Mr. Pelletier held a variety of marketing positions with PepsiCo, Inc., a manufacturer of beverages; Miles Laboratories, Inc., a manufacturer of over-the-counter toiletries and micro-nutrients; and Proctor and Gamble, a manufacturer of consumer products. In addition to Australia and Switzerland, Mr. Pelletier has spent his international career in Canada, the Philippines, Venezuela and Spain. Mr. Levitt joined the Company in July 1994 as Vice President, Operations. Prior to joining the Company, Mr. Levitt was employed by Eli Lilly and Company, a manufacturer of pharmaceutical products. During his 18 years with Eli Lilly and Company, Mr. Levitt held positions in sales, research, human resources and operations. Mr. Levitt's last position with Eli Lilly and Company was Director of Pharmaceutical Operations. ITEM 2. PROPERTIES Collagen's principal executive, marketing, and research activities are presently located in three buildings in Palo Alto, California which occupy a total of approximately 77,000 square feet. Collagen has leased these buildings under various leases that expire between June 1999 and November 2004 and contain renewal options. Collagen's international facilities are also leased under various leases and amount to approximately 10,000 square feet in total. In 1989, Collagen completed a sale-leaseback transaction relating to its manufacturing facility in Fremont, California. The facility lease term extends for fifteen years with four five-year renewal options. Collagen commenced commercial manufacturing in this facility in November 1990. In addition, Collagen leases approximately 11,000 square feet of warehouse space in Fremont, California. LipoMatrix' administrative, research and development, manufacturing and quality assurance functions are located in a 12,000 square foot facility in Neuchatel, Switzerland. Collagen considers that its facilities are adequate to meet its requirements for at least the next twelve months. ITEM 3. LEGAL PROCEEDINGS Collagen is involved in various legal actions arising in the ordinary course of business, the majority of which involve product liability claims. While the outcome of such matters is currently not determinable, it is management's opinion that these matters, including the matters discussed below, will not have a material adverse effect on Collagen's future consolidated financial position, results of operations or cash flows. Collagen faces an inherent business risk of exposure to product liability claims alleging that the use of Collagen's technology or products has resulted in adverse effects. Such risks will exist even Page 11 12 with respect to those products that have received or in the future may receive regulatory approval for commercial sale. There can be no assurance that Collagen will avoid significant product liability claims and attendant negative publicity. Furthermore, there can be no assurance that present insurance coverage will be adequate or that adequate insurance coverage will remain available at acceptable costs, if at all, or that a product liability claim or recall would not adversely affect the future business or financial condition of Collagen. It is possible that adverse product liability actions could negatively affect Collagen's ability to obtain and maintain regulatory approval for its products. In light of regulatory investigations surrounding product safety, Collagen announced in September 1991 that it will indemnify physicians against damages and legal fees arising from lawsuits brought to a jury trial alleging a link between collagen injections and Polymyositis and Dermatomyositis. To date, the impact of this indemnification on Collagen's results of operations has not been significant. There can be no assurance, however, that any future such claims would not have a material adverse effect on Collagen's operating results. On December 21, 1994, Collagen filed suit in Santa Clara County Superior Court 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. Collagen alleges that Matrix, which uses collagen for certain drug delivery applications, unlawfully obtained Collagen's confidential and proprietary information relating to Collagen's products and operations by hiring ten former employees that Collagen alleges had access to or were knowledgeable about Collagen's proprietary information. On February 12, 1995, Matrix denied Collagen's allegations and filed a cross-complaint charging Collagen with, among other things, unfair competition, defamation and restraint of trade. Matrix also has requested certain declaratory relief. Howard Palefsky, Chairman of the Board and Chief Executive Officer of Collagen, was personally named as an additional defendant to the Matrix defamation charge. Collagen intends to vigorously contest Matrix's charges. In September, 1995, Collagen filed an amended complaint naming two additional former employees, and alleging the acquisition of additional proprietary information obtained unlawfully. ITEM 4. RESULTS OF VOTES BY SECURITY HOLDERS No matters were submitted to a vote of stockholders of Collagen Corporation during its fourth fiscal quarter ended June 30, 1995. Page 12 13 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS MARKET FOR COMMON STOCK The Company's Common Stock is traded on The Nasdaq Stock Market under the symbol CGEN. The following table presents the high and low sale prices for the Company's Common Stock for each fiscal quarter for the fiscal years ended June 30, 1995 and 1994, as reported by The Nasdaq Stock Market Summary of Activity(TM).
Fiscal year ended June 30 1995 1994 ---- ---- Quarter ended High Low High Low ------------- ---- --- ---- --- September 30 $22.75 $17.25 $29.00 $21.75 December 31 24.00 19.25 30.25 25.25 March 31 28.25 21.50 31.75 19.00 June 30 22.50 15.00 23.75 17.00
HOLDERS OF RECORD At September 1, 1995 there were approximately 1,121 holders of record of the Company's Common Stock. DIVIDENDS The Company declared a cash dividend of $.075 per share on its common stock payable to stockholders of record on June 15, 1995, in addition to a $.075 per share dividend declared and paid earlier in fiscal 1995. In fiscal 1994, the Company declared a cash dividend of $.10 per share. The Board of Directors expects to review the potential for future dividends semi-annually. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following data have been derived from consolidated financial statements that have been audited by Ernst & Young LLP, independent auditors. The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K.
Fiscal years ended June 30, 1995(1) 1994(1) 1993(1) 1992(2) 1991(2) ---------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) OPERATING RESULTS Revenues $72,560 $65,552 $49,743 $67,182 $61,382 Research and development expenses 9,943 9,366 8,767 12,023 8,954 Operating income (loss) 11,854 8,607 (3,859) (6,294) 8,657 Gain from investments, net(1) 5,110 -- 20,323 9,439 -- Income from continuing operations 8,760 4,920 9,732 1,408 5,113 Net income (loss) 8,760 4,920 8,743 1,147 (4,349) Income (loss) per share: Continuing operations .93 .50 .95 .14 .53 Net income (loss) .93 .50 .85 .11 (.45)
Page 13 14 FINANCIAL POSITION AT JUNE 30, Cash, cash equivalents and short-term investments $ 9,384 $12,736 $19,630 $44,686 $16,517 Total assets 76,906 74,505 76,206 95,479 67,591 Long-term obligations, excluding minority interest 9,972 9,507 8,784 1,786 10,168 Total stockholders' equity 47,920 49,082 54,936 57,174 37,798 Book value per share at June 30 5.31 5.21 5.64 5.71 3.88 ADDITIONAL INFORMATION: Cash dividends declared per share .15 .10 -- -- --
(1) As a result of the sale of a portion of the Company's shares of Target Therapeutics, Inc. ("Target"), the Company's ownership position in Target decreased to below 50% in December 1992. The fiscal 1995, 1994 and 1993 financial information is presented with Target accounted for under the equity method. All previous years contain consolidated results of Target (see Notes 1 and 4 to the Consolidated Financial Statements). Gains from the Company's investment in Target contributed $6,035,000, $20,323,000, and $10,239,000 to fiscal 1995, 1993 and 1992 pre-tax earnings, respectively. (2) Includes consolidated results of Target. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW 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 have been derived primarily from the sale of products used in reconstructive and cosmetic applications for the face, 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. RESULTS OF OPERATIONS The following table shows, for the periods indicated, the percentage relationship to product sales of Page 14 15 certain items in the Consolidated Statements of Income and the percentage changes in the dollar amounts of such items from year to year.
Percent Change 1995 1994 Percent of Product Sales vs. vs. Year ended June 30, 1995 1994 1993 1994 1993 --------------------------------------- ---- ---- ---- ---- ---- Product sales 100% 100% 100% 11% 30% Other revenue 1% 2% -- -- -- - ---------------------------------------------------------------------------------------------------------- Costs and expenses: Cost of sales 26% 29% 31% (2%) 21% Research and development 14% 15% 18% 6% 7% Selling, general and administrative 45% 44% 59% 12% (2%) - ---------------------------------------------------------------------------------------------------------- Income (loss) from operations 17% 13% (8%) 38% NM* - ----------------------------------------------------------------------------------------------------------
* Comparison not meaningful as operating result was positive in fiscal 1994 but negative in fiscal 1993. PRODUCT SALES. Product sales of $71.6 million in fiscal 1995 increased $7.0 million or 11% over fiscal 1994 sales of $64.6 million, which in turn increased $14.9 million or 30% over fiscal 1993 sales of $49.7 million. The $7.0 million increase in fiscal 1995 is primarily due to growth in worldwide sales of plastic surgery and dermatological products. The $14.9 million increase in fiscal 1994 was principally attributable to new products, primarily Contigen(R) Bard collagen implant ("Contigen implant"), Collagraft(R) bone graft matrix implant ("Collagraft implant") and Collagraft(R) bone graft matrix strip ("Collagraft strip"). Worldwide sales of plastic surgery and dermatological products in fiscal year 1995 were $51.5 million or 18% higher than fiscal 1994 sales of $43.5 million, compared to a 2% decrease in fiscal 1994 over fiscal 1993 sales of $44.2 million. U.S. sales of plastic surgery and dermatological products increased 12% in fiscal 1995 over fiscal 1994, which was relatively flat compared to the prior year. The Company believes that the increase in sales in the current fiscal year was due to a combination of a price increase and a growth in demand. The increase in unit demand may be attributable to advertising and public relations campaigns, the introduction of a new injection device in the second half of the year, and general increased physician interest in cosmetic procedures not reimbursed by third party payers. The Company believes the lack of growth in demand in fiscal 1994 was primarily due to competition from alternative cosmetic procedures such as fat injections and chemical peels, as well as the lingering effects of adverse publicity in prior years from the news media on cosmetic procedures in general and to regulatory investigations specific to the Company. (See--"Factors that May Affect Future Results of Operations".) U.S. sales represented approximately 49% of worldwide sales in dollars in fiscal 1995 and 52% in both fiscal years 1994 and 1993. International unit sales of plastic surgery and dermatological products increased approximately 29% in fiscal 1995 over fiscal 1994 and 8% in fiscal 1994 over the prior year. The Company believes the improved performance in the international market is a result of strong distributor sales, especially in Japan, successful international marketing and public relations efforts by the Company's subsidiaries, the launch of improved syringe configurations, and improving economic conditions in Europe. International sales in dollars were positively impacted by favorable exchange rates in fiscal 1995 by approximately $1.6 million, whereas in fiscal 1994, international sales in dollars were negatively impacted by unfavorable foreign exchange rates by approximately $1.6 million compared to the prior year. The Company anticipates continued growth in future worldwide product sales in dollars in the plastic surgery and dermatological market, but at rates lower than the 18% achieved in fiscal 1995. Page 15 16 In September 1993, the Company and its marketing partner, C.R. Bard, Inc. ("Bard"), received final clearance from the U.S. Food and Drug Administration ("FDA") to market Contigen implant. The table below outlines the two components of product sales for Contigen implant over the three year period.
Years ended June 30, 1995 1994 1993 - ---------------------------------------------------------------------------------------------- (In millions) Shipments of Contigen implant to Bard $13.4 $15.9 $4.4 Income from Bard's direct sales to physician customers 3.1 .8 -- ------------------------- $16.5 $16.7 $4.4 =========================
The Company did not record any income from Bard's direct sales to physician customers until fiscal 1994 as Bard's sales to customers commenced late in the second quarter of fiscal 1994. In the quarter ended December 31, 1994, the Company's share of Bard's direct sales increased from 5% to 10%, pursuant to terms of an agreement. Fiscal 1995 sales to Bard represent minimum shipment levels made in accordance with an agreement between the two companies. There is no agreement for fiscal 1996 sales to Bard. Bard currently has a significant inventory of these products and as a result, the Company expects to make minimal or no shipments to Bard in fiscal 1996. Future income from Bard's direct sales of Contigen implant to physicians is expected to continue but may fluctuate significantly due to market demand. As a result of the forgoing, revenues from Contigen implant during fiscal 1996 are expected to decline by more than 50 percent compared with fiscal 1995. In January 1994, the Company and its marketing partner, Zimmer, Inc. ("Zimmer"), received clearance from the FDA to market Collagraft strip, a second-generation product for the treatment of acute long bone fractures and traumatic osseous (bony) defects. Combined sales of Collagraft implant and Collagraft strip to Zimmer totaled $3.0 million in fiscal 1995 and $2.7 million in fiscal 1994 compared to sales of Collagraft implant of $150,000 in fiscal 1993. Fiscal 1994 represented the first full fiscal year of Collagraft implant sales. A number of uncertainties exist surrounding the marketing and distribution of Contigen implant, Collagraft implant and Collagraft strip. The Company's primary means of distribution for these products is through third party firms, Bard, in the case of Contigen implant, and Zimmer, in the case of Collagraft implant and Collagraft strip. The Company's business and financial results could be adversely affected in the event that either or both of these parties are unable to effectively market the products, accurately anticipate customer demand, or effectively manage industry-wide pricing and cost containment pressures in health care. OTHER REVENUE. Other revenue in fiscal years 1995 and 1994 consisted of milestone payments of $1.0 million in each period from Bard in accordance with an agreement between the Company and Bard. Under the agreement, Bard is scheduled to pay a final milestone payment of $2.0 million to the Company on September 30, 1995. COST OF SALES. Cost of sales as a percentage of product sales averaged 26%, 29% and 31% in fiscal 1995, 1994 and 1993, respectively. The decrease in cost of sales as a percentage of product sales over the three year period is primarily due to increased product revenues resulting from income received from Bard's direct sales of Contigen implant to physician customers, which lowered the cost of sales as a percentage of product sales, as well as the favorable impact of foreign exchange rates on international product sales in fiscal 1995. Additionally, cost of sales reflects slightly lower unit costs due to increased production volumes in fiscal 1995 and 1994, primarily from Contigen implant. Due to the high fixed costs of the Company's manufacturing facility, unit cost of sales is expected to remain highly dependent on the level of output at the Company's manufacturing facility, which is heavily dependent on production of Contigen implant. The Company anticipates that unit cost will be higher in fiscal 1996 compared to fiscal 1995 as a result of minimal or no shipments of Contigen implant to Page 16 17 Bard. Cost of sales as a percentage of sales is also contingent on the product mix of future sales for which demand and pricing characteristics may vary. R&D. R&D expenses, which include expenditures for regulatory compliance, were $9.9 million (14% of product sales) in fiscal 1995, $9.4 million (15% of product sales) in fiscal 1994, and $8.8 million (18% of product sales) in fiscal 1993. The R&D spending increase in fiscal 1995 over fiscal 1994 was primarily attributable to advancements in soft tissue programs, including clinical trials for Zyplast(R) II Implant (a concentrated collagen material for soft tissue augmentation). The increase in R&D expenses in fiscal 1994 over the prior year were primarily attributable to the Company devoting additional resources to expand its capabilities in collagen-based technologies through the hiring of additional personnel and expanding its facilities. The Company expects internal R&D spending, both in absolute dollars and as a percentage of product sales, to increase in fiscal 1996, due to the acquisition of LipoMatrix, Incorporated ("LipoMatrix") securities. (See Equity in earnings/losses of affiliate companies.) In addition, the Company anticipates that a significant portion of the LipoMatrix purchase price will be recognized as in-process R&D expense in the first quarter of fiscal 1996. SG&A. Selling, general and administrative ("SG&A") expenses totaled $32.2 million in fiscal 1995, $28.6 million in fiscal 1994 and $29.2 million in fiscal 1993, representing 45%, 44%, and 59% of product sales, respectively. The $3.5 million, or 12% increase in fiscal 1995 over the prior year was primarily due to higher international sales and marketing spending, including the unfavorable impact of foreign exchange rates. The $600,000, or 2%, decrease in fiscal 1994 from fiscal 1993 was primarily due to lower commission expenses related to international sales, the favorable impact of foreign exchange rates, and lower promotional expense for the U.S. plastic surgery and dermatological products, offset by increased personnel costs. The Company expects SG&A spending in fiscal 1996, both in absolute dollars and as a percentage of product sales, to be at substantially higher levels compared to fiscal 1995 due to the acquisition of LipoMatrix securities (see Equity in earnings/losses of affiliate companies), costs of launching and marketing a new product in Europe, Trilucent(TM) implant, and a transition from using a European inventory logistics vendor to using internal resources. OPERATING INCOME. Operating income was $11.9 million in fiscal 1995, compared to operating income of $8.6 million in fiscal 1994 and an operating loss of $3.9 million in fiscal 1993. The 38% increase in operating income in fiscal 1995 is primarily attributable to improved sales of plastic surgery and dermatological products, partially offset by increased SG&A expenses. The turnaround in operating income in fiscal 1994 over the prior year was primarily the result of increased sales of Contigen implant, Collagraft implant and Collagraft strip, as well as decreased SG&A expenses. IMPACT OF FOREIGN EXCHANGE RATES. The impact of foreign exchange rates from fiscal 1994 to fiscal 1995 resulted in an increase in revenue of approximately $1.5 million on equivalent local currency sales and an increase in operating expenses of approximately $1.0 million, resulting in a net increase in operating income of approximately $500,000 on an equivalent local currency basis, compared to a reduction of approximately $1.6 million in revenue, a reduction of approximately $1 million in operating expenses and a net reduction of approximately $600,000 in operating income from fiscal 1993 to fiscal 1994. Unhedged net foreign assets were $10.4 million at June 30, 1995. (See Note 1 to the Consolidated Financial Statements.) GAIN ON INVESTMENTS. In fiscal 1995, the Company sold 245,000 shares of common stock of Target Therapeutics, Inc. ("Target") for a pre-tax gain of approximately $6.0 million. In addition, the Company recorded an investment reserve of $925,000 to write-down the carrying value of certain equity investments due to a decline in value determined to be other than temporary. Page 17 18 EQUITY IN EARNINGS/LOSSES OF AFFILIATE COMPANIES. Equity in earnings of Target was $2.4 million in fiscal 1995 compared to $1.7 million and $1.5 million in fiscal 1994 and 1993, respectively. Equity in Target's earnings increased over the three-year period due to increased earnings of Target, partially offset by the Company's reduced ownership interest resulting from the sale of Target shares. Equity in losses of other affiliate companies in fiscal 1995 was $3.6 million compared to $1.9 million in fiscal 1994 and $487,000 in fiscal 1993. Equity in affiliates' losses increased over the three-year period due to additional investments made in affiliate companies. The Company intends to continue to expand its new product development activities through more equity investments in or loans to affiliate companies. 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. In August 1995, the Company entered into an agreement with certain of the stockholders in LipoMatrix, in which the Company will acquire, subject to certain conditions, approximately 50 percent of the outstanding securities on a fully diluted basis. The purchase increases the Company's ownership in LipoMatrix from approximately 40 percent to 90 percent of the outstanding securities on a fully diluted basis. The purchase is scheduled to close in January 1996. Due to the Company's increased ownership interest and depending on the financial and operating results of LipoMatrix in fiscal 1996, the Company's recognition of its share of losses of LipoMatrix, which was $2.3 million in fiscal 1995, will increase substantially in the next fiscal year. There can be no assurance that these investments in affiliates will result in positive returns nor can there be any assurance on the timing of any return on investment, or that the Company will not lose its entire investment. INTEREST INCOME AND EXPENSE. Interest income was $487,000 in fiscal 1995, $510,000 in fiscal 1994 and $880,000 in fiscal 1993. The decrease in fiscal 1995 over fiscal 1994 was due to lower average investment balances, partially offset by higher interest rates. The decrease in fiscal 1994 from fiscal 1993 was primarily due to lower average investment balances resulting primarily from the repurchase of common stock and to lower interest rates. Interest expense of $91,000 in fiscal 1995 was related primarily to a $7 million revolving credit facility which the Company established in November 1994. INCOME TAXES. The Company's effective income tax rate was approximately 46% for fiscal 1995 compared to 44% for fiscal 1994 and 47% for fiscal 1993. The increase in fiscal 1995 compared to fiscal 1994 is primarily due to increased non-deductible equity in losses of affiliates and investment reserves. The decrease in fiscal 1994 from fiscal 1993 was primarily attributable to a reduction in unbenefited foreign subsidiary losses and the recognition of tax credits, partially offset by an increase in non-deductible equity losses of affiliates. It is expected that the overall effective income tax rate for fiscal 1996 will be higher compared to fiscal 1995. As the Company continues its investments in affiliate companies, the effective tax rate for fiscal 1996 is expected to increase as a result of increased non-deductible equity losses and investment reserves. Effective July 1, 1992, the Company prospectively changed its method of accounting for income taxes from the deferred method to the liability method required by SFAS No. 109, "Accounting for Income Taxes". The cumulative effect of adopting SFAS No. 109 was a charge to earnings of $989,000 in the first quarter of fiscal 1993. (See Notes 1 and 10 to the Consolidated Financial Statements.) LIQUIDITY AND CAPITAL RESOURCES At June 30, 1995, the Company's cash, cash equivalents and short-term investments were $9.4 million compared to $12.7 million at June 30, 1994. Net cash provided by operating activities was $10.3 million for the fiscal year ended 1995, compared with $10.7 million provided by operating activities for the same prior-year period. Page 18 19 The $10.3 million of cash provided by operating activities in the current fiscal year was offset by $11.3 million used to repurchase 562,500 shares of the Company's common stock at an average acquisition price of approximately $20 per share, $5.7 million of additional investments in and loans to affiliate companies and the payments of aggregate cash dividends of approximately $1.6 million to the Company's stockholders in July 1994 and January 1995. The purchase price of the aforementioned acquisition of LipoMatrix securities is approximately $18 million. The Company intends to finance the purchase price by selling additional shares from its holdings of Target stock, and/or by borrowing funds, as needed, under its existing or other credit facility. Gains from the sale of Target stock are expected to offset these additional losses in part or in whole. The Company anticipates capital expenditures, and additional equity investments in, and loans to affiliate companies to be approximately $18.0 million in fiscal 1996. In June 1995, the Company's Board of Directors authorized the repurchase of an additional 300,000 shares of the Company's common stock under the stock repurchase program. Also in June 1995, the Company declared a dividend of 7.5 cents per share for stockholders of record as of June 15, 1995. This dividend totaled $676,000 and was paid to stockholders on July 14, 1995. The Company's principal sources of liquidity include cash generated from operations and its cash, cash equivalents and short-term investments. In addition, during the fiscal quarter ended September 30, 1994, the Company's Board of Directors authorized the Company to sell portions of its holdings of approximately 2.3 million shares of Target's common stock. In fiscal 1995, the Company sold an aggregate of 245,000 shares of Target common stock for a pre-tax gain of approximately $6.0 million. 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. In addition, the Company established a $7.0 million revolving credit facility with a bank in November 1994. The Company may use funds from this source to partially finance the acquisition of LipoMatrix securities as well as for general corporate purposes. The Company believes that these sources should be adequate to fund its anticipated cash needs through at least the next twelve months. FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS A large portion of the Company's revenues in recent years has come from its international operations. As a result, the Company's operations and financial results could be significantly affected by international factors, including numerous regulatory agencies, changes in foreign currency exchange rates and foreign economic and political conditions generally. The Company's 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, the majority of its research and development activities, its corporate headquarters, and other critical business functions are located near major earthquake faults. In addition, all of the manufacturing capacity is located in a single facility, with the Company currently maintaining only limited amounts of finished product inventory. While the Company has some limited protection in the form of disaster recovery programs and basic insurance coverages, 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. 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 Page 19 20 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 collagen-based products. The Company is confident of the safety and effectiveness of its collagen-based 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Financial Statements: Consolidated Balance Sheets at June 30, 1995 and 1994 21 Consolidated Statements of Income for the fiscal years ended June 30, 1995, 1994 and 1993 22 Consolidated Statements of Stockholders' Equity for the fiscal years ended June 30, 1995, 1994, and 1993 23 Consolidated Statements of Cash Flows for the fiscal years ended June 30, 1995, 1994, 24 and 1993 Notes to Consolidated Financial Statements 25 Report of Ernst & Young LLP, Independent Auditors 35 Supplementary Quarterly Consolidated Financial Data (Unaudited) 36 Financial Statement Schedule: For the years ended June 30, 1995, 1994, and 1993: Schedule II - Valuation and Qualifying Accounts 37
Schedules not listed above have been omitted because they are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or notes thereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable Page 20 21 CONSOLIDATED BALANCE SHEETS
June 30, 1995 1994 - --------------------------------------------------------------------------------------------------- (Dollars in thousands, except share and per share amounts) ASSETS Current assets: Cash, cash equivalents and short-term investments $ 9,384 $12,736 Accounts receivable, less allowance for doubtful accounts ($383 in 1995 and $353 in 1994) 13,402 12,241 Inventories 5,056 3,861 Other current assets 5,568 3,305 ------- ------- Total current assets 33,410 32,143 Property and equipment, net 16,506 17,108 Intangible assets 2,727 2,243 Investment in Target Therapeutics, Inc. 17,570 17,499 Other investments and assets 6,693 5,512 ------- ------- $76,906 $74,505 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $2,250 $1,420 Accrued compensation 2,908 2,169 Accrued liabilities 7,954 8,076 Income taxes payable 5,902 4,251 ------ ------ Total current liabilities 19,014 15,916 Deferred income taxes 8,478 8,240 Other long-term liabilities 1,494 1,267 Commitments and contingencies Stockholders' equity: Preferred Stock, $.01 par value, authorized: 5,000,000 shares; none issued or outstanding -- -- Common shares, $.01 par value, authorized: 28,950,000 shares; issued: 10,519,632 shares (10,354,633 shares in 1994); outstanding: 9,019,632 shares (9,417,133 shares in 1994) 106 104 Additional paid-in capital 63,855 61,172 Retained earnings 17,273 9,882 Cumulative translation adjustment (604) (648) Treasury stock, 1,500,000 shares in 1995 (937,500 shares -------- -------- in 1994) (32,710) (21,428) Total stockholders' equity 47,920 49,082 -------- -------- $ 76,906 $ 74,505 ======== ======== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
Page 21 22 CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------ (Dollars in thousands, except per share amounts) REVENUES: Product sales $71,560 $64,552 $49,743 Other 1,000 1,000 -- 72,560 65,552 49,743 COSTS AND EXPENSES: Cost of sales 18,584 18,940 15,659 Research and development 9,943 9,366 8,767 Selling, general and administrative 32,179 28,639 29,176 ------------------------------------ 60,706 56,945 53,602 ------------------------------------ Income (loss) from operations 11,854 8,607 (3,859) Other income (expense): Net gain from investments, principally Target Therapeutics, Inc. 5,110 -- 20,323 Equity in earnings of Target Therapeutics, Inc. 2,417 1,675 1,455 Equity in losses of other affiliates (3,577) (1,944) (487) Interest income 487 510 880 Interest expense (91) -- -- Income before income taxes and cumulative effect of ------------------------------------- accounting change 16,200 8,848 18,312 Provision for income taxes 7,440 3,928 8,580 ------------------------------------- Income before cumulative effect of accounting change 8,760 4,920 9,732 Cumulative effect of change in accounting for income taxes -- -- (989) ------------------------------------- Net income $8,760 $4,920 $8,743 ===================================== INCOME (LOSS) PER SHARE: Income before cumulative effect of accounting change $.93 $.50 $.95 Cumulative effect of accounting change -- -- (.10) ------------------------------------- Net income per share $.93 $.50 $.85 ===================================== Shares used in calculating per share information 9,460 9,896 10,267 ===================================== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
Page 22 23 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1995, 1994 AND 1993 BALANCE AT JUNE 30, 1992 $100 $59,901 $(2,838) $ 11 $ -- $ 57,174 Change in method of accounting for income taxes -- (4,346) -- -- -- (4,346) Sale of common stock under options and employee stock purchase plan 1 1,009 -- -- -- 1,010 Tax benefit relating to stock options -- 298 -- -- -- 298 Foreign currency translation adjustment and other -- 63 -- (425) -- (362) Treasury stock purchased -- -- -- -- (7,581) (7,581) Net income -- -- 8,743 -- -- 8,743 ------------------------------------------------------------------------ BALANCE AT JUNE 30, 1993 101 56,925 5,905 (414) (7,581) 54,936 Sale of common stock under options and employee stock purchase plan 3 2,909 -- -- -- 2,912 Tax benefit relating to stock options -- 1,338 -- -- -- 1,338 Foreign currency translation adjustment -- -- -- (234) -- (234) Dividends declared ($.10 per share) -- -- (943) -- -- (943) Treasury stock purchased -- -- -- -- (13,847) (13,847) Net income -- -- 4,920 -- -- 4,920 ------------------------------------------------------------------------ BALANCE AT JUNE 30, 1994 104 61,172 9,882 (648) (21,428) 49,082 Sale of common stock under options and employee stock purchase plan 2 2,300 -- -- -- 2,302 Tax benefit relating to stock options -- 383 -- -- -- 383 Foreign currency translation adjustment -- -- -- 44 -- 44 Dividends declared ($.15 per share) -- -- (1,369) -- -- (1,369) Treasury stock purchased -- -- -- -- (11,282) (11,282) Net income -- -- 8,760 -- -- 8,760 ------------------------------------------------------------------------ BALANCE AT JUNE 30, 1995 $106 $63,855 $17,273 $ (604) $(32,710) $ 47,920 ======================================================================== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
Page 23 24 CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Years ended June 30, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------- (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $8,760 $4,920 $8,743 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in losses (earnings) of affiliates 1,160 269 (968) Depreciation and amortization 4,368 3,909 3,808 Deferred income taxes 238 553 (4,711) Tax benefit relating to stock options 383 1,338 298 Gain from investments, net (5,110) -- (20,323) Cumulative effect of accounting change -- -- 989 Decrease (increase) in assets: Accounts receivable (1,161) (2,968) (1,588) Inventories (1,195) 306 2,068 Other (737) 16 4,443 Increase (decrease) in liabilities: Accounts payable and accrued liabilities 1,709 764 (3,650) Income taxes payable 1,651 1,720 1,854 Other long-term liabilities 224 (126) (21) ------------------------------------ Total adjustments 1,530 5,781 (17,801) ------------------------------------ Net cash provided by (used in) operating activities 10,290 10,701 (9,058) ------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from sales of Target Therapeutics, Inc. stock 8,379 -- 28,456 Reduction in cash from deconsolidation of Target Therapeutics, Inc. -- -- (5,974) Proceeds from sales and maturities of short-term investments 7,366 15,331 27,561 Purchase of short-term investments (3,126) (12,362) (34,935) Expenditures for investments in and loans to affiliates (5,737) (2,378) (3,025) Expenditures for property and equipment (4,385) (4,011) (2,510) (Increase) in intangible and other assets (1,385) (269) (663) ------------------------------------- Net cash provided by (used in) investing activities 1,112 (3,689) 8,910 ------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repurchase of common stock (11,282) (13,847) (7,581) Net proceeds from issuance of common stock 2,302 2,910 1,009 Cash dividends paid (1,636) -- -- ------------------------------------- Net cash used in financing activities (10,616) (10,937) (6,572) ------------------------------------- Net increase (decrease) in cash and cash equivalents 786 (3,925) (6,720) Cash and cash equivalents at beginning of period 5,369 9,294 16,014 ------------------------------------- Cash and cash equivalents at end of period $6,155 $5,369 $9,294 ===================================== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
Page 24 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Collagen Corporation (the "Company"), a Delaware corporation, and its wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. 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 (See Note 4). Investments in companies in which the Company has less than a 20% interest are carried at cost or estimated realizable value, if less. In fiscal 1995, investments were written down by $925,000 to estimated net realizable value. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly liquid investments with a maturity from date of purchase of three months or less to be cash equivalents. Effective July 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities". The adoption at July 1, 1994 did not have a material impact on the Company's financial statements. Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation as of each balance sheet date. The Company's investment securities are classified as available-for-sale and are carried at estimated fair value in cash equivalents and short-term investments. Material unrealized gains and losses will be recorded, net of tax, in a separate component of stockholders' equity. Both realized and unrealized gains and losses were immaterial at and for the year ended June 30, 1995. The Company invests its excess cash in deposits with major banks and in money market securities of companies with strong credit ratings and from a variety of industries. These securities are typically short-term in nature and, therefore, bear minimal risk. The Company has not experienced any losses on its money market investments. INVENTORIES Inventories are valued at the lower of cost, determined on a standard cost basis which approximates average cost, or market. PROPERTY AND EQUIPMENT Depreciation and amortization of property and equipment which is stated at cost are provided on the straight-line method over estimated useful lives as follows: Machinery and equipment 5 - 10 years Leasehold improvements Term of lease
Page 25 26 INTANGIBLE ASSETS Intangible assets are amortized using the straight-line method. Patents are amortized over a seventeen-year period beginning with the effective date or over the remainder of such period from the date acquired. Trademarks are amortized over a twenty-year period beginning with the trademark filing dates. Organization costs are amortized over a five-year period. Purchased product rights are amortized over their estimated useful lives. OTHER ASSETS Other assets include loans to employees and directors totaling $759,000 and $285,000, at June 30, 1995 and 1994, respectively. REVENUE RECOGNITION Revenue from product sales is recognized at time of shipment net of allowances for estimated future returns. CONCENTRATION OF CREDIT RISK The Company sells its plastic surgery and dermatological products primarily to physicians and pharmacies in North America, Europe and the Pacific Rim. The Company sells Contigen(R) Bard collagen implant ("Contigen implant") to C.R. Bard, Inc. ("Bard"), its marketing partner for Contigen implant, and Collagraft(R) bone graft matrix implant and Collagraft(R) bone graft matrix strip to Zimmer, Inc., the Company's marketing partner for Collagraft(R) products. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses and such losses have been within management's expectations. The Company allows, on occasion, its customers to return product for credit, and also allows customers to return defective or damaged product for credit or replacement. Written authorization from the Company is required to return merchandise. Some domestic and foreign customers are subject to extended payment terms. These practices have not had a material effect on the company's working capital. ADVERTISING COSTS The Company charges advertising costs to expense when incurred. Total advertising expense was $840,000 for 1995, and was not material for fiscal 1994 or 1993. INCOME TAXES Effective July 1, 1992, the Company prospectively adopted the liability method of accounting for income taxes as required by SFAS No. 109, "Accounting for Income Taxes". Prior to the adoption of SFAS No. 109, the Company accounted for income taxes under the deferred method of APB No. 11 (See Note 10). EARNINGS PER SHARE Earnings per share have been computed based upon the weighted average number of common and dilutive common equivalent shares outstanding. Common equivalent shares result from stock options. FOREIGN CURRENCY TRANSLATION The functional currency for each foreign subsidiary is its respective foreign currency. Accordingly, all assets and liabilities related to these operations are translated at the current exchange rates at the end of each period. The resulting cumulative translation adjustments are recorded directly to the accumulated foreign currency translation adjustment account included in stockholders' equity. Revenues and expenses are translated at average exchange rates in effect during the period. Foreign currency transaction gains and losses are included in results of operations. Page 26 27 Until December, 1994, the Company's policy was to hedge material foreign currency transaction exposures. At June 30, 1995, no foreign currency transaction exposures were hedged. Unhedged net foreign assets were $10.4 million. FORWARD EXCHANGE CONTRACTS Prior to December 1994, the Company used foreign currency forward exchange contracts with various issuers to hedge against the effects for fluctuating currency rates on its net foreign currency position denominated in currencies other than the United States dollar. The Company's net foreign currency position is approximately equal to its foreign subsidiary assets minus liabilities resulting from transaction related exposures. The forward exchange contracts were denominated in readily tradable major European currencies and the unhedged exposure on the balance sheet was immaterial. Gains and losses on forward exchange contracts, based on the difference between the forward exchange rate and the actual spot rate at the time of valuation, were generally deferred and accumulated in a separate component of stockholders' equity to the extent such contracts were designated as hedges of a net investment in a foreign entity. The Company discontinued its purchase of forward exchange contracts in December 1994. There were no deferred gains or losses on forward contracts at June 30, 1994. RECLASSIFICATION Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the current year presentation. 2. BALANCE SHEET INFORMATION
June 30, 1995 1994 - -------------------------------------------------------------------------- ----------- (In thousands) Cash, cash equivalents and short-term investments: Cash and cash equivalents $6,155 $ 5,369 Short-term investments 3,229 7,367 ---------- ---------- $9,384 $12,736 Inventories: Raw materials $ 684 $ 625 Work-in-process 1,845 1,763 Finished goods 2,527 1,473 ---------- ---------- $5,056 $ 3,861 ========== ========== Other current assets: Deferred taxes $3,142 $ 2,501 Other 2,426 804 ---------- ---------- $5,568 $ 3,305 ========== ========== Property and equipment: Machinery and equipment $ 24,095 $ 21,544 Leasehold improvements 11,937 11,835 ---------- ---------- 36,032 33,379 Less accumulated depreciation and amortization (19,526) (16,271) ---------- ---------- $ 16,506 $ 17,108 ========== ==========
Page 27 28 Intangible assets: Patents, trademarks, and other $ 3,840 $ 2,910 Organization costs* 1,677 1,451 ---------- ---------- 5,517 4,361 Less amortization (2,790) (2,118) ---------- ---------- $ 2,727 $ 2,243 ========== ==========
Accrued liabilities: Dividends payable $ 676 $ 943 Other accrued liabilities 7,278 7,133 ------- ------- $ 7,954 $ 8,076 ======= =======
