-----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, NqnRXl/LIgg74w1HOIZegFS9hhLbOcD9iQ4NFXfx0lD5vULnM2gNPQoHMo/PWqkq WCjioduvCrirKHnJKAVDLg== 0000891618-98-004328.txt : 19980929 0000891618-98-004328.hdr.sgml : 19980929 ACCESSION NUMBER: 0000891618-98-004328 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLLAGEN AESTHETICS INC 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-K405 SEC ACT: SEC FILE NUMBER: 000-10640 FILM NUMBER: 98715935 BUSINESS ADDRESS: STREET 1: 2500 FABER PL CITY: PALO ALTO STATE: CA ZIP: 94303 BUSINESS PHONE: 4158560200 FORMER COMPANY: FORMER CONFORMED NAME: COLLAGEN CORP /DE DATE OF NAME CHANGE: 19920703 10-K405 1 FORM 10-K FOR THE PERIOD ENDED JUNE 30, 1998 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, 1998, OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ . COMMISSION FILE NUMBER: 0-10640 COLLAGEN AESTHETICS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-2300486 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1850 EMBARCADERO ROAD, PALO ALTO, CA 94303 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 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 PREFERRED SHARE PURCHASE RIGHTS (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 4, 1998, on the Nasdaq Stock Market, was approximately $38,855,586. 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 4, 1998, the Registrant had 8,847,588 shares of Common Stock outstanding. Parts of the Proxy Statement for Registrant's 1998 Annual Meeting of Stockholders are incorporated by reference to Parts III and IV of this Form 10-K Report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I IN ITEMS 1, 2 AND 3 BELOW THE DISCUSSION DESCRIBES THE COMPANY'S AESTHETICS BUSINESS, UNLESS OTHERWISE NOTED, AS PERFORMED BY THE AESTHETICS GROUP IN FISCAL 1998. FURTHER, THE DISCUSSION INCLUDES THE BUSINESS AS PROPOSED TO BE CONDUCTED, PROPERTIES AND LEGAL PROCEEDINGS AFTER GIVING EFFECT TO THE SPINOFF OF COHESION TECHNOLOGIES, INC, ("COHESION") ON AUGUST 18, 1998 AND AFTER THE COMPANY'S NAME CHANGE FROM COLLAGEN CORPORATION TO COLLAGEN AESTHETICS, INC. In October 1997, the Company announced that it would proceed to separate its Aesthetic Technologies Group and its Collagen Technologies Group into two, independent, publicly-traded companies. In December 1997, the Company purchased substantially all of the remaining outstanding shares of Cohesion Corporation and integrated Cohesion Corporation into the Company's Collagen Technologies Group. The Collagen Technologies Group was spun off as a separate company on August 18, 1998, named Cohesion Technologies, Inc., to Collagen Corporation stockholders via a tax-free distribution. On August 12, 1998, the stockholders of the Company approved a corporate name change from Collagen Corporation to Collagen Aesthetics, Inc. which better reflects the Company's focus on serving the facial aesthetic medical marketplace. The Spinoff was designed to separate two distinct businesses with significant differences in their markets, products, research needs, investment needs, employee retention and compensation plans and plans for growth. The Company's Board believed the separation into two independent companies would enhance the ability of each to focus on strategic initiatives and new business opportunities, improve cost structures and operating efficiencies and create incentives that are more attractive and appropriate for the recruitment and retention of key employees. As a consequence, the Company believes that investors will be able to evaluate better the merits of the two groups of businesses and their future prospects. ITEM 1. BUSINESS In fiscal 1998, the Company's business consisted of its Aesthetic Technologies Group and Cohesion Technologies Group. For a discussion of the Cohesion Technologies Group, please refer to the Annual Report on Form 10-K of Cohesion Technologies, Inc. ("Cohesion"). The Company designs, develops, manufactures and markets on a worldwide basis biocompatible products for the treatment of defective, diseased, traumatized or aging human tissues. The Company has grown by identifying medical applications for its technology, developing innovative products and building markets with healthcare professionals, either directly or with marketing and technology partners. The Company's core products are principally used in facial aesthetic applications. INDUSTRY BACKGROUND The market for facial aesthetic products and treatments includes surgical and non-surgical therapies to remedy aging and defective soft tissues of the face. These products are used by healthcare professionals, including plastic surgeons and dermatologists, in an office environment and by consumers in the home. Most of these treatments are elective and are pursued by patients for cosmetic effects rather than due to medical necessity. The worldwide market for facial aesthetic products has experienced significant growth over the past several years. The Company believes this growth is primarily attributable to the following factors: - In the U.S. alone, a Baby Boomer turns 50 every eight seconds, and most developed countries around the world are experiencing similar demographic shifts. - The Company's products are elective procedures paid directly by the patient. As a result, increasing discretionary incomes, especially among aging Baby Boomers, helps to increase the size of the Company's market. - There is a significant opportunity for additional penetration among those patients already seeing plastic surgeons, facial plastic surgeons, dermatologists and other aesthetic physicians. Market research suggests that only 5% of such patients know of our 17-year-old line of injectable Zyderm(R) and Zyplast(R) 1 3 collagen implants ("Zyderm implants" and "Zyplast implant") on an "unaided" basis -- that is, with no prompting. With expanded customer awareness, demand for this product line and other products could increase. - Aesthetic medicine is gaining in acceptance and visibility. Physicians are showing greater interest in aesthetic medicine and patients are becoming increasingly open to discussing elective cosmetic procedures. In addition, the media provides a near-constant flow of information on the newest technologies and treatments to look one's best. - As the field of aesthetic medicine grows, more and more consumers have direct and easy access to trained physicians. Aesthetic medicine has expanded from its traditional constituency of females in select urban centers around the world to take its place among both men and women across a broader range of geographies. The Company believes that growth of the market, both within the U.S. and internationally, can be attributed to changing social conventions, which encourage consumers to explore products and treatments to make them look and feel younger. As demand has grown for facial aesthetic products and treatments, cost containment pressures imposed by managed care have induced many healthcare providers to offer additional services that are less dependent on reimbursement