-----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, AHkUAWMMBn75ksSQDOHlRB3M65K6zV4OTHv0q+xjT+Fq73wXVTlSmwl4F7kW9I/U Go3jxEyLkoWlD5jbpbyPeg== 0000891618-95-000696.txt : 19951119 0000891618-95-000696.hdr.sgml : 19951119 ACCESSION NUMBER: 0000891618-95-000696 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLLAGEN CORP /DE CENTRAL INDEX KEY: 0000021686 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 942300486 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10640 FILM NUMBER: 95591219 BUSINESS ADDRESS: STREET 1: 2500 FABER PL CITY: PALO ALTO STATE: CA ZIP: 94303 BUSINESS PHONE: 4158560200 10-Q 1 FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1995 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q /X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarter period ended September 30, 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 of Incorporation I.R.S. Employer Identification No. 2500 Faber Place, Palo Alto, California 94303 Telephone: (415) 856-0200 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of October 31, 1995, Registrant had outstanding 8,972,496 shares of common stock, exclusive of 1,550,000 shares held by the Registrant as treasury stock. 2 COLLAGEN CORPORATION INDEX
PART I. Financial Information Page No. -------- Condensed Consolidated Balance Sheets - September 30, 1995 and June 30, 1995............................... 3 Condensed Consolidated Statements of Operations - Three months ended September 30, 1995 and 1994..................... 4 Condensed Consolidated Statements of Cash Flows - Three months ended September 30, 1995 and 1994..................... 5 Notes to Condensed Consolidated Financial Statements............... 6-11 Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 12-20 PART II. Other Information Other Information.................................................. 21-22 Signatures......................................................... 23
2 3 PART I. FINANCIAL INFORMATION COLLAGEN CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share and per share amounts)
September 30, June 30, 1995 1995 ------------- --------- ASSETS Current assets: Cash, cash equivalents and short-term investments $ 21,153 $ 9,384 Accounts receivable, net 9,876 13,402 Inventories, net 6,377 5,056 Other current assets 5,303 5,568 -------- -------- Total current assets 42,709 33,410 Property and equipment, net 16,717 16,506 Intangible assets and goodwill, net 11,719 2,727 Investment in Target Therapeutics, Inc. 15,088 17,570 Other investments & assets, net 5,862 6,693 -------- -------- $ 92,095 $ 76,906 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,034 $ 2,250 Accrued purchase consideration to LipoMatrix, Incorporated 20,990 -- Other accrued liabilities 9,579 10,862 Income taxes payable 8,570 5,902 -------- -------- Total current liabilities 42,173 19,014 Long-term liabilities: Deferred income taxes 8,478 8,478 Other long-term liabilities 2,892 1,494 Stockholders' equity: Preferred stock, $.01 par value, authorized 5,000,000 shares; none issued and outstanding -- -- Common stock, $.01 par value, authorized 28,950,000 shares; issued: 10,522,496 shares at September 30, 1995 (10,519,632 shares at June 30, 1995) outstanding: 8,972,496 shares at September 30, 1995 (9,019,632 shares at June 30, 1995) 106 106 Additional paid-in capital 63,894 63,855 Retained earnings 8,722 17,273 Cumulative translation adjustment (656) (604) Treasury stock, 1,550,000 shares at September 30, 1995 (1,500,000 shares at June 30, 1995) (33,514) (32,710) -------- -------- Total stockholders' equity 38,552 47,920 -------- -------- $ 92,095 $ 76,906 ======== ========
See accompanying notes. 3 4 COLLAGEN CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts)
Three Months Ended September 30, ------------------------ 1995 1994 -------- -------- Revenues: Product sales $ 14,940 $ 15,432 Other 2,000 1,000 -------- -------- 16,940 16,432 -------- -------- Costs and expenses: Cost of sales 3,997 4,406 Selling, general & administrative 8,302 7,224 Research & development 2,579 2,534 Acquired In-process research and development 14,800 -- -------- -------- 29,678 14,164 -------- -------- Income (loss) from operations (12,738) 2,268 Other income (expense): Net gain on investments, principally Target Therapeutics, Inc. 10,466 -- Equity in losses of affiliates, net (508) (129) Interest income 154 130 Interest expense (12) (15) -------- -------- Income (loss) before income taxes (2,638) 2,254 Provision for income taxes 5,913 947 -------- -------- Net income (loss) $ (8,551) $ 1,307 ======== ======== Net income (loss) per share $ (.95) $ .14 ======== ======== Shares used in calculating per share information 8,992 9,631 ======== ========
See accompanying notes 4 5 COLLAGEN CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents (Unaudited) (In thousands)