* In March 1991, the Company formed Collagen International, Inc., a completely new and wholly owned subsidiary of the Company, to assume responsibility for the direct sales and marketing of its plastic surgery and dermatological products in nine European countries, Australia and New Zealand from Essex Chemie, A.G., a subsidiary of Schering-Plough Corporation. Organization costs are related to the formation of Collagen International, Inc. 3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The following is a summary of available-for-sale securities as of June 30, 1995:
Amortized Cost and Estimated Fair Value - ---------------------------------------------------------------------- (In thousands) Cash Equivalents: Money market funds $ 519 Commercial paper 1,638 ------- $ 2,157 ======= Short-term investments: Municipal obligations $ Commercial paper 2,257 ------- $3,229 ======
During the year ended June 30, 1995, the Company sold available-for-sale investments with a fair value at the dates of sale of $7,269,000. Both gross realized and unrealized gains and losses on these securities were insignificant. The Company uses amortized cost as the basis for recording gains and losses from securities transactions. Contractual maturities of the debt securities did not exceed one year at June 30, 1995. 4. INVESTMENT IN TARGET THERAPEUTICS, INC. In December 1992, the Company sold 1,129,700 shares of common stock of Target Therapeutics, Inc. ("Target"), for approximately $28.5 million, decreasing its ownership position from 52% to approximately 34%. The gain before taxes from the sale of the stock was $20.3 million. Beginning fiscal 1993, the Company's investment in Target has been accounted for under the equity method. In fiscal 1995, the Company sold an additional 245,000 shares of Target common stock for a pre-tax gain of approximately $6.0 million. The Company's ownership position in Target as of June 30, 1995 was approximately 29%. Condensed financial information for Target is shown below: Page 28 29 BALANCE SHEET INFORMATION
As of June 30, 1995 1994 - ---------------------------------------------------------------- ---- ---- (In thousands) Current assets $ 58,002 $ 52,152 Property and equipment 7,704 4,856 Other 6,484 3,296 ----- ----- Total assets $ 72,190 $60,304 ======== ======= Current liabilities $ 11,110 $ 9,260 Long-term liabilities 107 113 Stockholders' equity 60,973 50,931 ------ ------ Total liabilities and stockholders' equity $72,190 $60,304 ======= ======= Collagen Corporation's share of net assets $17,570 $17,499 ======= =======
STATEMENT OF INCOME INFORMATION
Twelve months ended June 30, 1995 1994 1993 - --------------------------------------------------------------- ---- ---- ---- (in thousands) Net sales $50,937 $ 38,275 $29,585 Costs and expenses (42,058) (32,260) (24,666) Interest and other income 2,081 1,894 755 ------------------------------------------ Income before income taxes 10,960 7,909 5,674 Provision for income taxes (3,097) (2,780) (1,867) Cumulative effect of accounting change --- --- 631 ------------------------------------------ Net income $7,863 $ 5,129 $4,438 ==========================================
Target's common stock is quoted on The Nasdaq Stock Market. The closing price of Target's stock at June 30, 1995 was $44 per share. The Company held 2,049,194 shares of Target's common stock at June 30, 1995. 5. COMMITMENTS MINIMUM LEASE PAYMENTS Future minimum lease payments under noncancelable operating leases at June 30, 1995 are as follows:
(In thousands) 1996 $ 4,886 1997 4,722 1998 4,392 1999 4,181 2000 3,242 Thereafter 13,176 ------- Total minimum lease payments $34,599 =======
Page 29 30 Rental expense for fiscal 1995 was approximately $4,743,000 ($4,643,000 in 1994 and $4,672,000 in 1993). CREDIT AGREEMENT In November 1994, the Company entered into a $7 million revolving line of credit with a bank, secured by shares of Target common stock held by the Company. The terms of this facility contain certain financial covenants and restricts the aggregate amount of cash dividends. No amounts were borrowed under this agreement through June 30, 1995. FUNDING COMMITMENT The Company has provided a credit facility of up to $4,000,000 to one of its affiliates. As of June 30, 1995, a total of $1,790,000 had been disbursed under this arrangement. 6. LEGAL MATTERS The Company is involved in legal actions, including product liability and intellectual property claims, arising in the ordinary course of business. While the outcome of such matters is currently not determinable, it is management's opinion that these matters will not have a material adverse effect on the Company's consolidated financial position or results of its operations. 7. STOCKHOLDERS' EQUITY STOCK OPTIONS The Company has various stock option plans under which incentive stock options or non-statutory stock options may be granted to officers, directors, key employees and consultants to purchase the Company's common stock. The options are granted at no less than the fair market value at the dates of grant and generally expire after ten years. Incentive stock options become exercisable at the rate of two percent each month beginning the first full month after the date of grant unless accelerated by the Board of Directors. Non-statutory stock options become exercisible on a monthly or yearly basis as determined by the Board of Directors at the date of grant. At June 30, 1995, the total number of shares of common stock reserved for issuance under the Company's current stock option plans was 1,900,450. Stock option activities under the stock option plans were as follows:
- ------------------------------------------------------------------------------------------------------ NUMBER NUMBER OPTION PRICE OF SHARES OF SHARES RANGE PER SHARE EXERCISIBLE - ------------------------------------------------------------------------------------------------------- Outstanding at June 30, 1993 1,285,172 $ 4.69 - $28.25 832,120 Granted 229,760 22.13 - 26.00 Exercised (209,922) 5.13 - 26.50 Canceled or expired (54,030) 7.25 - 28.25 --------- Outstanding at June 30, 1994 1,250,980 4.69 - 28.25 780,412 Granted 142,350 17.88 - 25.00 Exercised (128,918) 5.13 - 22.75 Canceled or expired (46,436) 5.50 - 26.50 -------- Outstanding at June 30, 1995 1,217,976 $4.69 - $28.25 851,702 ========= Available for grant at June 30, 1995 682,474 =======
Page 30 31 STOCK PURCHASE PLAN In 1985, the Company established an employee stock purchase plan under which 450,000 shares of the Company's common stock were reserved for issuance to employees. Subsequently, the Company increased the authorization to 600,000 shares. Under the plan, the Company's employees, subject to certain restrictions, may purchase shares at a price per share that is the lesser of 85 percent of the fair market value as of the beginning or close of the yearly offering period. For fiscal 1995, 1994 and 1993, shares issued under the plan were 36,100, 32,741 and 23,103, respectively. The average issuance price per share was $19.28, $19.00 and $18.27 for fiscal 1995, 1994 and 1993, respectively. At June 30, 1995, 101,993 shares remained available for future sales under this plan. STOCK REPURCHASE PROGRAM In February 1993, the Company's Board of Directors authorized a stock repurchase program. In fiscal 1995, 1994 and 1993, the Company repurchased 562,500, 567,500 and 370,000 shares at average acquisition prices of approximately $20, $24, and $21 per share respectively. In June 1995, the Board of Directors authorized the repurchase of up to an additional 300,000 shares. The Company plans to retain repurchased shares as treasury stock but may use a portion of the stock in various company stock benefit plans. STOCKHOLDER RIGHTS PLAN In November 1994, the Board of Directors approved a stockholder rights plan which would entitle stockholders to purchase stock in the Company or in an acquirer of the Company at a discounted price in the event of certain hostile efforts to acquire control of the Company. The rights may only be exercised, if at all, upon the occurrence of certain events unless earlier redeemed pursuant to the plan. The rights expire on November 28, 2004. 8. INTERNATIONAL SALES AND DISTRIBUTION RIGHTS Consolidated export sales were $26.1 million in fiscal 1995, $20.8 million in fiscal 1994 and $21.4 million in fiscal 1993. These export sales are primarily in Europe, Canada and the Pacific Rim. The Company markets its products internationally directly in Canada, ten European countries, Australia and New Zealand and via distributors in other countries. The Company pays commissions to its former European distributor based upon a percentage of net sales. 9. MAJOR CUSTOMER During fiscal 1995 and 1994, the Company realized revenues from its marketing partner, Bard, of $16.5 and $16.7 million respectively, which represented 23% and 26% of product sales. Bard has exclusive worldwide marketing and distribution rights for Contigen implant, a product introduced in fiscal 1994. These amounts were comprised of product sales of $13.4 and $15.9 million of Contigen implant as well as $3.1 million and $0.8 million of income from Bard's direct sales of Contigen implant to physicians in 1995 and 1994, respectively. The Company also recorded $1.0 million other revenue in each year representing milestone payments from Bard. No other single customer accounted for more than 10% of total product sales in the three years ended June 30, 1995. Page 31 32 10. INCOME TAXES The Company prospectively adopted the liability method of accounting for income taxes required by SFAS No. 109 effective July 1, 1992. The cumulative effect of adopting SFAS No. 109 in fiscal 1993 was to decrease net income by $989,000. Previously, income taxes were accounted for under the deferred method under APB No. 11. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities under SFAS 109 as of June 30, 1995 and June 30, 1994 are presented as follows:
JUNE 30, 1995 1994 - --------------------------------------------------------------------------------------------------------------- (In thousands) Deferred tax liabilities: Property, plant & equipment $ 332 $ 619 Intangible assets 651 587 Investments 7,491 7,034 Foreign earnings and credits (net) 4 -- ------------------- Total deferred tax liabilities $ 8,478 $ 8,240 =================== Deferred tax assets: Accounts receivable $ 948 $ 672 Inventories 15 495 State income taxes 731 311 Equity in losses of affiliates 3,419 1,416 Non-deductible accruals 1,893 1,995 Other 360 181 Valuation allowance (3,595) (1,597) -------------------- Total deferred tax assets 3,771 3,473 -------------------- Net deferred tax liabilities $ 4,707 $ 4,767 ====================
The valuation allowance increased by $1,998,000 and $717,000 in fiscal 1995 and 1994, respectively. Significant components of the provision for income taxes are as follows:
YEARS ENDED JUNE 30, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------- (In thousands) Current: Federal $6,358 $ 2,732 $8,907 Foreign 164 187 250 State 979 456 2,089 -------------------------------------- Total current 7,501 3,375 11,246 -------------------------------------- Deferred: Federal $ (368) $ 352 $(2,111) State 307 201 (555) -------------------------------------- Total deferred (61) 553 (2,666) -------------------------------------- $7,440 $ 3,928 $ 8,580 ======================================
Page 32 33 For financial reporting purposes, income before income taxes includes the following components:
YEARS ENDED JUNE 30, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------ (In thousands) Domestic operations $16,171 $ 8,636 $16,508 Foreign operations 29 212 1,804 ------------------------------------- $16,200 $ 8,848 $18,312 =====================================
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before taxes. The sources and tax effects of the differences are as follows:
YEARS ENDED JUNE 30, 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------- (In thousands) Income before income taxes $16,200 $8,848 $ 18,312 ===================================== Expected tax at 35% or 34% $5,670 $ 3,008 $ 6,226 State income tax, net of federal benefit 832 434 1,012 Net operating losses of subsidiaries for which no current benefit is realizable 80 (45) 612 Equity in losses of affiliates 1,549 660 165 Tax credits recognized (153) (315) -- Foreign Sales Corporation benefit (102) (150) -- (543) -- -- Benefit from favorable tax settlement Other 107 336 565 ------------------------------------ $7,440 $ 3,928 $ 8,580 ====================================
11. STATEMENTS OF CASH FLOWS Supplemental disclosures of cash flow information:
YEARS ENDED JUNE 30, 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------- (In thousands) Cash paid during the year for: Interest (net of capitalized interest) $ 91 $ -- $ -- Income taxes (net of refunds) 5,518 (54) 6,934 Non-cash financing activity: Dividends declared $ 676 $ 943 $ --
Page 33 34 12. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED) In August 1995, the Company entered into an agreement to purchase a controlling interest in LipoMatrix, Incorporated for approximately $18 million, increasing its equity and debt ownership percentage from approximately 40 percent to approximately 90 percent. Payment for the shares will be due in January 1996. The Company anticipates that a significant portion of the purchase price will be recognized as in-process R&D expense. Page 34 35 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders, Collagen Corporation We have audited the accompanying consolidated balance sheets of Collagen Corporation as of June 30, 1995 and 1994, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Collagen Corporation at June 30, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 1995 in conformity with generally accepted accounting principles. As discussed in Notes 1 and 10 to the consolidated financial statements, in 1993 the Company changed its method of accounting for income taxes. ERNST & YOUNG LLP Palo Alto, California August 1, 1995 Page 35 36 SUPPLEMENTARY QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FISCAL 1995, QUARTER ENDED June 30 March 31 December 31 September 30 - ------------------------------------------------------------------------------------------------------------- Product sales $20,226 $17,032 $18,870 $15,432 Other revenue -- -- -- 1,000 Cost of sales 4,917 4,451 4,810 4,406 Research and development expenses 2,672 2,223 2,504 2,534 Selling, general & administrative expenses 9,405 7,443 8,107 7,224 Operating income 3,232 2,905 3,449 2,268 Gain on investments, net 1,766 2,569 775 -- Net income 2,700 2,508 2,245 1,307 Net income per share .29 .26 .24 .14
FISCAL 1994, QUARTER ENDED June 30 March 31 December 31 September 30 - ------------------------------------------------------------------------------------------------------------- Product sales $18,726 $15,588 $16,930 $13,308 Other revenue -- -- -- 1,000 Cost of sales 5,968 4,382 4,892 3,698 Research and development expenses 2,377 2,424 2,339 2,226 Selling, general & administrative expenses 7,666 6,681 7,664 6,628 Operating income 2,715 2,101 2,035 1,756 Net income 1,631 1,252 1,271 766 Net income per share .17 .13 .13 .08
Page 36 37 SCHEDULE II COLLAGEN CORPORATION VALUATION AND QUALIFYING ACCOUNTS Years ended June 30, 1993, 1994, and 1995
Balance at Additions charged Balance at beginning of to costs and end of Description Period expenses Deductions period - ------------------------------------------------------------------------------------------------------------------- (In thousands) 1993: Allowance for doubtful accounts $ 720 $ 84 $ 388 (1) $ 416 1994 Allowance for doubtful accounts $ 416 $ -- $ 63 (2) $ 353 1995 Allowance for doubtful accounts $ 353 $ 46 $ 16 $ 383
__________________________________ 1 Includes write-off of uncollectible accounts of $78 and reduction in allowance for doubtful accounts of $310 of Target Therapeutics, Inc. (Target) due to change to the equity method of accounting for Target in fiscal 1993. 2 Write-off of uncollectible accounts Page 37 38 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT The information required by this item concerning the Company's directors is incorporated by reference from pages 3-5 of the Company's Proxy Statement for its Annual Meeting of Stockholders filed on or about September 21, 1995 (the "Proxy Statement"). See "Business - Executive Officers" in Item I of this Form 10-K Annual Report for information concerning the Company's executive officers. ITEM 11. EXECUTIVE COMPENSATION REGISTRANT The information required by this item is incorporated by reference from pages 13-18 of the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT REGISTRANT The information required by this item is incorporated by reference from pages 11-12 of the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS REGISTRANT The information required by this item is incorporated by reference from pages 18-20 of the Proxy Statement. Page 38 39 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: 1. Collagen Corporation Financial Statements and Financial Statement Schedule - See Index to Consolidated Financial Statements at Item 8 of this report 2. Target Therapeutics, Inc. The following Consolidated Finacial Statements of Target Therapeutics, Inc. ("Target") are included as Exhibit 99.1 Consolidated Balance Sheets at March 31, 1995 and 1994 Consolidated Statements of Income for the years ended March 31, 1995, 1994, and 1993 Consolidated Statements of Stockholders' Equity for the years ended March 31, 1995, 1994, and 1993 Consolidated Statements of Cash Flows for the years ended March 31, 1995, 1994, and 1993 Notes to Consolidated Financial Statements The Report of Ernst & Young LLP, independent auditors The following financial statement schedule of Target for the years ended March 31, 1995, 1994, and 1993 is filed as Exhibit No. 99.2. Schedule II - Valuation and Qualifying Accounts Schedules not listed above have been omitted because they are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or notes thereto. 3. Exhibits
EXHIBIT NUMBER NOTES DESCRIPTION - ------ ----- ----------- 3.1 (9) Certificate of Incorporation of Collagen Subsidiary, Inc. 3.2 (9) Certificate of Merger of Collagen Corporation, a California corporation, into Collagen Subsidiary, Inc., a Delaware corporation 3.3 By-Laws, as amended 10.24 (1) Collaborative Research and Distribution Agreement with Zimmer, Inc. dated as of June 26, 1985 10.27 (1) Distribution Agreement between Registrant and Lederle (Japan), Ltd. dated as of June 26, 1985
Page 39 40 10.34 (2) Agreement for Sale and Leaseback of Manufacturing Facility between Registrant and Heleasco Seven, Inc. 10.36 (3) Amended and Restated Development and Distribution Agreement with C.R. Bard, Inc., dated as of August 4, 1989. 10.38 (4) Agreement for Sale and Leaseback of Manufacturing Facility between Registrant and Heleasco Seven, Inc. dated September 25, 1989 10.39 (4) Agreement for Sale and Leaseback of Manufacturing Facility between Registrant and Heleasco Seven, Inc. dated December 29, 1989 10.40 (4) Amended and Restated Promissory Note of Dale A. Stringfellow, dated September 7, 1990 10.41 (4) Amended and Restated Promissory Note Secured by Deed of Trust by Dale A. Stringfellow, dated September 7, 1990 10.42 (4) 1984 Incentive Stock Option Plan, as amended. 10.43 (4) 1985 Employee Stock Purchase Plan, as amended. 10.44 1990 Directors' Stock Option Plan, as amended 10.46 (5) Agreement between Registrant and Essex Chemie, A.G. dated November 19, 1990. 10.56 (6) Lease Agreement dated June 1, 1992 by and between Registrant and Harbor Investment Partners 10.58 (6) License and Option Agreement dated June 30, 1992 between Registrant and Research Development Foundation. 10.60 (7) Amendments dated February 16, 1993 and February 18, 1993 respectively, to the Product Development and Distribution Agreement dated January 18, 1985 by and between Registrant and Zimmer, Inc., originally filed as Exhibit 10.24 to Registrant's Form 10-K for the fiscal year ended June 30, 1985. 10.61* (7) Letter Agreement, dated April 26, 1991 and May 21, 1993 by and between Collagen Corporation and A. Neville Pelletier. 10.62 (8) 1994 Stock Option Plan 10.63 (9) Renewed Lease for 2500 Faber Place, Palo Alto, California dated December 1, 1992 between Registrant and Leonard Ely, Shirley Ely, Carl Carlsen and Mary L. Carlsen. 10.65* (9) Promissory Note of Howard D. Palefsky dated August 3, 1994 10.66 (9) Revised Form of Agreement Regarding Proprietary Information and Inventions between Registrant and all employees or consultants. 10.67 (10) Credit Agreement, dated November 15, 1994, by and between the Bank of New York and the Registrant, as amended January 24, 1995. 10.68 (10) Letter Agreement, dated October 7, 1994, by and between C.R. Bard. Inc. and the Registrant, amending the Amended and Restated Development and Distribution Agreement dated August 4, 1989 between the Parties originally filed as Exhibit 10.36 to the Registrant's Form 10-K for the fiscal year ended June 30, 1989.
__________________________________ * Constitutes a management contract or compensatory contract, plan or arrangement. Page 40 41 10.70* Letter of Acceptance of Employment by and between Gary Petersmeyer and the Registrant, dated December 19, 1994. 10.71** License, Supply and Option Agreement, dated March 24, 1995 by and between LipoMatrix, Incorporated and Regristrant. 10.72** Distributor Agreement dated March 24, 1995 by and between LipoMatrix, Incorporated and Registrant's wholly owned subsidiary, Collagen International Incorporated. 10.73** Coordinaton Agreement dated March 24, 1995, by and between LipoMatrix Incorporated and Registrant's wholly owned subsidiary, Collagen International Incorporated. 10.74* Promissory Note of Howard D. Palefsky dated June 5, 1995. 10.75** Letter Agreement, dated July 10, 1995 by and between C.R. Bard, Inc. and the Registrant , amending the Amended and Restated Development and Distribution Agreement dated August 4, 1989 between the Parties originally filed as Exhibit 10.36 to the Registrant's Form 10-K for the fiscal year ended June 30, 1989. 10.76 (11) Stock Purchase Agreement dated August 22, 1995 between the Registrant and certain stockholders of LipoMatrix, Incorporated 11.1 Statement Regarding Weighted Average Common and Common Equivalent Shares Used in Computation of Per Share Income. 21.1 List of Subsidiaries 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of Ernst & Young LLP, Independent Auditors, with respect to the consolidated financial statements of Target Therapeutics, Inc., for the fiscal years ended March 31, 1995, 1994, and 1993. 24.1 Power of Attorney (see page 40) 27.1 Financial Data Schedule (EDGAR version only) 99.1 Target Therapeutics, Inc. Consolidated Financial Statements for the fiscal years ended March 31, 1995, 1994, and 1993 with Report of Ernst & Young LLP, Independent Auditors. 99.2 Financial Statement Schedule of Target Therapeutics Inc., for the fiscal years ended March 31, 1993, 1994 & 1995
Notes to Exhibits: (1) Incorporated by reference to the same exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1985. (2) Incorporated by reference to the same exhibits filed with Registrant's Current Report on Form 8-K dated March 31, 1989. (3) Incorporated by reference to the same exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1989. (4) Incorporated by reference to the same exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1990. (5) Incorporated by reference to the same exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1991. (6) Incorporated by reference to the same exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1992. (7) Incorporated by reference to the same exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1993. - --------------- * Constitutes a management contract or compensating contract, plan or arrangement. ** Confidential treatment requested for a portion of this document. Page 41 42 (8) Incorporated by reference to Exhibit 4.1 filed with Registrant's Registration statement of Form S-8 (No. 33-80038) which became effective June 9, 1994. (9) Incorporated by reference to the same exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1994 (10) Incorporated by reference to the same exhibits filed with Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1994. (11) Incorporated by reference to exhibit 2.1 filed with Registrant's Current Report on Form 8-K dated September 6, 1995. (b) Reports on Form 8-K. No reports on Form 8-K were filed by Registrant during the fiscal quarter ended June 30, 1995. Page 42 43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized COLLAGEN CORPORATION /s/ Gary S. Petersmeyer ---------------------------- Gary S. Petersmeyer President and Chief Operating Officer Dated: September 28,1995 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Howard D. Palefsky and David Foster, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Page 43 44 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - --------------------------------------------------------------------------------------------------------------- /s/ Howard D. Palefsky Chairman of the Board of Directors and Chief - --------------------------------- Executive Officer (Principal Executive September 27, 1995 Howard D. Palefsky Officer) /s/ Gary S. Petersmeyer President, Chief Operating Officer, and - --------------------------------- Director September 27, 1995 Gary S. Petersmeyer /s/ David J. Foster Vice President and Chief Financial Officer - --------------------------------- (Principal Financial and Accounting Officer) September 27, 1995 David J. Foster /s/ Anne L. Bakar Director September 20, 1995 - --------------------------------- Anne L. Bakar /s/ John R. Daniels Director September 27, 1995 - --------------------------------- John R. Daniels, M.D. /s/ William G. Davis Director September 27, 1995 - --------------------------------- William G. Davis /s/ Reid W. Dennis Director September 20, 1995 - --------------------------------- Reid W. Dennis /s/ Craig W. Johnson Director September 27, 1995 - --------------------------------- Craig W. Johnson, Esq. /s/ Terry R. Knapp M.D. Director September 27, 1995 - --------------------------------- Terry R. Knapp, M.D. /s/ Michael F. Mee Director September 20, 1995 - --------------------------------- Michael F. Mee /s/ Rodney Perkins Director September 27, 1995 - --------------------------------- Rodney Perkins, M.D. Director September , 1995 - --------------------------------- Cornelius W. Pettinga, Ph.D. /s/ Roger H. Salquist Director September 27, 1995 - ----------------------------- Roger H. Salquist
Page 44 45 COLLAGEN CORPORATION FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED JUNE 30, 1995 INDEX TO EXHIBITS
Sequentially Exhibit Numbered Number Exhibit Page - -------------------------------------------------------------------------------------------------------------- 3.3 By-Laws, as amended 10.44 1990 Directors' Stock Option Plan, as amended 10.70 Letter of Acceptance of Employment by and between Gary Petersmeyer and the Registrant, dated December 19, 1994. 10.71** License, Supply and Option Agreement, dated March 24, 1995 by and between LipoMatrix, Incorporated and Regristrant. 10.72** Distributor Agreement dated March 24, 1995 by and between LipoMatrix, Incorporated and Registrant 10.73** Coordinaton Agreement dated March 24, 1995, by and between LipoMatrix Incorporated and Registrant. 10.74 Promissory Note of Howard D. Palefsky dated June 5, 1995. 10.75** Letter Agreement, dated July 10, 1995 by and between C.R. Bard, Inc. and the Registrant, amending the Amended and Restated Development and Distribution Agreement dated August 4, 1989 between the Parties originally filed as Exhibit 10.36 to the Registrant's Form 10-K for the fiscal year ended June 30, 1989. 11.1 Statement Regarding Weighted Average Common and Common Equivalent Shares Used in Computation of Per Share Income. 21.1 List of Subsidiaries 23.1 Consent of Ernst & Young LLP, Independent Auditors (see page X) 23.2 Consent of Ernst & Young LLP, Independent Auditors, with respect to the consolidated financial statements of Target Therapeutics, Inc., for the fiscal years ended March 31, 1995, 1994 and 1993. 24.1 Power of Attorney (see page 40) 27.1 Financial Data Schedule (EDGAR version only) 99.1 Target Therapeutics, Inc. Consolidated Financial Statements for the Years Ended March 31, 1995, 1994, and 1993 with Report of Ernst & Young LLP, Independent Auditors. 99.2 Financial Statement Schedule of Target Therapeutics Inc., for the fiscal years ended March 31, 1993, 1994 & 1995
**Confidential treatment requested for a portion of this document. Page 45 EX-3.3 2 BY LAWS OF COLLAGEN 1 EXHIBIT 3.3 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 . . . . . . . . . . . . . . . . . 8 3.4 Resignation And Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.5 Place of Meetings; Meetings by Telephone . . . . . . . . . . . . . . . . . . . . . . . . 9 3.6 Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.7 Special Meetings; Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.8 Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.9 Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.10 Board Action by Written Consent Without a Meeting . . . . . . . . . . . . . . . . . . . . 10 3.11 Fees and Compensation of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3 BY-LAWS OF COLLAGEN CORPORATION TABLE OF CONTENTS (continued)
Page ---- 3.12 Approval of Loans to Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.13 Removal of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.14 Chairman of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE IV COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.1 Committees of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.2 Committee Minutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.3 Meetings and Action of Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE V OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.1 Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.2 Appointment of Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.3 Subordinate Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.4 Removal and Resignation of Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.5 Vacancies in Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.6 President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.7 Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.8 Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.9 Chief Financial Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.10 Representation of Shares of Other Corporations . . . . . . . . . . . . . . . . . . . . . 15 5.11 Authority and Duties of Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE VI INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.1 Third Party Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.2 Actions By or in the Right of the Corporation . . . . . . . . . . . . . . . . . . . . . . 16 6.3 Successful Defense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.4 Determination of Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.5 Payment of Expenses in Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.6 Indemnity Not Exclusive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.7 Insurance Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 6.8 The Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 6.9 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 6.10 Continuation of Indemnification and Advancement of Expenses . . . . . . . . . . . . . . . 18 ARTICLE VII RECORDS AND REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 7.1 Maintenance and Inspection of Records . . . . . . . . . . . . . . . . . . . . . . . . . . 19 7.2 Inspection by Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 7.3 Annual Statement to Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4 BY-LAWS OF COLLAGEN CORPORATION TABLE OF CONTENTS (continued)
Page ---- ARTICLE VIII GENERAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 8.1 Checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 8.2 Execution of Corporate Contracts and Instruments . . . . . . . . . . . . . . . . . . . . 20 8.3 Stock Certificates; Partly Paid Shares . . . . . . . . . . . . . . . . . . . . . . . . . 20 8.4 Special Designation on Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 8.5 Lost Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.6 Construction; Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.7 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.8 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.9 Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.10 Transfer of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8.11 Stock Transfer Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8.12 Registered Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE IX AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
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. 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 6 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 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 - 2 - 7 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. 2.11 WAIVER OF NOTICE - 4 - 9 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 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. - 5 - 10 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 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 - 6 - 11 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. * See amendments to this section at end of document. - 7 - 12 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. - 8 - 13 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 need not specify the purpose or - 9 - 14 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. - 10 - 15 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 - 11 - 16 present at any meeting and not disqualified from voting, 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 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 - 12 - 17 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 of the resignation shall not be necessary to make it effective. - 13 - 18 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 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. - 14 - 19 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. ARTICLE VI INDEMNITY - 15 - 20 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. 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 - 16 - 21 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 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 - 17 - 22 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. 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. - 18 - 23 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. 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 - 19 - 24 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 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 - 20 - 25 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. - 21 - 26 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. 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 - 22 - 27 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 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. - 23 - 28 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." - 24 - 29 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. - 25 - 30 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. - 26 - 31 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. - 27 - EX-10.44 3 COLLAGEN 1990 DIRECTORS STOCK OPTION PLAN 1 EXHIBIT 10.44 COLLAGEN CORPORATION 1990 DIRECTORS' STOCK OPTION PLAN as amended May 21, 1993 as amended August 11, 1995 1. Purposes of the Plan. The purposes of this Directors' Stock Option Plan are to attract and retain the best available personnel for service as Directors of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board. All options granted hereunder shall be "non-statutory stock options". 2. Definitions. As used herein, the following definitions shall apply: (a) "Board" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Common Stock" means the Common Stock of the Company. (d) "Company" means Collagen Corporation, a Delaware corporation. (e) "Continuous Status as a Director" means the absence of any interruption or termination of service as a Director. (f) "Director" means a member of the Board. (g) "Employee" means any person, including officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a Director's fee by the Company shall not be sufficient in and of itself to constitute "employment" by the Company. (h) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (i) "Fair Market Value" means, as of any date, the value, of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a Share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported, as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the last market trading day prior to the day of determination) as reported in the Wall Street Journal or such other source as the Board deems reliable; 2 (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market System thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high and low asked prices for the Common Stock on the last market trading day prior to the date of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable, or; (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board. (j) "Option" means a stock option granted pursuant to the Plan. (k) "Optioned Stock" means the Common Stock subject to an Option. (l) "Optionee" means an Outside Director who receives an Option. (m) "Outside Director" means a Director who is not an Employee. (n) "Parent" means a "parent corporation", whether now or hereafter existing, as defined in Section 425(e) of the Internal Revenue Code of 1986. (o) "Plan" means this 1990 Directors' Stock Option Plan. (p) "Share" means a share of the Common Stock, as adjusted in accordance with Section 10 of the Plan. (q) "Subsidiary" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 425(f) of the Internal Revenue Code of 1986. 3. Stock Subject to the Plan. Subject to the provisions of Section 10 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 300,000 Shares (the "Pool") of Common Stock. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. 4. Administration of and Grants of Options under the Plan. (a) Administrator. Except as otherwise required herein, the Plan shall be administered by the Board. No discretion concerning decisions regarding the Plan shall be afforded to any person who is not a "disinterested person" (as defined in Rule 16b-3 under the Exchange Act). (b) Procedure for Grants. All grants of Options hereunder shall be automatic and non-discretionary and shall be made strictly in accordance with the following provisions: 3 (i) No person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of Shares to be covered by Options granted to Outside Directors. (ii) Each Outside Director shall be automatically granted an Option (an "Initial Option") to purchase 15,000 Shares upon the date (on or after the effective date of this Plan) on which such person first becomes a Director and each Outside Director shall automatically be granted an Option to purchase an additional 10,000 Shares upon the date (on or after the effective date of this Plan) on which such person becomes Chairman of the Board of Directors for the first time, whether through election by the shareholders of the Company or appointment by the Board to fill a vacancy; provided, however, that no Option shall be issued under the Plan or become exercisable until shareholder approval of the Plan has been obtained in accordance with Section 16 hereof. (iii) On July 1, 1991 and on each July 1 thereafter during the term of this Plan, each Outside Director shall automatically receive an Option to purchase 3,000 Shares (an "Annual Option"). (iv) The terms of each Option granted hereunder shall be as follows: (A) the term of the Option shall be ten (10) years. (B) the Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Section 8 hereof. (C) the exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the Option. (D) the Annual Option shall become exercisable in full as to the Optioned Stock on the first anniversary of the date of grant of the Annual Option. (E) the Initial Option shall become exercisable in installments cumulatively as to twenty-five percent (25%) of the Optioned Stock on the first anniversary of the date of grant of the Initial Option and as to twenty-five percent (25%) of the remaining Optioned Stock for each full year thereafter that the Optionee remains a Director. (v) In the event that any Option granted under the Plan would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased upon exercise of Options to exceed the Pool, then each such automatic grant shall be for that number of Shares determined by dividing the total number of Shares remaining available for grant by the number of Outside Directors on the automatic grant date. No further grants shall be made until such time, if any, as additional Shares become available for grant under the Plan through action of the shareholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder. 4 (c) Powers of the Board. Subject to the provisions and restrictions of the Plan, the Board shall have the authority, in its discretion: (i) to determine, upon review of relevant information and in accordance with Section 2(i) of the Plan, the Fair Market Value of the Common Stock; (ii) to interpret the Plan; (iii) to prescribe, amend and rescind rules and regulations relating to the Plan; (iv) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted hereunder; and (v) to make all other determinations deemed necessary or advisable for the administration of the Plan. (d) Effect of Board's Decision. All decisions, determinations and interpretations of the Board shall be final. (e) Suspension or Termination of Option. If the President of the Company or his or her designee reasonably believes that an Optionee has committed an act of misconduct as defined in the section, the President may suspend the Optionee's right to exercise any Option pending a determination by the Board (excluding the Outside Director accused of such misconduct). An optionee shall be deemed to have committed an act of misconduct if the Board (excluding the Outside Director accused of such misconduct) determines an Optionee has committed an act of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the Company, breach of fiduciary duty or deliberate disregard of the Company rules resulting in loss, damage or injury to the Company, or if an Optionee makes an unauthorized disclosure of any Company trade secret or confidential information, engages in any conduct constituting unfair competition, induces any Company customer to breach a contract with the Company or induces any principal for whom the Company acts as agent to terminate such agency relationship, neither the Optionee nor his or her estate shall be entitled to exercise any Option whatsoever. In making such determination, the Board (excluding the Outside Director accused of such misconduct) shall act fairly and shall give the Optionee an opportunity to appear and present evidence on Optionee's behalf at a hearing before the Board or a committee of the Board. 5. Eligibility. Options may be granted only to Outside Directors. All Options shall be automatically granted in accordance with the terms set forth in Section 4(b) hereof. An Outside Director who has been granted an Option may, if otherwise eligible, be granted an additional Option or Options in accordance with such provisions. The Plan shall not confer upon any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate his or her directorship at any time. 6. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the shareholders of the Company as described in Section 16 of the Plan. It shall continue in effect for a term of ten (1 O) years unless sooner terminated under Section 12 of the Plan. 7. Exercise Price and Consideration. (a) Exercise Price. The per Share exercise price for Optioned Stock shall be 100% of the Fair Market Value per Share on the date of grant of the Option. 5 (b) Form of Consideration. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Board and may consist entirely of (i) cash, (ii) check, (iii) promissory note, (iv) other shares which (x) in the case of Shares acquired upon exercise of an Option either have been owned by the Optionee for more than six (6) months on the date of surrender or were not acquired, directly or indirectly, from the Company, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (v) delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds required to pay the exercise price, (vi) by delivering an irrevocable subscription agreement for the Shares which irrevocably obligates the Optionee to take and pay for the Shares not more than twelve (12) months after the date of delivery of the subscription agreement, (vii) any combination of the foregoing methods of payment, or (viii) such other consideration and method of payment for the issuance of Shares to the extent permitted under applicable law. 8. Exercise of Option. (a) Procedure for Exercise: Rights as a Shareholder. Any Option granted hereunder shall be exercisable at such times as are set forth in Section 4(b) hereof; provided, however, that no Options shall be exercisable until shareholder approval of the Plan in accordance with Section 16 hereof has been obtained. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may consist of any consideration and method of payment allowable under Section 7(b) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 10 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Rule 16b-3. Options granted to Outside Directors must comply with the applicable provisions of Rule 16b-3 promulgated under the Exchange Act or any successor thereto and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. (c) Termination of Status as a Director. If an Outside Director ceases to serve as a Director, he may, but only within three (3) months after the date he ceases to be a Director of the Company, exercise his or her Option to the extent that he or she was entitled to exercise it at the date of such termination. Notwithstanding the foregoing, in no 6 event may the Option be exercised after its ten (10) year term has expired. To the extent that the Optionee was not entitled to exercise an Option at the date of such termination, or if he does not exercise such Option (which the Optionee was entitled to exercise) within the time specified herein, the Option shall terminate. (d) Disability of Optionee. Notwithstanding the provisions of Section 8(c) above, in the event an Optionee is unable to continue his or her service as a Director as a result of total and permanent disability (as defined in Section 22(e)(3) of the Code), the Optionee may, but only within six (6) months from the date of termination, exercise an Option to the extent the Optionee was entitled to exercise it at the date of such termination. Notwithstanding the foregoing, in no event may the Option be exercised after its ten (10) year term has expired. To the extent that the Optionee was not entitled to exercise the Option at the date of termination, or if the Optionee does not exercise such Option (which the Optionee was entitled to exercise) within the time specified herein, the Option shall terminate. (e) Death of Optionee. In the-event of the death of an Optionee, the Option may be exercised, at any time within six (6) months following the date of death, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of death. Notwithstanding the foregoing, in no event may the option be exercised after its ten (10) year term has expired. 9. Non-Transferability of Options. The Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 10. Adjustments Upon Changes in Capitalization or Merger. (a) Subject to any required action by the shareholders of the Company, the number of Shares covered by each outstanding Option, and the number of Shares which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per Share covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the aggregate number of issued Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of Shares of stock of any class, or securities convertible into Shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option. In the event of the proposed dissolution or liquidation of the Company, all outstanding Options will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. The Board may, in the exercise of its sole discretion in such 7 instances, declare that any Option shall terminate as of a date fixed by the Board and give each Optionee the right to exercise any Option as to all or any part of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. Subject to the provisions of paragraph (b) hereof, in the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding Option shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Board determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the Optionee shall have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. If the Board makes an Option fully exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Company shall notify the Optionee that the Option shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Option will terminate upon the expiration of such period. For purposes of this paragraph, an Option granted under the Plan shall be deemed to be assumed if, following the sale of assets or merger, the Option confers the right to purchase, for each Share of Optioned Stock subject to the Option immediately prior to the sale of assets or merger, the consideration (whether stock, cash or other securities or property) received in the sale of assets or merger by holders of Common Stock for each Share held on the effective date of the transaction (and if such holders were offered a choice of consideration, the type of consideration chosen by the holders if a majority of the outstanding Shares); provided, however, that if such consideration received in the sale of assets or merger was not solely Common Stock of the successor corporation or its parent, the Board may, with the consent of the successor corporation and the participant, provide for the consideration to be received upon exercise of the Option to be solely Common Stock of the successor corporation or its parent equal in Fair Market Value to the per share consideration received by holders of Common Stock in the sale of assets or merger. 11. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend, or discontinue the Plan, but no amendment, alteration, suspension, or discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act (or any other applicable law or regulation), the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required. (b) Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated. 12. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date determined in accordance with Section 4(b) hereof. Notice of the determination shall be given to each Outside Director to whom an Option is so granted within a reasonable time after the date of such grant. 13. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, state securities laws, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. 8 As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares, if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 14. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 15. Option Agreement. Options shall be evidenced by written option agreements in such form as the Board shall approve. 16. Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Company at or prior to the first annual meeting of shareholders held subsequent to the granting of an Option hereunder. Such shareholder approval shall be obtained in the degree and manner required under applicable state and federal law. EX-10.70 4 EMPLOYMENT ACCEPTANCE 1 EXHIBIT 10.70 [Letterhead] December 19, 1994 Gary S. Petersmeyer 447 Van Buren Los Altos, CA 94022 Dear Gary: I am delighted you have decided to accept the offer for the position of Chief Operating Officer and President at Collagen Corporation. This letter confirms my offer and specifies the terms on which we mutually agreed. Your salary will be $200,000 per year, to be evaluated at our August, 1996, Board Meeting. A hire-on bonus of $35,000 will be paid on February 1, 1995, your first day of employment. You will be eligible to participate in our annual bonus program commencing in Fiscal Year 1996. You will be elected a board member of Collagen's Board at the February 10, 1995, Board Meeting. With the Board's approval, you will be granted 60,000 incentive stock options and non-qualified options to purchase Collagen Corporation Common Stock. The options will be priced at fair market value determined on the date of the Board approval meeting. As discussed, in the event of sale of substantially all of the assets of the Company or in the event of a merger, vesting of options is at the discretion of the Board. You will be eligible to participate in our Company's group health, dental, vision, long-term disability, and life insurance plans, and our short-term disability plan, effective immediately upon your first day of employment. You will also be eligible to invest in the Collagen Investment & Savings (CIS) Plan and our Employee Stock Purchase Plan beginning on April 1, 1995. In the event you are terminated from the Company during your first two years of employment for any reason other than cause, you will receive a minimum of six month's salary as compensation. If termination of employment occurs after your second year with Collagen, your severance will be at the discretion of our Board of Directors. 2 Gary S. Petersmeyer Page 2 December 19, 1994 In compliance with the Immigration and Naturalization Service requirements, please be prepared to produce documentation that verifies your eligibility to be employed in the United States. This documentation generally consists of two pieces of identification (that is, a Social Security card and a valid driver's license, or a birth certificate and a valid driver's license with photo). Please have this documentation available on your first working day. If you have any questions or concerns, please don't hesitate to call me or Deborah Berard at any time. I look forward to your arrival on February 11. Sincerely, /s/ Howard D. Paletsky Howard D. Paletsky President & Chief Executive Officer - ------------------------------------------------------------------------------ Dear Howard: I have read your letter of December 19, 1994. I fully understand and accept the terms outlined. Signed, /s/ Gary S. Petersmeyer Gary S. Petersmeyer EX-10.71 5 LICENSE, SUPPLY AND OPTION AGREEMENT 1 LipoMatrix Contract Number LMI 045 EXHIBIT 10.71 LICENSE, SUPPLY AND OPTION AGREEMENT* This License, Supply and Option Agreement (the "Agreement") is made as of March 24, 1995, (the "Effective Date") between Collagen Corporation, a Delaware corporation ("Collagen"), and LipoMatrix, Incorporated, a British Virgin Islands corporation ("LipoMatrix"). RECITALS. Collagen and a predecessor of LipoMatrix ("Old LipoMatrix") have entered into a Amended Product Development and Marketing Agreement dated January 19, 1993, as amended. The parties desire to terminate that agreement and enter into a License, Supply and Option Agreement (as set forth herein), and a distributor agreement (covering distribution of certain LipoMatrix products within the United States) in the form attached hereto as Exhibit A (the "U.S. Distributor Agreement"). 1. DEFINITIONS. 1.1 "Change in Control of Collagen" shall mean (i) a merger or consolidation to which Collagen is a party if the individuals and entities who were stockholders of Collagen immediately prior to the effective date of such merger or consolidation have beneficial ownership (as defined in Rule 13d-3 under the 1934 Act) of less than fifty percent (50%) of the total combined voting power for election of directors of the surviving corporation following the effective date of such merger or consolidation; (ii) the acquisition of direct or indirect beneficial ownership (as defined in Rule 13d-3 under the 1934 Act) in the aggregate of securities of Collagen representing fifty percent (50%) or more of the total combined voting power of Collagen's then issued and outstanding voting securities by any person or entity, or group, as shown on a Schedule 13D filed with the SEC pursuant to the 1934 Act; (iii) the sale of all or substantially all of the assets of Collagen to any person or entity which is not a majority-owned subsidiary of Collagen; (iv) the liquidation of Collagen accompanied by a distribution to its shareholders; or (v) a change in composition of a majority of Collagen's Board of Directors as a result of an election contest, following the filing of a Schedule 14B with the SEC pursuant to the 1934 Act. 1.2 "Coating Technology" shall mean implant coating techniques using Collagen Materials. 1.3 "Collagen Materials" shall mean atelopeptide collagen formulations, including fibrillar and nonfibrillar collagen, crosslinked collagen, succinylated collagen and other chemically modified collagen from any mammalian source (including bovine, porcine, ovine, avian and human collagens). 1.4 "LipoMatrix Products" shall mean LipoMatrix's present and future breast implant products and other products intended for use in cosmetic or reconstructive breast surgery. 1.5 "1934 Act" shall mean the Securities Exchange Act of 1934, as amended. - -------------- * Confidential treatment is requested for a portion of this document. 2 2. TERMINATION OF PRIOR AGREEMENT. 2.1 Collagen and LipoMatrix hereby terminate, effective as of the Effective Date, the Amended Product Development and Marketing Agreement between Collagen and Old LipoMatrix dated January 19, 1993. 3. SUBLICENSE OF COATING TECHNOLOGY. 3.1 Grant of Sublicense. Subject to the terms and conditions hereof, Collagen hereby grants to LipoMatrix, and LipoMatrix hereby accepts from Collagen, a worldwide, exclusive, royalty-free sublicense of Collagen's rights under the License Agreement between Collagen and Stanford University dated June 1, 1989, to use the Coating Technology solely for the LipoMatrix Products. 3.2 No Other Licenses. No license or sublicense is granted under this Agreement by Collagen to LipoMatrix, either directly or by implication, estoppel or otherwise, except as expressly provided in Section 3.1. 3.3 Intellectual Property Notice. LipoMatrix agrees to mark such patent, copyright, and other proprietary rights notices on documentation and packages for the Coating Technology or Collagen Materials used by LipoMatrix as are appropriate to protect Collagen's intellectual property rights, such notices to be designated by Collagen subject to the consent of LipoMatrix (which shall not unreasonably be delayed or withheld). All Coating Technology or Collagen Materials will have, at the option of Collagen, either a notice stating that such product was made with Collagen technology or a designated trademark of Collagen. 3.4 Disclaimer of Warranty. COLLAGEN IS PROVIDING THE COATING TECHNOLOGY TO LIPOMATRIX "AS IS," AND DISCLAIMS ALL WARRANTIES WITH RESPECT THERETO, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND ANY WARRANTY OF NONINFRINGEMENT OF THIRD PARTY PATENTS, COPYRIGHTS OR OTHER PROPRIETARY RIGHTS. COLLAGEN SHALL HAVE NO LIABILITY OR OBLIGATION WITH RESPECT TO DEFECTS OR ERRORS IN THE COATING TECHNOLOGY. 4. SUPPLY OF COLLAGEN MATERIALS. 4.1 LipoMatrix Requirements. Collagen shall use its reasonable best efforts to meet or arrange with a third party to meet LipoMatrix's requirements of the Collagen Materials for the LipoMatrix Products on a timely basis, provided that LipoMatrix gives Collagen reasonable advance notice of its requirements and that Collagen shall be entitled to meet its own requirements for the Collagen Materials before supplying the Collagen Materials to LipoMatrix. 4.2 Orders and Ordering Period. The terms of sale by Collagen of the Collagen Materials to LipoMatrix (including lead time, forecasts, and ordering mechanisms) shall be mutually determined by the parties. - 2 - 3 4.3 Price and Payment Terms. (a) Price. The price for Collagen Materials ordered by LipoMatrix hereunder shall be negotiated later. (b) Due Date; Penalty. LipoMatrix shall pay for Collagen Materials delivered hereunder net thirty (30) days after receipt of invoice and shipping waybills from Collagen. In the event Collagen notifies LipoMatrix of its failure to make such payment and LipoMatrix does not make such payment within thirty (30) days of receipt of such notice, Collagen may charge LipoMatrix interest on the late payment from the date due until paid in full at the rate of twelve percent (12%) simple, annual interest, or, if lower, the highest rate permitted by law. (c) Taxes. LipoMatrix shall pay or reimburse Collagen for any municipal, county, state or federal sales, excise or other taxes which may be levied upon the sale or transfer of ownership of the Collagen Materials. LipoMatrix also shall pay any such taxes which may be levied or assessed against the Collagen Materials or the ownership or use thereof, except for any tax assessed upon Collagen's net income. Said tax payments shall be made according to requirements of local law and are due and payable on invoice by Collagen, unless LipoMatrix provides Collagen with a proper tax exemption certificate. 4.4 Product Warranty. Collagen warrants that all quantities of the Collagen Materials delivered to LipoMatrix pursuant to this Agreement will be manufactured in accordance with good manufacturing practices and will meet mutually agreed upon specifications for the Collagen Materials. THE WARRANTIES SET FORTH IN THIS SECTION ARE EXCLUSIVE, AND EACH PARTY DISCLAIMS ALL OTHER WARRANTIES, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, OF ANY KIND, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 5. MARKETING RIGHTS. 5.1 LipoMatrix has granted Collagen certain rights to distribute, market and sell the LipoMatrix Products in the United States as set forth in the U.S. Distributor Agreement. 5.2 Collagen has no objection to LipoMatrix offering marketing rights to LipoMatrix Products to any subsidiary of Collagen International, Inc. in any country where such a subsidiary exists on terms acceptable to such subsidiary. 6. PURCHASE OPTION. 6.1 Grant of Purchase Option. (a) At any time after (i) April 19, 2000, or (ii) A Change in Control of Collagen, or (iii) LipoMatrix receives a bona fide written offer from a third party expressing its interest to acquire LipoMatrix at a substantial premium in excess of $1.25 per share (as adjusted for stock splits and - 3 - 4 dividends), provided, if Collagen so requests, such offer is substantiated by an investment banker, the Board of Directors of LipoMatrix (with the representatives of Collagen abstaining) may direct LipoMatrix to offer ("LipoMatrix Offer") to purchase all outstanding shares, options or other rights to equity of LipoMatrix held by Collagen ("Collagen Shares"). (b) The Board of Directors of Collagen shall have thirty (30) days after receipt of the LipoMatrix Offer and shall be obligated within such thirty (30)-day period either (i) to accept the LipoMatrix Offer, or (ii) to agree to purchase all outstanding shares, options or warrants of LipoMatrix at the same terms and conditions (including form of consideration and price per share) as in the LipoMatrix Offer ("Collagen Purchase Option"). In the event Collagen has accepted (or is deemed to have accepted) the LipoMatrix Offer, Collagen shall sell all the Collagen Shares in accordance with the LipoMatrix Offer. If Collagen does not exercise the Collagen Purchase Option within such thirty (30)-day period, Collagen will be deemed to have accepted the LipoMatrix Offer. If Collagen elects to exercise the Collagen Purchase Option, LipoMatrix shall be obligated to sell in accordance with the Collagen Purchase Option. The election by Collagen to purchase or sell shall be irrevocable and unconditional once made. The closing of the purchase by (i) LipoMatrix of Collagen Shares or (ii) Collagen of LipoMatrix shall take place within ninety (90) days after acceptance (including deemed acceptance) or rejection of the LipoMatrix Offer by Collagen. The Collagen Purchase Option and the right to make a LipoMatrix Offer under this Section 6.1 shall be collectively referred to as the "Option." 6.2 Grant of LipoMatrix Stockholder Option and Proxy. All present and future holders of more than five percent (5%) of the outstanding voting securities of LipoMatrix (on an as-converted basis) shall be obligated as a condition precedent to the issuance of such securities (i) to agree to the Collagen Purchase Option, (ii) to agree to the ability of the LipoMatrix Board of Directors to trigger the LipoMatrix Offer, and (iii) to enter into a Stockholder Option Agreement in the form attached hereto as Exhibit B. Sierra Ventures, B.J. Cassin, A/W Company, Terry Knapp, and Alta Berkeley Associates shall also agree to the Collagen Purchase Option. In the event Collagen elects to exercise the Collagen Purchase Option, Collagen shall offer to buy out all LipoMatrix shareholders at the same price and time, whether or not they have previously agreed to the Collagen Purchase Option. 6.3 Termination of Marketing Rights. If Collagen accepts the LipoMatrix Offer, then the U.S. Distributor Agreement shall terminate on the closing of the purchase of the Collagen Shares. 6.4 Termination on Initial Public Offering. The Option shall terminate upon the closing of the initial public offering of LipoMatrix's Common Stock. - 4 - 5 6.5 Legend. Each stock certificate, option or warrant of LipoMatrix owned by Collagen shall bear the following legend: THE SECURITIES REPRESENTED BY THIS [CERTIFICATE, OPTION OR WARRANT] ARE SUBJECT TO THE TERMS OF THE MASTER AGREEMENT BETWEEN THE HOLDER AND THE COMPANY, WHICH INCLUDES A RIGHT OF REPURCHASE, A COPY OF WHICH MAY BE OBTAINED UPON THE WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY. 6.6 Further Assurances. In the event that the Collagen Purchase Option has been exercised or the LipoMatrix Offer has been accepted, both parties shall take all steps reasonably necessary to facilitate the acquisition of shares, options or warrants pursuant to such Collagen Purchase Option or LipoMatrix Offer. 7. OWNERSHIP OF INVENTIONS. 7.1 Rights. Inventions shall belong to the inventing party; provided, however, if such invention is jointly developed by the parties, the invention shall be jointly owned with each party having an equal and undivided one-half co-ownership interest therein and the unrestricted right to use and license others to make, have made, use, sell and otherwise distribute such product. In connection therewith, each of LipoMatrix and Collagen may make, have made, use, sell and otherwise distribute, import, export, reproduce, copy, vend, prepare derivatives, display and otherwise exploit any jointly owned intellectual property rights relating to any jointly owned product without the consent of, and without paying royalties or accounting to, the other, and may grant licenses to others thereunder without such consent, payment or accounting. 7.2 Patent Filings. The party owning the rights to an application shall have the responsibility for patent filings. The other party and its employees shall cooperate in such filings to the extent requested and at the expense of the party making such filings. 8. PRODUCT LIABILITY. 8.1 Indemnity By Collagen. Collagen shall indemnify and hold LipoMatrix harmless from and against any and all liability, damage, loss, cost or expense (including reasonable attorney's fees) resulting from any claims made or suits brought against LipoMatrix, its employees, directors and customers which arise or result solely from Collagen's handling, distribution and marketing of the LipoMatrix Products or Collagen Materials, from failure to manufacture the Collagen Materials in accordance with agreed upon specifications, FDA Good Manufacturing Practices or other applicable standards for medical device manufacturers, or from negligence or willful misconduct. 8.2 Apportionment of Damages. In the event that any liability, damage, loss, cost or expense (including reasonable attorney's fees) as aforesaid cannot be established to have resulted solely from the actions or failures to act of LipoMatrix or Collagen or their affiliates, responsibility for payment of such liability, damage, loss, cost or expense (including reasonable attorney's fees) will be apportioned between LipoMatrix and Collagen according to the contribution of either party to the damage and if such allocation is not mutually agreed then it will be determined by mandatory arbitration as provided in Section 14.3. The apportionment of damages as aforesaid will apply with respect to final judgments of a court of competent jurisdiction from which no - 5 - 6 appeal is or can be taken as well as settlements made prior to, during or following termination of litigation to which the parties have expressly agreed in writing. 9. REPRESENTATIONS. 9.1 Collagen. Collagen represents and warrants to LipoMatrix that (a) it has the full authority and capacity to enter into and perform this Agreement in accordance with its terms and conditions and (b) this Agreement is a valid and binding obligation of Collagen, enforceable in accordance with its terms, except as the enforceability of the Agreement may be subject to or limited by bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws relating to or affecting the rights of creditors generally. 9.2 LipoMatrix. LipoMatrix warrants that (a) it has the full authority and capacity to enter into and perform this Agreement in accordance with its terms and conditions, and (b) this Agreement is a valid and binding obligation of LipoMatrix, enforceable in accordance with its terms, except as the enforceability of the Agreement may be subject to or limited by bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws relating to or affecting the rights of creditors generally. 10. PATENT INFRINGEMENT DEFENSE AND PROSECUTION. 10.1 Claims Involving Collagen Materials. Collagen shall have the right and obligation to defend, or at its option to settle, any claim, suit or proceeding brought against LipoMatrix or its employees, directors, or customers on the issue of infringement of any United States or foreign patent or other proprietary right by reason of LipoMatrix's use of the Collagen Materials in LipoMatrix Products, subject to the limitations hereafter set forth. Collagen shall have sole control of any such action or settlement negotiations, and Collagen agrees to pay any final judgment entered against LipoMatrix or its customers on such issue. 10.2 Notification and Cooperation. Each party shall promptly notify the other party if it becomes aware of any claim, action or proceeding subject to Sections 10.1 and shall cooperate in the defense of such claim, action or proceeding, provided that the party responsible for such defense shall reimburse the other party for any reasonable out-of-pocket expenses incurred by such other party at the defending party's request. 10.3 Prosecution of Infringers. Each party will promptly notify the other in writing if it becomes aware of any possible infringement of the patent or other proprietary rights of the other party related to this Agreement. Each party will be responsible for the prosecution or other action taken with respect to possible infringement of its patents or other rights. 10.4 Sole Remedy. THIS INFRINGEMENT INDEMNITY STATES COLLAGEN'S ENTIRE LIABILITY AND OBLIGATION TO LIPOMATRIX FOR ANY CLAIM OF INFRINGEMENT OF THIRD PARTY PATENT, COPYRIGHT, TRADEMARK, TRADE SECRET OR OTHER INTELLECTUAL PROPERTY RIGHTS. 11. CONFIDENTIAL INFORMATION. 11.1 Definition. "Confidential Information" of either party means information disclosed to or learned by the other party concerning the first party's business, customers, products, proposed products, plans, inventions, processes and techniques, but does not include information that: - 6 - 7 (a) is or becomes generally known to the public through no fault or breach on the part of the receiving party; (b) the receiving party obtains from a third party rightfully, without breach of nondisclosure obligations and without restriction on disclosure; (c) the providing party regularly provides to others without restriction on disclosure; or (d) was already known to the receiving party at the time of such disclosure. 11.2 Protection. Except as explicitly authorized in writing by this Agreement or otherwise, each party agrees: (a) not to use for its own benefit or the benefit of any third party the other party's Confidential Information; and (b) to use all reasonable care, but in no event less care than it takes to protect its own Confidential Information of similar importance, to protect the other party's Confidential Information from unauthorized use, disclosure and publication. 12. TERM AND TERMINATION. 12.1 Term. This Agreement shall commence on the Effective Date and shall continue for a term of ten (10) years from the date of marketing clearance by the United States Food and Drug Administration of the first LipoMatrix Product, unless and until earlier terminated as provided in this Section 12. 12.2 Termination For Cause. Either party may terminate this Agreement, upon a material default in the fulfillment of the obligations of the other party under this Agreement by giving written notice to such other party, specifying the nature of such default, not less than ninety (90) days prior to the date the non-defaulting party intends to terminate this Agreement. If such default is cured by the defaulting party within ninety (90) days, or, if such default cannot be cured during such period, such defaulting party is taking reasonable steps to correct such default within a reasonable period thereafter, no such termination shall occur. 12.3 Termination of the U.S. Distributor Agreement. In the event that either party terminates this Agreement for cause as provided in Section 12.2, then as of the effective date of such termination, the U.S. Distributor Agreement shall terminate. 12.4 Survival of Provisions. The provisions of Sections 7, 8, 10, 11, 12, 13 and 14 shall survive any termination of this Agreement. 12.5 Remedies. Nothing herein shall limit any remedies which a party may have for the other party's default, except as set forth in Section 13. 13. LIMITATION OF LIABILITY. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY INCIDENTAL, CONSEQUENTIAL OR INDIRECT DAMAGES OF ANY NATURE WHATSOEVER ARISING FROM THE PERFORMANCE OR FAILURE TO PERFORM OF EITHER PARTY HEREUNDER, OR ANY OF THE TECHNICAL INFORMATION TRANSFERRED PURSUANT HERETO, OR THE PERFORMANCE OR FAILURE TO PERFORM OF ANY GOODS DELIVERED HEREUNDER, WHETHER DUE TO - 7 - 8 BREACH OF WARRANTY, BREACH OF CONTRACT, NEGLIGENCE OR OTHERWISE. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE. THE FOREGOING LIMITATIONS SHALL NOT AFFECT EITHER PARTY'S DUTY TO INDEMNIFY THE OTHER PARTY FOR THIRD-PARTY SUITS FOR SUCH DAMAGES, AS SET FORTH IN SECTIONS 8 AND 10. 14. MISCELLANEOUS. 14.1 Assignment. Neither party may assign any rights (other than the right to receive money) or delegate any duties under this Agreement without the other party's prior written consent, and any attempt to assign or delegate without that consent will be void. Notwithstanding the foregoing, however, either party may assign this Agreement to any wholly-owned subsidiary of such party or to any successor to its business by merger, sale of assets or sale of stock, provided that such successor agrees in writing to be bound by the terms of this Agreement and a copy of such agreement is delivered to the other party. Subject to the foregoing, this Agreement will be binding upon and inure to the benefit of the parties, their respective successors and permitted assigns. 14.2 Applicable Law. This Agreement shall be construed in accordance with, and all the rights, powers and liabilities of the parties hereunder shall be governed by, the internal laws of the State of California, without reference to choice of law principles thereof. 14.3 Arbitration. The parties shall attempt to settle all disputes arising in connection with this Agreement through good faith consultation. In the event no agreement can be reached on such dispute within sixty (60) days after notification in writing by either party to the other concerning such dispute, the parties shall submit such dispute to arbitration by three arbitrators under the Rules of the American Arbitration Association. One arbitrator shall be selected by Collagen, one arbitrator shall be selected by LipoMatrix and the third arbitrator shall be selected by the first two arbitrators. The place of arbitration shall be a site in the United States mutually agreeable to the parties. The arbitrator's decision shall be final, conclusive, and binding; and such decision and any arbitration award may be entered in any court of competent jurisdiction. Expenses and fees of such arbitration shall be borne by the non-prevailing party in such arbitration (see Section 14.8 below). 14.4 Public Statements. Neither party shall make any public announcement or press release regarding the existence of this Agreement or any of the terms and conditions hereof (except as required by applicable governmental regulations) without the written consent of the other party. 14.5 Entire Agreement. This Agreement, including the exhibits attached hereto, sets forth the entire Agreement and understanding of the parties relating to its subject matter and merges all prior discussions and agreements between them, including without limitation any non-disclosure or confidentiality agreement prior to the Effective Date. No modification or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing signed by both parties. 14.6 Severability. If any provision of this Agreement is found invalid or unenforceable, that provision will be enforced to the maximum extent permissible under applicable law, and the remaining provisions of this Agreement will stay in force. In addition, the parties agree to negotiate in good faith a provision to replace the provision found invalid or unenforceable that will have, to the extent possible, the same economic effect. - 8 - 9 14.7 Notices. All notices required or to be given pursuant to this Agreement shall be in writing, shall be effective upon receipt and shall be delivered in person or by first class mail, postage prepaid to the following addresses, with a copy of such notice to be sent simultaneously by telex, facsimile copier or similar device to the party receiving such notice: To Collagen: Collagen Corporation 2500 Faber Place Palo Alto, California, U.S.A. 94303 Attention: President To LipoMatrix: LipoMatrix, Incorporated 24 Puits Godet, CH-2000 Neuchatel, Switzerland Attention: President 14.8 Attorney's Fees. If a dispute arises pursuant to this Agreement, the prevailing party shall be entitled to receive its attorney's fees and costs in connection with such dispute, as determined by the arbitrator. 14.9 Force Majeure. Each of the parties shall be excused from the performance of its obligations hereunder in the event such Performance is prevented by force majeure, and such excuse shall continue so long as the condition constituting such force majeure continues plus thirty (30) days after the termination of such condition. For the purposes of this Agreement, force majeure is defined to include causes beyond the control of LipoMatrix or Collagen, including without limitation acts of God, acts, regulations or laws of any government, war, civil commotion, destruction of production facilities or materials by fire, earthquake or storm, labor disturbances, epidemic and failure of public utilities or common carriers. 14.10 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 14.11 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. 14.12 Waiver of Conflict. EACH PARTY TO THIS AGREEMENT THAT HAS BEEN OR CONTINUES TO BE REPRESENTED BY VENTURE LAW GROUP ("VLG") HEREBY ACKNOWLEDGES THAT RULE 3-310 OF THE RULES OF PROFESSIONAL CONDUCT PROMULGATED BY THE STATE BAR OF CALIFORNIA REQUIRES AN ATTORNEY TO AVOID REPRESENTATIONS IN WHICH THE ATTORNEY HAS OR HAD A RELATIONSHIP WITH ANOTHER PARTY INTERESTED IN THE REPRESENTATION WITHOUT THE INFORMED WRITTEN CONSENT OF ALL PARTIES AFFECTED. BY EXECUTING THIS AGREEMENT, EACH SUCH PARTY GIVES ITS INFORMED WRITTEN CONSENT TO THE REPRESENTATION OF LIPOMATRIX BY VLG IN CONNECTION WITH THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY. - 9 - 10 IN WITNESS WHEREOF, the parties have executed this Agreement through the signatures of their duly authorized representatives set forth below. COLLAGEN CORPORATION LIPOMATRIX, INCORPORATED a Delaware corporation a British Virgin Islands corporation By: /s/ Howard D. Palefsky By: /s/ Terry R. Knapp, MD ----------------------------------- --------------------------------- Title: Chairman & CEO Title: Chairman & CEO - 10 - 11 LipoMatrix Contract Number LMI 045 EXHIBIT A U.S. DISTRIBUTOR AGREEMENT 12 LipoMatrix Contract Number LMI 046 DISTRIBUTOR AGREEMENT BETWEEN LIPOMATRIX, INCORPORATED. AND COLLAGEN CORPORATION Note: Confidential treatment requested for a portion of this document. 13 LipoMatrix Contract Number LMI 046 TABLE OF CONTENTS
PAGE ---- I. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. APPOINTMENT AS EXCLUSIVE DISTRIBUTOR . . . . . . . . . . . . . . . . 2 III. SPECIFIC RESPONSIBILITIES . . . . . . . . . . . . . . . . . . . . . 3 IV. TERMS AND CONDITIONS OF SALE . . . . . . . . . . . . . . . . . . . . 7 V. ACQUISITION AND USE OF DEMONSTRATION PRODUCT AND TRANSPONDER READERS . . . . . . . . . . . . . . . . . . . . . . . . 9 VI. TERM AND TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . 10 VII. PATENT INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . 11 VIII. PRODUCT LIABILITY . . . . . . . . . . . . . . . . . . . . . . . . . 12 IX. LIMITATION OF LIABILITY . . . . . . . . . . . . . . . . . . . . . . 13 X. NO RIGHT TO MANUFACTURE OR COPY . . . . . . . . . . . . . . . . . . 13 XI. INTELLECTUAL PROPERTY RIGHTS . . . . . . . . . . . . . . . . . . . . 13 XII. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 EXHIBITS Exhibit A Risk Management Program* Exhibit B Risk Management Support Documents*
* Confidential treatment requested for this exhibit. 14 LipoMatrix Contract Number LMI 046 DISTRIBUTOR AGREEMENT This Distributor Agreement (the "Agreement") is entered into as of March 24, 1995, (the "Effective Date") between LIPOMATRIX, INCORPORATED ("LIPOMATRIX"), a corporation organized under the laws of the British Virgin Islands with an office located at Puits Godet 24, CH-2000 Neuchatel, Switzerland and COLLAGEN CORPORATION ("DISTRIBUTOR"), a Delaware corporation with an office located at 2500 Faber Place, Palo Alto, CA 94303. IN CONSIDERATION OF THE MUTUAL PROMISES HEREIN CONTAINED, THE PARTIES AGREE AS FOLLOWS: I. DEFINITIONS A. "PRODUCTS" shall mean LipoMatrix's present and future (subject to Section II.A) breast implant products and other products intended for use in cosmetic or reconstructive breast surgery. Products may be changed, abandoned or added by LipoMatrix, at its sole discretion, after reasonable prior written notice (which shall not be less than ninety (90) days) is given to Distributor, or in any other manner necessary in order to comply with applicable laws. LipoMatrix shall be under no obligation to continue the production of any Product, except as provided herein. B. "TERRITORY" shall mean the United States of America. C. "TECHNICAL DATA" shall mean all information belonging to LipoMatrix in written, graphic or tangible form relating to design, programming, operation or service of the Products, including all information that exists as of the Effective Date of this Agreement, or is developed by LipoMatrix during the term hereof. D. "INTELLECTUAL PROPERTY RIGHTS" shall mean all of LipoMatrix's worldwide patents, trademarks, trade names, inventions, copyrights, regulatory approvals, know-how, trade secrets, and all other intellectual property rights, in existence as of the Effective Date of this Agreement or hereafter developed or acquired by LipoMatrix, relating to the design, manufacture, or marketing of the Products. E. "TRADE SECRETS" shall mean any formula, pattern, device, or compilation of information which is used in LipoMatrix's business and which provides competitive advantage to LipoMatrix and which is not known or used by LipoMatrix's competitors. This term includes, but is not limited to, formulas, compounds, manufacturing processes, methods for treating or preserving materials, patterns for the design or operation of devices, materials filed with governmental agencies in connection with regulatory approval of LipoMatrix's products, and information relating to marketing of LipoMatrix products and services. F. "LIPOMATRIX TRADEMARKS" shall mean those trademarks, trade names, service marks, slogans, designs, distinct advertising, labels, logos and other trade-identifying symbols as are or have been developed and used by LipoMatrix and/or any of its subsidiaries or affiliate companies anywhere in the world. G. "GOVERNMENT AGENCY" shall include all local, national and supranational bodies with the legal authority to establish rules, regulations, standards and guidelines, (or to issue certificates of compliance with these), covering the design, manufacturing and marketing of the - 1 - 15 Products in the Territory. This will include without limitation the United States Food and Drug Administration. H. COMMERCIAL SALE. The sale of a Product by Distributor, other than for clinical use required to obtain governmental approvals to market such Product. I. ORDERING YEAR. The twelve-month period commencing on the first Commercial Sale and each subsequent twelve-month period commencing on the anniversary of such date. II. APPOINTMENT AS EXCLUSIVE DISTRIBUTOR A. Subject to the terms and conditions set forth herein LipoMatrix hereby appoints Distributor, and Distributor hereby accepts such appointment, as LipoMatrix's exclusive distributor for the Products in the Territory. As a result, LipoMatrix will not sell the Products in the Territory, other than through Distributor. The mechanism for sales of Products for clinical trials in the Territory shall be determined by mutual agreement. Any future Product developed by LipoMatrix shall be deemed a Product hereunder. If Distributor does not initiate commercial sales of such future Product within ninety (90) days of regulatory clearance, then all rights to such product will revert to LipoMatrix. B. Distributor shall not represent or sell competitive products in the Territory which, in LipoMatrix's opinion, are likely to conflict with Distributor's obligation to use its reasonable commercial efforts to represent and sell Products in the Territory. C. Distributor shall not, directly or indirectly, solicit sales of the Products outside the Territory. Distributor shall forward to LipoMatrix all unsolicited inquiries relating to the Products or potential customers outside of both the Territory and the territory, if any, covered by affiliates of Distributor that are authorized to distribute Products. D. The relationship of LipoMatrix and Distributor established by this Agreement is that of independent contractors, and nothing contained in this Agreement shall be construed to give either party the power to direct or control the day-to-day activities of the other or allow one party to create or assume any obligation on behalf of the other for any purpose whatsoever. III. SPECIFIC RESPONSIBILITIES A. MARKETING. 1. MARKETING EFFORTS. During the term of the Agreement, Distributor shall use its reasonable commercial efforts to develop and exploit the market and to sell the Products throughout the Territory. 2. MARKETING PLAN. Distributor shall complete, as soon as practicable (but no later than ninety (90) days prior to the scheduled commencement of sales), and thereafter, annually on or before March 31, a comprehensive marketing plan for each country within the Territory. 3. PRINTED MATERIALS. a. Packaging. LipoMatrix will provide at its expense all materials in and on the Product packages. - 2 - 16 b. Risk Management Support Documents. The text of the risk management documents, including the Patient Advisory and Consent and the Supply Agreement, as of the date of this Agreement in the form attached as Exhibit B hereto, will be provided by LipoMatrix, but printing and distribution expenses will be borne by Distributor. c. Sales and Promotional Literature. Distributor will produce all sales and promotional literature, obtaining LipoMatrix's prior approval of scientific and regulatory matters contained therein. Distributor and LipoMatrix will cooperate on the development of such materials. 4. TRADE SHOWS. Distributor shall use its reasonable commercial efforts to attend major national and regional (i.e. regions in or encompassing the Territory) trade shows and educational forums where similar or competitive products are displayed and to present the Products fairly at such shows and workshops. 5. CLINICAL REFERENCE ACCOUNTS. Distributor shall endeavor to develop key clinical reference accounts with plastic surgeons who are key opinion leaders within the Territory. This includes those leaders as reasonably selected by LipoMatrix. 