and are paid for by the consumer. The Company believes that the needs of physicians and patients have created a demand for more innovative aesthetic products, a wider selection of alternatives, and products that are safe, more affordable and longer lasting than existing products and treatments. Facial Enhancement There is a wide range of products available in the facial aesthetic product market that are designed to resurface skin, repair fine lines, deep folds and scars, enhance the vermilion (lip) border and surgically contour the face. Demand for products that address facial enhancement has increased significantly over the past several years, and the Company believes there is a significant market opportunity for products that are safe, more cost-effective, and that cause less discomfort and trauma as compared to traditional products. Urinary Incontinence Urinary incontinence, the involuntary loss of urine from the bladder, affects a large population of individuals. The Company believes that the incidence of incontinence is significantly underreported, due to patient embarrassment and the social stigma attached to incontinence, as well as the shortage of effective treatments for the condition. Effective, emerging therapies that treat incontinence in a less invasive manner may increase the number of patients seeking treatment, expanding the potential market size. The incidence of incontinence generally increases with age, and the Company believes that as the population grows older, the market for incontinence treatments will increase. STRATEGY The Company's strategy consists of the following principal elements: Continued Innovation and Expansion of Existing Product Lines - Develop and market novel facial aesthetic products which will meet the changing needs and desires of current customers and offer an even broader range of products which will appeal to a diverse population of new patients and users. - Acquire and in-license products, new technologies and product distribution rights, allowing the Company to market additional complementary products and technologies that can provide effective, safe and innovative solutions to meet the needs of patients. 2 4 Strengthened Business Relationships - Connect with physician customers by introducing new means of using aesthetic products to meet the needs of patients. - Utilize physician feedback to develop new products, enhance existing products and design training programs to improve physician's practice economics and increase patient satisfaction. Scientific Leadership - Establish collaborations with leading experts in aesthetic and cosmetic therapies who will advise the Company about scientific development and clinical needs for new products, provide counsel for the design of clinical trials and evaluate potential new products. - Continue to market and distribute facial aesthetic products supported by scientific research and cutting edge clinical data. Improved Operating Margins - Leverage existing worldwide distribution network to market and sell through multiple channels allowing the effective launch of new products and creating increased operating efficiencies. - Utilize infrastructure that has the additional capacity to effectively increase operating profits. PRODUCTS Zyderm/Zyplast.......... Soft tissue augmentation with visible results in one treatment session Hylaform................ Same-day treatment of wrinkles and scars SoftForm................ Long-lasting but removable material which provides a solution to pronounced facial wrinkles and lip border definition Refinity................ In-office AHA peel and home-use maintenance products to improve the surface and texture of the skin and reduce the appearance of fine lines Contigen................ Minimally invasive outpatient procedure designed to treat stress urinary incontinence
The Company offers products for soft tissue reconstruction and augmentation, skin care and stress urinary incontinence. In the U.S., the Company markets a line of collagen-based injectable products, Zyderm implants and Zyplast implant, for soft tissue augmentation of the face. The Company has launched, in the U.S., a new product for subdermal soft tissue reconstruction and augmentation, the SoftForm(R) ("SoftForm implant"), made of ePTFE, expanded polytetrafluoroethylene, a non-resorbable material, and is currently launching the SoftForm implant in certain international markets. Internationally, the Company markets its Zyderm and Zyplast injectable implants for the face and Hylaform(R) viscoelastic gel ("Hylaform gel"), an injectable gel for facial wrinkles and scars that does not require a skin sensitivity test. The Company currently plans to introduce Refinity(TM) Medical Skin Solutions ("Refinity skin solutions"), a line of alpha hydroxy acid ("AHA") based skin care products, in the U.S. in fiscal 1999 and when regulatory approvals permit, these products are expected to be introduced into Canada, Australia and Europe. In addition, the Company's product for stress urinary incontinence, Contigen(R) Bard collagen implant ("Contigen implant"), is currently marketed on a worldwide basis through the Company's marketing partner, C.R. Bard ("Bard"). Facial Enhancement Products ZYDERM AND ZYPLAST IMPLANTS. The Company's collagen-based injectable product line for the treatment of skin contour defects includes Zyderm implants and Zyplast implant. The Company markets its Zyderm and Zyplast implant products worldwide to dermatologists, plastic surgeons, and other physicians. The Company estimates that over one million patients worldwide have been treated with a collagen-based injectable product 3 5 of the Company, of which approximately 920,000 patients are in the U.S. and Canada and approximately 575,000 are in international markets. Zyplast implant is a collagen product molecularly cross-linked with glutaraldehyde. Zyderm and Zyplast implant treatments replenish the skin's natural collagen support layer, smooth facial lines and many types of scars, and can produce an immediate visible difference in the appearance of a patient's skin. The implants are dispersed in a saline solution containing a small amount of lidocaine, a local anesthetic, and injected with a fine gauge needle into depressed layers of skin to elevate the area to the level of the surrounding skin surface. As a result, Zyderm and Zyplast implants can minimize lines and scars. Depending on the need and the product (or product combination) used, many patients can achieve correction of wrinkles or scars in one treatment session. The implants take on the texture and appearance of human tissue and are subject to similar stresses and aging processes. Consequently, supplemental treatments are necessary after initial treatment, depending on the location and original cause of the skin deformity. On average, patients require two to four treatments per year to maintain the desired result. Zyderm implants were formulated especially for people with small or superficial contour defects. These implants