Three Months Ended September 30, ------------------------ 1995 1994 --------- -------- Cash flows from operating activities: Net income (loss) $ (8,551) $ 1,307 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Acquired in-process research and development 14,800 -- Depreciation and amortization 1,210 887 Gain on investments, net (10,466) -- Other adjustments related to changes in assets and liabilities 4,227 10 -------- ------- Net cash provided by operating activities 1,220 2,204 -------- ------- Cash flows from investing activities: Net proceeds from sale of stock of Target Therapeutics, Inc. 14,336 -- Proceeds from sales and maturities of short-term investments 1,144 2,357 Purchase of short-term investments (101) -- Increase in intangible and other assets (163) (354) Expenditures for investments in and loans to affiliates (1,775) (2,179) Expenditures for property and equipment (592) (570) Acquisition of LipoMatrix, Incorporated, net of cash balances (22,608) -- Accrued purchase consideration and other costs of acquisition of LipoMatrix 22,729 -- -------- ------- Net cash provided by (used in) investing activities 12,970 (746) -------- ------- Cash flows from financing activities: Repurchase of common stock (804) (1,805) Net proceeds from issuance of common stock 39 654 Dividends paid (676) (943) Proceeds from bank borrowings by LipoMatrix, Incorporated 70 -- -------- ------- Net cash used in financing activities (1,371) (2,094) -------- ------- Net increase (decrease) in cash and cash equivalents 12,819 (636) Cash and cash equivalents at beginning of period 6,155 5,369 -------- ------- Cash and cash equivalents at end of period $ 18,974 $ 4,733 ======== =======
See accompanying notes. 5 6 COLLAGEN CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Summary of Significant Accounting Policies Basis of Presentation The condensed consolidated financial statements include the accounts of Collagen Corporation ("the Company"), a Delaware corporation, and its wholly-owned and majority-owned subsidiaries. The financial statements include the accounts of LipoMatrix, Incorporated ("LipoMatrix"), of Neuchatel, Switzerland subsequent to August 22, 1995 when the Company entered into a stock purchase agreement with certain of the stockholders of LipoMatrix to purchase approximately 50% of the outstanding securities of LipoMatrix on a fully diluted basis. At the same time, the Company has also entered into discussions with certain of LipoMatrix's management and employees to purchase the remaining 10% of the outstanding securities on a fully diluted basis. This purchase will increase the Company's ownership interest in LipoMatrix from approximately 40% to approximately 100% of the outstanding securities on a fully diluted basis. Previously, LipoMatrix was accounted for under the equity method of accounting. 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.) The condensed consolidated balance sheet as of September 30, 1995, the condensed consolidated statements of operations for the three months ended September 30, 1995 and 1994, and the condensed consolidated statements of cash flows for the three months ended September 30, 1995 and 1994, have been prepared by the Company, without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at September 30, 1995 and for all periods presented have been made. Interim results are not necessarily indicative of results for a full fiscal year. The condensed consolidated balance sheet as of June 30, 1995 has been derived from the audited consolidated financial statements at that date. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and 6 7 notes thereto for the year ended June 30, 1995 included in the Company's 1995 Annual Report to Stockholders. Cash, 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. Short-term investments consist principally of bankers acceptances, commercial paper and master notes and have maturities greater than ninety days, but not exceeding one year. The Company's investment securities are classified as available-for-sale and their carrying value approximates fair value because of the short maturity of these investments. The Company determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation as of each balance sheet date. 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". 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 for the three months ended September 30, 1995 and 1994. Intangible assets and goodwill The cost of identified intangible assets (customer lists, purchased developed technology, etc.) is generally amortized on a straight-line basis over periods from 2 to 7 years. The excess cost over the fair value of net assets acquired (goodwill) is generally amortized on a straight-line basis over periods generally not exceeding 7 years. The carrying value of intangible assets and goodwill is reviewed on a regular basis for the existence of facts or circumstances both internally and externally that may suggest impairment. To date no such impairment has been indicated. 2. Inventories Inventories consist of the following:
September 30, 1995 June 30, 1995 ------------------ ------------- Raw materials $ 780 $ 684 Work-in-process 2,117 1,845 Finished goods 3,480 2,527 ------ ------ $6,377 $5,056 ====== ======