6. MARKETING AND SALES SUPPORT. In LipoMatrix's sole determination, LipoMatrix personnel shall make periodic visits to the Territory during the period of this Agreement, as necessary in order to monitor administration, marketing and sales related to the Products. LipoMatrix shall pay all transportation, meal, lodging, salary and related expenses for its personnel in this regard. LipoMatrix shall use commercially reasonable efforts to assist Distributor in locating and obtaining appropriate clinical expertise at Distributor's reasonable request, for purposes of supporting Distributor's marketing effort. The parties will mutually agree in advance on the amount and duration of clinical education and the allocation of costs associated with such clinical education. B. PURCHASE QUOTAS, ORGANIZATION AND FORECASTS. 1. PURCHASE QUOTAS. The purchase quota for the first Ordering Year shall be mutually agreed between the parties prior to first Commercial Sale. Such purchase quota will be eighty percent (80%) of the anticipated sales for the first Ordering Year. The purchase quota for the second Ordering Year shall equal Distributor's actual purchases (in units) in the first Ordering Year. The purchase quota for the third Ordering Year shall equal Distributor's actual purchases (in units) in the second Ordering Year. Quotas for subsequent Ordering Years shall equal the higher of actual purchases (in units) or purchase quotas in the prior Ordering Year. Distributor agrees to use reasonable commercial efforts to meet or exceed the purchase quotas as set forth in this paragraph. In the event Distributor fails to meet or exceed, on an aggregate basis, the purchase quotas for two (2) consecutive Ordering Years beginning on or after the third Ordering Year, LipoMatrix may terminate this Agreement for cause as provided in Section VI.C, provided, however, that this termination option must be exercised within sixty (60) days of the commencement of the next Ordering Year. Purchase quotas will be adjusted if LipoMatrix is unable to supply Products due to regulatory constraints or significant manufacturing delays. 2. SALES ORGANIZATION AND TRAINING. Distributor shall use reasonable commercial efforts to develop a sales organization that is knowledgeable concerning the features of the Products and the relationship of those features to the clinical benefits to potential customers within the Territory. In connection with the sale of Products, at LipoMatrix's request, Distributor - 3 - 17 shall make available an individual reasonably satisfactory to LipoMatrix ("Distributor's Trainer") for sales training of Distributor's other representatives. Training for Distributor's Trainer shall be provided, at LipoMatrix's election, either in Switzerland or in the Territory, and will occur before commencement of Commercial Sales, with training updates to be held as needed. LipoMatrix shall pay the costs of the training (including the transportation, meals, lodging, salary and related expenses of LipoMatrix employees), and Distributor shall be responsible for all transportation, meals, lodging, salary and related expenses of Distributor employees attending such training. 3. QUARTERLY SALES INFORMATION AND FORECASTS. On a quarterly basis, Distributor shall provide within ten (10) days after the end of each calendar quarter a reasonably detailed quarterly sales and promotional report to LipoMatrix. On a monthly basis, within the first ten (10) days of every month, Distributor shall provide LipoMatrix with a six (6) month (during the first Ordering Year) and fifteen (15) month (thereafter) rolling forecast. 4. SALES LAUNCH SCHEDULE. Distributor shall commence Commercial Sales of the Products in the Territory as soon as practicable after obtaining regulatory clearance. Clinical or marketing trials may commence at any time by mutual agreement of the parties and will not constitute a Commercial Sale. C. LIPOMATRIX VISITS AND MARKETING REPRESENTATIVE. Upon reasonable notice, Distributor shall permit and facilitate visits by LipoMatrix personnel to Distributor's facilities to review compliance with specific requirements of this Agreement, and to customer sites and to travel with Distributor's sales personnel for training purposes. Distributor shall permit the placement within Distributor's organization of a part-time or full-time Product specialist by LipoMatrix, at LipoMatrix's sole option and expense, for purposes of providing marketing and risk management support. Office space will be provided for such individual by Distributor. This requirement is waived as long as Distributor and its affiliates collectively own at least twenty percent (20%) of the Common Stock of LipoMatrix (on an as-converted basis) and the management of Distributor or any of its affiliates is represented on the board of directors of LipoMatrix. D. REGULATORY APPROVALS AND COMPLIANCE. LipoMatrix shall obtain and own all regulatory approvals, certificates, registrations, licenses, and permits related to the Products unless prohibited by local law. In the event that necessary approvals, certificates, registrations, licenses and permits required to sell and distribute the Products in the Territory are required by local law to be owned by, or held in the name of Distributor, Distributor agrees that upon termination of this Agreement for any reason, Distributor shall immediately take all steps necessary to promptly transfer the ownership, registration or entitlement of such registrations, certificates, licenses and permits to LipoMatrix or its designee. Distributor shall provide reasonable assistance to LipoMatrix in order to obtain any and all applicable regulatory approvals required by Governmental Agencies under the laws and/or regulations of any jurisdiction in order to market the Products within Territory, including but not necessarily limited to, meeting relevant standards and guidelines, preclinical, clinical and safety approvals required by Government Agencies. LipoMatrix shall reimburse Distributor for reasonable out-of-pocket expenses incurred by Distributor in connection with such assistance provided such expenses are approved in advance. - 4 - 18 LipoMatrix shall have the primary responsibility for manufacturing compliance and Distributor for any distribution compliance regarding any reporting or compliance matters in the Territory required of distributors by Government Agency rules and regulations, including but not limited to, recalls of the Products and reporting of adverse events involving the Products. The parties shall share information to allow each party to fulfill its compliance obligations hereunder. Each party shall promptly inform the other of any changes in regulatory or compliance status that might significantly affect the marketing of the Products in the Territory. Each party shall inform the other within two (2) working days of any actions taken by such party that could reasonably be expected to affect the regulatory or compliance status of LipoMatrix or the Products. Distributor shall make all reasonable efforts to comply with appropriate standards for review and approval of orders from its customers. E. IMPORT LICENSES. Distributor shall obtain import and reexport licenses and permits and take all other actions required in connection with the import or reexport of Products purchased hereunder. F. CUSTOMER FEEDBACK AND POST-MARKETING SURVEILLANCE. Distributor shall use its commercially reasonable efforts to provide LipoMatrix with assessments of customer requirements for Product modifications and improvements. These assessments will focus on the quality, design, functional capability and other features of the Products, with a view to maximizing the potential market for such Products within the Territory. Distributor will promptly furnish LipoMatrix with copies of any written communications from its customers with respect to the use of its Products, suggestions for modifications or improvement to the Products, reliability of Products, performance of the Products, compliance with specifications, and other pertinent information. G. REGISTRY INFORMATION. On a monthly basis, Distributor will provide to LipoMatrix a report which will provide such information defined by LipoMatrix as necessary for maintenance of a registry of implants, including but not limited to, the transponder numbers for those Products shipped to customers or otherwise disposed of, including the transponder number and the customer number of the physician, clinic or hospital to whom the Product was sold. Distributor will provide LipoMatrix with an inventory reconciliation as requested by LipoMatrix from time to time. H. INVENTORY. Distributor agrees to maintain an inventory of Products equivalent to three (3) months of forecast sales provided the Products have a stated shelf life of at least twenty-four (24) months. Distributor will maintain its inventory of Products in a clean, secure and well organized facility. In addition, such storage space will comply with environmental requirements, including temperature or other requirements, set forth on the labeling of the Products, or other reasonable requirements notified from time to time by LipoMatrix to Distributor. Distributor will maintain records of the Products to enable traceability of Products. Distributor will use an effective materials management system for tracking its inventory and shipments of Products to its customers. - 5 - 19 I. RISK MANAGEMENT PROGRAM. Distributor recognizes that LipoMatrix maintains an active program of risk management as set out in Exhibits A and B attached to this Agreement (the "Risk Management Program"). The Risk Management Program may be changed by mutual agreement. Distributor agrees to comply with the Risk Management Program and to use its best efforts to assure compliance by Distributor's customers. J. HEALTH AND SAFETY LAWS AND REGULATIONS. Distributor shall comply fully with any and all applicable health and safety laws and regulations of the Territory. K. REPRESENTATIONS. Neither Distributor nor LipoMatrix shall make any false or misleading representations to customers or others regarding LipoMatrix or the Products. Distributor and its employees and agents shall not make any representations, warranties or guarantees with respect to the specifications, features or capabilities of the Products that are not consistent with LipoMatrix's documentation accompanying the Products or LipoMatrix's literature describing the Products, including LipoMatrix's standard warranty and disclaimers. Distributor shall not make any commitments or comments to its customers about possible future Product enhancements or future Products without the written authorization of LipoMatrix. L. WARRANTY. LipoMatrix warrants that each Product sold to Distributor hereunder will (i) have any required regulatory clearance for commercial sale in the Territory, (ii) be free from defects in materials and workmanship, (iii) be designed in compliance with ISO 9001 design standards, (iv) be manufactured, packaged, and labeled in accordance with the then prevailing specifications, and (v) have a remaining shelf life at the date of shipment of twenty-one (21) months when the stated shelf life from date of manufacture is twenty-four (24) months (the "Warranty Period"). If Distributor provides notice to LipoMatrix during the Warranty Period that a Product breaches this warranty, Distributor shall, if requested by LipoMatrix, return such Product to LipoMatrix for evaluation, or if not so requested, dispose of such Product in accordance with LipoMatrix's instructions, and, if such Product does breach this warranty, LipoMatrix will, in its sole discretion, either repair or replace same, and reimburse Distributor for its reasonable return freight incurred therefor, if any, or refund the purchase price. This warranty does not cover defects or damage caused by Distributor's misuse, abuse, alterations or failure to properly maintain, handle and store any Products. M. EXTENDED WARRANTY. In addition, an extended warranty will be provided by LipoMatrix as set out in the Risk Management Program. All claims pursuant to the extended warranty shall be made in a writing (including a telecopy) stating (1) the name and address of the site at which the Product was implanted, (2) the name and telephone number of the contact person at the site, (3) the transponder number of the allegedly nonconforming Product, (4) the date the Product was delivered to the site by Distributor, and (5) a reasonably detailed description of the alleged nonconformity. The allegedly non-conforming Product must be returned to LipoMatrix for evaluation. LipoMatrix shall promptly advise Distributor of any changes in its extended warranty. N. THE WARRANTY SET FORTH IN SECTIONS III.L AND III.M ABOVE IS EXCLUSIVE AND NO OTHER WARRANTY, WHETHER WRITTEN, ORAL OR IN ANY COMMUNICATION WITH DISTRIBUTOR, IS EXPRESSED OR IMPLIED. LIPOMATRIX MAKES NO WARRANTIES OR REPRESENTATIONS AS TO PERFORMANCE OF THE PRODUCT TO DISTRIBUTOR OR TO ANY OTHER PERSONS, EXCEPT AS SET FORTH HEREIN. NOTWITHSTANDING ANYTHING IN - 6 - 20 THIS AGREEMENT TO THE CONTRARY, LIPOMATRIX RESERVES THE RIGHT TO MODIFY THE EXTENDED WARRANTY POLICY AND OBLIGATIONS SET FORTH HEREIN UPON NOTICE TO DISTRIBUTOR FROM TIME TO TIME AS TO PRODUCTS ORDERED BY DISTRIBUTOR AFTER THE DATE OF SUCH NOTICE. ALL IMPLIED WARRANTIES INCLUDING BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NON-INFRINGEMENT (EXCEPT AS SET FORTH IN SECTION VII) ARE HEREBY EXCLUDED. THE FOREGOING DISCLAIMERS SHALL NOT AFFECT LIPOMATRIX'S OBLIGATIONS AS SET FORTH IN SECTIONS VII AND VIII. IV. TERMS AND CONDITIONS OF SALE A. PRICES. Distributor and LipoMatrix shall, prior to launch in the Territory, mutually agree on list prices for Distributor's sales of Products to its customers. Prices charged by LipoMatrix to Distributor will reflect a discount of fifty-five percent (55%) from the agreed upon list price for the first Ordering Year and a discount of fifty percent (50%) thereafter. Prices to Distributor for all Products shall be F.O.B. Swiss manufacturing facility of LipoMatrix and shall exclude freight, taxes (including, without limitation, export, import and local excise, sales, use, property and other taxes, but excluding taxes imposed on LipoMatrix's net income), insurance, duties and other governmental charges levied with respect to the Products sold hereunder, all of which shall be paid by Distributor. Prices may be changed at any time during the term of this Agreement, or any extension or renewal thereof, by mutual agreement. B. RESEARCH AND DEVELOPMENT FUND. While Distributor markets the Products, Distributor shall pay to LipoMatrix an amount equal to five percent (5%) of Distributor's net sales revenue from sales of Products, such payments to be made for each month by the fifteenth day of the following month. Such payments shall commence in respect of sales for the month of April 1997. The payments, and the interest earned on them until expenditure, are intended to be expended on mutually agreed research, development, clinical and manufacturing programs for breast implant products and other products intended for use in cosmetic or reconstructive breast surgery, and if such funding is not expended, the funds shall revert to Distributor. LipoMatrix shall have full ownership of the results of such programs; provided, however, if Distributor and its affiliates beneficially own less than twenty percent (20%) of LipoMatrix, LipoMatrix will pay Distributor a mutually agreed upon royalty for sales of products incorporating the results of such programs outside the Territory and other territories where Distributor and its affiliates are selling Products. Distributor shall have the exclusive right to market in the Territory all products developed with any use of such funds and any such product shall be deemed a Product hereunder. If Distributor does not initiate commercial sales of such Product within ninety (90) days of regulatory clearance, then all rights to such product will revert to LipoMatrix. C. PAYMENT TERMS 1. LipoMatrix agrees to grant Distributor credit terms for sales. Distributor agrees to pay to LipoMatrix the full amount of all invoices net sixty (60) days from the invoice date. In the event that Distributor does not promptly pay all invoices in accordance with this Section, then the payment terms will revert to payment by irrevocable letter of credit (or equivalent satisfactory to LipoMatrix) payable against shipping documents. Accounts past due will be subject to a monthly service charge of one and one-half percent (1.5%) of unpaid sum, but in no event to exceed the maximum allowable by law. - 7 - 21 2. All payments shall be in the local currency of the Territory. 3. Distributor must give LipoMatrix written notice of any discrepancies among the purchase order, the invoice, and Products received, within thirty (30) days after receipt of Products or the invoice, whichever occurs later. 4. If Distributor fails to make payment when due, LipoMatrix may also decline to make further shipments until all above indebtedness is paid, and/or alternatively may decline to make further deliveries except for cash in advance of shipment or letter of credit acceptable to LipoMatrix. D. PRODUCT ORDERS. All orders for Products submitted hereunder shall be initiated by purchase orders sent by regular mail, hand delivery, airmail, courier mail, e-mail, or facsimile to LipoMatrix. LipoMatrix shall respond to such orders by air mail, courier mail, e-mail, or facsimile within reasonable time, not to exceed ten (10) days after receipt thereof. All purchase orders submitted by Distributor to LipoMatrix shall identify the Products ordered by Product number and quantity and the desired shipment date. E. ORDER ACCEPTANCE. All purchase orders are subject to acceptance by LipoMatrix at its Neuchatel office. LipoMatrix shall have no obligation or liability to Distributor with respect to purchase orders which are not accepted; however LipoMatrix shall not unreasonably reject any purchase order. LipoMatrix shall use reasonable efforts to deliver Products covered by accepted purchase orders at the times specified in the corresponding quotation or written acceptance of Distributor's purchase order. Any orders in the ordinary course of business, consistent with normal ordering practices, that are rejected by LipoMatrix shall be deducted from the purchase quota for such Ordering Year as set forth in Section III.B.1. Distributor's purchase orders hereunder shall be governed by the terms and conditions of this Agreement. Nothing contained in any purchase order shall in any way modify or add any terms or conditions of sale. F. CANCELLATION/RESCHEDULING. Distributor may, at its option and subject to the provisions of this Section, either reschedule delivery of any Products or cancel any order or portion thereof, upon written notice to LipoMatrix. A "reschedule" is defined as changing all or any portion of those Products scheduled for shipment on any ship date by moving the ship date later in time. Distributor shall have a right to cancel or reschedule any order for later shipment provided such request is received by LipoMatrix at least thirty (30) days in advance of the original ship date. Rescheduling or cancellation requests made Distributor within thirty (30) days of the original ship date are subject to LipoMatrix's approval. G. COUNTRY SHIPMENTS. Products sold to Distributor in the Territory will not be transferred by Distributor outside the Territory without the written notification to LipoMatrix and an appropriate billing adjustment to reflect any difference in prices between countries. Such transfers out of the Territory will only be permitted to countries in a territory covered by a distributor that is an affiliated company of Distributor. - 8 - 22 V. ACQUISITION AND USE OF DEMONSTRATION PRODUCT AND TRANSPONDER READERS A. Products will be provided without charge to Distributor for Distributor's exclusive use in selling and marketing of Products within the Territory, in such limited quantities as are determined by mutual agreement. B. Transponder readers will be loaned to Distributor for use in tracking inventory and for demonstration use with customers, in such limited quantities as are determined by mutual agreement. VI. TERM AND TERMINATION A. TERM. This Agreement shall commence upon the Effective Date and shall expire ten (10) years after first Commercial Sale, unless renewed or terminated as provided below. B. RENEWAL. Unless terminated in the manner provided below, the term of this Agreement shall be extended automatically for successive one (1) year periods, unless either party elects not to renew by written notice to the other party at least ninety (90) days prior to the conclusion of the initial term hereof or any such renewal period, as the case may be. Either party may elect not to renew this Agreement for any or no reason. C. TERMINATION FOR CAUSE. Either party shall have the right to terminate this Agreement at any time effective upon written notice, in the event of (1) breach by the other party of any of the terms and conditions hereof and failure to correct the breach within the thirty (30) days of written notice thereof; (2) the other party becoming generally unable to obtain necessary licenses; or (3) Force Majeure which suspends or delays performance of this Agreement for more than ninety (90) days from the beginning of such event. It is recognized by the parties that the Risk Management Program (see Section III.A.3.b) is an essential element of this Agreement. Failure by either party to adhere to its provisions or to use best efforts to implement it, may be used as grounds for termination of this Agreement for cause under this Section. In the event of a substantial change in ownership of Distributor, or the continued failure by Distributor to meet the purchase quotas as specified in Section III.B.1, LipoMatrix shall have the right to terminate this Agreement upon thirty (30) days written notice. In the event that LipoMatrix is acquired by a third party, LipoMatrix shall have the right to terminate this Agreement upon thirty (30) days written notice. Either party shall have the right to terminate this Agreement, by written notice taking immediate effect, if the other party becomes insolvent, or if there are instituted by or against the other party proceedings in bankruptcy or under insolvency similar laws or for reorganization, receivership or dissolution. Any such termination shall not relieve either party from any payment obligation which accrued prior to such termination. D. CANCELLATION AND REPURCHASE OPTIONS. Upon expiration or termination of this Agreement, any or all unfilled orders shall be cancelled. LipoMatrix reserves the right at its sole option to repurchase from Distributor any or all Products unsold by Distributor, at a mutually - 9 - 23 agreed upon price, which in any case shall not exceed the landed price Distributor paid LipoMatrix for Products to be repurchased. In the event LipoMatrix fails to repurchase such Products, Distributor shall have the right to continue to sell its existing inventory of such Products for a reasonable period following such expiration or termination. E. RETURN OF MATERIALS. Upon expiration or termination of this Agreement, Distributor shall return to LipoMatrix, at LipoMatrix's expense, all sales promotional materials and aids and any tools or equipment loaned or furnished to Distributor pursuant to this Agreement. F. EFFECT OF TERMINATION. In the event of termination by either party in accordance with any of the provisions this Agreement, or expiration of this Agreement, neither party shall be liable to the other, because of such termination or expiration, for compensation, reimbursement or damages on account of the loss of prospective profits or anticipated sales or on account of expenditures, inventory, investments, leases, or commitments in connection with the business or goodwill of LipoMatrix or Distributor, occurring as a result of such termination or expiration, or incurred in anticipation of renewal. VII. PATENT INDEMNITY LipoMatrix will defend any suit brought against Distributor based on a claim that the Product furnished under this Agreement infringes any patent or trademark, and will pay all damages and costs that a court awards against Distributor as a result of such claim and any payments made in settlement of such claim, provided that Distributor gives LipoMatrix: (a) prompt written notice of such suit; (b) full control over the defense or settlement thereof; and (c) all reasonable information and assistance (at LipoMatrix's expense excluding time spent by employees or consultants of the Distributor) to handle the defense and settlement thereof. If the Products, or any part thereof, are, or in the opinion of LipoMatrix may become, the subject of any claim, suit or proceeding for infringement of any patent or trademark, or in the event of any adjudication that the Products, or any part thereof, infringe any patent or trademark, or if the sale or use of Products, or any part thereof, is enjoined, LipoMatrix may, at its option and expense: (a) procure for Distributor and its customers the right under such patent or trademark to use or sell as appropriate the Products or such part thereof; or (b) replace the Products, or part thereof, with other suitable Products or parts; or (c) suitably modify the Products or part thereof, or (d) if none of the foregoing are commercially practicable, refund the amounts paid therefore by Distributor, and recover possession of such Products. LipoMatrix shall not be liable for any costs or expenses incurred without its prior written authorization. Notwithstanding the provisions of the preceding paragraphs, LipoMatrix shall not be liable to Distributor or its customers for: (a) infringement of patent claims covering the usage of LipoMatrix Products in a manner not intended under this Agreement; (b) any trademark infringements involving any marking or branding applied by LipoMatrix or involving any marking or branding applied at the request of Distributor, except if such marking or branding is owned by LipoMatrix; (c) the modification of Products, or any part thereof, unless such modification was made by LipoMatrix; or (d) the combination, operation or use of the Product with other products not furnished by LipoMatrix to the extent such claim would not have arisen had such combination, operation or use not occurred. THE FOREGOING PROVISIONS OF THIS SECTION VII STATE THE ENTIRE LIABILITY AND OBLIGATIONS OF LIPOMATRIX, AND THE EXCLUSIVE - 10 - 24 REMEDIES OF DISTRIBUTOR AND ITS CUSTOMERS WITH RESPECT TO ANY ALLEGED INFRINGEMENT OF PATENTS, COPYRIGHTS, TRADEMARKS, OR OTHER INTELLECTUAL PROPERTY RIGHTS, BY THE PRODUCTS OR ANY PART THEREOF. VIII. PRODUCT LIABILITY A. INDEMNITY BY DISTRIBUTOR. Distributor shall indemnify and hold LipoMatrix harmless from and against any and all liability, damage, loss, cost, expense (including reasonable attorney's fees), regulatory penalties and enforcement actions resulting from any claims made or suits brought against LipoMatrix, its employees, directors and customers which arise or result solely from Distributor's marketing, distribution, handling and shipping of the LipoMatrix Products, or from Distributor's negligence or willful misconduct. LipoMatrix shall promptly notify Distributor of any such claim or suit and shall permit Distributor at Distributor's cost and expense, to handle and control such claim or suit. B. INDEMNITY BY LIPOMATRIX. LipoMatrix shall indemnify and hold Distributor harmless from and against any and all liability, damage, loss, cost or expense (including reasonable attorney's fees) resulting from any claims made or suits brought against Distributor, its employees, directors and customers which arise or result solely from LipoMatrix's design, handling and shipping of the LipoMatrix Products, or failure to manufacture the LipoMatrix Products in accordance with agreed upon specifications, FDA Good Manufacturing Practices or other applicable standards for medical device manufacturers, or from negligence or willful misconduct. Distributor shall promptly notify LipoMatrix of any such claim or suit and shall permit LipoMatrix at LipoMatrix's cost and expense, to handle and control such claim or suit. C. APPORTIONMENT OF DAMAGES. In the event that any liability, damage, loss, cost or expense (including reasonable attorney's fees) as aforesaid cannot be established (with respect to final judgments of a court of competent jurisdiction from which no appeal is or can be taken as well as settlements made prior to, during or following termination of litigation to which the parties have expressly agreed in writing) to have resulted solely from the actions or failures to act of LipoMatrix or Distributor or their affiliates, responsibility for payment of such liability, damage, loss, cost or expense (including reasonable attorney's fees) will be apportioned between LipoMatrix and Distributor according to the contribution of either party to the damage; and if such allocation is not mutually agreed, then it will be determined by mandatory binding arbitration. D. PRODUCT LIABILITY INSURANCE. LipoMatrix shall use its reasonable commercial efforts to secure product liability insurance in the amount of five million dollars ($5,000,000), to the extent this is available on commercially reasonable terms. LipoMatrix shall have Distributor named as an additional insured on its product liability insurance policy. If LipoMatrix is unable to secure or maintain such insurance, Distributor may terminate this Agreement. The parties agree to review the possibility of increasing the amount of such insurance if increases in sales so warrant. - 11 - 25 IX. LIMITATION OF LIABILITY IN NO EVENT, WHETHER THE CAUSE OF ACTION BE BASED IN CONTRACT OR TORT (INCLUDING NEGLIGENCE) OR ANY OTHER LEGAL OR EQUITABLE THEORY SHALL EITHER PARTY BE LIABLE FOR INCIDENTAL, CONSEQUENTIAL, INDIRECT, SPECIAL OR PUNITIVE DAMAGE OF ANY KIND, OR FOR LOSS OF REVENUE, LOSS OF BUSINESS OR OTHER FINANCIAL LOSS ARISING OUT OF OR IN CONNECTION WITH THE SALE, USE, PERFORMANCE, FAILURE OR INTERRUPTIONS OF ITS PRODUCTS. NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, LIPOMATRIX'S MAXIMUM LIABILITY FOR DAMAGES HEREUNDER SHALL NOT EXCEED THE PURCHASE PRICE OF THE PRODUCTS PURCHASED DURING THE TERM OF THIS AGREEMENT. THE FOREGOING LIMITATIONS SHALL NOT AFFECT EITHER PARTY'S DUTY TO INDEMNIFY THE OTHER PARTY FOR THIRD-PARTY SUITS FOR SUCH DAMAGES, AS SET FORTH IN SECTIONS VII AND VIII. THE DISCLAIMER OF LIABILITY FOR DAMAGES WILL NOT BE AFFECTED IF ANY REMEDY PROVIDED HEREUNDER SHALL FAIL OF ITS ESSENTIAL PURPOSE. DISTRIBUTOR HAS ACCEPTED THE DISCLAIMER OF LIABILITY FOR DAMAGES AS PART OF A BARGAIN TO LOWER THE PRICE OF THE PRODUCTS AND UNDERSTANDS THAT THE PRICE OF THE PRODUCTS WOULD BE HIGHER IF LIPOMATRIX WERE REQUIRED TO BEAR ADDITIONAL LIABILITY FOR DAMAGES. X. NO RIGHT TO MANUFACTURE OR COPY The Products are offered for sale and are sold by LipoMatrix subject in every case to the condition that such sale does not convey or license to Distributor, expressly or by implication, the right to manufacture, duplicate or otherwise copy or reproduce any of the Products. Distributor shall take appropriate steps with customers, as mutually agreed, to inform them of, and both parties shall, as mutually agreed, assist each other in assuring compliance with, the restrictions contained in this Section. XI. INTELLECTUAL PROPERTY RIGHTS A. SOLE PROPERTY OF LIPOMATRIX. Distributor agrees that Intellectual Property Rights are and shall remain sole property of LipoMatrix and that LipoMatrix owns all right, title and interest in the product lines which include the Products now or hereafter subject to this Agreement. The use by Distributor of any Intellectual Property Rights, including, but not limited to any patent, invention, trademark, trade name, trade secret or copyrighted material, is authorized only for the purposes herein set forth. Upon termination of this Agreement for any reason, authorization shall cease. Distributor agrees that the Products contain a device identification system (including software) which is proprietary to LipoMatrix. LipoMatrix at all times retains ownership of and title to the device identification system supplied with the Product, and to the trade secrets embodied in such technology. Subject to Distributor's acceptance of the obligations contained in this Section, and to the fulfillment of these obligations, LipoMatrix grants Distributor a non-exclusive license to use - 12 - 26 the device identification system included with the Products solely in the form and on the medium in which program is delivered for the purposes of operating the Product in accordance with the instructions set forth in the Instructions for Use supplied with the Product, and for no other purposes whatsoever. Distributor may not decompile, reverse engineer or reverse assemble such technology, nor may it make a copy of such program or apply any techniques to derive the trade secrets embodied therein. B. USE OF LIPOMATRIX NAME AND TRADEMARKS. During the term of this Agreement, Distributor shall have the right to indicate to the public that Distributor is an authorized distributor of LipoMatrix's Products and to advertise within the Territory such Products under the LipoMatrix Trademarks. Distributor shall not alter or remove any LipoMatrix Trademark applied to the Products at the factory. At no time during or after the term of this Agreement shall Distributor challenge or assist others to challenge the LipoMatrix Trademarks or registration thereof or attempt to register any trademarks, marks or tradenames confusingly similar to those of LipoMatrix. C. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. Distributor and LipoMatrix acknowledge that by reason of their relationship hereunder they will have access to certain information and materials concerning each other's business, plans, customers and products (including Trade Secrets and Technical Data provided to Distributor) which are confidential and of substantial value to Distributor and LipoMatrix, which value would be impaired if such information were disclosed to third parties. Each party agrees that it shall not use in any way for its own account or the account of any third party, nor disclose to any third party, any such confidential information which is revealed to it by the other party. The receiving party shall take every reasonable precaution to protect the confidentiality of such information, which in no event shall be less than the efforts exercised by such party with respect to its own confidential business information. Distributor and LipoMatrix shall advise each other in the event that either party considers particular information or materials to be confidential. Distributor shall not publish any technical description of the Products beyond the description published by LipoMatrix. In the event of expiration or earlier termination of this Agreement, there shall be no use or disclosure by Distributor or LipoMatrix of any confidential information, and Distributor shall not manufacture, or have manufactured, devices, components or assemblies utilizing any of LipoMatrix's Intellectual Property Rights. XII. GENERAL A. COUNTERPARTS AND GOVERNING LAW. This Agreement may be executed in counterparts. This Agreement shall be construed in accordance with, and all the rights, powers and liabilities of the parties hereunder shall be governed by, the internal laws of the State of California, without reference to choice of law principles thereof. B. COMPLETE AGREEMENT. This Agreement is intended as the complete, final and exclusive statement of the terms of agreement between the parties and supersedes any and all agreements between them relating to the subject matter hereof. No modification, change or amendment to this Agreement, nor any waiver of any rights in respect hereto, shall be effective unless in writing and signed by the party to be charged, unless explicitly permitted by the terms of this contract. The waiver of breach or default hereunder shall not constitute the waiver of subsequent breach or default. - 13 - 27 C. FORCE MAJEURE. Notwithstanding anything in this Agreement to the contrary, other than the obligation to pay money, the obligations of either party under this Agreement, including purchase quotas, shall be excused during any continuing event which is beyond the reasonable control of such party, including without limitation, strike, fire, war, rebellion, natural disasters/Acts of God, embargo, governmental order or restriction, or inability for any other reason to supply or deliver Products due to unnatural or commercially impractical circumstances. D. NOTICE. Any notice or report required or permitted under this Agreement shall be deemed given if delivered personally or if sent by either party to the other by registered or certified mail, postage prepaid, or internationally recognized courier, for overnight delivery, addressed to the other party at its address first set forth above or at such other address to which such party shall give notice hereunder. If by mail, delivery shall effective five (5) days after deposit with postal authorities. E. ASSIGNMENT. Distributor shall not assign this Agreement nor any rights hereunder without the prior written consent of LipoMatrix, granted in LipoMatrix's sole discretion. Subject to the foregoing, this Agreement shall bind and inure to the benefit of the parties and their respective successors and assigns. LipoMatrix shall be entitled to assign its interest in this Agreement in connection with a merger or other business combination in which LipoMatrix is not the surviving entity. F. SEVERABILITY. In the event any provision of this Agreement is found to be invalid, illegal or unenforceable, the validity, legality and enforceability of any of the remaining provisions shall not in any way be affected or impaired thereby. G. SURVIVAL. The obligations and duties listed in the Sections titled "Warranty", "Patent Indemnity", "Limitation of Liability", "No Right to Manufacture or Copy", "Product Liability" and "Intellectual Property Rights" shall survive any termination or expiration of this Agreement and shall remain in effect for a period of ten (10) years thereafter. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the day and year first above written. LIPOMATRIX, INCORPORATED COLLAGEN CORPORATION ("LIPOMATRIX") ("DISTRIBUTOR") By:___________________________________ By:________________________________ (signature) (signature) Printed Name: Terry R. Knapp, M.D. Printed Name: Howard Palefsky -------------------- --------------- Title: President & CEO Title: Chief Executive Officer --------------- ----------------------- - 14 - 28 EXHIBIT A RISK MANAGEMENT PROGRAM Confidential treatment requested for this document. 29 EXHIBIT B RISK MANAGEMENT SUPPORT DOCUMENTS Confidential treatment requested for all documents included in this exhibit. 30 EXHIBIT B STOCKHOLDER OPTION AGREEMENT 31 STOCKHOLDER OPTION AGREEMENT THIS STOCKHOLDER OPTION AGREEMENT is entered into this ____ day of _______ 1995 among the undersigned stockholders (the "Stockholders") of LipoMatrix, Inc., a British Virgin Islands corporation ("LipoMatrix") and Collagen Corporation, a Delaware corporation ("Collagen"). WHEREAS, Collagen and LipoMatrix have entered into a License, Supply and Option Agreement dated _________, 1995 (the "Master Agreement"). The Master Agreement provides that, in certain circumstances, LipoMatrix may offer to purchase all outstanding shares or warrants of LipoMatrix held by Collagen ("LipoMatrix Offer"). The Board of Directors of Collagen shall be obligated either to accept such offer or to agree to purchase all shares or warrants of LipoMatrix at the same price ("Collagen Purchase Option"). If Collagen elects to purchase LipoMatrix's shares or warrants, LipoMatrix shall be obligated to sell. WHEREAS, All present and future holders of more than 5% of the outstanding voting securities of LipoMatrix shall be obligated to agree to the above Collagen Purchase Option and to the ability of the LipoMatrix Board of Directors to trigger the LipoMatrix Offer on their behalf. WHEREAS, the Stockholders own those number of shares of Common Stock, Series A Preferred Stock and Series B Preferred Stock of LipoMatrix ("Shares"), listed opposite their names on Exhibit A attached hereto; and WHEREAS, as a condition to its willingness to enter into the Master Agreement, Collagen has requested that the Stockholders agree, and the Stockholders have agreed, severally and not jointly, to grant Collagen an irrevocable option as set forth herein to purchase up to an aggregate amount of approximately __________ Shares (subject to adjustment as provided herein); NOW, THEREFORE, to induce Collagen to enter into, and in consideration of it entering into, the Master Agreement, and in consideration of the premises and the representations, warranties and agreements herein contained, the parties agree as follows: 1. Stockholder Option. (a) Grant of Stockholder Option. Each Stockholder, severally and not jointly, hereby grants to Collagen an irrevocable option (the "Stockholder Option", and collectively the "Stockholder Options") to purchase the number of outstanding shares (as adjusted for stock splits, stock dividends, or combinations of shares) of Common Stock, Series A Preferred Stock and Series B Preferred Stock set forth next to such Stockholder's name on Exhibit A attached hereto (the "Optioned Shares") in the event Collagen has exercised the Collagen Purchase Option, all in accordance with Section 6 of the Master Agreement. The parties acknowledge that Collagen may exercise the Collagen Purchase Option only if LipoMatrix first makes the LipoMatrix Offer to purchase Collagen's interest in LipoMatrix's equity. (b) Exercise of Option. Provided that Collagen shall have exercised the Collagen Purchase Option, Collagen may exercise the Stockholder Options in whole, and not in - 1 - 32 part, at any time (provided that all the Stockholder Options must be exercised). In the event that Collagen wishes to exercise the Stockholder Option, Collagen shall give written notice (the date of such notice being herein called the "Notice Date") to the Stockholder specifying the date it will purchase pursuant to such exercise (not later than ten business days and not earlier than five business days from the Notice Date) for the closing of such purchase, which closing shall occur in Palo Alto, California or such other place as the parties may agree. In the event that Collagen exercises the Stockholder Option, Collagen will promptly offer to purchase all other outstanding shares, and rights to acquire shares, of LipoMatrix at the same price and terms as those set forth in the Stockholder Option. (c) Payment of Purchase Price and Delivery of Certificates for Optioned Shares. At any closing hereunder, (1) against delivery of the certificates and warrants set forth in (2) below, Collagen will make payment to each Stockholder either in next day funds by certified or official bank check payable to the order of such Stockholder, or with a certificate for registered (with the Securities and Exchange Commission under a Registration Statement) or freely tradable Common Stock of Collagen, and (2) against such payment, such Stockholder will deliver to Collagen his certificate or certificates representing the number of Optioned Shares so purchased, duly endorsed for transfer to Collagen and instruct LipoMatrix and its transfer agent to deliver to Collagen a certificate or certificates representing the Optioned Shares, registered in the name of Collagen, with applicable legends regarding "restricted securities" under the Securities Act of 1933 and the Rules and Regulations thereunder ("Securities Act"). 2. Proxy. (a) Revocation of Prior Proxies. Each Stockholder hereby revokes any and all previous proxies granted with respect to such Stockholder's Optioned Shares. (b) Grant of Proxy. By entering into this Agreement, each Stockholder hereby grants a proxy with respect to such Stockholder's Optioned Shares appointing Collagen as such Stockholder's attorney-in-fact and proxy, with full power of substitution, for and in such Stockholder's name, to vote, express consent or dissent, or otherwise to utilize such voting power in favor of the acquisition of LipoMatrix by Collagen by merger pursuant to Section 6 of the Master Agreement upon exercise of the Collagen Purchase Option ("Merger") (whether the form of the consideration is cash or stock). Collagen agrees to execute the proxy granted by each Stockholder by voting in favor of the Merger pursuant to the Master Agreement. The proxy granted by each Stockholder pursuant to this Section 2 is irrevocable and is granted in consideration of Collagen's entering into this Agreement and the Master Agreement. 