are particularly effective in smoothing delicate frown and smile lines and fine creases that develop at the corners of the eyes and above and below the lips, and can also help correct certain kinds of shallow scars. Zyplast implants, which are the most persistent of the collagen-based implants, are cross-linked with glutaraldehyde, are designed to treat depressions requiring a stronger material and can be used for more pronounced contour problems (such as deeper scars, lines and furrows) and for areas upon which more force is exerted (such as the corners of the mouth). Zyderm and Zyplast implants may be used alone or in conjunction with one another. HYLAFORM GEL. The Company has extended its injectable product line with Hylaform gel, a product which can be used without a skin sensitivity test. The Company has acquired exclusive distribution rights in certain international markets from Biomatrix, Inc. ("Biomatrix") to sell Hylaform gel for facial wrinkles and scars. Hylaform is a viscoelastic product made from hylan B, a biopolymer created by cross linking hyaluronan molecules. Hyaluronan is the elastoviscous polysaccharide present in the intercellular matrix of nearly all human tissues. Hyaluronan plays an important role in the skin's hydration and viscoelasticity. Over time, the hyaluronan content in skin decreases, contributing to the aging appearance of skin. Due to its unique cross-linking to hylan B, Hylaform gel has a higher water content and greater elastic properties than other hyaluronan-derived products. Since hyaluronan is neither tissue-specific nor species-specific, Hylaform gel can be used without a skin test. In addition, Hylaform gel has a chemical structure that is completely different from bovine collagen and does not contain any bovine protein. Hylaform gel allows for same day treatment of facial wrinkles and scars, giving patients and doctors an additional treatment option. Biomatrix received CE Mark for Hylaform gel in December 1995, allowing this product to be marketed throughout Europe. The Company began marketing Hylaform gel in several European countries in fiscal 1997. The Company holds exclusive marketing and distribution rights to Hylaform gel in certain markets outside the U.S. and has the option to acquire the U.S. distribution rights in the future. The exclusivity of the license will terminate if the Company fails to meet certain sales goals. The Company plans to introduce Hylaform gel in additional international markets following receipt of required regulatory approvals or clearances. Hylaform gel is not currently approved for marketing in the U.S. There can be no assurance that Hylaform gel will be marketed in the U.S. in the near future, or at all. SOFTFORM IMPLANT. The Company has acquired exclusive worldwide distribution rights from Tissue Technologies, Inc. ("Tissue Technologies") to market SoftForm implant, for subdermal soft tissue reconstruction and augmentation. SoftForm implant is a non-resorbable, long-lasting, yet removable facial implant for the treatment of deep facial furrow and creases such as nasolabial folds (creases between the nose and corners of the mouth), deep frown lines and definition of the vermilion border. SoftForm implant comes preloaded in a self-contained delivery system enabling precise placement without requiring physicians to handle the implant prior to placement. Treatment with SoftForm implant consists of a simple in-office procedure performed under a local anesthetic. The implant is inserted below the surface of the skin through 4 6 two small incisions. The procedure generally takes less than 30 minutes, but treatment times will vary depending on the number of implants used. Microporous material limits tissue in-growth through the surface of the implant, allowing easy removal of SoftForm implant. The removability of SoftForm implant provides physicians with the option of adjusting or removing the implant as desired. The Company believes that SoftForm implant is more easily removable than other non-resorbable facial implants. SoftForm implant is a soft, tube-shaped implant made of the biocompatible polymer ePTFE. SoftForm implant has a hollow configuration designed to provide stability by promoting fibrous tissue ingrowth through the inside of the tube. The Company believes that SoftForm implant demonstrates greater stability and less likelihood of extrusion through the skin's surface with the hollow configuration of SoftForm implant as compared to competitive products. The ePTFE polymer used in the SoftForm implant has been used for more than 20 years in a variety of medical applications, including replacement of deteriorated blood vessels, hernia repair, abdominal wall reinforcement and soft tissue augmentation of the face. SoftForm implant received marketing clearance from the FDA in April 1996 under a 510(k) application and the Company introduced SoftForm implant to a panel of six physician advisors in December 1996. The Company launched SoftForm in the U.S. in 1997. The product is currently approved for usage in Canada and has received CE Mark in the European Community ("EC"). SoftForm implant is currently being launched in certain international markets. The Company's facial enhancement products have been designed to provide a range of corrective products to the Company's customers. SoftForm implant is designed to complement Zyderm and Zyplast implants as well as Hylaform gel by offering a sub-dermal (under the skin), persistent treatment to patients with deep furrows. REFINITY SKIN SOLUTIONS. The Company has acquired exclusive worldwide rights from Cosmederm Technologies, Inc. ("Cosmederm") to distribute Refinity skin solutions, a line of alpha hydroxy acid ("AHA") skin care products being developed by the Company and Cosmederm. Refinity skin solutions products contain a patented anti-irritant developed by Cosmederm. The Company believes that these products diminish the appearance of fine lines and wrinkles and give the skin a smoother texture and tone while minimizing or eliminating the itching, burning and stinging traditionally associated with AHA products. The Company plans to introduce Refinity skin solutions in the U.S. in fiscal 1999 and in certain international markets in the future. The Company plans to distribute its Refinity skin care products through physicians' offices to leverage the Company's existing distribution network. In order to develop a high-performance AHA product which produces minimal adverse effects, Cosmederm is developing the Refinity skin solutions product line for the Company utilizing Cosmederm's patented anti-irritant, COSMEDERM-7. Because Refinity skin solutions products contain significantly higher levels of active ingredients than currently available alternative products, the Company believes that they can achieve more effective results. The Refinity skin solutions product line will include home use products with an AHA concentration of 15% (compared with other physician dispensed products with concentrations generally