7 8 3. Investment in Target Therapeutics, Inc. During the quarter ended September 30, 1995, the Company sold 300,000 shares of the common stock of Target Therapeutics, Inc. ("Target") for a pre-tax gain of approximately $11.4 million. The Company also recorded an investment reserve of $900,000 in the quarter ended September 30, 1995 to write-down the carrying value of certain equity investments due to a decline in value determined to be other than temporary. Condensed Statement of Income information for Target is shown below:
Three months ended September 30, 1995 1994 --------------------------------------------------------------------- (in thousands) Revenues $15,741 $11,543 Costs and expenses 12,498 9,437 Interest and other income 606 611 ------------------------ Income before income taxes 3,849 2,717 Provision for income taxes (1,149) (1,006) ------------------------ Net income $ 2,700 $ 1,711 ========================
Target's common stock is quoted on The Nasdaq Stock Market. The closing price of Target's stock at September 29, 1995 was $70.00 per share. Subsequent to the end of September 1995, the Company sold an additional 156,500 shares of its Target common stock at an average selling price of $66 per share for net pre-tax proceeds of approximately $10.4 million. As of November 10, 1995, the Company's ownership position in Target was approximately 22%. 4. Acquisition of LipoMatrix LipoMatrix is a developer and manufacturer of the Trilucent(TM) breast implant, which is the first commercially available triglyceride-filled mammary implant in the world. Collagen and LipoMatrix recently introduced the Trilucent(TM) implant in the United Kingdom and plan to introduce it in other countries of Western Europe over the remainder of the current fiscal year. On August 22, 1995, as part of the Company's strategy to expand in its marketing franchise in cosmetic medicine, the Company entered into a stock purchase agreement ("Agreement") with certain of the stockholders of LipoMatrix to purchase approximately 50% of its outstanding securities on a fully diluted basis. At the same time, the Company has also entered into discussions with certain of the LipoMatrix's management and employees to purchase the remaining 10% of the outstanding securities of LipoMatrix on a fully diluted basis. 8 9 This purchase will increase the Company's ownership interest in LipoMatrix from approximately 40% to approximately 100% of the outstanding securities on a fully diluted basis. In connection with the Agreement, certain LipoMatrix's shareholders granted to the Company an irrevocable proxy covering the voting rights of approximately 50% of the outstanding securities. The acquisition of LipoMatrix, which was accounted for as a purchase, had an aggregate purchase price of approximately $23.7 million, which was determined as follows:
(in thousands) Payable to LipoMatrix's shareholders $ 20,990 Assumption of LipoMatrix's liabilities in excess of LipoMatrix's assets 926 Balance of the Company's investment in LipoMatrix prior to date of acquisition 909 Direct acquisition costs 830 -------- $ 23,655 ========
A cash payment of approximately $18 million is due from the Company to the selling LipoMatrix stockholders at the closing of the transaction in January 1996. As part of the purchase, the Company expects to make further cash payments of the remaining $3 million by July 1, 1997 to the selling LipoMatrix's management and employees. The assets and liabilities assumed by the Company were recorded based on their independently appraised fair values at the date of the acquisition, which are subject to final adjustments which the Company believes will not be significant. Of the purchase price of $23.7 million, $14.8 million was allocated to in-process research and development, $3.8 million to intangible assets and $5.1 million to goodwill. The amount allocated to in-process research and development was expensed in the three months ended September 30, 1995. The Company's results of operations for the three months ended September 30, 1995 include LipoMatrix's results from August 22, 1995 through quarter-end. The unaudited pro forma results of operations of the Company for the three months ended September 30, 1995 and 1994, respectively, assuming the acquisition of LipoMatrix occurred on July 1, 1994, on the bases described above with all material intercompany transactions eliminated are as follows: 9 10
Three months ended September 30, 1995 1994 ------------------------------------------------------------------------- (in thousands, except income per share) Total revenues $16,955 $16,432 Net income 5,248 62 Net income per share .58 .01