3. Representations and Warranties of the Stockholders. Each of the Stockholders hereby represents and warrants to Collagen, severally and not jointly, and only with respect to such Stockholder's Optioned Shares, as follows: (a) Ownership. Such Stockholder is the sole, true, lawful and beneficial owner of the number of Optioned Shares set forth opposite his name on Exhibit A attached hereto with no restrictions on such Stockholder's voting rights or disposition pertaining thereto, except for any - 2 - 33 vesting restrictions or pursuant to this Agreement. None of such Stockholder's Optioned Shares is subject to any voting trust or other agreement or arrangement with respect to the voting of such Shares. (b) Good and Marketable Title. Upon delivery of the consideration for the Optioned Shares, Collagen will receive good and marketable title to the Optioned Shares, free and clear of all liens, encumbrances, equities, security interests, restrictions on transfer and claims whatsoever, except as the transfer of the Optioned Shares may be restricted by the Securities Act or subject to vesting. (c) Authority. Stockholder has all requisite power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation by the Stockholder of the transactions contemplated hereby have been or will be duly authorized by all necessary action on the part of the Stockholder. This Agreement has been duly executed and delivered by each Stockholder and is valid, binding and enforceable against such Stockholder in accordance with its terms, except as enforcement hereof may be limited by applicable bankruptcy, insolvency, or other similar laws affecting the enforcement of creditors' rights generally and except that the availability of equitable remedies, including specific performance, is subject to the discretion of the court before which any proceeding therefor may be brought. 4. Representations and Warranties of Collagen. Collagen hereby represents and warrants to LipoMatrix and the Stockholders as follows: (a) Authority. Collagen has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation by Collagen of the transactions contemplated hereby have been or will be duly authorized by all necessary corporate action on the part of Collagen. This Agreement has been duly executed and delivered by Collagen and constitutes a valid and binding obligation of Collagen enforceable in accordance with its terms except as enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally and except that the availability of equitable remedies, including specific performance, is subject to the discretion of the court before which any proceeding therefor may be brought. (b) Securities Act. Any Optioned Shares purchased by Collagen will be acquired for its own account and not with a view to any public distribution thereof and Collagen will not transfer any Optioned Shares so acquired except in compliance with the Securities Act. 5. Term. Each Stockholder Option and proxy shall expire on the earliest of (i) the termination of the Collagen Purchase Option under Section 6.4 of the Master Agreement, (ii) the termination of the Master Agreement, or (iii) the termination of this Agreement. 6. Assignment. Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned by any of the parties without the prior written consent of the other parties, except that Collagen may assign, in its sole discretion, any or all of its rights, interests and obligations under this Agreement to any direct or indirect wholly-owned subsidiary. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by, the parties and their respective successors and assigns. - 3 - 34 7. General Provisions. (a) Applicable Law. This Agreement shall be construed in accordance with, and all the rights, powers and liabilities of the parties hereunder shall be governed by, the laws of the State of California. (b) Arbitration. The parties shall attempt to settle all disputes arising in connection with this Agreement through good faith consultation. In the event no agreement can be reached on such dispute within sixty days after notification in writing by either party to the other concerning such dispute, either party may submit such dispute to arbitration by three arbitrators under the Rules of the American Arbitration Association. One arbitrator shall be selected by Collagen, one arbitrator shall be selected by LipoMatrix and the third arbitrator shall be selected by the first two arbitrators. The place of arbitration shall be San Francisco, California. The arbitrator's decision shall be final conclusive, and binding and judgment and any arbitration award or decision may be entered in any court of competent jurisdiction. Expenses and fees of such arbitration shall be borne by the non-prevailing party in such arbitration (see Section 7(f) below). (c) Entire Agreement. This Agreement sets forth the entire Agreement and understanding of the parties relating to its subject matter and merges all prior discussions and agreements between them, including without limitation any non-disclosure or confidentiality agreement prior to the date hereof. No modification or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing signed by both parties. (d) Severability. If any provision of this Agreement is found invalid or unenforceable, that provision will be enforced to the maximum extent permissible under applicable law, and the remaining provisions of this Agreement will stay in force. In addition, the parties agree to negotiate in good faith a provision to replace the provision found invalid or unenforceable that will have, to the extent possible, the same economic effect. (e) Notices. All notices required or to be given pursuant to this Agreement shall be in writing, shall be effective upon receipt and shall be delivered in person or by first class mail, postage prepaid, and if to Collagen, to the following address, and if to a Stockholder, to such Stockholder's address as provided in LipoMatrix's records. Collagen Corporation 1850 Embarcadero Road Palo Alto, California, U.S.A. 94303 Attention: President (f) Attorney's Fees. If a dispute arises pursuant to this Agreement, the prevailing party shall be entitled to receive its attorney's fees and costs in connection with such dispute, as determined by the arbitrator or court. (g) Force Majeure. Each of the parties shall be excused from the performance of its obligations hereunder in the event such performance is prevented by force majeure, and such excuse shall continue so long as the condition constituting such force majeure continues plus thirty days after the termination of such condition. For the purposes of this Agreement, force majeure is - 4 - 35 defined to include causes beyond the control of LipoMatrix or Collagen, including without limitation acts of God, acts, regulations or laws of any government, war, civil commotion, destruction of production facilities or materials by fire, earthquake or storm, labor disturbances, epidemic and failure of public utilities or common carriers. (h) Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. (i) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. (j) Specific Performance. Each of the parties agrees that the others shall have the right, in addition to any other rights which it may have, to specific performance and equitable injunctive relief if any party shall fail or threaten to fail to perform any of its obligations under this Agreement. (k) Waiver of Conflict. EACH PARTY TO THIS AGREEMENT THAT HAS BEEN OR CONTINUES TO BE REPRESENTED BY VENTURE LAW GROUP ("VLG") HEREBY ACKNOWLEDGES THAT RULE 3-310 OF THE RULES OF PROFESSIONAL CONDUCT PROMULGATED BY THE STATE BAR OF CALIFORNIA REQUIRES AN ATTORNEY TO AVOID REPRESENTATIONS IN WHICH THE ATTORNEY HAS OR HAD A RELATIONSHIP WITH ANOTHER PARTY INTERESTED IN THE REPRESENTATION WITHOUT THE INFORMED WRITTEN CONSENT OF ALL PARTIES AFFECTED. BY EXECUTING THIS AGREEMENT, EACH SUCH PARTY GIVES HIS OR ITS INFORMED WRITTEN CONSENT TO THE REPRESENTATION OF LIPOMATRIX BY VLG IN CONNECTION WITH THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY. - 5 - 36 IN WITNESS WHEREOF, Collagen and Stockholders have caused this Agreement to be signed by their respective officers thereunto duly authorized, all as of the date first written above. COLLAGEN CORPORATION By:_________________________________ Title:______________________________ STOCKHOLDERS ____________________________________ (Print or Type Name) ____________________________________ (Signature) ____________________________________ (Title) - 6 - 37 CONSENT OF SPOUSE Each of the undersigned, being the spouse of the above-named Stockholder, does hereby acknowledge that she has read and is familiar with the provisions of the above Agreement, and she hereby agrees thereto and joins therein to the extent, if any, that her agreement and joinder may be necessary. STOCKHOLDERS: SPOUSE: ____________________________________ ____________________________________ (Print or Type Name) (Print or Type Name) ____________________________________ ____________________________________ (Signature) (Signature) ____________________________________ ____________________________________ (Title) (Title) 38 EXHIBIT A Stockholder Optioned Shares ----------- ---------------
EX-10.72 6 DISTRIBUTOR AGREEMENT LIPMATRIX & COLLAGEN 1 EXHIBIT 10.72 LipoMatrix Contract Number LMI 046 DISTRIBUTOR AGREEMENT BETWEEN LIPOMATRIX, INCORPORATED AND COLLAGEN CORPORATION Confidential treatment is requested for a portion of this document. 2 LipoMatrix Contract Number LMI 046 TABLE OF CONTENTS
PAGE ---- I. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. APPOINTMENT AS EXCLUSIVE DISTRIBUTOR . . . . . . . . . . . . . . . . . . . . . . . . . 2 III. SPECIFIC RESPONSIBILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 IV. TERMS AND CONDITIONS OF SALE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 V. ACQUISITION AND USE OF DEMONSTRATION PRODUCT AND TRANSPONDER READERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 VI. TERM AND TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 VII. PATENT INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 VIII. PRODUCT LIABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 IX. LIMITATION OF LIABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 X. NO RIGHT TO MANUFACTURE OR COPY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 XI. INTELLECTUAL PROPERTY RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 XII. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
EXHIBITS Exhibit A Risk Management Program* Exhibit B Risk Management Support Documents*
* Confidential treatment requested for this exhibit. 3 LipoMatrix Contract Number LMI 046 DISTRIBUTOR AGREEMENT This Distributor Agreement (the "Agreement") is entered into as of March 24, 1995, (the "Effective Date") between LIPOMATRIX, INCORPORATED ("LIPOMATRIX"), a corporation organized under the laws of the British Virgin Islands with an office located at Puits Godet 24, CH-2000 Neuchatel, Switzerland and COLLAGEN CORPORATION ("DISTRIBUTOR"), a Delaware corporation with an office located at 2500 Faber Place, Palo Alto, CA 94303. IN CONSIDERATION OF THE MUTUAL PROMISES HEREIN CONTAINED, THE PARTIES AGREE AS FOLLOWS: I. DEFINITIONS A. "PRODUCTS" shall mean LipoMatrix's present and future (subject to Section II.A) breast implant products and other products intended for use in cosmetic or reconstructive breast surgery. Products may be changed, abandoned or added by LipoMatrix, at its sole discretion, after reasonable prior written notice (which shall not be less than ninety (90) days) is given to Distributor, or in any other manner necessary in order to comply with applicable laws. LipoMatrix shall be under no obligation to continue the production of any Product, except as provided herein. B. "TERRITORY" shall mean the United States of America. C. "TECHNICAL DATA" shall mean all information belonging to LipoMatrix in written, graphic or tangible form relating to design, programming, operation or service of the Products, including all information that exists as of the Effective Date of this Agreement, or is developed by LipoMatrix during the term hereof. D. "INTELLECTUAL PROPERTY RIGHTS" shall mean all of LipoMatrix's worldwide patents, trademarks, trade names, inventions, copyrights, regulatory approvals, know-how, trade secrets, and all other intellectual property rights, in existence as of the Effective Date of this Agreement or hereafter developed or acquired by LipoMatrix, relating to the design, manufacture, or marketing of the Products. E. "TRADE SECRETS" shall mean any formula, pattern, device, or compilation of information which is used in LipoMatrix's business and which provides competitive advantage to LipoMatrix and which is not known or used by LipoMatrix's competitors. This term includes, but is not limited to, formulas, compounds, manufacturing processes, methods for treating or preserving materials, patterns for the design or operation of devices, materials filed with governmental agencies in connection with regulatory approval of LipoMatrix's products, and information relating to marketing of LipoMatrix products and services. F. "LIPOMATRIX TRADEMARKS" shall mean those trademarks, trade names, service marks, slogans, designs, distinct advertising, labels, logos and other trade-identifying symbols as are or have been developed and used by LipoMatrix and/or any of its subsidiaries or affiliate companies anywhere in the world. G. "GOVERNMENT AGENCY" shall include all local, national and supranational bodies with the legal authority to establish rules, regulations, standards and guidelines, (or to issue certificates of compliance with these), covering the design, manufacturing and marketing of the 4 Products in the Territory. This will include without limitation the United States Food and Drug Administration. H. COMMERCIAL SALE. The sale of a Product by Distributor, other than for clinical use required to obtain governmental approvals to market such Product. I. ORDERING YEAR. The twelve-month period commencing on the first Commercial Sale and each subsequent twelve-month period commencing on the anniversary of such date. II. APPOINTMENT AS EXCLUSIVE DISTRIBUTOR A. Subject to the terms and conditions set forth herein LipoMatrix hereby appoints Distributor, and Distributor hereby accepts such appointment, as LipoMatrix's exclusive distributor for the Products in the Territory. As a result, LipoMatrix will not sell the Products in the Territory, other than through Distributor. The mechanism for sales of Products for clinical trials in the Territory shall be determined by mutual agreement. Any future Product developed by LipoMatrix shall be deemed a Product hereunder. If Distributor does not initiate commercial sales of such future Product within ninety (90) days of regulatory clearance, then all rights to such product will revert to LipoMatrix. B. Distributor shall not represent or sell competitive products in the Territory which, in LipoMatrix's opinion, are likely to conflict with Distributor's obligation to use its reasonable commercial efforts to represent and sell Products in the Territory. C. Distributor shall not, directly or indirectly, solicit sales of the Products outside the Territory. Distributor shall forward to LipoMatrix all unsolicited inquiries relating to the Products or potential customers outside of both the Territory and the territory, if any, covered by affiliates of Distributor that are authorized to distribute Products. D. The relationship of LipoMatrix and Distributor established by this Agreement is that of independent contractors, and nothing contained in this Agreement shall be construed to give either party the power to direct or control the day-to-day activities of the other or allow one party to create or assume any obligation on behalf of the other for any purpose whatsoever. III. SPECIFIC RESPONSIBILITIES A. MARKETING. 1. MARKETING EFFORTS. During the term of the Agreement, Distributor shall use its reasonable commercial efforts to develop and exploit the market and to sell the Products throughout the Territory. 2. MARKETING PLAN. Distributor shall complete, as soon as practicable (but no later than ninety (90) days prior to the scheduled commencement of sales), and thereafter, annually on or before March 31, a comprehensive marketing plan for each country within the Territory. 3. PRINTED MATERIALS. a. Packaging. LipoMatrix will provide at its expense all materials in and on the Product packages. - 2 - 5 b. Risk Management Support Documents. The text of the risk management documents, including the Patient Advisory and Consent and the Supply Agreement, as of the date of this Agreement in the form attached as Exhibit B hereto, will be provided by LipoMatrix, but printing and distribution expenses will be borne by Distributor. c. Sales and Promotional Literature. Distributor will produce all sales and promotional literature, obtaining LipoMatrix's prior approval of scientific and regulatory matters contained therein. Distributor and LipoMatrix will cooperate on the development of such materials. 4. TRADE SHOWS. Distributor shall use its reasonable commercial efforts to attend major national and regional (i.e. regions in or encompassing the Territory) trade shows and educational forums where similar or competitive products are displayed and to present the Products fairly at such shows and workshops. 5. CLINICAL REFERENCE ACCOUNTS. Distributor shall endeavor to develop key clinical reference accounts with plastic surgeons who are key opinion leaders within the Territory. This includes those leaders as reasonably selected by LipoMatrix. 6. MARKETING AND SALES SUPPORT. In LipoMatrix's sole determination, LipoMatrix personnel shall make periodic visits to the Territory during the period of this Agreement, as necessary in order to monitor administration, marketing and sales related to the Products. LipoMatrix shall pay all transportation, meal, lodging, salary and related expenses for its personnel in this regard. LipoMatrix shall use commercially reasonable efforts to assist Distributor in locating and obtaining appropriate clinical expertise at Distributor's reasonable request, for purposes of supporting Distributor's marketing effort. The parties will mutually agree in advance on the amount and duration of clinical education and the allocation of costs associated with such clinical education. B. PURCHASE QUOTAS, ORGANIZATION AND FORECASTS. 1. PURCHASE QUOTAS. The purchase quota for the first Ordering Year shall be mutually agreed between the parties prior to first Commercial Sale. Such purchase quota will be eighty percent (80%) of the anticipated sales for the first Ordering Year. The purchase quota for the second Ordering Year shall equal Distributor's actual purchases (in units) in the first Ordering Year. The purchase quota for the third Ordering Year shall equal Distributor's actual purchases (in units) in the second Ordering Year. Quotas for subsequent Ordering Years shall equal the higher of actual purchases (in units) or purchase quotas in the prior Ordering Year. Distributor agrees to use reasonable commercial efforts to meet or exceed the purchase quotas as set forth in this paragraph. In the event Distributor fails to meet or exceed, on an aggregate basis, the purchase quotas for two (2) consecutive Ordering Years beginning on or after the third Ordering Year, LipoMatrix may terminate this Agreement for cause as provided in Section VI.C, provided, however, that this termination option must be exercised within sixty (60) days of the commencement of the next Ordering Year. Purchase quotas will be adjusted if LipoMatrix is unable to supply Products due to regulatory constraints or significant manufacturing delays. 2. SALES ORGANIZATION AND TRAINING. Distributor shall use reasonable commercial efforts to develop a sales organization that is knowledgeable concerning the features of the Products and the relationship of those features to the clinical benefits to potential customers within the Territory. In connection with the sale of Products, at LipoMatrix's request, Distributor shall make available an individual reasonably satisfactory to LipoMatrix ("Distributor's Trainer") - 3 - 6 for sales training of Distributor's other representatives. Training for Distributor's Trainer shall be provided, at LipoMatrix's election, either in Switzerland or in the Territory, and will occur before commencement of Commercial Sales, with training updates to be held as needed. LipoMatrix shall pay the costs of the training (including the transportation, meals, lodging, salary and related expenses of LipoMatrix employees), and Distributor shall be responsible for all transportation, meals, lodging, salary and related expenses of Distributor employees attending such training. 3. QUARTERLY SALES INFORMATION AND FORECASTS. On a quarterly basis, Distributor shall provide within ten (10) days after the end of each calendar quarter a reasonably detailed quarterly sales and promotional report to LipoMatrix. On a monthly basis, within the first ten (10) days of every month, Distributor shall provide LipoMatrix with a six (6) month (during the first Ordering Year) and fifteen (15) month (thereafter) rolling forecast. 4. SALES LAUNCH SCHEDULE. Distributor shall commence Commercial Sales of the Products in the Territory as soon as practicable after obtaining regulatory clearance. Clinical or marketing trials may commence at any time by mutual agreement of the parties and will not constitute a Commercial Sale. C. LIPOMATRIX VISITS AND MARKETING REPRESENTATIVE. Upon reasonable notice, Distributor shall permit and facilitate visits by LipoMatrix personnel to Distributor's facilities to review compliance with specific requirements of this Agreement, and to customer sites and to travel with Distributor's sales personnel for training purposes. Distributor shall permit the placement within Distributor's organization of a part-time or full-time Product specialist by LipoMatrix, at LipoMatrix's sole option and expense, for purposes of providing marketing and risk management support. Office space will be provided for such individual by Distributor. This requirement is waived as long as Distributor and its affiliates collectively own at least twenty percent (20%) of the Common Stock of LipoMatrix (on an as-converted basis) and the management of Distributor or any of its affiliates is represented on the board of directors of LipoMatrix. D. REGULATORY APPROVALS AND COMPLIANCE. LipoMatrix shall obtain and own all regulatory approvals, certificates, registrations, licenses, and permits related to the Products unless prohibited by local law. In the event that necessary approvals, certificates, registrations, licenses and permits required to sell and distribute the Products in the Territory are required by local law to be owned by, or held in the name of Distributor, Distributor agrees that upon termination of this Agreement for any reason, Distributor shall immediately take all steps necessary to promptly transfer the ownership, registration or entitlement of such registrations, certificates, licenses and permits to LipoMatrix or its designee. Distributor shall provide reasonable assistance to LipoMatrix in order to obtain any and all applicable regulatory approvals required by Governmental Agencies under the laws and/or regulations of any jurisdiction in order to market the Products within Territory, including but not necessarily limited to, meeting relevant standards and guidelines, preclinical, clinical and safety approvals required by Government Agencies. LipoMatrix shall reimburse Distributor for reasonable out-of-pocket expenses incurred by Distributor in connection with such assistance provided such expenses are approved in advance. - 4 - 7 LipoMatrix shall have the primary responsibility for manufacturing compliance and Distributor for any distribution compliance regarding any reporting or compliance matters in the Territory required of distributors by Government Agency rules and regulations, including but not limited to, recalls of the Products and reporting of adverse events involving the Products. The parties shall share information to allow each party to fulfill its compliance obligations hereunder. Each party shall promptly inform the other of any changes in regulatory or compliance status that might significantly affect the marketing of the Products in the Territory. Each party shall inform the other within two (2) working days of any actions taken by such party that could reasonably be expected to affect the regulatory or compliance status of LipoMatrix or the Products. Distributor shall make all reasonable efforts to comply with appropriate standards for review and approval of orders from its customers. E. IMPORT LICENSES. Distributor shall obtain import and reexport licenses and permits and take all other actions required in connection with the import or reexport of Products purchased hereunder. F. CUSTOMER FEEDBACK AND POST-MARKETING SURVEILLANCE. Distributor shall use its commercially reasonable efforts to provide LipoMatrix with assessments of customer requirements for Product modifications and improvements. These assessments will focus on the quality, design, functional capability and other features of the Products, with a view to maximizing the potential market for such Products within the Territory. Distributor will promptly furnish LipoMatrix with copies of any written communications from its customers with respect to the use of its Products, suggestions for modifications or improvement to the Products, reliability of Products, performance of the Products, compliance with specifications, and other pertinent information. G. REGISTRY INFORMATION. On a monthly basis, Distributor will provide to LipoMatrix a report which will provide such information defined by LipoMatrix as necessary for maintenance of a registry of implants, including but not limited to, the transponder numbers for those Products shipped to customers or otherwise disposed of, including the transponder number and the customer number of the physician, clinic or hospital to whom the Product was sold. Distributor will provide LipoMatrix with an inventory reconciliation as requested by LipoMatrix from time to time. H. INVENTORY. Distributor agrees to maintain an inventory of Products equivalent to three (3) months of forecast sales provided the Products have a stated shelf life of at least twenty-four (24) months. Distributor will maintain its inventory of Products in a clean, secure and well organized facility. In addition, such storage space will comply with environmental requirements, including temperature or other requirements, set forth on the labeling of the Products, or other reasonable requirements notified from time to time by LipoMatrix to Distributor. Distributor will maintain records of the Products to enable traceability of Products. Distributor will use an effective materials management system for tracking its inventory and shipments of Products to its customers. - 5 - 8 I. RISK MANAGEMENT PROGRAM. Distributor recognizes that LipoMatrix maintains an active program of risk management as set out in Exhibits A and B attached to this Agreement (the "Risk Management Program"). The Risk Management Program may be changed by mutual agreement. Distributor agrees to comply with the Risk Management Program and to use its best efforts to assure compliance by Distributor's customers. J. HEALTH AND SAFETY LAWS AND REGULATIONS. Distributor shall comply fully with any and all applicable health and safety laws and regulations of the Territory. K. REPRESENTATIONS. Neither Distributor nor LipoMatrix shall make any false or misleading representations to customers or others regarding LipoMatrix or the Products. Distributor and its employees and agents shall not make any representations, warranties or guarantees with respect to the specifications, features or capabilities of the Products that are not consistent with LipoMatrix's documentation accompanying the Products or LipoMatrix's literature describing the Products, including LipoMatrix's standard warranty and disclaimers. Distributor shall not make any commitments or comments to its customers about possible future Product enhancements or future Products without the written authorization of LipoMatrix. L. WARRANTY. LipoMatrix warrants that each Product sold to Distributor hereunder will (i) have any required regulatory clearance for commercial sale in the Territory, (ii) be free from defects in materials and workmanship, (iii) be designed in compliance with ISO 9001 design standards, (iv) be manufactured, packaged, and labeled in accordance with the then prevailing specifications, and (v) have a remaining shelf life at the date of shipment of twenty-one (21) months when the stated shelf life from date of manufacture is twenty-four (24) months (the "Warranty Period"). If Distributor provides notice to LipoMatrix during the Warranty Period that a Product breaches this warranty, Distributor shall, if requested by LipoMatrix, return such Product to LipoMatrix for evaluation, or if not so requested, dispose of such Product in accordance with LipoMatrix's instructions, and, if such Product does breach this warranty, LipoMatrix will, in its sole discretion, either repair or replace same, and reimburse Distributor for its reasonable return freight incurred therefor, if any, or refund the purchase price. This warranty does not cover defects or damage caused by Distributor's misuse, abuse, alterations or failure to properly maintain, handle and store any Products. M. EXTENDED WARRANTY. In addition, an extended warranty will be provided by LipoMatrix as set out in the Risk Management Program. All claims pursuant to the extended warranty shall be made in a writing (including a telecopy) stating (1) the name and address of the site at which the Product was implanted, (2) the name and telephone number of the contact person at the site, (3) the transponder number of the allegedly nonconforming Product, (4) the date the Product was delivered to the site by Distributor, and (5) a reasonably detailed description of the alleged nonconformity. The allegedly non-conforming Product must be returned to LipoMatrix for evaluation. LipoMatrix shall promptly advise Distributor of any changes in its extended warranty. N. THE WARRANTY SET FORTH IN SECTIONS III.L AND III.M ABOVE IS EXCLUSIVE AND NO OTHER WARRANTY, WHETHER WRITTEN, ORAL OR IN ANY COMMUNICATION WITH DISTRIBUTOR, IS EXPRESSED OR IMPLIED. LIPOMATRIX MAKES NO WARRANTIES OR REPRESENTATIONS AS TO PERFORMANCE OF THE PRODUCT TO DISTRIBUTOR OR TO ANY OTHER PERSONS, EXCEPT AS SET FORTH HEREIN. NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, LIPOMATRIX RESERVES THE RIGHT TO MODIFY THE EXTENDED WAR- - 6 - 9 RANTY POLICY AND OBLIGATIONS SET FORTH HEREIN UPON NOTICE TO DISTRIBUTOR FROM TIME TO TIME AS TO PRODUCTS ORDERED BY DISTRIBUTOR AFTER THE DATE OF SUCH NOTICE. ALL IMPLIED WARRANTIES INCLUDING BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NON-INFRINGEMENT (EXCEPT AS SET FORTH IN SECTION VII) ARE HEREBY EXCLUDED. THE FOREGOING DISCLAIMERS SHALL NOT AFFECT LIPOMATRIX'S OBLIGATIONS AS SET FORTH IN SECTIONS VII AND VIII. IV. TERMS AND CONDITIONS OF SALE A. PRICES. Distributor and LipoMatrix shall, prior to launch in the Territory, mutually agree on list prices for Distributor's sales of Products to its customers. Prices charged by LipoMatrix to Distributor will reflect a discount of fifty-five percent (55%) from the agreed upon list price for the first Ordering Year and a discount of fifty percent (50%) thereafter. Prices to Distributor for all Products shall be F.O.B. Swiss manufacturing facility of LipoMatrix and shall exclude freight, taxes (including, without limitation, export, import and local excise, sales, use, property and other taxes, but excluding taxes imposed on LipoMatrix's net income), insurance, duties and other governmental charges levied with respect to the Products sold hereunder, all of which shall be paid by Distributor. Prices may be changed at any time during the term of this Agreement, or any extension or renewal thereof, by mutual agreement. B. RESEARCH AND DEVELOPMENT FUND. While Distributor markets the Products, Distributor shall pay to LipoMatrix an amount equal to five percent (5%) of Distributor's net sales revenue from sales of Products, such payments to be made for each month by the fifteenth day of the following month. Such payments shall commence in respect of sales for the month of April 1997. The payments, and the interest earned on them until expenditure, are intended to be expended on mutually agreed research, development, clinical and manufacturing programs for breast implant products and other products intended for use in cosmetic or reconstructive breast surgery, and if such funding is not expended, the funds shall revert to Distributor. LipoMatrix shall have full ownership of the results of such programs; provided, however, if Distributor and its affiliates beneficially own less than twenty percent (20%) of LipoMatrix, LipoMatrix will pay Distributor a mutually agreed upon royalty for sales of products incorporating the results of such programs outside the Territory and other territories where Distributor and its affiliates are selling Products. Distributor shall have the exclusive right to market in the Territory all products developed with any use of such funds and any such product shall be deemed a Product hereunder. If Distributor does not initiate commercial sales of such Product within ninety (90) days of regulatory clearance, then all rights to such product will revert to LipoMatrix. C. PAYMENT TERMS 1. LipoMatrix agrees to grant Distributor credit terms for sales. Distributor agrees to pay to LipoMatrix the full amount of all invoices net sixty (60) days from the invoice date. In the event that Distributor does not promptly pay all invoices in accordance with this Section, then the payment terms will revert to payment by irrevocable letter of credit (or equivalent satisfactory to LipoMatrix) payable against shipping documents. Accounts past due will be subject to a monthly service charge of one and one-half percent (1.5%) of unpaid sum, but in no event to exceed the maximum allowable by law. - 7 - 10 2. All payments shall be in the local currency of the Territory. 3. Distributor must give LipoMatrix written notice of any discrepancies among the purchase order, the invoice, and Products received, within thirty (30) days after receipt of Products or the invoice, whichever occurs later. 4. If Distributor fails to make payment when due, LipoMatrix may also decline to make further shipments until all above indebtedness is paid, and/or alternatively may decline to make further deliveries except for cash in advance of shipment or letter of credit acceptable to LipoMatrix. D. PRODUCT ORDERS. All orders for Products submitted hereunder shall be initiated by purchase orders sent by regular mail, hand delivery, airmail, courier mail, e-mail, or facsimile to LipoMatrix. LipoMatrix shall respond to such orders by air mail, courier mail, e-mail, or facsimile within reasonable time, not to exceed ten (10) days after receipt thereof. All purchase orders submitted by Distributor to LipoMatrix shall identify the Products ordered by Product number and quantity and the desired shipment date. E. ORDER ACCEPTANCE. All purchase orders are subject to acceptance by LipoMatrix at its Neuchatel office. LipoMatrix shall have no obligation or liability to Distributor with respect to purchase orders which are not accepted; however LipoMatrix shall not unreasonably reject any purchase order. LipoMatrix shall use reasonable efforts to deliver Products covered by accepted purchase orders at the times specified in the corresponding quotation or written acceptance of Distributor's purchase order. Any orders in the ordinary course of business, consistent with normal ordering practices, that are rejected by LipoMatrix shall be deducted from the purchase quota for such Ordering Year as set forth in Section III.B.1. Distributor's purchase orders hereunder shall be governed by the terms and conditions of this Agreement. Nothing contained in any purchase order shall in any way modify or add any terms or conditions of sale. F. CANCELLATION/RESCHEDULING. Distributor may, at its option and subject to the provisions of this Section, either reschedule delivery of any Products or cancel any order or portion thereof, upon written notice to LipoMatrix. A "reschedule" is defined as changing all or any portion of those Products scheduled for shipment on any ship date by moving the ship date later in time. Distributor shall have a right to cancel or reschedule any order for later shipment provided such request is received by LipoMatrix at least thirty (30) days in advance of the original ship date. Rescheduling or cancellation requests made Distributor within thirty (30) days of the original ship date are subject to LipoMatrix's approval. G. COUNTRY SHIPMENTS. Products sold to Distributor in the Territory will not be transferred by Distributor outside the Territory without the written notification to LipoMatrix and an appropriate billing adjustment to reflect any difference in prices between countries. Such transfers out of the Territory will only be permitted to countries in a territory covered by a distributor that is an affiliated company of Distributor. - 8 - 11 V. ACQUISITION AND USE OF DEMONSTRATION PRODUCT AND TRANSPONDER READERS A. Products will be provided without charge to Distributor for Distributor's exclusive use in selling and marketing of Products within the Territory, in such limited quantities as are determined by mutual agreement. B. Transponder readers will be loaned to Distributor for use in tracking inventory and for demonstration use with customers, in such limited quantities as are determined by mutual agreement. VI. TERM AND TERMINATION A. TERM. This Agreement shall commence upon the Effective Date and shall expire ten (10) years after first Commercial Sale, unless renewed or terminated as provided below. B. RENEWAL. Unless terminated in the manner provided below, the term of this Agreement shall be extended automatically for successive one (1) year periods, unless either party elects not to renew by written notice to the other party at least ninety (90) days prior to the conclusion of the initial term hereof or any such renewal period, as the case may be. Either party may elect not to renew this Agreement for any or no reason. C. TERMINATION FOR CAUSE. Either party shall have the right to terminate this Agreement at any time effective upon written notice, in the event of (1) breach by the other party of any of the terms and conditions hereof and failure to correct the breach within the thirty (30) days of written notice thereof; (2) the other party becoming generally unable to obtain necessary licenses; or (3) Force Majeure which suspends or delays performance of this Agreement for more than ninety (90) days from the beginning of such event. It is recognized by the parties that the Risk Management Program (see Section III.A.3.b) is an essential element of this Agreement. Failure by either party to adhere to its provisions or to use best efforts to implement it, may be used as grounds for termination of this Agreement for cause under this Section. In the event of a substantial change in ownership of Distributor, or the continued failure by Distributor to meet the purchase quotas as specified in Section III.B.1, LipoMatrix shall have the right to terminate this Agreement upon thirty (30) days written notice. In the event that LipoMatrix is acquired by a third party, LipoMatrix shall have the right to terminate this Agreement upon thirty (30) days written notice. Either party shall have the right to terminate this Agreement, by written notice taking immediate effect, if the other party becomes insolvent, or if there are instituted by or against the other party proceedings in bankruptcy or under insolvency similar laws or for reorganization, receivership or dissolution. Any such termination shall not relieve either party from any payment obligation which accrued prior to such termination. D. CANCELLATION AND REPURCHASE OPTIONS. Upon expiration or termination of this Agreement, any or all unfilled orders shall be cancelled. LipoMatrix reserves the right at its sole option to repurchase from Distributor any or all Products unsold by Distributor, at a mutually agreed upon price, which in any case shall not exceed the landed price Distributor paid LipoMatrix - 9 - 12 for Products to be repurchased. In the event LipoMatrix fails to repurchase such Products, Distributor shall have the right to continue to sell its existing inventory of such Products for a reasonable period following such expiration or termination. E. RETURN OF MATERIALS. Upon expiration or termination of this Agreement, Distributor shall return to LipoMatrix, at LipoMatrix's expense, all sales promotional materials and aids and any tools or equipment loaned or furnished to Distributor pursuant to this Agreement. F. EFFECT OF TERMINATION. In the event of termination by either party in accordance with any of the provisions this Agreement, or expiration of this Agreement, neither party shall be liable to the other, because of such termination or expiration, for compensation, reimbursement or damages on account of the loss of prospective profits or anticipated sales or on account of expenditures, inventory, investments, leases, or commitments in connection with the business or goodwill of LipoMatrix or Distributor, occurring as a result of such termination or expiration, or incurred in anticipation of renewal. VII. PATENT INDEMNITY LipoMatrix will defend any suit brought against Distributor based on a claim that the Product furnished under this Agreement infringes any patent or trademark, and will pay all damages and costs that a court awards against Distributor as a result of such claim and any payments made in settlement of such claim, provided that Distributor gives LipoMatrix: (a) prompt written notice of such suit; (b) full control over the defense or settlement thereof; and (c) all reasonable information and assistance (at LipoMatrix's expense excluding time spent by employees or consultants of the Distributor) to handle the defense and settlement thereof. If the Products, or any part thereof, are, or in the opinion of LipoMatrix may become, the subject of any claim, suit or proceeding for infringement of any patent or trademark, or in the event of any adjudication that the Products, or any part thereof, infringe any patent or trademark, or if the sale or use of Products, or any part thereof, is enjoined, LipoMatrix may, at its option and expense: (a) procure for Distributor and its customers the right under such patent or trademark to use or sell as appropriate the Products or such part thereof; or (b) replace the Products, or part thereof, with other suitable Products or parts; or (c) suitably modify the Products or part thereof, or (d) if none of the foregoing are commercially practicable, refund the amounts paid therefore by Distributor, and recover possession of such Products. LipoMatrix shall not be liable for any costs or expenses incurred without its prior written authorization. Notwithstanding the provisions of the preceding paragraphs, LipoMatrix shall not be liable to Distributor or its customers for: (a) infringement of patent claims covering the usage of LipoMatrix Products in a manner not intended under this Agreement; (b) any trademark infringements involving any marking or branding applied by LipoMatrix or involving any marking or branding applied at the request of Distributor, except if such marking or branding is owned by LipoMatrix; (c) the modification of Products, or any part thereof, unless such modification was made by LipoMatrix; or (d) the combination, operation or use of the Product with other products not furnished by LipoMatrix to the extent such claim would not have arisen had such combination, operation or use not occurred. THE FOREGOING PROVISIONS OF THIS SECTION VII STATE THE ENTIRE LIABILITY AND OBLIGATIONS OF LIPOMATRIX, AND THE EXCLUSIVE REMEDIES OF DISTRIBUTOR AND ITS CUSTOMERS WITH RESPECT TO ANY ALLEGED IN- - 10 - 13 FRINGEMENT OF PATENTS, COPYRIGHTS, TRADEMARKS, OR OTHER INTELLECTUAL PROPERTY RIGHTS, BY THE PRODUCTS OR ANY PART THEREOF. VIII. PRODUCT LIABILITY A. INDEMNITY BY DISTRIBUTOR. Distributor shall indemnify and hold LipoMatrix harmless from and against any and all liability, damage, loss, cost, expense (including reasonable attorney's fees), regulatory penalties and enforcement actions resulting from any claims made or suits brought against LipoMatrix, its employees, directors and customers which arise or result solely from Distributor's marketing, distribution, handling and shipping of the LipoMatrix Products, or from Distributor's negligence or willful misconduct. LipoMatrix shall promptly notify Distributor of any such claim or suit and shall permit Distributor at Distributor's cost and expense, to handle and control such claim or suit. B. INDEMNITY BY LIPOMATRIX. LipoMatrix shall indemnify and hold Distributor harmless from and against any and all liability, damage, loss, cost or expense (including reasonable attorney's fees) resulting from any claims made or suits brought against Distributor, its employees, directors and customers which arise or result solely from LipoMatrix's design, handling and shipping of the LipoMatrix Products, or failure to manufacture the LipoMatrix Products in accordance with agreed upon specifications, FDA Good Manufacturing Practices or other applicable standards for medical device manufacturers, or from negligence or willful misconduct. Distributor shall promptly notify LipoMatrix of any such claim or suit and shall permit LipoMatrix at LipoMatrix's cost and expense, to handle and control such claim or suit. C. APPORTIONMENT OF DAMAGES. In the event that any liability, damage, loss, cost or expense (including reasonable attorney's fees) as aforesaid cannot be established (with respect to final judgments of a court of competent jurisdiction from which no appeal is or can be taken as well as settlements made prior to, during or following termination of litigation to which the parties have expressly agreed in writing) to have resulted solely from the actions or failures to act of LipoMatrix or Distributor or their affiliates, responsibility for payment of such liability, damage, loss, cost or expense (including reasonable attorney's fees) will be apportioned between LipoMatrix and Distributor according to the contribution of either party to the damage; and if such allocation is not mutually agreed, then it will be determined by mandatory binding arbitration. D. PRODUCT LIABILITY INSURANCE. LipoMatrix shall use its reasonable commercial efforts to secure product liability insurance in the amount of five million dollars ($5,000,000), to the extent this is available on commercially reasonable terms. LipoMatrix shall have Distributor named as an additional insured on its product liability insurance policy. If LipoMatrix is unable to secure or maintain such insurance, Distributor may terminate this Agreement. The parties agree to review the possibility of increasing the amount of such insurance if increases in sales so warrant. - 11 - 14 IX. LIMITATION OF LIABILITY IN NO EVENT, WHETHER THE CAUSE OF ACTION BE BASED IN CONTRACT OR TORT (INCLUDING NEGLIGENCE) OR ANY OTHER LEGAL OR EQUITABLE THEORY SHALL EITHER PARTY BE LIABLE FOR INCIDENTAL, CONSEQUENTIAL, INDIRECT, SPECIAL OR PUNITIVE DAMAGE OF ANY KIND, OR FOR LOSS OF REVENUE, LOSS OF BUSINESS OR OTHER FINANCIAL LOSS ARISING OUT OF OR IN CONNECTION WITH THE SALE, USE, PERFORMANCE, FAILURE OR INTERRUPTIONS OF ITS PRODUCTS. NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, LIPOMATRIX'S MAXIMUM LIABILITY FOR DAMAGES HEREUNDER SHALL NOT EXCEED THE PURCHASE PRICE OF THE PRODUCTS PURCHASED DURING THE TERM OF THIS AGREEMENT. THE FOREGOING LIMITATIONS SHALL NOT AFFECT EITHER PARTY'S DUTY TO INDEMNIFY THE OTHER PARTY FOR THIRD-PARTY SUITS FOR SUCH DAMAGES, AS SET FORTH IN SECTIONS VII AND VIII. THE DISCLAIMER OF LIABILITY FOR DAMAGES WILL NOT BE AFFECTED IF ANY REMEDY PROVIDED HEREUNDER SHALL FAIL OF ITS ESSENTIAL PURPOSE. DISTRIBUTOR HAS ACCEPTED THE DISCLAIMER OF LIABILITY FOR DAMAGES AS PART OF A BARGAIN TO LOWER THE PRICE OF THE PRODUCTS AND UNDERSTANDS THAT THE PRICE OF THE PRODUCTS WOULD BE HIGHER IF LIPOMATRIX WERE REQUIRED TO BEAR ADDITIONAL LIABILITY FOR DAMAGES. X. NO RIGHT TO MANUFACTURE OR COPY The Products are offered for sale and are sold by LipoMatrix subject in every case to the condition that such sale does not convey or license to Distributor, expressly or by implication, the right to manufacture, duplicate or otherwise copy or reproduce any of the Products. Distributor shall take appropriate steps with customers, as mutually agreed, to inform them of, and both parties shall, as mutually agreed, assist each other in assuring compliance with, the restrictions contained in this Section. XI. INTELLECTUAL PROPERTY RIGHTS A. SOLE PROPERTY OF LIPOMATRIX. Distributor agrees that Intellectual Property Rights are and shall remain sole property of LipoMatrix and that LipoMatrix owns all right, title and interest in the product lines which include the Products now or hereafter subject to this Agreement. The use by Distributor of any Intellectual Property Rights, including, but not limited to any patent, invention, trademark, trade name, trade secret or copyrighted material, is authorized only for the purposes herein set forth. Upon termination of this Agreement for any reason, authorization shall cease. Distributor agrees that the Products contain a device identification system (including software) which is proprietary to LipoMatrix. LipoMatrix at all times retains ownership of and title to the device identification system supplied with the Product, and to the trade secrets embodied in such technology. Subject to Distributor's acceptance of the obligations contained in this Section, and to the fulfillment of these obligations, LipoMatrix grants Distributor a non-exclusive license to use the device identification system included with the Products solely in the form and on the medium in which program is delivered for the purposes of operating the Product in accordance with the instructions set forth in the Instructions for Use supplied with the Product, and for no other purposes - 12 - 15 whatsoever. Distributor may not decompile, reverse engineer or reverse assemble such technology, nor may it make a copy of such program or apply any techniques to derive the trade secrets embodied therein. B. USE OF LIPOMATRIX NAME AND TRADEMARKS. During the term of this Agreement, Distributor shall have the right to indicate to the public that Distributor is an authorized distributor of LipoMatrix's Products and to advertise within the Territory such Products under the LipoMatrix Trademarks. Distributor shall not alter or remove any LipoMatrix Trademark applied to the Products at the factory. At no time during or after the term of this Agreement shall Distributor challenge or assist others to challenge the LipoMatrix Trademarks or registration thereof or attempt to register any trademarks, marks or tradenames confusingly similar to those of LipoMatrix. C. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. Distributor and LipoMatrix acknowledge that by reason of their relationship hereunder they will have access to certain information and materials concerning each other's business, plans, customers and products (including Trade Secrets and Technical Data provided to Distributor) which are confidential and of substantial value to Distributor and LipoMatrix, which value would be impaired if such information were disclosed to third parties. Each party agrees that it shall not use in any way for its own account or the account of any third party, nor disclose to any third party, any such confidential information which is revealed to it by the other party. The receiving party shall take every reasonable precaution to protect the confidentiality of such information, which in no event shall be less than the efforts exercised by such party with respect to its own confidential business information. Distributor and LipoMatrix shall advise each other in the event that either party considers particular information or materials to be confidential. Distributor shall not publish any technical description of the Products beyond the description published by LipoMatrix. In the event of expiration or earlier termination of this Agreement, there shall be no use or disclosure by Distributor or LipoMatrix of any confidential information, and Distributor shall not manufacture, or have manufactured, devices, components or assemblies utilizing any of LipoMatrix's Intellectual Property Rights. XII. GENERAL A. COUNTERPARTS AND GOVERNING LAW. This Agreement may be executed in counterparts. This Agreement shall be construed in accordance with, and all the rights, powers and liabilities of the parties hereunder shall be governed by, the internal laws of the State of California, without reference to choice of law principles thereof. B. COMPLETE AGREEMENT. This Agreement is intended as the complete, final and exclusive statement of the terms of agreement between the parties and supersedes any and all agreements between them relating to the subject matter hereof. No modification, change or amendment to this Agreement, nor any waiver of any rights in respect hereto, shall be effective unless in writing and signed by the party to be charged, unless explicitly permitted by the terms of this contract. The waiver of breach or default hereunder shall not constitute the waiver of subsequent breach or default. C. FORCE MAJEURE. Notwithstanding anything in this Agreement to the contrary, other than the obligation to pay money, the obligations of either party under this Agreement, including purchase quotas, shall be excused during any continuing event which is beyond the reasonable - 13 - 16 control of such party, including without limitation, strike, fire, war, rebellion, natural disasters/Acts of God, embargo, governmental order or restriction, or inability for any other reason to supply or deliver Products due to unnatural or commercially impractical circumstances. D. NOTICE. Any notice or report required or permitted under this Agreement shall be deemed given if delivered personally or if sent by either party to the other by registered or certified mail, postage prepaid, or internationally recognized courier, for overnight delivery, addressed to the other party at its address first set forth above or at such other address to which such party shall give notice hereunder. If by mail, delivery shall effective five (5) days after deposit with postal authorities. E. ASSIGNMENT. Distributor shall not assign this Agreement nor any rights hereunder without the prior written consent of LipoMatrix, granted in LipoMatrix's sole discretion. Subject to the foregoing, this Agreement shall bind and inure to the benefit of the parties and their respective successors and assigns. LipoMatrix shall be entitled to assign its interest in this Agreement in connection with a merger or other business combination in which LipoMatrix is not the surviving entity. F. SEVERABILITY. In the event any provision of this Agreement is found to be invalid, illegal or unenforceable, the validity, legality and enforceability of any of the remaining provisions shall not in any way be affected or impaired thereby. G. SURVIVAL. The obligations and duties listed in the Sections titled "Warranty", "Patent Indemnity", "Limitation of Liability", "No Right to Manufacture or Copy", "Product Liability" and "Intellectual Property Rights" shall survive any termination or expiration of this Agreement and shall remain in effect for a period of ten (10) years thereafter. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the day and year first above written. LIPOMATRIX, INCORPORATED COLLAGEN CORPORATION ("LIPOMATRIX") ("DISTRIBUTOR") By:___________________________________ By:________________________________ (signature) (signature) Printed Name: Terry R. Knapp, M.D. Printed Name: Howard Palefsky ------------------------- ---------------------- Title: President & CEO Title: Chief Executive Officer -------------------------------- ----------------------------- - 14 - 17 LipoMatrix Contract Number LMI 046 EXHIBIT A RISK MANAGEMENT PROGRAM Confidential treatment requested for this exhibit. 18 LipoMatrix Contract Number LMI 046 EXHIBIT B RISK MANAGEMENT SUPPORT DOCUMENTS Confidential treatment requested for this exhibit. EX-10.73 7 COORDINATION AGREEMENT 1 LipoMatrix Contract Number LMI 047 EXHIBIT 10.73 COORDINATION AGREEMENT* This Coordination Agreement (the "Agreement") is entered into as of March 24, 1995, between LipoMatrix, Incorporated ("LipoMatrix"), a corporation organized under the law of the British Virgin Islands with an office located at Puits Godets 24, CH-2000 Neuchatel, Switzerland and Collagen International Incorporated ("Collagen International"), a corporation organized under the law of the State of Delaware, United States of America with an office located at 2, Avenue Gratta-Paille, CH-1000 Lausanne 30 Grey, Switzerland. IN CONSIDERATION OF THE MUTUAL PROMISES HEREIN CONTAINED, THE PARTIES AGREE AS FOLLOWS: 1. DISTRIBUTOR APPOINTMENTS. 1.1 LipoMatrix desires to appoint certain Collagen International subsidiaries ("CI Subsidiaries") as distributors of LipoMatrix's present and future breast implant products and other products intended for use in cosmetic or reconstructive breast surgery ("Products"), and those CI Subsidiaries have expressed interest in distributing Products in the countries of their respective incorporation (collectively, the "Territory"), pursuant to separate distribution agreements (each, a "Distributor Agreement") containing terms and conditions as set forth in the form agreement attached hereto as Exhibit A. 1.2 Those CI Subsidiaries that have expressed an interest in distributing Products are listed in Exhibit B. Collagen International has no objection to any CI Subsidiary entering into a separate Distributor Agreement on terms acceptable to such CI Subsidiary. 1.3 If Collagen International subsequently establishes a majority-owned affiliate in a country not designated as part of the Territory, LipoMatrix and Collagen International agree to enter into negotiations in good faith with regard to the possibility of including such country in the Territory, provided however, that this Section will not require LipoMatrix to cancel or modify pre-existing distribution agreements with third parties. Notwithstanding the foregoing, if Collagen International and LipoMatrix have not entered into an agreement within ninety (90) days of Collagen International notifying LipoMatrix of the establishment of its affiliate and the desire to enter negotiations for distribution rights, then LipoMatrix shall be free, in its sole discretion, to distribute, market and sell the Products in such country on its own or in conjunction with third parties. 1.4 If Collagen International or one of its subsidiaries has an interest in distributing the Products in a country where it does not have a subsidiary, but does have a third-party distributor, it may notify LipoMatrix of its desire to distribute the Products in such country. The parties will negotiate in good faith to arrive at a mutually acceptable distribution agreement. In addition, prior to entering into an agreement with a third party for distribution of Products, LipoMatrix will notify Collagen International of its intentions and, if Collagen International desires, negotiate in good faith to arrive at a mutually acceptable distribution agreement. In either of these cases, if agreement cannot be reached within ninety (90) days of initiation of discussions, LipoMatrix will be free to negotiate distribution rights with other parties. This section will not apply to Spain, Portugal or Latin America. - ------------- *Confidential treatment is requested for a portion of this agreement. 2 1.5 The parties recognize that it would facilitate the administration of certain aspects of the Distributor Agreements if Collagen International would agree to coordinate and perform certain functions on behalf of the CI Subsidiaries collectively, and Collagen International has agreed to serve in the limited capacity set forth herein. 2. RESEARCH AND DEVELOPMENT FUND. 2.1 The Distributor Agreements provide for the establishment of a research and development fund (the "Fund") to be created by certain payments equal to five percent (5%) of each distributor's net sales revenue from sales of Products beginning in April 1997. 2.2 LipoMatrix has agreed to collect and deposit these payments in a separate interest bearing account, and to provide quarterly statements of the Fund balance to Collagen International, and to use them on research, development, clinical and manufacturing programs for breast implant products and other products intended for use in cosmetic or reconstructive breast surgery, as mutually agreed with each CI Subsidiary. 2.3 LipoMatrix, Collagen International and the CI Subsidiaries recognize that it would be cumbersome for LipoMatrix to have to reach and coordinate agreement on the use of the Fund with each CI Subsidiary, and therefore, with the support of each CI Subsidiary, Collagen International and LipoMatrix have agreed that Collagen International will perform this coordination function on the CI Subsidiaries' collective behalf. As a result, a decision on the use of the Fund for specific projects by Collagen International will be deemed as binding for each CI Subsidiary. 3. RESOLUTION OF DISPUTES. 3.1 The parties wish to attempt to resolve any disputes or disagreements that might arise under any Distributor Agreement that cannot be resolved by LipoMatrix and the management of the relevant CI Subsidiary without resort to formal arbitration or litigation wherever possible. 3.2 Wherever a dispute has arisen that cannot be resolved, as described in Section 3.1, the chief executive officers of LipoMatrix and Collagen International will meet to attempt to resolve it. 3.3 In the event the dispute cannot be resolved under Section 3.2, the chief executive officers of LipoMatrix and Collagen International will refer the dispute to a panel of three arbitrators, one appointed by each party, and the third by the two appointed arbitrators, convened under the rules of the International Chamber of Commerce in Geneva, Switzerland. 3.4 The decision of the chief executive officers under Section 3.2 or, when necessary, of the arbitrators under Section 3.3, shall be final and conclusive and binding on LipoMatrix and the relevant CI Subsidiary with respect to the matter in dispute. 3.5 Collagen International represents that each CI Subsidiary that has signed a Distributor Agreement has agreed to this mechanism for resolving any disputes that may arise. 4. MOST FAVORED DISTRIBUTOR. - 2 - 3 4.1 LipoMatrix agrees that the prices offered to its distributors in the European Union ("E.U.") will be not less than the lowest price ("the Lowest Price") at which Products are sold to subsidiaries of Collagen International in the E.U. (currently Collagen (UK) Ltd.) as of the date of this Agreement. In addition, LipoMatrix agrees that the prices at which Products are sold to its Latin American distributors will be not less than eighty-five percent (85%) of such Lowest Price. 4.2 LipoMatrix agrees that prior to entering a distribution agreement with a third party for Israel, Poland or Hungary, that it will discuss pricing for that agreement with Collagen International in an attempt to arrive at a mutually acceptable arrangement. 4.3 LipoMatrix agrees that three (3) years after the date of this Agreement, the payment terms granted to subsidiaries of Collagen International will be reviewed to ensure that those subsidiaries are treated fairly in comparison to other LipoMatrix distributors. 5. TARGET LAUNCH DATES. 5.1 Assuming the appropriate regulatory clearances are obtained, the target launch dates for each of the CI Subsidiaries listed in Exhibit B are as follows:
CI Subsidiary Target Launch Date ------------- ------------------ United Kingdom April 1995 Germany September 1995 France October or November 1995 Switzerland, Austria, Belgium, as soon as practical but no later than Luxembourg, The Netherlands March 31, 1996 Italy first quarter 1996 Australia, Canada second quarter 1996
In the event that any launch is delayed due to regulatory considerations, such launch will take place as soon as practicable after regulatory considerations permit, and the remaining target launch dates will be adjusted, if necessary, to assure that no two (2) launches will be required to occur at an interval of less than four (4) weeks, and that a launch will not be required to take place in a month that would not be appropriate due to holiday or seasonal considerations. 6. TERM; TERMINATION. 6.1 This Agreement shall be effective as of the date first set forth above and shall continue in effect until all Distributor Agreements with CI Subsidiaries have expired or been terminated, unless earlier terminated pursuant to the provisions of this Section 6. 6.2 Either party shall have the right to terminate this Agreement at any time effective upon written notice, in the event of breach by the other party of any of the terms and conditions hereof and failure to correct the breach within thirty (30) days of written notice thereof. - 3 - 4 6.3 In the event that Collagen Corporation accepts the LipoMatrix Offer (as defined in the License, Supply and Option Agreement between LipoMatrix and Collagen Corporation dated as of March 24, 1995) or the U.S. Distributor Agreement between LipoMatrix and Collagen Corporation is terminated, LipoMatrix shall have the right to terminate each of the Distributor Agreements and this Agreement. Collagen International represents that each CI Subsidiary that has signed a Distributor Agreement has agreed to this provision, and Collagen International agrees to use its best efforts to enforce this provision. 7. MISCELLANEOUS. 7.1 Counterparts and Governing Law. This Agreement may be executed in counterparts, and shall be governed by the laws of Switzerland without regard to conflicts of law. Each party hereby agrees to submit to the jurisdiction of an appropriate court within Vaud, Switzerland, and agrees that service of documents commencing any legal action may be made on such party in the manner provided for giving notice hereunder. 7.2 Complete Agreement. This Agreement is intended as the complete, final and exclusive statement of the terms of agreement between the parties and supersedes any and all agreements between them relating to the subject matter hereof. No modification, change or amendment to this Agreement, nor any waiver of any rights in respect hereto, shall be effective unless in writing and signed by the party to be charged, unless explicitly permitted by the terms of this contract. The waiver of breach or default hereunder shall not constitute the waiver of subsequent breach or default. 7.3 Notices. All notices required or to be given pursuant to this Agreement shall be in writing, shall be effective upon receipt and shall be delivered in person or by first class mail, postage prepaid to the following addresses, with a copy of such notice to be sent simultaneously by telex, facsimile copier or similar device to the party receiving such notice. To Collagen International: Collagen International Incorporated 2, Avenue Gratta-Paille CH-1000 Lausanne 30 Grey, Switzerland Attention: President To LipoMatrix: LipoMatrix, Incorporated 24 Puits Godet, CH-2000 Neuchatel, Switzerland Attention: President 7.4 Assignment. Collagen International shall not assign this Agreement nor any rights hereunder without the prior written consent of LipoMatrix, granted in LipoMatrix's sole discretion. Subject to the foregoing, this Agreement shall bind and inure to the benefit of the parties and their respective successors and assigns. LipoMatrix shall be entitled to assign its interest in this Agreement in connection with a merger or other business combination in which LipoMatrix is not the surviving entity. 7.5 English as Language of Agreement. The original of this Agreement has been written in English. Each party waives right it may have under the law of its country to have this Agreement written in any language other than English. - 4 - 5 7.6 Severability. In the event any provision of this Agreement is found to be invalid, illegal or unenforceable, the validity, legality and enforceability of any of the remaining provisions shall not in any way be affected or impaired thereby. 7.7 Waiver of Conflict. EACH PARTY TO THIS AGREEMENT THAT HAS BEEN OR CONTINUES TO BE REPRESENTED BY VENTURE LAW GROUP ("VLG") HEREBY ACKNOWLEDGES THAT RULE 3-310 OF THE RULES OF PROFESSIONAL CONDUCT PROMULGATED BY THE STATE BAR OF CALIFORNIA REQUIRES AN ATTORNEY TO AVOID REPRESENTATIONS IN WHICH THE ATTORNEY HAS OR HAD A RELATIONSHIP WITH ANOTHER PARTY INTERESTED IN THE REPRESENTATION WITHOUT THE INFORMED WRITTEN CONSENT OF ALL PARTIES AFFECTED. BY EXECUTING THIS AGREEMENT, EACH SUCH PARTY GIVES ITS INFORMED WRITTEN CONSENT TO THE REPRESENTATION OF LIPOMATRIX BY VLG IN CONNECTION WITH THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY. IN WITNESS WHEREOF, the parties have executed this Agreement through the signatures of their duly authorized representatives set forth below. COLLAGEN INTERNATIONAL LIPOMATRIX, INCORPORATED INCORPORATED a British Virgin Islands corporation a Delaware corporation By: /s/ Neville Pelletier By: /s/ Terry R. Knapp, MD --------------------------- ---------------------------- Title: President Title: Chairman & CEO - 5 - 6 LipoMatrix Contract Number LMI 047 EXHIBIT A FORM OF DISTRIBUTOR AGREEMENT 7 FORM OF DISTRIBUTOR AGREEMENT BETWEEN LIPOMATRIX, INCORPORATED AND CERTAIN SUBSIDIARIES OF COLLAGEN INTERNATIONAL, INC. 8 TABLE OF CONTENTS
PAGE ---- I. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. APPOINTMENT AS EXCLUSIVE DISTRIBUTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 III. SPECIFIC RESPONSIBILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 IV. TERMS AND CONDITIONS OF SALE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 V. ACQUISITION AND USE OF DEMONSTRATION PRODUCT AND TRANSPONDER READERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 VI. TERM AND TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 VII. PATENT INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 VIII. PRODUCT LIABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 IX. LIMITATION OF LIABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 X. NO RIGHT TO MANUFACTURE OR COPY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 XI. INTELLECTUAL PROPERTY RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 XII. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
EXHIBITS Exhibit A Risk Management Program* Exhibit B Risk Management Support Documents*
* Confidential treatment requested for this exhibit. - 1 - 9 DISTRIBUTOR AGREEMENT This Distributor Agreement (the "Agreement") is entered into as of March 24, 1995, (the "Effective Date") between LIPOMATRIX, INCORPORATED ("LIPOMATRIX"), a corporation organized under the laws of the British Virgin Islands with an office located at Puits Godet 24, CH- 2000 Neuchatel, Switzerland and COLLAGEN _______ ("DISTRIBUTOR") with an office located at _________________________________. IN CONSIDERATION OF THE MUTUAL PROMISES HEREIN CONTAINED, THE PARTIES AGREE AS FOLLOWS: I. DEFINITIONS A. "PRODUCTS" shall mean LipoMatrix's present and future (subject to Section II.A) breast implant products and other products intended for use in cosmetic or reconstructive breast surgery. Products may be changed, abandoned or added by LipoMatrix, at its sole discretion, after reasonable prior written notice (which shall not be less than ninety (90) days) is given to Distributor, or in any other manner necessary in order to comply with applicable laws. LipoMatrix shall be under no obligation to continue the production of any Product, except as provided herein. B. "TERRITORY" shall mean _____________________________________. C. "TECHNICAL DATA" shall mean all information belonging to LipoMatrix in written, graphic or tangible form relating to design, programming, operation or service of the Products, including all information that exists as of the Effective Date of this Agreement, or is developed by LipoMatrix during the term hereof. D. "INTELLECTUAL PROPERTY RIGHTS" shall mean all of LipoMatrix's worldwide patents, trademarks, trade names, inventions, copyrights, regulatory approvals, know-how, trade secrets, and all other intellectual property rights, in existence as of the Effective Date of this Agreement or hereafter developed or acquired by LipoMatrix, relating to the design, manufacture, or marketing of the Products. E. "TRADE SECRETS" shall mean any formula, pattern, device, or compilation of information which is used in LipoMatrix's business and which provides competitive advantage to LipoMatrix and which is not known or used by LipoMatrix's competitors. This term includes, but is not limited to, formulas, compounds, manufacturing processes, methods for treating or preserving materials, patterns for the design or operation of devices, materials filed with governmental agencies in connection with regulatory approval of LipoMatrix's products, and information relating to marketing of LipoMatrix products and services. F. "LIPOMATRIX TRADEMARKS" shall mean those trademarks, trade names, service marks, slogans, designs, distinct advertising, labels, logos and other trade-identifying symbols as are or have been developed and used by LipoMatrix and/or any of its subsidiaries or affiliate companies anywhere in the world. G. "GOVERNMENT AGENCY" shall include all local, national and supranational bodies with the legal authority to establish rules, regulations, standards and guidelines, (or to issue certificates of compliance with these), covering the design, manufacturing and marketing of the Products in the Territory. Within the European Union, this will include Competent Authorities - 1 - 10 and Notified Bodies or similar agencies as a consequence of or related to the Medical Device Directive (93/42/EEC), and/or where applicable, the Active Implantable Medical Device Directive (93/385/EEC), as well as similar directives established in the future. H. COMMERCIAL SALE. The sale of a Product by Distributor, other than for clinical use required to obtain governmental approvals to market such Product. I. ORDERING YEAR. The twelve-month period commencing on the first Commercial Sale and each subsequent twelve-month period commencing on the anniversary of such date. II. APPOINTMENT AS EXCLUSIVE DISTRIBUTOR A. Subject to the terms and conditions set forth herein LipoMatrix hereby appoints Distributor, and Distributor hereby accepts such appointment, as LipoMatrix's exclusive distributor for the Products in the Territory. As a result, LipoMatrix will not sell the Products in the Territory, other than through Distributor. The mechanism for sales of Products for clinical trials in the Territory shall be determined by mutual agreement. Any future Product developed by LipoMatrix shall be deemed a Product hereunder. If Distributor does not initiate commercial sales of such future Product within ninety (90) days of regulatory clearance, then all rights to such product will revert to LipoMatrix. B. Distributor shall not represent or sell competitive products in the Territory which, in LipoMatrix's opinion, are likely to conflict with Distributor's obligation to use its reasonable commercial efforts to represent and sell Products in the Territory. C. Distributor shall not, directly or indirectly, solicit sales of the Products outside the Territory. Distributor shall forward to LipoMatrix all unsolicited inquiries relating to the Products or potential customers outside of both the Territory and the territory, if any, covered by affiliates of Distributor that are authorized to distribute Products. D. The relationship of LipoMatrix and Distributor established by this Agreement is that of independent contractors, and nothing contained in this Agreement shall be construed to give either party the power to direct or control the day-to-day activities of the other or allow one party to create or assume any obligation on behalf of the other for any purpose whatsoever. III. SPECIFIC RESPONSIBILITIES A. MARKETING. 1. MARKETING EFFORTS. During the term of the Agreement, Distributor shall use its reasonable commercial efforts to develop and exploit the market and to sell the Products throughout the Territory. 2. MARKETING PLAN. Distributor shall complete, as soon as practicable (but no later than ninety (90) days prior to the scheduled commencement of sales), and thereafter, annually on or before March 31, a comprehensive marketing plan for each country within the Territory. 3. PRINTED MATERIALS. - 2 - 11 a. Packaging. LipoMatrix will provide at its expense all materials in and on the Product packages. b. Risk Management Support Documents. The text of the risk management documents, including the Patient Advisory and Consent and the Supply Agreement, as of the date of this Agreement in the form attached as Exhibit B hereto, but in the local language of the Territory, will be provided by LipoMatrix, but printing and distribution expenses will be borne by Distributor. c. Sales and Promotional Literature. Distributor will produce all sales and promotional literature, obtaining LipoMatrix's prior approval of scientific and regulatory matters contained therein. Distributor and LipoMatrix will cooperate on the development of such materials. 4. TRADE SHOWS. Distributor shall use its reasonable commercial efforts to attend major national and regional (i.e. regions in or encompassing the Territory) trade shows and educational forums where similar or competitive products are displayed and to present the Products fairly at such shows and workshops. 5. CLINICAL REFERENCE ACCOUNTS. Distributor shall endeavor to develop key clinical reference accounts with plastic surgeons who are key opinion leaders within the Territory. This includes those leaders as reasonably selected by LipoMatrix. 6. MARKETING AND SALES SUPPORT. In LipoMatrix's sole determination, LipoMatrix personnel shall make periodic visits to the Territory during the period of this Agreement, as necessary in order to monitor administration, marketing and sales related to the Products. LipoMatrix shall pay all transportation, meal, lodging, salary and related expenses for its personnel in this regard. LipoMatrix shall use commercially reasonable efforts to assist Distributor in locating and obtaining appropriate clinical expertise at Distributor's reasonable request, for purposes of supporting Distributor's marketing effort. The parties will mutually agree in advance on the amount and duration of clinical education and the allocation of costs associated with such clinical education. B. PURCHASE QUOTAS, ORGANIZATION AND FORECASTS. 1. PURCHASE QUOTAS. The purchase quota for the first Ordering Year shall be mutually agreed between the parties prior to first Commercial Sale. Such purchase quota will be eighty percent (80%) of the anticipated sales for the first Ordering Year. The purchase quota for the second Ordering Year shall equal Distributor's actual purchases (in units) in the first Ordering Year. The purchase quota for the third Ordering Year shall equal Distributor's actual purchases (in units) in the second Ordering Year. Quotas for subsequent Ordering Years shall equal the higher of actual purchases (in units) or purchase quotas in the prior Ordering Year. Distributor agrees to use reasonable commercial efforts to meet or exceed the purchase quotas as set forth in this paragraph. In the event Distributor fails to meet or exceed, on an aggregate basis, the purchase quotas for two (2) consecutive Ordering Years beginning on or after the third Ordering Year, LipoMatrix may terminate this Agreement for cause as provided in Section VI.C, provided, however, that this termination option must be exercised within sixty (60) days of the commencement of the next Ordering Year. Purchase quotas will be adjusted if LipoMatrix is unable to supply Products due to regulatory constraints or significant manufacturing delays. - 3 - 12 2. SALES ORGANIZATION AND TRAINING. Distributor shall use reasonable commercial efforts to develop a sales organization that is knowledgeable concerning the features of the Products and the relationship of those features to the clinical benefits to potential customers within the Territory. In connection with the sale of Products, at LipoMatrix's request, Distributor shall make available an individual reasonably satisfactory to LipoMatrix ("Distributor's Trainer") for sales training of Distributor's other representatives. Training for Distributor's Trainer shall be provided, at LipoMatrix's election, either in Switzerland or in the Territory, and will occur before commencement of Commercial Sales, with training updates to be held as needed. LipoMatrix shall pay the costs of the training (including the transportation, meals, lodging, salary and related expenses of LipoMatrix employees), and Distributor shall be responsible for all transportation, meals, lodging, salary and related expenses of Distributor employees attending such training. 3. QUARTERLY SALES INFORMATION AND FORECASTS. On a quarterly basis, Distributor shall provide within ten (10) days after the end of each calendar quarter a reasonably detailed quarterly sales and promotional report to LipoMatrix. On a monthly basis, within the first ten (10) days of every month, Distributor shall provide LipoMatrix with a six (6) month (during the first Ordering Year) and fifteen (15) month (thereafter) rolling forecast. 4. SALES LAUNCH SCHEDULE. Distributor shall commence Commercial Sales of the Products in the Territory on __________, 199_. Clinical or marketing trials may commence at any time by mutual agreement of the parties and will not constitute a Commercial Sale. C. LIPOMATRIX VISITS AND MARKETING REPRESENTATIVE. Upon reasonable notice, Distributor shall permit and facilitate visits by LipoMatrix personnel to Distributor's facilities to review compliance with specific requirements of this Agreement, and to customer sites and to travel with Distributor's sales personnel for training purposes. Distributor shall permit the placement within Distributor's organization of a part-time or full-time Product specialist by LipoMatrix, at LipoMatrix's sole option and expense, for purposes of providing marketing and risk management support. Office space will be provided for such individual by Distributor. This requirement is waived as long as Distributor and its affiliates collectively own at least twenty percent (20%) of the Common Stock of LipoMatrix (on an as-converted basis) and the management of Distributor or any of its affiliates is represented on the board of directors of LipoMatrix. D. REGULATORY APPROVALS AND COMPLIANCE. LipoMatrix shall obtain and own all regulatory approvals, certificates, registrations, licenses, and permits related to the Products unless prohibited by local law. In the event that necessary approvals, certificates, registrations, licenses and permits required to sell and distribute the Products in the Territory are required by local law to be owned by, or held in the name of Distributor, Distributor agrees that upon termination of this Agreement for any reason, Distributor shall immediately take all steps necessary to promptly transfer the ownership, registration or entitlement of such registrations, certificates, licenses and permits to LipoMatrix or its designee. Distributor shall provide reasonable assistance to LipoMatrix in order to obtain any and all applicable regulatory approvals required by Governmental Agencies under the laws and/or regulations of any jurisdiction in order to market the Products within Territory, including but not necessarily limited to, meeting relevant standards and guidelines, preclinical, clinical and safety - 4 - 13 approvals required by Government Agencies. LipoMatrix shall reimburse Distributor for reasonable out-of-pocket expenses incurred by Distributor in connection with such assistance provided such expenses are approved in advance. LipoMatrix shall have the primary responsibility for manufacturing compliance and Distributor for any distribution compliance regarding any reporting or compliance matters in the Territory required of distributors by Government Agency rules and regulations, including but not limited to, recalls of the Products and reporting of adverse events involving the Products. The parties shall share information to allow each party to fulfill its compliance obligations hereunder. Each party shall promptly inform the other of any changes in regulatory or compliance status that might significantly affect the marketing of the Products in the Territory. Each party shall inform the other within two (2) working days of any actions taken by such party that could reasonably be expected to affect the regulatory or compliance status of LipoMatrix or the Products. Distributor shall make all reasonable efforts to comply with "Good Distribution Practices", as defined by EUCOMED, and with other appropriate standards for review and approval of orders from its customers. E. IMPORT LICENSES. Distributor shall obtain import and reexport licenses and permits and take all other actions required in connection with the import or reexport of Products purchased hereunder. F. CUSTOMER FEEDBACK AND POST-MARKETING SURVEILLANCE. Distributor shall use its commercially reasonable efforts to provide LipoMatrix with assessments of customer requirements for Product modifications and improvements. These assessments will focus on the quality, design, functional capability and other features of the Products, with a view to maximizing the potential market for such Products within the Territory. Distributor will promptly furnish LipoMatrix with copies of any written communications from its customers with respect to the use of its Products, suggestions for modifications or improvement to the Products, reliability of Products, performance of the Products, compliance with specifications, and other pertinent information. G. REGISTRY INFORMATION. On a monthly basis, Distributor will provide to LipoMatrix a report which will provide such information defined by LipoMatrix as necessary for maintenance of a registry of implants, including but not limited to, the transponder numbers for those Products shipped to customers or otherwise disposed of, including the transponder number and the customer number of the physician, clinic or hospital to whom the Product was sold. Distributor will provide LipoMatrix with an inventory reconciliation as requested by LipoMatrix from time to time. H. INVENTORY. Distributor agrees to maintain an inventory of Products equivalent to three (3) months of forecast sales provided the Products have a stated shelf life of at least twenty-four (24) months. Distributor will maintain its inventory of Products in a clean, secure and well organized facility. In addition, such storage space will comply with environmental requirements, - 5 - 14 including temperature or other requirements, set forth on the labeling of the Products, or other reasonable requirements notified from time to time by LipoMatrix to Distributor. Distributor will maintain records of the Products to enable traceability of Products. Distributor will use an effective materials management system for tracking its inventory and shipments of Products to its customers. I. RISK MANAGEMENT PROGRAM. Distributor recognizes that LipoMatrix maintains an active program of risk management as set out in Exhibits A and B attached to this Agreement (the "Risk Management Program"). The Risk Management Program may be changed by mutual agreement. Distributor agrees to comply with the Risk Management Program and to use its best efforts to assure compliance by Distributor's customers. J. HEALTH AND SAFETY LAWS AND REGULATIONS. Distributor shall comply fully with any and all applicable health and safety laws and regulations of the Territory. K. REPRESENTATIONS. Neither Distributor nor LipoMatrix shall make any false or misleading representations to customers or others regarding LipoMatrix or the Products. Distributor and its employees and agents shall not make any representations, warranties or guarantees with respect to the specifications, features or capabilities of the Products that are not consistent with LipoMatrix's documentation accompanying the Products or LipoMatrix's literature describing the Products, including LipoMatrix's standard warranty and disclaimers. Distributor shall not make any commitments or comments to its customers about possible future Product enhancements or future Products without the written authorization of LipoMatrix. L. WARRANTY. LipoMatrix warrants that each Product sold to Distributor hereunder will (i) have any required regulatory clearance for commercial sale in the Territory, (ii) be free from defects in materials and workmanship, (iii) be designed in compliance with ISO 9001 design standards, (iv) be manufactured, packaged, and labeled in accordance with the then prevailing specifications, and (v) have a remaining shelf life at the date of shipment of twenty-one (21) months when the stated shelf life from date of manufacture is twenty-four (24) months (the "Warranty Period"). If Distributor provides notice to LipoMatrix during the Warranty Period that a Product breaches this warranty, Distributor shall, if requested by LipoMatrix, return such Product to LipoMatrix for evaluation, or if not so requested, dispose of such Product in accordance with LipoMatrix's instructions, and, if such Product does breach this warranty, LipoMatrix will, in its sole discretion, either repair or replace same, and reimburse Distributor for its reasonable return freight incurred therefor, if any, or refund the purchase price. This warranty does not cover defects or damage caused by Distributor's misuse, abuse, alterations or failure to properly maintain, handle and store any Products. M. EXTENDED WARRANTY. In addition, an extended warranty will be provided by LipoMatrix as set out in the Risk Management Program. All claims pursuant to the extended warranty shall be made in a writing (including a telecopy) stating (1) the name and address of the site at which the Product was implanted, (2) the name and telephone number of the contact person at the site, (3) the transponder number of the allegedly nonconforming Product, (4) the date the Product was delivered to the site by Distributor, and (5) a reasonably detailed description of the alleged nonconformity. The allegedly non-conforming Product must be returned to LipoMatrix for evaluation. LipoMatrix shall promptly advise Distributor of any changes in its extended warranty. - 6 - 15 N. THE WARRANTY SET FORTH IN SECTIONS III.L AND III.M ABOVE IS EXCLUSIVE AND NO OTHER WARRANTY, WHETHER WRITTEN, ORAL OR IN ANY COMMUNICATION WITH DISTRIBUTOR, IS EXPRESSED OR IMPLIED. LIPOMATRIX MAKES NO WARRANTIES OR REPRESENTATIONS AS TO PERFORMANCE OF THE PRODUCT TO DISTRIBUTOR OR TO ANY OTHER PERSONS, EXCEPT AS SET FORTH HEREIN. NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, LIPOMATRIX RESERVES THE RIGHT TO MODIFY THE EXTENDED WARRANTY POLICY AND OBLIGATIONS SET FORTH HEREIN UPON NOTICE TO DISTRIBUTOR FROM TIME TO TIME AS TO PRODUCTS ORDERED BY DISTRIBUTOR AFTER THE DATE OF SUCH NOTICE. ALL IMPLIED WARRANTIES INCLUDING BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NON-INFRINGEMENT (EXCEPT AS SET FORTH IN SECTION VII) ARE HEREBY EXCLUDED. THE FOREGOING DISCLAIMERS SHALL NOT AFFECT LIPOMATRIX'S OBLIGATIONS AS SET FORTH IN SECTIONS VII AND VIII. IV. TERMS AND CONDITIONS OF SALE A. PRICES. Distributor and LipoMatrix shall, prior to launch in the Territory, mutually agree on list prices for Distributor's sales of Products to its customers. Prices charged by LipoMatrix to Distributor will reflect a discount of fifty-five percent (55%) from the agreed upon list price for the first Ordering Year and a discount of fifty percent (50%) thereafter. Prices to Distributor for all Products shall be F.O.B. Swiss manufacturing facility of LipoMatrix and shall exclude freight, taxes (including, without limitation, export, import and local excise, sales, use, property and other taxes, but excluding taxes imposed on LipoMatrix's net income), insurance, duties and other governmental charges levied with respect to the Products sold hereunder, all of which shall be paid by Distributor. Prices may be changed at any time during the term of this Agreement, or any extension or renewal thereof, by mutual agreement. B. RESEARCH AND DEVELOPMENT FUND. While Distributor markets the Products, Distributor shall pay to LipoMatrix an amount equal to five percent (5%) of Distributor's net sales revenue from sales of Products, such payments to be made for each month by the fifteenth day of the following month. Such payments shall commence in respect of sales for the month of April 1997. The payments, and the interest earned on them until expenditure, are intended to be expended on mutually agreed research, development, clinical and manufacturing programs for breast implant products and other products intended for use in cosmetic or reconstructive breast surgery, and if such funding is not expended, the funds shall revert to Distributor. LipoMatrix shall have full ownership of the results of such programs; provided, however, if Distributor and its affiliates beneficially own less than twenty percent (20%) of LipoMatrix, LipoMatrix will pay Distributor a mutually agreed upon royalty for sales of products incorporating the results of such programs outside the Territory and other territories where Distributor and its affiliates are selling Products. Distributor shall have the exclusive right to market in the Territory all products developed with any use of such funds and any such product shall be deemed a Product hereunder. If Distributor does not initiate commercial sales of such Product within ninety (90) days of regulatory clearance, then all rights to such product will revert to LipoMatrix. C. PAYMENT TERMS - 7 - 16 1. LipoMatrix agrees to grant Distributor credit terms for sales. Distributor agrees to pay to LipoMatrix the full amount of all invoices net sixty (60) days from the invoice date. In the event that Distributor does not promptly pay all invoices in accordance with this Section, then the payment terms will revert to payment by irrevocable letter of credit (or equivalent satisfactory to LipoMatrix) payable against shipping documents. Accounts past due will be subject to a monthly service charge of one and one-half percent (1.5%) of unpaid sum, but in no event to exceed the maximum allowable by law. 2. All payments shall be in the local currency of the Territory. 