ranging from 8-12%), as well as a physician in-office peel product with an AHA concentration of 70%. CONTIGEN IMPLANT. Contigen implant injections are designed to treat incontinence due to intrinsic sphincter deficiency ("ISD"). Contigen implant is a sterile, highly purified bovine dermal collagen that is 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 joining of the urethral lumen. After injection, the suspended collagen forms a soft cohesive network of fibers and over time, the implant takes on the appearance of human tissue. The treatment cycle of Contigen implant may require multiple injections at the start of treatment and may require supplementary injections over time. The Company obtained pre-market approval from the United States Food and Drug Administration (the "FDA") to market Contigen implant in September 1993 for the treatment of ISD. Under the terms of a distribution agreement with Bard, the Company sells Contigen implant to Bard and the Company receives a 5 7 royalty on end market sales of Contigen implant. Bard has exclusive worldwide marketing and distribution rights to Contigen implant which is currently marketed in the United States. Bard has received reimbursement codes for Contigen implant and is expected to commence marketing in several European nations (Belgium, France, Germany, Italy, Spain and the United Kingdom), Latin America, Japan, Australia and Canada. DISCONTINUED OPERATIONS -- LIPOMATRIX On April 8, 1998, the Company announced plans to pursue a divestiture of its LipoMatrix, Incorporated ("LipoMatrix") subsidiary, manufacturer of the Trilucent(TM) breast implant ("Trilucent implant"), thereby allowing the Company to dedicate further resources to its aesthetic operations. In June 1998, the Company adopted a formal plan to complete the divestiture and has accounted for the results of LipoMatrix as a discontinued operation in the accompanying consolidated financial statements. The Company has recorded losses from discontinued operations before taxes of $5.3 million, $9.1 million and $24.7 million in fiscal 1998, 1997 and 1996, respectively. In addition, the Company recorded a provision of $11.0 million before taxes, for the loss on disposal of the net assets of LipoMatrix including estimated future costs. The Company expects to dispose of the assets by December 31, 1998. SALES AND MARKETING The Company has developed a worldwide distribution network, comprised of a direct sales force in the United States and certain international markets. The Company's sales force consists of over 100 sales representatives and agents worldwide, distributors in certain international markets and a marketing partner, Bard, for Contigen implant. This distribution network is experienced in selling technologically advanced products for facial aesthetic applications, thereby enabling the Company to introduce more rapidly and effectively newly developed, acquired and in-licensed products. The Company believes that the increased utilization of the existing distribution network will lead to increased operating efficiencies. The Company markets its Zyderm and Zyplast implants directly to dermatologists, plastic surgeons and other physicians in the U.S. and several European countries, Canada, Australia and New Zealand and through distributors in certain other international markets. The Company has historically distributed Zyderm and Zyplast implants in Japan through Lederle Japan, but in fiscal 1999 it will begin using its own subsidiary to market these products directly. The Company has launched SoftForm implant and is marketing the SoftForm product through its direct sales force in the U.S. and limited sales in several European countries, Canada and through international distributors. The Company expects to launch Refinity skin solutions in the U.S. in fiscal 1999. Hylaform gel is currently sold in several European countries through the Company's direct sales force and its international distributors, but is not approved for marketing in the U.S. Contigen implant is marketed worldwide through Bard, the Company's marketing partner. The Company utilizes a variety of methods to promote its facial aesthetic products to patients and physicians. To stimulate demand at the patient level, the Company conducts consumer marketing awareness programs, including public relations events, health and beauty magazine advertising, direct mailing campaigns and patient seminars. The Company's marketing efforts to physicians consist of on-going education and promotional activities. Examples of physician marketing activities include in-office education, presence at medical meetings, and direct mail campaigns. The Company has emphasized physician education to ensure proper education in the use of its products and timely communication of clinical and product use information. The Company is committed to optimizing patient satisfaction through various initiatives aimed at meeting the patient's aesthetic needs while making the Company's products more affordable. Market research sponsored by the Company and conducted during fiscal 1996 revealed that many patients were not receiving enough collagen material per treatment to provide for full correction of soft tissue defects and that existing prices for the product discouraged patients from purchasing more collagen. As a result, the Company introduced syringes with larger fill volumes, offering more collagen material with a minimal increase in cost and injection time and an opportunity for more complete correction. The Company benefits from this strategy due to increased patient satisfaction. In addition to larger syringes, the Company has also introduced programs to further encourage more complete correction at the initial treatment and on an ongoing basis. 6 8 The Company has instituted a new patient program in an effort to attract new patients and increase existing patient satisfaction. The Company's program offers all patients special pricing options that make full and ongoing correction more affordable. In addition, the Company has initiated the Collagen Specialist Program to educate nurses to administer collagen proficiently, which the Company believes may increase collagen-based injectable revenues of both the Company and its physician customers while maintaining patient satisfaction. The Company believes this program may improve physicians' practice economics while providing for continued high quality patient care. For the uncertainties or risk factors that exist surrounding the marketing and distribution of the Company's facial aesthetic products and its stress urinary incontinence product see "Factors That May Affect Future Results of Operations" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION The Company believes that the primary competitive factors in the market for facial aesthetic medical products are safety, efficacy, reliability, cost-effectiveness, patient recovery time, absence of significant side effects, availability of third-party reimbursement, and physician and public