The unaudited pro forma net income and per share amounts above do not include a charge for in-process research and development of $14.8 million arising from the acquisition of LipoMatrix. The pro forma results reflect amortization of acquired goodwill and other intangible assets. The unaudited pro forma information is not necessarily indicative of the actual results of operations had the transaction occurred at the beginning of the periods indicated, nor should it be used to project the Company's results of operations for any future dates or periods. 5. Stock Repurchase Program In February 1993, the Company's Board of Directors authorized a stock repurchase program. During the three months ended September 30, 1995, the Company repurchased 50,000 shares of its common stock at an average acquisition price of approximately $16 per share. Subsequent to the end of September 1995, the Company repurchased 42,000 shares of its common stock at an average acquisition price of approximately $18 per share. Since the inception of the stock repurchase program in February 1993, the Company has repurchased 1,592,000 shares of its common stock at an average acquisition price of approximately $22 per share. As of November 10, 1995, the Company is authorized to repurchase an additional 208,000 shares under the program. The Company currently plans to keep the repurchased shares as treasury stock and may use this stock in various company stock benefit plans. 6. Income Taxes The provision for income taxes for the three months ended September 30, 1995 and 1994 was computed by applying the estimated annual income tax rates of approximately 49% (excluding the impact of in-process research and development charge for which no tax benefit is available) and 42%, respectively, to income before income taxes. The higher effective tax rate in the current fiscal quarter was primarily due to increased equity in losses of certain affiliates and the write-down of certain of these investments. 10 11 7. Per Share Information Loss per share for the three months ended September 30, 1995 has been computed based upon the weighted average number of common stock outstanding. Common stock equivalents have been excluded since their effect would be anti-dilutive on loss per share for this period. Income per share for the three months ended September 30, 1994 has been computed based upon the weighted average number of common and dilutive common stock equivalents outstanding. Common stock equivalents result from stock options. Shares used in the per share computations are as follows (in thousands):
Three Months Ended ------------------ September 30, ------------- 1995 1994 ---- ---- Primary: Common stock 8,992 9,456 Stock options -- 175 Weighted average number of common ----- ----- and common equivalent shares outstanding 8,992 9,631 ===== =====
8. Subsequent Events Subsequent to September 30, 1995, the Company completed an equity investment in and a collaborative product development agreement with Innovasive Devices, Inc. of Hopkinton, Massachusetts. The investment, part of a larger round of equity financing for Innovasive, was for $4.0 million, or an approximately 15 percent ownership position. The Company and Innovasive are collaborating to develop certain resorbable or partially resorbable mechanical tissue-fixation devices utilizing collagen-based biomaterials for applications in orthopaedic tissue repairs. Innovasive Devices is a company that develops, manufactures, and markets tissue and bone reattachment systems which are particularly relevant to the sports medicine and arthroscopy segments of the orthopaedic surgery market. 11 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company Collagen Corporation (the "Company") is a technology-based company that develops, manufactures and markets biomedical devices for the treatment of defective, diseased, traumatized or aging human tissues. The Company's revenues have been derived primarily from the sale of products principally 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 joint 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. On August 22, 1995, as part of the Company's strategy to expand in its marketing franchise in cosmetic medicine, the Company entered into a stock purchase agreement ("Agreement") with certain of the stockholders of LipoMatrix, Incorporated ("LipoMatrix"), a developer and manufacturer of the Trilucent(TM) breast implant ("Trilucent(TM) Implant"), to purchase approximately 50% of the outstanding securities of LipoMatrix on a fully diluted basis. At the same time, the Company has also entered into discussions with certain of the LipoMatrix's management and employees to purchase the remaining 10% of the outstanding securities on a fully diluted basis. This purchase will increase the Company's ownership interest in LipoMatrix from approximately 40% to approximately 100% of the outstanding securities on a fully diluted basis. In connection with the Agreement, certain LipoMatrix's shareholders granted to the Company an irrevocable proxy covering the voting rights of approximately 50% of the outstanding securities. The acquisition of LipoMatrix, which was accounted for as a purchase, had an aggregate purchase price of approximately $23.7 million. (See Note 4 to Condensed Consolidated Financial Statements.) A cash payment of approximately $18 million is due from the Company to the selling LipoMatrix stockholders at the closing of the transaction in January 1996. As part of the purchase, the Company expects to make further cash payments of the remaining $3 million by July 1, 1997 to the selling LipoMatrix's management and employees. 