3. Distributor must give LipoMatrix written notice of any discrepancies among the purchase order, the invoice, and Products received, within thirty (30) days after receipt of Products or the invoice, whichever occurs later. 4. If Distributor fails to make payment when due, LipoMatrix may also decline to make further shipments until all above indebtedness is paid, and/or alternatively may decline to make further deliveries except for cash in advance of shipment or letter of credit acceptable to LipoMatrix. D. PRODUCT ORDERS. All orders for Products submitted hereunder shall be initiated by purchase orders sent by regular mail, hand delivery, airmail, courier mail, e-mail, or facsimile to LipoMatrix. LipoMatrix shall respond to such orders by air mail, courier mail, e-mail, or facsimile within reasonable time, not to exceed ten (10) days after receipt thereof. All purchase orders submitted by Distributor to LipoMatrix shall identify the Products ordered by Product number and quantity and the desired shipment date. E. ORDER ACCEPTANCE. All purchase orders are subject to acceptance by LipoMatrix at its Neuchatel office. LipoMatrix shall have no obligation or liability to Distributor with respect to purchase orders which are not accepted; however LipoMatrix shall not unreasonably reject any purchase order. LipoMatrix shall use reasonable efforts to deliver Products covered by accepted purchase orders at the times specified in the corresponding quotation or written acceptance of Distributor's purchase order. Any orders in the ordinary course of business, consistent with normal ordering practices, that are rejected by LipoMatrix shall be deducted from the purchase quota for such Ordering Year as set forth in Section III.B.1. Distributor's purchase orders hereunder shall be governed by the terms and conditions of this Agreement. Nothing contained in any purchase order shall in any way modify or add any terms or conditions of sale. F. CANCELLATION/RESCHEDULING. Distributor may, at its option and subject to the provisions of this Section, either reschedule delivery of any Products or cancel any order or portion thereof, upon written notice to LipoMatrix. A "reschedule" is defined as changing all or any portion of those Products scheduled for shipment on any ship date by moving the ship date later in time. Distributor shall have a right to cancel or reschedule any order for later shipment provided such request is received by LipoMatrix at least thirty (30) days in advance of the original ship date. Rescheduling or cancellation requests made Distributor within thirty (30) days of the original ship date are subject to LipoMatrix's approval. - 8 - 17 G. COUNTRY SHIPMENTS. Products sold to Distributor in the Territory will not be transferred by Distributor outside the Territory without the written notification to LipoMatrix and an appropriate billing adjustment to reflect any difference in prices between countries. Such transfers out of the Territory will only be permitted to countries in a territory covered by a distributor that is an affiliated company of Distributor. V. ACQUISITION AND USE OF DEMONSTRATION PRODUCT AND TRANSPONDER READERS A. Products will be provided without charge to Distributor for Distributor's exclusive use in selling and marketing of Products within the Territory, in such limited quantities as are determined by mutual agreement. B. Transponder readers will be loaned to Distributor for use in tracking inventory and for demonstration use with customers, in such limited quantities as are determined by mutual agreement. VI. TERM AND TERMINATION A. TERM. This Agreement shall commence upon the Effective Date and shall expire ten (10) years after first Commercial Sale, unless renewed or terminated as provided below. B. RENEWAL. Unless terminated in the manner provided below, the term of this Agreement shall be extended automatically for successive one (1) year periods, unless either party elects not to renew by written notice to the other party at least ninety (90) days prior to the conclusion of the initial term hereof or any such renewal period, as the case may be. Either party may elect not to renew this Agreement for any or no reason. C. TERMINATION FOR CAUSE. Either party shall have the right to terminate this Agreement at any time effective upon written notice, in the event of (1) breach by the other party of any of the terms and conditions hereof and failure to correct the breach within the thirty (30) days of written notice thereof; (2) the other party becoming generally unable to obtain necessary licenses; or (3) Force Majeure which suspends or delays performance of this Agreement for more than ninety (90) days from the beginning of such event. It is recognized by the parties that the Risk Management Program (see Section III.A.3.b) is an essential element of this Agreement. Failure by either party to adhere to its provisions or to use best efforts to implement it, may be used as grounds for termination of this Agreement for cause under this Section. In the event of a substantial change in ownership of Distributor, or the continued failure by Distributor to meet the purchase quotas as specified in Section III.B.1, LipoMatrix shall have the right to terminate this Agreement upon thirty (30) days written notice. In the event that LipoMatrix is acquired by a third party, LipoMatrix shall have the right to terminate this Agreement upon thirty (30) days written notice. Either party shall have the right to terminate this Agreement, by written notice taking immediate effect, if the other party becomes insolvent, or if there are instituted by or against the other party proceedings in bankruptcy or under insolvency similar laws or for reorganization, - 9 - 18 receivership or dissolution. Any such termination shall not relieve either party from any payment obligation which accrued prior to such termination. D. CANCELLATION AND REPURCHASE OPTIONS. Upon expiration or termination of this Agreement, any or all unfilled orders shall be cancelled. LipoMatrix reserves the right at its sole option to repurchase from Distributor any or all Products unsold by Distributor, at a mutually agreed upon price, which in any case shall not exceed the landed price Distributor paid LipoMatrix for Products to be repurchased. In the event LipoMatrix fails to repurchase such Products, Distributor shall have the right to continue to sell its existing inventory of such Products for a reasonable period following such expiration or termination. E. RETURN OF MATERIALS. Upon expiration or termination of this Agreement, Distributor shall return to LipoMatrix, at LipoMatrix's expense, all sales promotional materials and aids and any tools or equipment loaned or furnished to Distributor pursuant to this Agreement. F. EFFECT OF TERMINATION. In the event of termination by either party in accordance with any of the provisions this Agreement, or expiration of this Agreement, neither party shall be liable to the other, because of such termination or expiration, for compensation, reimbursement or damages on account of the loss of prospective profits or anticipated sales or on account of expenditures, inventory, investments, leases, or commitments in connection with the business or goodwill of LipoMatrix or Distributor, occurring as a result of such termination or expiration, or incurred in anticipation of renewal. VII. PATENT INDEMNITY LipoMatrix will defend any suit brought against Distributor based on a claim that the Product furnished under this Agreement infringes any patent or trademark, and will pay all damages and costs that a court awards against Distributor as a result of such claim and any payments made in settlement of such claim, provided that Distributor gives LipoMatrix: (a) prompt written notice of such suit; (b) full control over the defense or settlement thereof; and (c) all reasonable information and assistance (at LipoMatrix's expense excluding time spent by employees or consultants of the Distributor) to handle the defense and settlement thereof. If the Products, or any part thereof, are, or in the opinion of LipoMatrix may become, the subject of any claim, suit or proceeding for infringement of any patent or trademark, or in the event of any adjudication that the Products, or any part thereof, infringe any patent or trademark, or if the sale or use of Products, or any part thereof, is enjoined, LipoMatrix may, at its option and expense: (a) procure for Distributor and its customers the right under such patent or trademark to use or sell as appropriate the Products or such part thereof; or (b) replace the Products, or part thereof, with other suitable Products or parts; or (c) suitably modify the Products or part thereof, or (d) if none of the foregoing are commercially practicable, refund the amounts paid therefore by Distributor, and recover possession of such Products. LipoMatrix shall not be liable for any costs or expenses incurred without its prior written authorization. Notwithstanding the provisions of the preceding paragraphs, LipoMatrix shall not be liable to Distributor or its customers for: (a) infringement of patent claims covering the usage of LipoMatrix Products in a manner not intended under this Agreement; (b) any trademark infringements involving any marking or branding applied by LipoMatrix or involving any marking or branding applied at the request of Distributor, except if such marking or branding is owned by LipoMatrix; (c) the modification of Products, or any part thereof, unless such modification was - 10 - 19 made by LipoMatrix; or (d) the combination, operation or use of the Product with other products not furnished by LipoMatrix to the extent such claim would not have arisen had such combination, operation or use not occurred. THE FOREGOING PROVISIONS OF THIS SECTION VII STATE THE ENTIRE LIABILITY AND OBLIGATIONS OF LIPOMATRIX, AND THE EXCLUSIVE REMEDIES OF DISTRIBUTOR AND ITS CUSTOMERS WITH RESPECT TO ANY ALLEGED INFRINGEMENT OF PATENTS, COPYRIGHTS, TRADEMARKS, OR OTHER INTELLECTUAL PROPERTY RIGHTS, BY THE PRODUCTS OR ANY PART THEREOF. VIII. PRODUCT LIABILITY A. INDEMNITY BY DISTRIBUTOR. Distributor shall indemnify and hold LipoMatrix harmless from and against any and all liability, damage, loss, cost, expense (including reasonable attorney's fees), regulatory penalties and enforcement actions resulting from any claims made or suits brought against LipoMatrix, its employees, directors and customers which arise or result solely from Distributor's marketing, distribution, handling and shipping of the LipoMatrix Products, or from Distributor's negligence or willful misconduct. LipoMatrix shall promptly notify Distributor of any such claim or suit and shall permit Distributor at Distributor's cost and expense, to handle and control such claim or suit. B. INDEMNITY BY LIPOMATRIX. LipoMatrix shall indemnify and hold Distributor harmless from and against any and all liability, damage, loss, cost or expense (including reasonable attorney's fees) resulting from any claims made or suits brought against Distributor, its owners, employees, directors and customers which arise or result solely from LipoMatrix's design, handling and shipping of the LipoMatrix Products, or failure to manufacture the LipoMatrix Products in accordance with agreed upon specifications, FDA Good Manufacturing Practices or other applicable standards for medical device manufacturers, or from negligence or willful misconduct. Distributor shall promptly notify LipoMatrix of any such claim or suit and shall permit LipoMatrix at LipoMatrix's cost and expense, to handle and control such claim or suit. C. APPORTIONMENT OF DAMAGES. In the event that any liability, damage, loss, cost or expense (including reasonable attorney's fees) as aforesaid cannot be established (with respect to final judgments of a court of competent jurisdiction from which no appeal is or can be taken as well as settlements made prior to, during or following termination of litigation to which the parties have expressly agreed in writing) to have resulted solely from the actions or failures to act of LipoMatrix or Distributor or their affiliates, responsibility for payment of such liability, damage, loss, cost or expense (including reasonable attorney's fees) will be apportioned between LipoMatrix and Distributor according to the contribution of either party to the damage; and if such allocation is not mutually agreed, then it will be determined by mandatory binding arbitration. D. PRODUCT LIABILITY INSURANCE. LipoMatrix shall use its reasonable commercial efforts to secure product liability insurance in the amount of five million dollars ($5,000,000), to the extent this is available on commercially reasonable terms. LipoMatrix shall have Distributor named as an additional insured on its product liability insurance policy. If LipoMatrix is unable to secure or maintain such insurance, Distributor may terminate this Agreement. The parties agree to review the possibility of increasing the amount of such insurance if increases in sales so warrant. - 11 - 20 IX. LIMITATION OF LIABILITY IN NO EVENT, WHETHER THE CAUSE OF ACTION BE BASED IN CONTRACT OR TORT (INCLUDING NEGLIGENCE) OR ANY OTHER LEGAL OR EQUITABLE THEORY SHALL EITHER PARTY BE LIABLE FOR INCIDENTAL, CONSEQUENTIAL, INDIRECT, SPECIAL OR PUNITIVE DAMAGE OF ANY KIND, OR FOR LOSS OF REVENUE, LOSS OF BUSINESS OR OTHER FINANCIAL LOSS ARISING OUT OF OR IN CONNECTION WITH THE SALE, USE, PERFORMANCE, FAILURE OR INTERRUPTIONS OF ITS PRODUCTS. NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, LIPOMATRIX'S MAXIMUM LIABILITY FOR DAMAGES HEREUNDER SHALL NOT EXCEED THE PURCHASE PRICE OF THE PRODUCTS PURCHASED DURING THE TERM OF THIS AGREEMENT. THE FOREGOING LIMITATIONS SHALL NOT AFFECT EITHER PARTY'S DUTY TO INDEMNIFY THE OTHER PARTY FOR THIRD-PARTY SUITS FOR SUCH DAMAGES, AS SET FORTH IN SECTIONS VII AND VIII. THE DISCLAIMER OF LIABILITY FOR DAMAGES WILL NOT BE AFFECTED IF ANY REMEDY PROVIDED HEREUNDER SHALL FAIL OF ITS ESSENTIAL PURPOSE. DISTRIBUTOR HAS ACCEPTED THE DISCLAIMER OF LIABILITY FOR DAMAGES AS PART OF A BARGAIN TO LOWER THE PRICE OF THE PRODUCTS AND UNDERSTANDS THAT THE PRICE OF THE PRODUCTS WOULD BE HIGHER IF LIPOMATRIX WERE REQUIRED TO BEAR ADDITIONAL LIABILITY FOR DAMAGES. X. NO RIGHT TO MANUFACTURE OR COPY The Products are offered for sale and are sold by LipoMatrix subject in every case to the condition that such sale does not convey or license to Distributor, expressly or by implication, the right to manufacture, duplicate or otherwise copy or reproduce any of the Products. Distributor shall take appropriate steps with customers, as mutually agreed, to inform them of, and both parties shall, as mutually agreed, assist each other in assuring compliance with, the restrictions contained in this Section. XI. INTELLECTUAL PROPERTY RIGHTS A. SOLE PROPERTY OF LIPOMATRIX. Distributor agrees that Intellectual Property Rights are and shall remain sole property of LipoMatrix and that LipoMatrix owns all right, title and interest in the product lines which include the Products now or hereafter subject to this Agreement. The use by Distributor of any Intellectual Property Rights, including, but not limited to any patent, invention, trademark, trade name, trade secret or copyrighted material, is authorized only for the purposes herein set forth. Upon termination of this Agreement for any reason, authorization shall cease. Distributor agrees that the Products contain a device identification system (including software) which is proprietary to LipoMatrix. LipoMatrix at all times retains ownership of and title to the device identification system supplied with the Product, and to the trade secrets embodied in such technology. Subject to Distributor's acceptance of the obligations contained in this Section, and to the fulfillment of these obligations, LipoMatrix grants Distributor a non-exclusive license to use - 12 - 21 the device identification system included with the Products solely in the form and on the medium in which program is delivered for the purposes of operating the Product in accordance with the instructions set forth in the Instructions for Use supplied with the Product, and for no other purposes whatsoever. Distributor may not decompile, reverse engineer or reverse assemble such technology, nor may it make a copy of such program or apply any techniques to derive the trade secrets embodied therein. B. USE OF LIPOMATRIX NAME AND TRADEMARKS. During the term of this Agreement, Distributor shall have the right to indicate to the public that Distributor is an authorized distributor of LipoMatrix's Products and to advertise within the Territory such Products under the LipoMatrix Trademarks. Distributor shall not alter or remove any LipoMatrix Trademark applied to the Products at the factory. At no time during or after the term of this Agreement shall Distributor challenge or assist others to challenge the LipoMatrix Trademarks or registration thereof or attempt to register any trademarks, marks or tradenames confusingly similar to those of LipoMatrix. C. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. Distributor and LipoMatrix acknowledge that by reason of their relationship hereunder they will have access to certain information and materials concerning each other's business, plans, customers and products (including Trade Secrets and Technical Data provided to Distributor) which are confidential and of substantial value to Distributor and LipoMatrix, which value would be impaired if such information were disclosed to third parties. Each party agrees that it shall not use in any way for its own account or the account of any third party, nor disclose to any third party, any such confidential information which is revealed to it by the other party. The receiving party shall take every reasonable precaution to protect the confidentiality of such information, which in no event shall be less than the efforts exercised by such party with respect to its own confidential business information. Distributor and LipoMatrix shall advise each other in the event that either party considers particular information or materials to be confidential. Distributor shall not publish any technical description of the Products beyond the description published by LipoMatrix. In the event of expiration or earlier termination of this Agreement, there shall be no use or disclosure by Distributor or LipoMatrix of any confidential information, and Distributor shall not manufacture, or have manufactured, devices, components or assemblies utilizing any of LipoMatrix's Intellectual Property Rights. XII. GENERAL A. COUNTERPARTS AND GOVERNING LAW. This Agreement may be executed in counterparts, and shall be governed by the laws of Switzerland, without regard to conflicts of law. Distributor hereby agrees to submit to the jurisdiction of an appropriate court within Vaud, Switzerland, and agrees that service of documents commencing any legal action may be made on Distributor in the manner provided for giving notice hereunder B. COMPLETE AGREEMENT. This Agreement is intended as the complete, final and exclusive statement of the terms of agreement between the parties and supersedes any and all agreements between them relating to the subject matter hereof. No modification, change or amendment to this Agreement, nor any waiver of any rights in respect hereto, shall be effective unless in writing and signed by the party to be charged, unless explicitly permitted by the terms of - 13 - 22 this contract. The waiver of breach or default hereunder shall not constitute the waiver of subsequent breach or default. C. FORCE MAJEURE. Notwithstanding anything in this Agreement to the contrary, other than the obligation to pay money, the obligations of either party under this Agreement, including purchase quotas, shall be excused during any continuing event which is beyond the reasonable control of such party, including without limitation, strike, fire, war, rebellion, natural disasters/Acts of God, embargo, governmental order or restriction, or inability for any other reason to supply or deliver Products due to unnatural or commercially impractical circumstances. D. NOTICE. Any notice or report required or permitted under this Agreement shall be deemed given if delivered personally or if sent by either party to the other by registered or certified mail, postage prepaid, or internationally recognized courier, for overnight delivery, addressed to the other party at its address first set forth above or at such other address to which such party shall give notice hereunder. If by mail, delivery shall effective five (5) days after deposit with postal authorities. E. ASSIGNMENT. Distributor shall not assign this Agreement nor any rights hereunder without the prior written consent of LipoMatrix, granted in LipoMatrix's sole discretion. Subject to the foregoing, this Agreement shall bind and inure to the benefit of the parties and their respective successors and assigns. LipoMatrix shall be entitled to assign its interest in this Agreement in connection with a merger or other business combination in which LipoMatrix is not the surviving entity. F. ENGLISH AS LANGUAGE OF AGREEMENT. The original of this Agreement has been written in English. Distributor waives right it may have under the law of Distributor's country to have this Agreement written in any language other than English. G. SEVERABILITY. In the event any provision of this Agreement is found to be invalid, illegal or unenforceable, the validity, legality and enforceability of any of the remaining provisions shall not in any way be affected or impaired thereby. H. SURVIVAL. The obligations and duties listed in the Sections titled "Warranty", "Patent Indemnity", "Limitation of Liability", "No Right to Manufacture or Copy", "Product Liability" and "Intellectual Property Rights" shall survive any termination or expiration of this Agreement and shall remain in effect for a period of ten (10) years thereafter. - 14 - 23 IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the day and year first above written. LIPOMATRIX, INCORPORATED COLLAGEN _____________________________ ("LIPOMATRIX") ("DISTRIBUTOR") By:__________________________________ By:___________________________________ (signature) (signature) Printed Name: Terry R. Knapp, M.D. Printed Name: Neville Pelletier Title: President & CEO Title: Director - 15 - 24 EXHIBIT A RISK MANAGEMENT PROGRAM Confidential treatment requested for this exhibit. 25 EXHIBIT B RISK MANAGEMENT SUPPORT DOCUMENTS * Confidential treatment requested for this exhibit. 26 EXHIBIT B CI SUBSIDIARIES
TERRITORY COMPANY/ADDRESS - -------------------------------------------------- ------------------------------------------- Australia/New Zealand Collagen Biomedical Pty. Ltd. Unit 1, Chullora Central Corner Brunker Rd & Anza St. Chullora NSW 2190 Austria Collagen Vertriebe biomedizinischer Produkte GmbH Schloss Essling Esslinger Hauptrasse 81-87 1228 Wien Belgium/Luxembourg Collagen S.A. Avenue Winston Churchill 22 1180 Brussels Canada Collagen Canada Ltd. 1235 Bay Street Suite 500 Toronto, Ontario M5R 3K4 France Collagen France S.a.r.l. 113 rue Victor Hugo 92300 Levallois-Perret Germany Collagen GmbH Oskar-Messter-Strasse 22 85737 Ismaning Italy Collagen S.r.l. Via Ripamonti, 66 20141 Milan Netherlands Collagen BV Marksingel 2C NL-4811 NV Breda Switzerland/Lichtenstein Collagen S.A. Avenue Gratta Paille 2 1000 Lausanne 30 Grey
27
TERRITORY COMPANY/ADDRESS - -------------------------------------------------- ------------------------------------------- United Kingdom/Ireland Collagen (UK) Ltd. The Business Centre 6, Bertie Road Thame OX 9 3FR - Oxon
- 2 - EX-10.74 8 PROMISSORY NOTE 1 EXHIBIT 10.74 PROMISSORY NOTE $150,000 Palo Alto, California June 5, 1995 FOR VALUE RECEIVED, the undersigned, Howard D. Palefsky ("Borrower"), promises to pay to Collagen Corporation, a Delaware corporation ("Lender"), or order, at 2500 Faber Place, Palo Alto, CA 94303, or at such other place as Lender may from time to tome designate in writing, the sum of one hundred and fifty thousand dollars ($150,000). Interest will be accrued quarterly on the outstanding principal balance at the lower of: Ten percent (10%) per annum, or the prime rate as of the last day of the calendar quarter, as reported in the Wall Street Journal. All accrued interest will be paid annually, on September 1 of each year. Fifty percent (50%) of each performance bonus (e.g., the MBR bonus) awarded to the undersigned will be retained by the Company and deducted from the loan balance for the next five years, until the loan is paid in full; and upon the fifth anniversary date of the note, the entire balance of principal and interest if any, will be due and payable. If Borrower's employment with the Lender terminates for any reason, the then outstanding principal balance of this Note, and interest accrued thereon shall become due and payable immediately. Borrower hereby acknowledges that the amounts of principal reduced hereunder and any interest imputed to Borrower under the Internal Revenue Code of 1986, as amended, will be taxable income to Borrower and, as such will be subject to all applicable federal state and local tax withholding requirements. As security for the payment of the principal and accrued interest on this Note and any renewal, extension or modification thereof, Borrower hereby grants to Lender a first priority security interest in any and all shares of Lender's capital stock currently held or hereafter acquired by or on behalf of Borrower ("Pledged Shares"). Borrower covenants and agrees to promptly deliver all certificates or other evidences of Pledged Shares to Lender and to take such further actions and execute such further documents as may be necessary for Lender to perfect its security interest in the Pledged Shares. Amounts due under this Note shall be payable in lawful money of the United States of America and in immediately available funds. All payments under this Note shall be applied first to any accrued and unpaid interest and then to principal. Borrower shall have the right to pay, without penalty or premium, all or any portion of the outstanding principal amount of this Note at any time. Borrower waives presentment, protest and demand, and notice of protest, demand, dishonor and nonpayment of this Note and diligence in taking any action to collect any amounts owing under this Note by proceeding against any of the rights securing the payment of this Note. If action is instituted on this Note, Borrower agrees to pay such reasonable sum as attorney's fees as the court may fix and award in such action. This Note shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, Borrower has executed this Note as of the date first written above. /s/ REID W. DENNIS /s/ HOWARD D. PALEFSKY - ------------------------------------- ------------------------------------- Acknowledged and accepted by: Reid W. Dennis ------------------------------------- Chairman Emeritus Chairman of Executive Committee EX-10.75 9 LETTER AGREEMENT 1 EXHIBIT 10.75 July 10, 1995 Benson F. Smith Executive V.P. & Chief Operating Officer C.R. Bard, Inc. 730 Central Avenue Murray Hill, NJ 07974 Dear Benson: When accepted on behalf of C.R. Bard, Inc. ("BARD") and returned to Collagen Corporation ("COLLAGEN"), this letter will constitute a formal agreement between our companies concerning the subject matter of this letter agreement. BARD and COLLAGEN, the "parties" to this agreement, agree as follows: 1. DEFINITIONS. Terms which are capitalized but not defined in this letter will have the meaning given such terms in the Amended and Restated Development and Distribution Agreement between BARD and COLLAGEN, as amended August 4, 1989 (the "1989 AGREEMENT"), or in the INITIAL PRODUCT AGREEMENT between BARD and COLLAGEN, as amended and restated August 4, 1989 (the "INITIAL PRODUCT AGREEMENT") as applicable. 2. PURCHASE COMMITMENT AND REPLACEMENT. After June 30, 1995, BARD shall have no obligation to make minimum purchases of Product from COLLAGEN. The obligation of COLLAGEN under paragraph 5 of the October 7, 1994, letter agreement between the parties (the "October 7th Letter Agreement") to replace expired units shall apply only to purchases of Product by BARD between July 1, 1994, and June 30, 1995, subject to BARD maintaining appropriate "first in first out inventory" (FIFO) management at all times for Product purchased from COLLAGEN. 3. INVENTORY CARRYING COSTS. The obligation in paragraph 3 of the October 7th Letter Agreement providing for COLLAGEN to reimburse BARD's inventory carrying costs shall remain in effect, but only for Product purchased by BARD through June 30, 1995. For purchases of Product by BARD between July 1, 1994, and June 30, 1995, the payment terms shall remain net ninety (90) days. For purchases of Product by BARD from and ** Confidential treatment requested for a portion of this document. Page 1 2 after July 1, 1995, payment terms shall revert to net thirty (30) days. The credit for the net ninety (90) day terms on purchases of Product between July 1, 1994 and June 30, 1995 shall continue to apply to reducing the amount of the inventory carrying costs pursuant to paragraph 3 of the October 7th Letter Agreement. After June 30, 1995, COLLAGEN shall reimburse BARD for the inventory carrying costs for Products purchased from July 1, 1994 through June 30, 1995, in accordance with the October 7th Letter Agreement, but shall reimburse BARD in cash net thirty (30) days following receipt of notice from BARD, due to the dissolution of the R&D FUND as set forth in paragraph 4 below. 4. R&D FUND DISSOLUTION AND DISTRIBUTIONS. Section 8 (c)(ii)(aa) and (bb) of the 1989 AGREEMENT currently provides for an R&D FUND into which BARD is obligated to deposit an amount equal to four percent (4%) of the NET SALES PRICE of PRODUCT sold during the previous calendar quarter if and for so long as the balance in the R&D FUND is less than $5,000,000. The parties hereby agree that effective as of the close of business on June 30, 1995 (the "Dissolution Date"), BARD's obligations to make contributions into the R&D FUND shall cease to accrue, and the R&D FUND shall be dissolved; provided that this shall not relieve BARD of the obligation to contribute all amounts owing to the R&D FUND as a result of Product sales on or before the Dissolution Date. The balance of the R&D FUND on the Dissolution Date, as adjusted by virtue of deposits into the R&D FUND by BARD based on Product sales through the Dissolution Date, shall be adjusted by adding thereto the total of BARD's Product inventory carrying costs (as described in the October 7th Letter Agreement) which COLLAGEN has elected to have deducted from R&D FUND contributions which, but for the October 7th Letter Agreement between the parties, BARD would have been required to make (the "Adjusted R&D FUND"). Fifty percent (50%) of the Adjusted R&D FUND will be distributed to BARD within thirty (30) days of the Dissolution Date. The balance remaining in the R&D FUND, after such distribution to BARD, will be distributed to COLLAGEN within thirty (30) days of the Dissolution Date. After the Dissolution Date, neither party shall have any further obligations to the other party with respect to the R&D FUND, and the provisions of Section 8 (c)(ii)(aa)(bb)(cc) and (dd) of the 1989 AGREEMENT shall be deemed terminated, effective as of the close of business on the Dissolution Date. 5. INCREASE OF ROYALTY TO COLLAGEN. In consideration of the dissolution of the R&D FUND as described in paragraph 4 above, COLLAGEN's royalty as set forth in Section 3 (c) of the INITIAL PRODUCT AGREEMENT shall be permanently increased by ** over the rates stated in such section, such increase to be effective with respect to sales of Product on and ** Confidential treatment requested for a portion of this document. Page 2 3 after July 1, 1995. Accordingly, effective as of July 1, 1995, Sections 3 (c)(iii) and 3 (c)(iv) of the INITIAL PRODUCT AGREEMENT are hereby amended to read as follows: Section 3 (c)(iii) For COMMERCIAL SALES of the Product by BARD during the second twelve months after the date of PMA Approval, the royalty shall be the difference (if any) between (A) ** of the NET SALES PRICE of the Product and (B) the price paid by BARD for the Product pursuant to Section 3 (a) above; Section 3 (c)(iv) For COMMERCIAL SALES of the Product by BARD during the third twelve months after the date of PMA Approval and thereafter, the royalty shall be the difference (if any) between (A) ** of the NET SALES PRICE of the Product and (B) the price paid by BARD for the Product pursuant to Section 3 (a) above; 6. AMENDMENT TO OCTOBER 12, 1994, LETTER AGREEMENT. In order to reflect the latest financial calculations, the letter agreement between the parties dated October 12, 1994, reflecting certain royalty adjustments is restated as follows: ALLOCATION OF VARIABLE OVERHEAD, LABOR, AND MATERIAL COSTS. Subject to the terms of this amendment, BARD and COLLAGEN hereby agree that effective January 1, 1995, BARD shall have the right to deduct the sum of ** from the NET SALES PRICE of Product sold in packages of six (6) syringes prior to calculating the royalty payable pursuant to Section 3(c) of the INITIAL PRODUCT AGREEMENT. The parties hereby acknowledge that: (a) BARD's current net selling price of Product sold in packages of six (6) syringes is $1,800, and (b) at the time of sale of Product, BARD furnishes purchasers with a periurethral delivery device as described in BARD order number 651010 (hereinafter the "periurethral delivery device") or a transurethral delivery device, as described in BARD order number 651015 (hereinafter the "transurethral delivery device"), and (c) BARD's current cost for the periurethral device is **, which cost is comprised of ** for variable overhead and ** for direct labor and material costs, and (d) BARD's current cost for the transurethral delivery device is **, which cost is comprised of ** for variable overhead and **for direct labor and material costs, and (e) the deduction of ** from the NET SALES PRICE of Product sold in packages of six (6) syringes has been arrived at based upon ** Confidential treatment requested for a portion of this document. Page 3 4 COLLAGEN hereby agreeing to bear ** of the average of BARD's variable overhead, direct labor, and material costs for the periurethral delivery device and transurethral delivery device. AUDIT. BARD hereby grants COLLAGEN the right, at COLLAGEN's expense, to have Ernst & Young, or at COLLAGEN's option, an alternate accounting firm chosen by COLLAGEN and reasonably acceptable to BARD, or COLLAGEN' internal auditors, audit BARD's records relating to its variable overhead, direct labor, and material costs relating to the periurethral delivery device and transurethral delivery device. FUTURE ADJUSTMENTS. Notwithstanding the above provisions of this Paragraph 6, if the result arrived at by adding BARD's future variable overhead, direct labor, and material costs for the periurethral delivery device and BARD's future variable overhead, direct labor, and material costs for the transurethral delivery device, dividing such sum by two (2) and multiplying the result by .5 is less than **, BARD shall deduct such result from the NET SALES PRICE of Product sold in packages of six (6) syringes prior to calculating the royalty due to COLLAGEN pursuant to Section 3(c) of the INITIAL PRODUCT AGREEMENT in lieu of deducting **. In the event, after COLLAGEN's acceptance of this amendment, BARD's average variable overhead, direct labor, and material costs for the periurethral device and transurethral device exceed **, BARD shall so notify COLLAGEN and shall include in its notice documentation supporting such increase(s). In the event BARD issues a notice to COLLAGEN pursuant to the preceding sentence, the parties hereby agree to negotiate in good faith an increase, based upon the documentation provided to COLLAGEN, in the deduction from the NET SALES PRICE which BARD is then permitted to take hereunder prior to the calculation of the royalty payable pursuant to Section 3(c) of the INITIAL PRODUCT AGREEMENT. Notwithstanding the preceding sentence, in the event the parties are unable to reach an agreement on any such increase within a reasonable time following BARD's notice, then at BARD's option, either (a) the treatment of NET SALES PRICE of Product shall revert to the original terms of the INITIAL PRODUCT AGREEMENT or (b) the treatment of NET SALES PRICE of Product shall revert to a ** deduction per six (6) syringe package of Product. The provisions contained herein shall not apply to any other delivery device unless the parties expressly agree otherwise. ** Confidential treatment requested for a portion of this document. Page 4 5 All provisions of the 1989 AGREEMENT, the INITIAL PRODUCT AGREEMENT, the October 7th Letter Agreement, and the October 12, 1994, letter agreement between the parties which are not inconsistent with this letter agreement shall remain in full force and effect. If the above terms reflect our agreement on this subject, would you please sign on behalf of COLLAGEN in the space provided below and return a fully-executed copy to me for our records. Nothing contained herein is intended, nor shall anything contained herein be deemed or construed as modifying the exclusivity in Section 5(a) of the 1989 AGREEMENT with respect to Product specified in Section 1 of the INITIAL PRODUCT AGREEMENT or otherwise. Sincerely, COLLAGEN CORPORATION /s/ William C. Miller William C. Miller Vice President and General Counsel Accepted on behalf of C.R. Bard, Inc.: By: /s/ Benson F. Smith --------------------------------------------- Title: Executive Vice-President & Chief Operating Officer -------------------------------------------------- ** Confidential treatment requested for a portion of this document. Page 5 EX-11.1 10 COMPUTATION OF PER SHARE INCOME 1 EXHIBIT 11.1 COLLAGEN CORPORATION Statement Regarding Weighted Average Common and Common Equivalent Shares Used in Computation of Per Share Income
Years Ended June 30, 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) Net income $8,760 $4,920 $ 8,743 ============================================= Primary - ------- Common Stock 9,270 9,592 9,957 Stock Options (treasury stock method) 190 304 310 --------------------------------------------- Weighted average number of common and common equivalent shares outstanding 9,460 9,896 10,267 ============================================= Earnings per share - primary $.93 $.50 $.85 ============================================= Fully Diluted - ------------- Common Stock 9,270 9,586 9,957 Stock Options (treasury stock method) 211 321 321 --------------------------------------------- Weighted average number of common and common equivalent shares outstanding 9,481 9,907 10,278 ============================================= Earnings per share - fully diluted NA* NA* NA* =============================================
__________________________________ * Not applicable - dilution less than 3%. EX-21.1 11 SUBSIDIARIES OF COLLAGEN CORPORATION 1 EXHIBIT 21.1 COLLAGEN CORPORATION Subsidiaries* of Collagen Corporation The Registrant owns the following percentages of the outstanding voting securities of the following corporations, which are included in the Registrant's consolidated financial statements (other than Target Therapeutics, Inc. which is accounted for under the equity method in years ended June 30, 1995, 1994, and 1993).