awareness of the existence and efficacy of products. The medical device industry is characterized by rapid and significant technological change. The length of time required for product development and regulatory approval plays an important role in a company's competitive position. Consequently, the Company's success will depend in part on its ability to respond quickly to medical and technological changes through the development, acquisition or in-licensing and commercialization of new products. The Company believes that it competes favorably with respect to these factors, although there can be no assurance that it will continue to do so. Several companies and institutions are engaged in the development of collagen-based and other materials, techniques, procedures and products for use in facial aesthetic applications anticipated to be addressed by the Company's products. Some of these companies and institutions are developing human-based collagen products which, when and if commercially introduced, may have perceived advantages over the Company's bovine collagen-based 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 the Company. These companies and institutions may represent significant long-term competition for the Company. There can be no assurance that the Company's competitors will not succeed in developing technologies and products that are more effective than any which have been or may be developed by the Company or that would render the Company's technology and products obsolete or non-competitive or that the Company will be able to compete effectively against such competitors based on its abilities to manufacture, market and sell its products. There can be no assurance that such potential competition will not have an adverse effect on the future business, financial condition or results of operations of the Company. The market for facial aesthetic products and treatments is characterized by rapidly evolving technology and increasing competition resulting from changes in the health care environment. The Company faces competition in each of its target product markets. Facial Enhancement The Company faces direct and indirect competition for its Zyderm and Zyplast implant products. At the present time, the Company is aware of a commercial product marketed in the U.S. and Canada that competes directly with Zyderm and Zyplast implants. This product is a gelatin-based (denatured collagen) product for soft tissue augmentation. The Company also competes with products derived from human tissue. Collagenesis, Inc. produces a product requiring a biopsy of the patient's tissue, which tissue is then used to generate an injectable material. Fat injections require surgical removal of the patient's fatty tissue. Implantable cadaver tissue obtained through tissue banks is sold under the brand name Alloderm and competes directly with SoftForm implant. Internationally, the direct competitors in the injectable product segment are primarily derived from collagen, hyaluronic acid and silicone. The Company is aware of one foreign company that is 7 9 marketing internationally a collagen-based material for soft tissue augmentation. The Company is aware of a hyaluronic acid-based product called Restylane that is competitive with Hylaform gel. In addition, W.L. Gore, Inc. markets an ePTFE product that is directly competitive with SoftForm implant. The Company's injectable products also compete in the dermatology and plastic surgery markets with substantially different treatments, such as laser treatments, chemical peels, fat injections, dermabrasion, botulinum toxin injections 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. Although the Company believes it has a leadership position in the injectable product segment of the soft tissue augmentation market, there can be no assurance that the Company will not face increased direct and indirect competition in such a market. Refinity skin solutions, once introduced, will compete in the competitive segment of the AHA product market which includes products distributed through physicians' offices. Physician dispensed AHA products represent approximately 6% to 7% of the $1.6 billion per year AHA market. Physicians dispense a significant number of private label in-office peel and take-home AHA products to their patients, making the in-office distribution channel increasingly profitable for companies which offer their physician customers highly efficacious AHA products. During the last two years, several large pharmaceutical companies with high product profiles within the dermatology market have purchased or agreed to distribute AHA skin care lines. Should such pharmaceutical companies begin dispensing AHA products through physicians' offices, there can be no assurance that the Company will be able to compete effectively in this market. Contigen Implant At the present time, autologous fat, silicone micro-implants and polytetrafluoroethylene (Teflon paste, or PTFE) are directly competing or will compete with the Contigen implant for the treatment of stress incontinence due to ISD. Neither silicone micro-implants nor PTFE have been approved by the FDA for use in the U.S. The Contigen implant also competes with other methods of treatment or amelioration of ISD including absorbent products (diapers, pads and other drip and collection devices), drugs and estrogen therapy, behavior modification (kegel exercises, electrical stimulation, and biofeedback), surgery (artificial urinary sphincter, sling procedures, bladder neck suspension and bone anchors), and bulking agents (Urethrin, Macroplastique, inert materials and fat). MANUFACTURING The Company manufactures its collagen-based injectable products utilizing readily available chemicals and enzymes. The source of its collagen is bovine dermis. The Company uses a patented viral inactivation process for its collagen-based products to promote both their safety and quality. Since 1987, the hides have been sourced from a closed herd, in an effort to prevent diseases such as Bovine Spongiform Encephalopathy ("BSE" or "mad cow disease"), from contaminating its collagen-based products. Maintaining a closed herd 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 veterinary program. The Company 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 can be available from other sources. The Company's principal collagen-based products have refrigerated shelf lives of 36 months. The Company typically ships products to physicians as orders are received on an express delivery basis, and has no material backlog. It is the Company's policy to maintain levels of finished goods inventory adequate to allow for the expeditious handling of orders received. The Company believes its physician customers typically purchase products on an as-needed basis, while distributor customers purchase products based on inventory stocking levels. The Company manufactures Zyderm and Zyplast implant products and Contigen implant products, as well as Collagraft(R) bone graft matrix implant and