12 13 The assets and liabilities assumed by the Company were recorded based on their independently appraised fair values at the date of the acquisition, which are subject to final adjustments which the Company believes will not be significant. Of the purchase price of $23.7 million, $14.8 million was allocated to in-process research and development, $3.8 million to intangible assets and $5.1 million to goodwill. The amount allocated to in-process research and development was expensed in the three months ended September 30, 1995. The Company's results of operations for the three months ended September 30, 1995 include LipoMatrix's results from August 22, 1995 through quarter-end. Results of Operations The following table shows for the periods indicated the percentage relationship to product sales of certain items in the Consolidated Statements of Operations and the percentage changes in the dollar amounts of such items from period to period.
Percent Change Quarter Ended ------------- Sep 30,1995 ----------- Percent of Product Sales Compared to Quarter Ended Quarter Ended Quarter Ended ------------- ------------- ------------- Sep 30,1995 Sep 30,1994 Sep 30,1994 ----------- ----------- ----------- Product sales 100% 100% (3%) Other revenues 13% 6% 100% - -------------------------------------------------------------------------------------- Costs and expenses: Cost of sales 27% 29% (9%) Selling, general and administrative 56% 47% 15% Research and development 17% 16% 2%
Product sales of $14.9 million for the three months ended September 30, 1995 decreased $500,000 or 3%, compared to product sales of $15.4 million for the same period in the prior year. Worldwide sales of plastic surgery and dermatological products for the three months ended September 30, 1995 were approximately $12.8 million, up 24% from sales of $10.3 million for the same period in the prior year. U.S. sales of plastic surgery and dermatological products, representing 49% of worldwide sales in the current fiscal quarter, increased approximately $410,000 or 7% over the same quarter in the prior year. 13 14 International sales of plastic surgery and dermatological products in the current fiscal quarter increased approximately $2.0 million or 45% over the same quarter in the prior year. Of the $2 million, $200,000 was a result of favorable foreign exchange rates, compared with the same quarter in the prior year. (See " Operating Income " below.) Total unit sales increased approximately 39% on a worldwide basis compared with the same quarter in the prior year. The Company believes that the increase in both dollar and unit sales in the current fiscal quarter was a result of strong distributor sales, especially in Japan, successful marketing and public relations campaigns, the launch of improved syringe configurations and increased physician interest in cosmetic procedures not reimbursed by third-party payors. The Company anticipates continued growth in future worldwide demand for its plastic surgery and dermatological products, but at rates significantly lower than those achieved in the current fiscal quarter. In the three months ended September 30, 1995, pursuant to terms of an agreement between the Company and C.R. Bard Inc. ("Bard"), the Company's marketing partner for Contigen(R) Bard(R) Collagen Implant ("Contigen(R) Implant"), the Company recorded income of $1 million from Bard based on Bard's direct sales of Contigen(R) Implant to physician customers. The Company did not record any income from shipments of Contigen(R) Implant to Bard in the three months ended September 30, 1995. In June 1995, the Company announced that it expected to ship little, if any, Contigen(R) Implant to Bard during fiscal year 1996 due to excess inventory at Bard. In the three months ended September 30, 1994, the Company recorded income of $3.5 million from shipments of Contigen(R) Implant to Bard and income of $487,000 from Bard's direct sales of Contigen(R) Implant to physician customers. Future income from Bard's direct sales of Contigen(R) Implant to physician customers is expected to continue but may fluctuate significantly due to market demand. As a result of the foregoing, total revenues from Contigen(R) Implant during fiscal 1996 are expected to decline by more than 50 percent compared with fiscal 1995. For the three months ended September 30, 1995, combined sales of Collagraft(R) Bone Graft Matrix ("Collagraft(R) Implant") and Collagraft(R) Bone Graft Matrix Strip ("Collagraft(R) Strip") to the Company's marketing partner, Zimmer, Inc. ("Zimmer"), were $966,000 compared to combined sales of Collagraft(R) Implant and Collagraft(R) Strip of approximately $1.0 million to Zimmer for the same period in the prior year. A number of uncertainties exist surrounding the marketing and distribution of