Percent Ownership of Outstanding Voting Securities @ September 1, 1995** Name Jurisdiction of Incorporation - ----------------------------------------------------------------------------------------------------------- Target Therapeutics, Inc. 24% Delaware Collagen International, Inc. 100% Delaware Collagen Biomedical Pty., Limited 100% Australia Collagen Vertrieb biomedizischer Produkte Ges m.b.H. 100% Austria Collagen SA 100% Belgium Collagen Canada Ltd. 100% Canada Collagen SARL 100% France Collagen GmbH 100% Germany Collagen S.r.l. 100% Italy Collagen Luxembourg S.A. 100% Luxembourg Collagen B.V. 100% Netherlands Collagen AG 100% United Kingdom Collagen International Sales Corporation 100% Virgin Islands
__________________________________ * Excludes certain subsidiaries, which, considered in the aggregate as a single subsidiary, did not constitute a significant subsidiary as of June 30, 1995. ** Excludes LipoMatrix, Incorporated, in which Registrant agreed to increase its ownership from 40% to 90%, on a fully-diluted basis, on August 22, 1995. EX-23.1 12 CONSENT OF ERNST & YOUNG 1 EXHIBIT 23.1 Consent of Ernst & Young LLP, Independent Auditors We consent to the use of our report dated August 1, 1995, with respect to the consolidated financial statements of Collagen Corporation included in this Annual Report (Form 10-K) of Collagen Corporation for the year ended June 30, 1995. Our audits also included the financial statement schedule of Collagen Corporation listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth herein. We also consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 2-93777, 33-21252, 33-39684, 33-73674 and 33-80038), pertaining to the 1984 Incentive Stock Option Plan, 1985 Employee Stock Purchase Plan, 1990 Directors' Stock Option Plan and 1994 Stock Option Plan of Collagen Corporation of our report dated August 1, 1995, with respect to the consolidated financial statements and our report included in the preceding paragraph with respect to the consolidated financial statement schedule included in this Annual Report (Form 10-K) of Collagen Corporation. ERNST & YOUNG LLP /s/ Ernst & Young LLP Palo Alto, California September 26, 1995 EX-23.2 13 CONSENT OF ERNST & YOUNG WITH RESPECT TO TARGET 1 EXHIBIT 23.2 Consent of Ernst & Young LLP, Independent Auditors With respect to The Consolidated Financial Statements of Target Therapeutics, Inc. for the fiscal years ended March 31, 1995, 1994, & 1993 We consent to the use of our report dated April 26, 1995 with respect to the consolidated financial statements of Target Therapeutics, Inc. included as Exhibit 99.1 to this Annual Report (form 10-K) of Collagen Corporation for the year ended June 30, 1995. Our audits also included the financial statement schedule of Target Therapeutics, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects the information set forth therein. ERNST & YOUNG LLP /s/ Ernst & Young LLP Palo Alto, California April 26, 1995 EX-27.1 14 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE CONSOLIDATED FINANCIAL STATEMENTS OF COLLAGEN CORPORATION INCLUDED IN FORM 10-K ANNUAL REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-K, ANNUAL REPORT FOR THE YEAR ENDED JUNE 30, 1995. 1,000 YEAR JUN-30-1995 JUL-01-1994 JUN-30-1995 9,384 0 13,785 383 5,056 33,410 37,032 19,526 76,906 19,014 9,972 106 0 0 47,814 76,906 71,560 72,560 18,584 18,584 42,122 46 91 16,200 7,440 8,760 0 0 0 8,760 .93 .93
EX-99.1 15 TARGET CONSOLIDATED FINANCIAL STATEMENTS 1 EXHIBIT 99.1 TARGET THERAPEUTICS, INC. CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1995, 1994 AND 1993 WITH REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 2 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Target Therapeutics, Inc. We have audited the accompanying consolidated balance sheets of Target Therapeutics, Inc. as of March 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended March 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Target Therapeutics, Inc. at March 31, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 1995, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP /s/ Ernst & Young LLP Palo Alto, California April 26, 1995 2 3 TARGET THERAPEUTICS, INC. ---------------- CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) ASSETS ------
March 31, ------------------------- 1995 1994 ------- ------- Current assets: Cash, cash equivalents and short-term investments $38,070 $37,673 Accounts receivable 9,442 6,426 Inventories 5,423 2,987 Deferred tax assets 4,014 2,094 Other current assets 424 289 ------- ------- Total current assets 57,373 49,469 Property and equipment, net 6,502 4,688 Other assets 6,524 2,973 ------- ------- $70,399 $57,130 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable $ 1,646 $ 1,454 Accrued compensation 3,361 2,152 Taxes payable 1,480 672 Accrued product replacement costs 1,030 1,141 Other accrued liabilities 3,506 1,925 Deferred tax liabilities 1,398 598 ------- ------- Total current liabilities 12,421 7,942 Long-term obligations 115 124 Commitments and contingencies Stockholders' equity: Preferred stock, $.001 par value (shares authorized: 2,000,000; issued and outstanding: none) --- --- Common stock, $.0025 par value (shares authorized: 25,000,000; issued and outstanding: 7,098,619 and 7,024,619 at March 31, 1995 and 1994, respectively) 18 18 Additional paid-in capital 41,857 40,593 Deferred compensation --- (124) Retained earnings 15,986 8,608 Accumulated translation adjustments 35 --- Notes receivable from stockholders (33) (31) ------- ------- Total stockholders' equity 57,863 49,064 ------- ------- $70,399 $57,130 ======= =======
The accompanying notes are an integral part of these financial statements. 3 4 TARGET THERAPEUTICS, INC. ---------------- CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts)
Year ended March 31, ------------------------------------------ 1995 1994 1993 ------- ------- ------- Product sales $47,508 $35,353 $28,117 Costs and expenses: Cost of sales 15,151 13,368 9,657 Research and development 10,336 7,624 6,496 Selling, general and administrative 13,556 9,245 7,543 ------- ------- ------- Total costs and expenses 39,043 30,237 23,696 ------- ------- ------- Income from operations 8,465 5,116 4,421 Interest income, net 1,271 954 890 Other income 792 515 16 ------- ------- ------- Income before income taxes and cumulative effect of change in method of accounting for income taxes 10,528 6,585 5,327 Provision for income taxes 3,150 2,265 1,747 ------- ------- ------- Income before cumulative effect of accounting change 7,378 4,320 3,580 Cumulative effect of change in method of accounting for income taxes --- 631 --- ------- ------- ------- Net income $ 7,378 $ 4,951 $ 3,580 ======= ======= ======= Income per share: Income before cumulative effect of accounting change $ 1.02 $ .61 $ .51 Cumulative effect of change in method of accounting for income taxes --- .09 --- ------- ------- ------- Net income per share $ 1.02 $ .70 $ .51 ======= ======= ======= Shares used in calculating per share information 7,233 7,103 7,075 ======= ======= =======
The accompanying notes are an integral part of these financial statements. 4 5 TARGET THERAPEUTICS, INC. ---------------- CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands, except share amounts)
Notes Accumulated Receivable Total Additional Deferred translation from stock- Common paid-in compen- Retained adjust- stock- holders' stock capital sation earnings ments holders equity ------ ---------- -------- -------- ----------- ---------- -------- Balances at March 31, 1992 $17 $38,253 $(340) $ 77 $--- $(24) $37,983 Exercise of common stock options (190,195 shares), net of notes receivable --- 101 --- --- --- 24 125 Amortization of deferred compensation --- --- 108 --- --- --- 108 Income tax benefit of disqualifying dispositions --- 666 --- --- --- --- 666 Net income --- --- --- 3,580 --- --- 3,580 --- ------- ----- ------- ---- ---- ------- Balances at March 31, 1993 17 39,020 (232) 3,657 --- --- 42,462 Exercise of common stock options and issuance under stock purchase plan (268,264 shares), net of notes receivable 1 687 --- --- --- (31) 657 Amortization of deferred compensation --- --- 108 --- --- --- 108 Income tax benefit of disqualifying dispositions --- 886 --- --- --- --- 886 Net income --- --- --- 4,951 --- --- 4,951 --- ------- ----- ------- ---- ---- ------- Balances at March 31, 1994 18 40,593 (124) 8,608 --- (31) 49,064 Exercise of common stock options and issuance under stock purchase plan (74,000 shares), net of notes receivable --- 1,038 --- --- --- (2) 1,036 Amortization of deferred compensation --- --- 124 --- --- --- 124 Income tax benefit of disqualifying dispositions --- 226 --- --- --- --- 226 Translation adjustments --- --- --- --- 35 --- 35 Net income --- --- --- 7,378 --- --- 7,378 --- ------- ----- ------- ---- ---- ------- Balances at March 31, 1995 $18 $41,857 $ --- $15,986 $ 35 $(33) $57,863 === ======= ===== ======= ==== ==== =======
The accompanying notes are an integral part of these financial statements. 5 6 TARGET THERAPEUTICS, INC. ---------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year ended March 31, -------------------------------- 1995 1994 1993 -------- -------- -------- Cash flows from operating activities: Net income $ 7,378 $ 4,951 $ 3,580 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 2,393 1,524 1,135 Changes in assets and liabilities: Accounts receivable (2,882) (501) (1,826) Inventories (2,432) 606 (1,247) Deferred tax assets (1,920) (2,094) --- Other current assets (135) 289 117 Accounts payable 194 584 (188) Accrued compensation 1,210 381 567 Taxes payable 815 661 544 Accrued product replacement costs (111) 1,141 --- Other accrued liabilities 1,630 384 (158) Deferred tax liabilities 800 598 --- Payable to Collagen Corporation --- --- (180) Accrued facility lease costs --- --- (330) Income tax benefit of disqualifying dispositions 226 886 666 -------- -------- -------- Total adjustments (212) 4,459 (900) -------- -------- -------- Net cash provided by operating activities 7,166 9,410 2,680 -------- -------- -------- Cash flows used in investing activities: Capital expenditures, net (3,624) (1,938) (2,205) Purchase of securities available-for-sale (68,967) (65,266) (95,371) Maturities of securities available-for-sale 66,615 62,782 81,831 Increase in other assets (4,010) (1,895) (515) -------- -------- -------- Net cash used in investing activities (9,986) (6,317) (16,260) -------- -------- -------- Cash flows from financing activities: Issuance of common stock for cash 1,036 657 101 Principal payments under capital leases (56) (48) (42) Decrease in notes receivable from stockholders --- --- 24 -------- -------- -------- Net cash provided by financing activities 980 609 83 -------- -------- -------- Net increase (decrease) in cash and cash equivalents (1,840) 3,702 (13,497) Cash and cash equivalents, beginning of year 8,679 4,977 18,474 -------- -------- -------- Cash and cash equivalents, end of year $ 6,839 $ 8,679 $ 4,977 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 6 7 TARGET THERAPEUTICS, INC. ---------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Target Therapeutics, Inc. (the "Company" or "Target") was incorporated in California in June 1985 and reincorporated in the State of Delaware in January 1992. The Company is in the business of developing, manufacturing and marketing disposable medical devices used in minimally invasive procedures to treat vascular diseases of the brain associated with stroke and other diseases accessible through small vessels of the circulatory system. Principles of consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in jointly owned companies and other investments in which the Company has a 20 to 50 percent interest are accounted for on the equity method. Translation of foreign currencies All assets and liabilities of the Company's foreign subsidiary are translated at exchange rates in effect on reporting dates and differences due to changing translation rates are charged or credited to "cumulative translation adjustment" in stockholders' equity. Income and expenses are translated at rates which approximate those in effect during the respective periods. Cash equivalents and short-term investments Cash equivalents consist of highly liquid investments, primarily money market accounts, with maturities at the date of purchase of 90 days or less. Short-term investments consist primarily of government debt securities and money auction preferred stock. Effective April 1, 1994, the Company adopted Financial Accounting Standards Board ("FASB") Statement 115, "Accounting for Certain Investments in Debt and Equity Securities." Short-term investments are classified as available-for-sale and are stated at fair market value. In accordance with Statement 115 prior period financial statements have not been restated to reflect the change in accounting principle. The impact of adopting the Statement was not material. The Company has no unrealized gains or losses to be recorded as a separate component of stockholders' equity and includes in current period earnings any decline in fair value below cost that is deemed other than temporary. Concentration of credit risk The Company sells its products primarily to hospitals in North America and to medical device distributors in Europe and Asia. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses. See Note 8 for discussion of export sales and major customers. The Company invests its excess cash in deposits, government debt securities and corporate debt securities. These securities typically mature within 365 days and, therefore, bear minimal risk. The Company has not experienced any material losses on its investments. Inventories Inventories are stated at the lower of cost or market. Cost is determined using standard costs, which approximate actual costs, under the first-in, first-out method. Property and equipment Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the respective assets, ranging from three to five years. Leasehold improvements are amortized on a straight-line basis over five years or the remaining lease term, whichever is shorter. 7 8 Patents and trademarks Patents and trademarks are stated at cost, net of accumulated amortization. Amortization is provided using the straight-line method over an estimated seven-year useful life beginning with the effective dates or over the remainder of such periods from the dates acquired. Revenue recognition Product sales are recognized upon shipment. 8 9 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Income taxes Effective April 1, 1993, the Company adopted FASB Statement 109, "Accounting for Income Taxes," under which the liability method is used in accounting for income taxes. As permitted by Statement 109, the Company elected to report the cumulative effect of the change in the year adopted rather than restate the financial statements of prior years. The cumulative positive effect of the change in method of accounting for income taxes increased net income by $631,000, or $.09 per share, for the year ended March 31, 1994. Net income per share Net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding. 2. BALANCE SHEET INFORMATION
(In thousands) March 31, ------------------------ 1995 1994 ------- ------- Cash, cash equivalents and short-term investments: Cash and cash equivalents $ 6,839 $ 8,679 Short-term investments 31,231 28,994 ------- ------- $38,070 $37,673 ======= ======= Accounts receivable: Trade receivables $ 9,990 $ 6,840 Less allowance for doubtful accounts (548) (414) ------- ------- $ 9,442 $ 6,426 ======= ======= Inventories: Raw materials $ 781 $ 531 Work-in-process 1,037 1,152 Finished goods 3,605 1,304 ------- ------- $ 5,423 $ 2,987 ======= ======= Property and equipment: Machinery and equipment $ 7,159 $ 5,275 Office equipment 3,795 2,495 Leasehold improvements 935 495 ------- ------- 11,889 8,265 Less accumulated depreciation and amortization (5,387) (3,577) ------- ------- $ 6,502 $ 4,688 ======= ======= Other assets: Cost in excess of net assets acquired, net $ 2,009 $ --- Patents and trademarks, net 1,846 1,152 Investments in entities accounted for on the equity method 1,508 952 Other 1,161 869 ------- ------- $ 6,524 $ 2,973 ======= =======
9 10 3. SHORT-TERM INVESTMENTS The following is a summary of available-for-sale securities as of March 31, 1995 (in thousands):
Gross Gross unrealized unrealized Estimated Cost gains losses fair value ------- ---------- ------ ---------- Money auction preferred stock $ 7,700 $ -- $ -- $ 7,700 Government debt securities 23,640 16 (131) 23,525 ------- ---- ----- ------- Total debt securities 31,340 16 (131) 31,225 Equity securities 6 -- -- 6 ------- ---- ----- ------- $31,346 $16 $(131) $31,231 ======= ==== ===== =======
The gross realized gains, gross realized losses and the net adjustment to unrealized holding gains (losses) on maturities of available-for-sale securities were not significant. The amortized cost and estimated fair value of debt and marketable equity securities at March 31, 1995, are shown below (in thousands).
Amortized Estimated cost fair value --------- ---------- Due in one year or less $27,840 $27,766 Due after one year through three years 3,500 3,459 ------- ------- 31,340 31,225 Equity securities 6 6 ------- ------- $31,346 $31,231 ======= =======
4. COMMITMENTS Line of credit arrangement The Company maintains a $3.0 million bank line of credit which expires in July 1996. Borrowings under the line of credit bear interest at the bank's prime rate, are unsecured and are subject to certain covenants related to financial ratios and profits. There were no amounts outstanding under this line at March 31, 1995. Lease obligations The Company leases its facilities and certain equipment under operating leases. The Company recognizes rent expense on a straight- line basis over the lease term. The future minimum lease commitments by fiscal year as of March 31, 1995 are as follows (in thousands): 1996 $ 873 1997 873 1998 877 1999 872 2000 868 Thereafter 1,592 ------ $5,955 ======
10 11 The following schedule shows the composition of net rental expense for all operating leases (in thousands):
Year ended March 31, --------------------------------------- 1995 1994 1993 ---- ---- ------ Rent expense $848 $914 $1,146 Less sublease rental income -- (77) (88) ---- ---- ------ $848 $837 $1,058 ==== ==== ======
11 12 5. STOCKHOLDERS' EQUITY Stock option and purchase plan The 1988 Stock Option Plan (the "Plan") is an incentive and nonstatutory option plan providing for the issuance of common stock to employees, officers, directors and consultants of the Company. At March 31, 1995 the Company had reserved 2,200,000 shares of common stock for issuance under the Plan. Options granted generally become exercisable over a 48-month period. Under the Plan, the exercise price of incentive stock options may not be less than 100 percent of the fair market value at the date of grant, and the exercise price of nonstatutory options must be at least 85 percent of the fair market value at the date of grant. In the case of an option holder who owns more than ten percent of the voting power of all outstanding stock, the incentive option exercise price must be at least 110 percent of fair market value and the option must be exercised, if at all, within five years of the grant date. The Company recorded deferred compensation expense for the difference between the grant price and the deemed fair value for financial statement presentation purposes of the Company's common stock for certain options granted in fiscal 1992. Amortization of deferred compensation was $124,000 in the year ended March 31, 1995 and $108,000 in each of the years ended March 31, 1994 and 1993. The deferred compensation amount was amortized over a four-year period. Information with respect to the 1988 Stock Option Plan is summarized as follows:
Options outstanding Shares -------------------------------------------- available Number Aggregate Price for grant of shares price per share --------- --------- ----------- ----------- Balances at March 31, 1992 261,685 551,819 $945,492 $.13-11.50 Additional shares reserved 500,000 --- --- --- Options granted (111,160) 111,160 2,227,063 17.75-26.75 Options exercised --- (190,195) (100,566) .13-17.75 Options canceled 14,673 (14,673) (134,309) .13-26.00 -------- -------- ----------- Balances at March 31, 1993 665,198 458,111 2,937,680 .13-26.75 Options granted (302,875) 302,875 6,035,300 17.25-24.25 Options exercised --- (252,113) (416,980) .13-25.63 Options canceled 28,514 (28,514) (425,976) .33-26.00 -------- -------- ----------- Balances at March 31, 1994 390,837 480,359 8,130,024 .13-26.75 Additional shares reserved 500,000 --- --- --- Options granted (413,715) 413,715 10,084,991 21.44-36.25 Options exercised --- (57,062) (741,206) .13-26.75 Options canceled 29,727 (29,727) (601,990) .13-26.00 -------- -------- ----------- Balances at March 31, 1995 506,849 807,285 $16,871,819 $.13-36.25 ======== ======== ===========
As of March 31, 1995, options for 232,738 shares were exercisable. During fiscal 1995 the Company granted options to purchase up to 101,600 shares under the Plan that vest after six years or upon the Company's achievement of certain market valuation criteria. In December 1991, the Company's Board of Directors (the "Board") adopted the 1991 Director Option Plan ("Director Option Plan"). A total of 100,000 shares of common stock have been reserved for issuance under the Director Option Plan which provides for the grant of nonstatutory options to non employee directors of the Company. As of March 31, 1995, options to purchase up to 42,000 shares under this plan were outstanding and become exercisable over a three year period from the grant date. As of March 31, 1995, options for 6,667 shares were exercisable. No options under the Director Option Plan have been exercised. 12 13 The Board also adopted the 1991 Employee Stock Purchase Plan (the "Purchase Plan") in December 1991. The Purchase Plan allows for the issuance of up to 100,000 shares of common stock to employees of the Company. During the years ended March 31, 1995 and 1994, 16,938 shares and 16,151 shares, respectively, were issued at prices of $15.09 and $20.83 per share and $15.09 and $18.70 per share, respectively, under the Purchase Plan. 13 14 6. INCOME TAXES The Company's provision for income taxes for the years ended March 31, 1995 and 1994 (under the liability method) and 1993 (under the deferred method) consists of the following (in thousands):
Year ended March 31, ----------------------------------------- 1995 1994 1993 ------ ------ ------ Current: Federal $3,613 $2,353 $1,374 State 657 674 466 ------ ------ ------ Total current 4,270 3,027 1,840 Deferred: Federal (992) (614) (101) State (128) (148) 8 ------ ------ ------ Total deferred (1,120) (762) (93) ------ ------ ------ Total provision $3,150 $2,265 $1,747 ====== ====== ======
At March 31, 1995, the Company had available net operating loss carryforwards for tax purposes of approximately $1.1 million which expire in the year 2001. Because of the "change in ownership" provisions of the Tax Reform Act of 1986, the loss carryforwards will be subject to an annual limitation regarding their utilization against future taxable income. The Company realizes tax benefits as a result of the exercise and subsequent sale of certain employee stock options (disqualifying dispositions). For financial reporting purposes, any reduction in income tax obligations as a result of these tax benefits, $226,000, $886,000 and $666,000 in fiscal 1995, 1994 and 1993, respectively, is credited to additional paid-in capital. The provision for income taxes for the years ended March 31, 1995, 1994 and 1993 differs from the amount computed by applying the statutory federal income tax rate to income before taxes. The reconciliation between the federal statutory rate and the effective tax rate is as follows:
Year ended March 31, --------------------------------------- 1995 1994 1993 ---- ---- ---- Statutory federal income tax rate 34.0% 34.0% 34.0% Foreign tax credits (5.7) --- --- Unrealized losses on investments accounted for on the equity method 3.6 1.5 --- Foreign sales corporation tax benefit (3.5) (3.7) (3.3) State income taxes 3.7 5.3 5.9 Tax exempt interest (3.0) (2.6) (2.9) Other 0.8 (0.1) (0.9) ---- ---- ---- Provision for income taxes 29.9% 34.4% 32.8% ==== ==== ====
14 15 6. INCOME TAXES (continued) Deferred taxes for the years ended March 31, 1995 and 1994 reflect the net tax effects of loss carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant amounts of the Company's deferred tax assets and liabilities as of March 31, 1995 and 1994 are as follows (in thousands):
March 31, ------------------------ 1995 1994 ------ ------ Deferred tax assets: Inventory valuation accounts $ 461 $ 382 Reserves and accruals not currently tax deductible 1,152 861 Foreign tax credits 1,605 --- Benefit of net operating loss carryforwards 490 546 Accrued cost of exchanging GDC inventory 414 578 State income taxes 174 159 Other 152 58 ------ ------ 4,448 2,584 Valuation allowance (434) (490) ------ ------ $4,014 $2,094 ====== ====== Deferred tax liabilities: Patent costs $ 580 $ 328 Depreciation and amortization 64 128 Unrealized gains and dividend income related to investments accounted for on the equity method 700 142 Other 54 -- ------ ------ $1,398 $ 598 ====== ======
The valuation allowance decreased by $56,000 from March 31, 1994 to March 31, 1995. The components of the credit for deferred income taxes for the year ended March 31, 1993 under the deferred method are as follows (in thousands):
Year ended March 31, -------------------- 1993 ----- Depreciation $ 98 Accounts receivable and sales return reserves (51) Patent expenses 132 Accrued vacation and commissions (44) State income taxes (129) Inventory valuation (80) Accrued expenses (49) Other 30 ----- Total deferred provision $ (93) =====
7. JOINT VENTURE AND AFFILIATE COMPANIES In September 1991, the Company entered into a joint venture agreement with Century Medical Inc. ("CMI"), a Japanese corporation, to distribute the Company's products in Japan. The Company accounts for this 50 percent-owned investment on the equity method and includes its share of joint venture net income in "Other income" in the Consolidated Statements of Income. These amounts were $1.6 million and $520,000 in fiscal 1995 and 1994, respectively. In conjunction with establishing the joint venture, the Company also entered into a distribution agreement with CMI, and CMI entered into a subdistribution agreement with the joint venture. 15 16 The Company entered into an agreement with the joint venture, effective in January 1994, in which the Company is obligated to provide certain management services, assist in marketing, development and planning activities and provide certain literature to the joint venture. In consideration for the Company providing such services, the joint venture has agreed to reimburse costs incurred by the Company, of which $318,000 and $445,000 have been included in "Other income" for the years ended March 31, 1995 and 1994, respectively. Summarized information for the joint venture is as follows (in thousands):
March 31, ------------------------- 1995 1994 ------- ------ Current assets $18,540 $8,932 Non current assets 755 262 Current liabilities 13,604 7,528 Non current liabilities --- ---
Year ended March 31, ------------------------- 1995 1994 ------- ------- Net sales $37,349 $22,894 Gross profit 15,243 8,896 Income from operations 6,837 2,876 Net income 3,213 1,038
The Company's other investments accounted for on the equity method, comprised of cash investments and the granting of technology licenses, are Cardima, Inc., Prograft Medical, Inc. and Conceptus, Inc. for which the Company's ownership interest is approximately 30 percent, 20 percent and 20 percent, respectively. The equity losses for these investments were $1.1 million and $292,000 for fiscal 1995 and 1994, respectively. 8. EXPORT SALES AND MAJOR CUSTOMERS The Company markets its products both domestically and internationally. Export product sales are as follows (in thousands):
Year ended March 31, ------------------------------------------ 1995 1994 1993 ------- ------- ------- Europe $12,708 $ 8,651 $ 7,883 Asia 17,699 11,019 8,275 Other 2,152 1,469 1,086 ------- ------- ------- $32,559 $21,139 $17,244 ======= ======= =======
One customer accounted for approximately 35 percent, 29 percent and 27 percent of the Company's product sales for the years ended March 31, 1995, 1994 and 1993, respectively. 9. FORMATION OF GERMAN SUBSIDIARY In October 1994, the Company and Target Therapeutics International (Deutschland) GmbH ("Target GmbH") entered into an Asset Purchase Agreement (the "Agreement") with Rehaforum Medical GmbH ("Rehaforum"), a distributor of the Company's products in Germany. The Company and Target GmbH acquired certain of the assets of Rehaforum attributable to the Target portion of Rehaforum's business, including inventory of Target products, property and equipment and assumed certain liabilities. Pursuant to the terms of the Agreement, Rehaforum no longer has distribution rights to the Company's products and is limited as to sales of competitive products for a two year period. The purchase price in excess of the fair value of net tangible assets acquired is being amortized over a five year period. 16 17 10. EXPECTED COSTS OF PRODUCT REPLACEMENT In October 1993, the Company announced that it was pursuing certain changes to a product currently sold under an investigational device exemption ("IDE") by the U.S. Food and Drug Administration ("FDA"). Pursuant to a supplement to the IDE which was approved by the FDA in March 1994, limited FDA clinical trials of the modified product were commenced in April 1994. As treatment sites were converted to the modified product, the Company exchanged such modified product for any original product that customers still had in their inventory. The Company provided $1.5 million, which was included in cost of sales in fiscal 1994, for the estimated costs of such exchange including the disposition of the Company's inventory of such product. 11. SUPPLEMENTAL CASH FLOW INFORMATION
(In thousands) Year ended March 31, ----------------------------------------- 1995 1994 1993 ------ ------ ------ Supplemental disclosure of cash flow information: Cash paid during the period for income taxes $3,785 $1,573 $1,195 Cash paid during the period for interest 24 17 19 Supplemental schedule of non cash investing and financing activities: Acquisition of assets under capital lease $ --- $ --- $ 32 Issuance of common stock options in exchange for a note receivable --- 31 ---
12. RELATED PARTY TRANSACTIONS In December 1993, the Company entered into a lease line agreement as lessor with a less than 50 percent-owned affiliate. The maximum available lease line of $1.0 million expired March 31, 1995 and requires monthly payments to be made on the outstanding balance over 36 or 48 months with interest at approximately 8.5 percent per year. As of March 31, 1995 and 1994 there was $521,000 and $143,000 outstanding, respectively, under this agreement. In March 1994, the Company loaned approximately $200,000 to a less than 50 percent-owned affiliate in exchange for promissory notes bearing interest at 8.5 percent per year. Monthly payments are required over 36 and 48 months. The Company also entered into a lease line agreement as lessor with this affiliate in March 1994. The maximum available lease line of $300,000 expired March 1, 1995 and requires monthly payments to be made on the outstanding balance over 36 or 48 months with interest at approximately 8.5 percent per year. At March 31, 1995 there was $288,000 outstanding under this agreement. There were no amounts outstanding under this agreement at March 31, 1994. 13. LEGAL MATTERS The Company is involved in legal actions, including product liability claims and the protection of the Company's proprietary assets, arising in the ordinary course of business. While the outcome of such matters is currently not determinable, it is management's opinion that these matters, both individually or in the aggregate, will not have a material adverse effect on the Company's consolidated financial position, results of its operations or cash flows. 17 EX-99.2 16 TARGET-VALUATION AND QUALIFYING ACCOUNTS 1 EXHIBIT 99.2 TARGET THERAPEUTICS, INC. ---------------- VALUATION AND QUALIFYING ACCOUNTS (In thousands) SCHEDULE II
Additions Balance at charged to Balance beginning costs and at end of period expenses Deductions of period --------- -------- ---------- --------- Year ended March 31, 1993 Allowance for doubtful accounts $270 $127 $ --- $397 Year ended March 31, 1994 Allowance for doubtful accounts 397 357 (340) 414 Year ended March 31, 1995 Allowance for doubtful accounts 414 150 (17) 548
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