Collagraft(R) bone graft matrix strip ("Collagraft bone graft products") for Cohesion, in its Fremont, California facility. This facility is used primarily for bulk processing, aseptic filling and packaging of finished goods. While the Company has not experienced any disruptions in its manufacturing schedule during the last two fiscal years, there can be no assurance that the Company will not 8 10 experience disruptions in its manufacturing schedule in the event that it attempts to manufacture products in larger quantities and with new process improvements. In addition to the Company's in-house inspection teams which work to promote the quality and consistency of the Company's products, the Company's manufacturing facilities are subject to regulatory requirements and periodic inspection by regulatory authorities, such as the FDA in the U.S. In June 1995, the Company's quality system was audited by TUV Product Services, Munich ("TUV") to ensure that the Company's products conform to the provisions of the European Medical Devices Directive. After the completion of the audit and review of the technical documentation, the Company was granted permission to affix CE Mark on its Zyderm and Zyplast implant product packages and to sell these products in the EC. An annual surveillance audit of the Company's quality system was performed by TUV in March 1998 and the Company's quality systems were recertified. Hylaform gel, SoftForm implant and Refinity skin solutions products, distributed or expected to be distributed by the Company, are manufactured by third parties. The Company is dependent on these third parties to manufacture and supply products to the Company as required. While the Company has supply agreements with these third parties, there can be no assurances that these third parties will manufacture and supply high quality products on a timely basis or in adequate quantities. Inventory shortages or quality issues could adversely affect the Company's sales of these products and as a result, could adversely affect the Company's business, financial condition and results of operations. PRODUCT DEVELOPMENT Most of the research and development efforts previously conducted by the Company have been assumed by Cohesion. In connection with the Spinoff, the Company has entered into a Research and Development Agreement with Cohesion, effective as of January 1, 1998. The Company's research and development efforts will focus on those products that are in-licensed or acquired and require additional development. In addition, the Company will continue independent research and development activities, primarily focused on enhancement of its manufacturing processes. Under the terms of the Research and Development Agreement, the Company is collaborating with Cohesion to develop an alternative to bovine sourced collagen. Research efforts are focused on the development of recombinant human collagen through transgenic animals and yeast. Cohesion has made an equity investment in and is actively collaborating with Pharming for the purpose of developing recombinant human collagen through transgenic animals. In addition, Cohesion has a collaborative agreement with Genotypes, Inc. of South San Francisco, California, to develop recombinant human collagen through yeast. The Research and Development Agreement allocates the obligations and responsibilities of Cohesion and the Company with respect to research, development and manufacturing development of the recombinant technology and provides for the sharing of development costs. Pursuant to the Research and Development Agreement, the resultant recombinant technology and related intellectual property shall be owned by Cohesion, but shall be exclusively licensed to the Company for uses related to the Company's business, subject to the payment of royalties by the Company to Cohesion. PATENTS AND PROPRIETARY TECHNOLOGY The Company has historically depended substantially upon its proprietary technological expertise in the extraction, purification, and formulation of collagen-based materials and other biomaterials into biomedical products. The Company has sought patents on inventions concerning novel manufacturing processes, composition of matter, and applications for its proprietary biomaterials. In connection with the Spinoff, the Company and Cohesion have entered into an Assignment and License Agreement pursuant to which a large portion of the Company's technology and intellectual property (including patents and trade secrets), other than technology relating to the breast implant technology, has been assigned to Cohesion. Cohesion has granted back to the Company an exclusive, worldwide, perpetual, fully paid-up license to such assigned technology and intellectual property for use in the Company's field of business. The Assignment and License Agreement also provides for each of Cohesion and the Company to obtain certain rights to any improvements made by the other company prior to March 15, 2004, solely as such improvements relate to its business. In 9 11 addition, under the Assignment and License Agreement, each of Cohesion and the Company covenant to not compete in each other's business until March 15, 2004. Patent-related litigation is a risk in the medical device industry. There can be no assurance the Company will be successful in the future in obtaining patents or license rights, that patents will be issued for the Company's current patent applications, that the Company will develop additional proprietary technology that is patentable, that any issued patents will provide the Company with any competitive advantages or will not be challenged by third parties, or that patents of others will not have an adverse effect on the Company. No assurance can be given that the processes or products of the Company or its licensors, including Cohesion, will not infringe patents or proprietary rights of others or that any licenses required under any such patents or proprietary rights would be made available on terms acceptable to the Company. If the Company does not obtain such licenses, it could encounter delays in product introductions while it attempts to design around such patents, or it could find that the manufacture, sale or use of products requiring such licenses could be enjoined. In addition, the Company could incur substantial costs in defending itself in suits brought against the Company on such patents or in bringing suits to protect the Company's patents against infringement. The Company relies upon trade secret protection for certain unpatented aspects of its proprietary technology. There can be no assurance that others will not independently develop or otherwise acquire substantially equivalent proprietary information or techniques, that others will not otherwise gain access to the Company's proprietary technology or disclose such technology, or that the Company can meaningfully protect its trade secrets. The Company requires its employees and consultants to execute appropriate confidentiality and proprietary information agreements upon the commencement of employment or a consulting relationship with the Company. These agreements generally provide that all confidential information developed or made known to the individual by the Company during the course of the individual's relationship with the Company is to be kept confidential and not disclosed to third parties, except in specific circumstances. The agreements generally provide that all inventions conceived by the individual in the course of rendering services to the Company shall be the exclusive property of the Company; however, certain of the Company's agreements with consultants, who typically are employed on a full-time basis by academic institutions or hospitals, do not contain assignment of invention provisions. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for the Company in the event of unauthorized use, transfer or disclosure of such information or inventions. The Company holds several registered trademarks in the U.S. and a number of foreign countries and vigorously pursues the protection of its trademarks and service marks, whether registered or not. GOVERNMENT REGULATION The Company's manufacturing activities and most products sold in the U.S. are subject to extensive and rigorous regulations by the FDA and by comparable agencies in certain other countries where these products are manufactured and/or distributed. The FDA regulates the manufacture, clinical research and sale of medical devices, including labeling, advertising and recordkeeping. Before a new device can be introduced into the market, generally the manufacturer must obtain FDA approval of a premarket approval ("PMA") or clearance of a 510(k) notification submission. A PMA application must be filed if a proposed device is not substantially equivalent to a legally marketed Class I or Class II device, or if it is a Class III device for which the FDA has called for PMAs. The PMA application must contain the results of clinical trials, the results of all relevant bench tests, laboratory and animal studies, a complete description of the device and its components, and a detailed description of the methods, facilities and controls used to manufacture the device. The FDA's review of a PMA application generally takes one to two years from the date the PMA is accepted for filing, but it may take significantly longer. The review time is often significantly extended by FDA requests for additional information or clarification of information already provided in the submission. Modifications to a device that is the subject of an approved PMA, its labeling or manufacturing process may require approval by the FDA of PMA supplements or new PMAs. The PMA process can be expensive, uncertain and lengthy, and 10 12 a number of devices for which FDA approval has been sought by other companies have never been approved for marketing. If human clinical trials of a device are required in order to obtain adequate safety, performance and/or efficacy data, and the device presents a "significant risk" to the patient, the sponsor of the trial (usually the manufacturer or the distributor of the device) will have to file an Investigational Device Exemption ("IDE") application prior to commencing human clinical trials. The IDE application must be supported by data, typically including the results of animal and laboratory testing. If the IDE application is approved by the FDA and the study protocol is approved by one or more appropriate Institutional Review Boards ("IRBs"), human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA. If the device presents a "nonsignificant risk" to the patient, a sponsor may begin the clinical trial after obtaining approval for the study by one or more appropriate IRBs without the need for FDA approval. Sponsors of U.S. clinical trials are permitted to sell investigational devices distributed in the course of the study provided that compensation does not exceed recovery of the costs of manufacture, research, development and handling. An IDE supplement must be submitted and approved by the FDA and appropriate IRB(s) before a sponsor or investigator may make a change to the investigational plan that may affect its scientific soundness or the rights, safety or welfare of human subjects. A 510(k) clearance will be granted if the submitted information establishes that the proposed device is "substantially equivalent" to a legally marketed Class I or Class II medical device or a Class III medical device for which the FDA has not called for PMAs. The FDA recently has been requiring more rigorous demonstration of substantial equivalence than in the past, including, in some cases, requiring submission of clinical trial data. The FDA may determine that the proposed device is not substantially equivalent to a predicate device, or that additional information is needed before it is deemed substantially equivalent to a predicate device or that additional information is needed before a substantial equivalence determination can be made. The majority of the Company's products are classified as Class III medical devices, which require pre-market approval from the FDA. All of the Company's products described in "Products," other than Hylaform gel, have been approved or cleared for sale in the U.S. Refinity skin solutions are regulated as cosmetic products in the U.S. Products for which medical market applications have not yet been approved by the FDA may only be exported from the U.S. with the appropriate regulatory approval(s). There can be no assurance that the FDA will choose to designate future products as medical devices or cosmetics rather than drugs, biologics or combination products. Any such change in FDA designation would potentially lengthen and increase the cost and complexity of the approval process. The Company's clinical research program for medical devices has been and remains subject to the IDE regulations of the FDA. These regulations govern many important aspects of the clinical investigation of medical products, including obtaining informed consent from clinical subjects, securing the approval of an IRB and maintaining required documentation relating to the conduct of the investigational study. In addition, these regulations may require that the Company obtain approval from the FDA prior to the commencement of clinical investigations of new products or of expanded applications of commercially available products. Compliance with the current Quality Systems Regulations ("QSR"), formerly Good Manufacturing Practices, is necessary to receive FDA approval to market new products and to continue to market current products. Manufacturers of medical devices for marketing in the U.S. are required to adhere to applicable regulations setting forth detailed QSR requirements, which include testing, control and documentation requirements. Manufacturers must also comply with Medical Device Reporting ("MDR") requirements that a company report to the FDA any incident in which its product may have caused or contributed