Contigen(R) Implant, Collagraft(R) Implant and Collagraft(R) Strip. The Company's primary means of distribution for these products is through third party firms, Bard, in the case of Contigen(R) Implant, and Zimmer, in the case of Collagraft(R) Implant and Collagraft(R) 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 14 15 products, accurately anticipate customer demand, or effectively manage industry-wide pricing and cost containment pressures in health care. Other revenues. Other revenues in the three months ended September 30, 1995 consisted of a final milestone payment of $2 million from Bard in accordance with an agreement between the Company and Bard. The Company recorded a milestone payment of $1 million from Bard in the same period in the prior year. Cost of sales. Cost of sales as a percentage of product sales was 27% for the three months ended September 30, 1995, compared with 29% for the same period in the prior year. The decrease in the current fiscal quarter was primarily due to increased product revenues resulting from income received from Bard's direct sales of Contigen(R) Implant to physician customers, which lowered the cost of sales as a percentage of product sales. Unit cost of sales was considerably higher in the current fiscal quarter due to decreased production volumes, primarily of Contigen(R) 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 itself heavily dependent on production of Contigen(R) 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(R) Implant to 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. SG&A. Selling, general and administrative ("SG&A") expenses were $8.3 million for the three months ended September 30, 1995, an increase of 15% over $7.2 million for the same period in the prior year. SG&A expenses as a percentage of product sales were 56% for the three months ended September 30, 1995, compared to 47% for the same period in the prior year. Domestically, the increase in SG&A expenses in the current fiscal quarter resulted primarily from the hiring of the Company's Chief Operating Officer, higher legal expenses (See Other Information - Legal Proceedings) and amortization expenses on purchased intangibles and goodwill resulting from the acquisition of LipoMatrix. Internationally, the increase in SG&A expenses resulted primarily from the costs of launching the Trilucent(TM) Implant in the United Kingdom, higher international spending and an overall unfavorable impact of foreign exchange rates, slightly offset by lower commission expense related to international sales. The Company expects SG&A expenses this fiscal year, both in absolute dollars and as a percentage of product sales, to be at levels higher than those of the prior year primarily due to the inclusion of the operating results of LipoMatrix, and the continued costs of launching the Trilucent(TM) Implant in Europe. R&D. Research and development ("R&D") expenses, which include expenditures for regulatory compliance, were $2.6 million (17% of product sales) for the three months ended September 30, 1995, an increase of 2% 15 16 over $2.5 million (16% of product sales) for the same period in the prior year. The increase in R&D spending in the current fiscal quarter was primarily attributable to R&D spending incurred by LipoMatrix, partially offset by completion of soft tissue programs, including the clinical trials for Zyplast II(R) Implant, a concentrated collagen material for soft tissue augmentation, as well as by lower expenses related to ISO 9000 certification. The Company expects R&D spending for this fiscal year, both in absolute dollars and as a percentage of product sales, to be at levels higher than those of the prior year due to the inclusion of the operating results of LipoMatrix. Acquired In-process Research and Development. The charge for acquired in-process research and development ("in-process R&D") of $14.8 million in the current fiscal quarter was a non-recurring charge related to the acquisition of LipoMatrix. The value attributed to the in-process R&D was determined by an independent appraisal. Operating income (loss). Operating loss was $12.7 million in the three months ended September 30, 1995, compared to operating income of $2.3 million for the same period in the prior year. The loss in the current fiscal quarter was primarily due to the acquisition related, non-recurring, in-process R&D charge of $14.8 million. Compared with foreign exchange rates for the same quarter in the prior year, the impact of foreign exchange rates in the current fiscal quarter on operating income was a net increase of approximately $23,000, resulting from an increase of approximately $200,000 in revenue on equivalent local currency sales and an increase of approximately $177,000 in operating expenses. Gain on investments, net. In the three months ended September 30, 1995, the Company recorded a net gain on investments of $10.5 million, resulting from the sale of 300,000 shares of the common stock of Target Therapeutics, Inc. ("Target") for a pre-tax gain of approximately $11.4 million, partially offset by the recording of an investment reserve of $900,000 to write-down the carrying value of certain equity investments due to a decline in value determined to be other than temporary. Equity in earnings/losses of affiliate companies. Equity in losses of affiliate companies was $508,000 in the three months ended September 30, 1995, compared to losses of $129,000 in the same period in the prior year. The increase in losses in the current fiscal quarter was primarily due to increased losses recognized by affiliate companies, partially offset by equity in increased earnings of Target. Equity in losses of affiliate companies in the current fiscal quarter consisted of approximately $996,000 of losses from affiliate companies other than Target, partially offset by approximately $488,000 of earnings from Target. 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 16 17 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 results. Furthermore, there can be no assurance that any investments in affiliates will result in any return nor as to the timing of such return, or that the Company will not lose its entire investment. Interest income. Interest income was $154,000 for the three months ended September 30, 1995, an 18% increase compared to $130,000 for the same period in the prior year. The increase in the current fiscal quarter was primarily due to higher average investment balances resulting primarily from the sale of Target stock, which was partially offset by the repurchase of 50,000 shares of the Company's common stock, and slightly higher interest rates. Income tax. The provision for income taxes for the three months ended September 30, 1995 and 1994 was computed by applying the estimated annual income tax rates of approximately 49% (excluding the impact of in-process research and development charge for which no tax benefit is available) and 42%, respectively, to income before income taxes. The higher effective tax rate in the current fiscal quarter was primarily due to increased equity in losses of certain affiliates and the write-down of certain of these investments. Liquidity and Capital Resources At September 30, 1995, the Company's cash, cash equivalents and short-term investments were $21.2 million compared to $9.4 million at June 30, 1995. Net cash provided by operating activities was approximately $1.2 million in the three months ended September 30, 1995, compared to approximately $2.2 million of net cash provided by operating activities in the same period in the prior year. Pre-tax proceeds of $14.3 million from the sale of 300,000 shares of common stock of Target by the Company during the quarter ended September 30, 1995 were partially offset by $804,000 used to repurchase 50,000 shares of the Company's common stock at an average acquisition price of approximately $16 per share, the payments of an aggregate cash dividend of approximately $676,000 to the Company's stockholders in July 1995, and $1,775,000 of additional investments in and loans to affiliates. Subsequent to the end of September 1995, the Company paid $4.0 million for an equity investment in and a collaborative product development agreement with Innovasive Devices, Inc. of Hopkinton, Massachusetts. (See Note 8 to Condensed Consolidated Financial Statement.) The Company also repurchased 42,000 shares of its common stock at an average acquisition price of approximately $18 per share. As of November 10, 1995, the 17 18 Company is authorized to repurchase an additional 208,000 shares of its common stock under the stock repurchase program. The Company anticipates capital expenditures, equity investments in, and loans to affiliate companies to be approximately $18.0 million in fiscal 1996. As of September 30, 1995, the Company's capital expenditures, equity investments in, and loans to affiliate companies totaled approximately $1.8 million. In addition, a cash payment of approximately $18 million is due from the Company to the selling LipoMatrix stockholders at the closing of the aforementioned acquisition of LipoMatrix securities in January 1996. Further cash payments of approximately $3 million are expected to be paid by July 1, 1997 to the selling LipoMatrix's management and employees. The Company intends to finance the cash payments by selling additional shares from its holdings of Target stock, and/or by borrowing funds, as needed, under its existing or other credit facility. 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 then of approximately 2.3 million shares of Target's common stock. Between July 1, 1994 and September 30, 1995, the Company sold an aggregate of 545,000 shares of Target common stock for an aggregate pre-tax gain of approximately $17.4 million. Subsequent to September 30, 1995, the Company sold 156,500 shares of its Target common stock at an average selling price of $66 per share for net pre-tax proceeds of approximately $10.4 million. The Company anticipates that stock sales pursuant to the authorization will be made from time to time, subject to 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. As of November 10, 1995, the credit facility remained unused. The Company intends to 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 18 19 significantly affected in the short term by fluctuations in foreign currency exchange rates or disruptions to shipments. All of the Company's manufacturing capacity for collagen products, the majority of its research and development activities, its corporate headquarters, and other critical business functions are located near major earthquake faults. In addition, all of the Company's manufacturing capacity for collagen products and the Trilucent(TM) Implant are located in two primary facilities (one for collagen products and one for the Trilucent(TM) Implant), with the Company currently maintaining only limited amounts of finished product inventory. While the Company has some limited protection in the form of disaster recovery programs and basic insurance 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 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. 19 20 Due to the factors noted above, as well as other factors that may affect the Company's operating results, the Company's future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Any shortfall in revenue or earnings from levels expected by securities analysts could have an immediate and significant adverse effect on the trading price of the Company's common stock in any given period. Additionally, the Company may not learn of, or be able to confirm, such shortfalls until late in the fiscal quarter, or following the end of the quarter, which could result in an even more immediate and adverse effect on the trading price of the Company's common stock. Finally, the Company participates in a highly dynamic industry, which often results in significant volatility of the Company's common stock price. 20 21 PART II. OTHER INFORMATION COLLAGEN CORPORATION Item 1. Legal Proceedings On December 21, 1994, the Company filed suit against Matrix Pharmaceutical, Inc., ("Matrix") alleging fraud, misappropriation of trade secrets, unfair competition, breach of fiduciary duty, inducing breach of contract, breach of duty of loyalty and tortious interference. The Company alleges that Matrix, which uses collagen for certain drug delivery applications, unlawfully obtained the Company's confidential and proprietary information relating to Collagen's products and operations by hiring ten former employees that the Company alleges had access to or were knowledgeable about the Company's proprietary information. On February 12, 1995, Matrix denied the Company's allegations and filed a cross-complaint charging the Company with, among other things, unfair competition, defamation and restraint of trade. Matrix also has requested certain declaratory relief. Howard Palefsky, the Company's Chairman of the Board and Chief Executive Officer, was personally named as an additional defendant to the Matrix defamation charge. In September, 1995, Collagen filed an amended complaint naming two additional former employees, and alleging the acquisition of additional proprietary information obtained unlawfully. On November 3, 1995, those two additional former employees filed a cross-complaint against the Company and Mr. Palefsky, claiming damages for, among other things, libel, invasion of privacy and intentional infliction of emotional distress. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None 21 22 Item 6. Exhibits and Reports on Form 8-K A. Exhibits Exhibit 27 - Financial Data Schedule B. Reports on Form 8-K The Company filed the following reports on Form 8-K during the fiscal quarter ended September 30, 1995, each relating to the Company's acquisition of LipoMatrix, Incorporated. Form 8-K Report Date: August 22, 1995 Filing Date: September 6, 1995 Item 2 - Acquisition or Disposition of Assets Item 7a - Financial Statements of Acquired Business Item 7b - Pro Forma Financial Statements Item 7c - Exhibits Form 8-K/A Report Date: August 22, 1995 Filing Date: November 6, 1995 Item 7a - Financial Statements of Acquired Business Item 7b - Pro Forma Financial Statements Item 7c - Exhibits 22 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COLLAGEN CORPORATION Date: November 13, 1995 /s/ David Foster ----------------------- David Foster Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 23 24 COLLAGEN CORPORATION INDEX TO EXHIBITS
Sequentially Exhibit Numbered Number Exhibit Page - -------------------------------------------------------------------------------- 27 Financial Data Schedule............................... 25
24 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF COLLAGEN CORPORATION INCLUDED IN FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1995 1,000 3-MOS JUN-30-1996 JUL-1-1995 SEP-30-1995 21,153 0 10,246 370 6,377 42,709 36,507 19,790 92,095 42,173 11,370 106 0 0 38,446 92,095 14,940 16,940 3,997 3,997 25,681 0 12 (2,638) 5,913 (8,551) 0 0 0 (8,551) (.95) (.95)
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