to a death or serious injury, or in which its product malfunctioned and, if the malfunction were to recur, would be likely to cause or contribute to death or serious injury. Labeling and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses. The Company is registered with the FDA as a manufacturer of medical devices. The Company is subject to routine inspection by the FDA and certain state agencies for compliance with QSR requirements, MDR 11 13 requirements and other applicable regulations. The Company's facilities and manufacturing processes have been inspected periodically by the State of California and other agencies, and remain subject to audit from time to time. The Company believes that it is in substantial compliance with all applicable federal and state regulations. Nevertheless, there can be no assurance that the FDA or a state agency will agree with the Company's position, or that its QSR compliance will not be challenged at some subsequent point in time. Enforcement of QSR has increased significantly in the last several years and the FDA has stated publicly that compliance will be scrutinized more strictly. In the event that the Company is determined to be in noncompliance with FDA regulations, to the extent that the Company is unable to convince the FDA or state agency of the adequacy of its compliance, the FDA or state agency has the power to assert penalties or remedies, including injunction or temporary suspension of shipment until compliance is achieved. Noncompliance may also lead to a recall of product. Such penalties or remedies could have a materially adverse effect on the Company's business, financial condition and results of operations. The continuing trend of more stringent FDA oversight in product clearance and enforcement activities has caused medical device manufacturers to experience longer approval cycles, more uncertainty, greater risk and higher expenses. Failure to obtain, or delays in obtaining, the required regulatory approvals for new products could adversely affect the Company, as could product recalls. In addition, there can be no assurance that the FDA will give approval to the Company to market its current products for broader or different applications, or that it will grant approval with respect to separate product applications which represent extensions of the basic collagen technology, or that existing approvals will not be withdrawn. In the U.S., health care providers that purchase medical devices, such as Contigen implant, generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans to reimburse all or part of the cost of the procedure in which the device is used. Such reimbursement is typically made at a fixed rate. Changes in reimbursement policies could have an economic impact on the purchase and use of medical devices. Although the Company's aesthetic products are not generally subject to reimbursement, a material decrease in current reimbursement levels for treatment of ISD could have a material adverse effect on sales of Contigen implant and on the Company's business. Sales of medical devices outside the U.S. are subject to regulatory requirements that vary widely from country to country. The time required to obtain clearance required by countries may be longer or shorter than that required for FDA clearance, and requirements for such clearances may differ significantly from FDA requirements. Some countries have historically permitted human studies earlier in the product development cycle than regulations in the U.S. permit. Other countries, such as Japan, have requirements similar to those of the U.S. This disparity in the regulation of medical devices may result in more rapid product clearance in certain countries than in others. The primary regulatory environment in Europe is that of the EC which consists of more than 15 countries encompassing most of the major countries in Europe. Certain other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the EC with respect to medical devices. The EC has adopted numerous directives and standards regulating the design, manufacture, clinical trial, labeling, and adverse event reporting for medical devices. The principal directives prescribing the laws and regulations pertaining to medical devices in the EC are found in the European Medical Devices Directive, 93/42/EC. Devices that comply with requirements of a relevant directive will be entitled to bear CE conformity marking, indicating that the device conforms with the essential requirements of the applicable directive and, accordingly, can be commercially distributed throughout the EC. The method of assessing conformity varies depending on the class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a Notified Body. This third-party assessment may consist of an audit of the manufacturer's quality system, review of a technical file and specific testing of the manufacturer's products. An assessment by a Notified Body in one country within the EC is required in order for a manufacturer to commercially distribute the product throughout the EC. There can be no assurance that the Company will be successful in meeting the European quality standards or other certification requirements. The Company's Zyderm implants and Zyplast implant received CE Mark on June 23, 1995, Contigen implant 12 14 received CE Mark on October 26, 1995, Hylaform gel received CE Mark on November 2, 1995 and SoftForm received CE Mark in September 22, 1997. While no additional pre-market approvals for individual EC countries are required prior to the marketing of a device bearing CE Mark, practical complications with respect to market introduction may occur. For example differences among countries have arisen with regard to labeling requirements. Unapproved devices subject to the PMA requirements generally must receive prior FDA export approval unless they are approved for use by any member country of the EC and certain other countries, including Australia, Canada, Israel, Japan, New Zealand, Switzerland and South Africa, in which case they can be exported to any country without prior FDA approval upon meeting certain requirements. Exports of products subject to the 510(k) notification requirements, but not yet cleared to market, are permitted without FDA export approval provided certain requirements are met. However, the Company must, among other things, notify the FDA and meet the importing country's requirements. There can be no assurance that the Company will receive FDA export approval when such approval is necessary, or that countries to which the devices are to be exported will approve the devices for import. Failure of the Company to receive import approval from other countries, or to obtain Certificates for Products for Export when required, or to meet FDA's export requirements or to obtain FDA export approval when required to do so, could have a material adverse effect on the Company's business, financial condition and results of operations. EMPLOYEES As of September 1, 1998, the Company employed 280 employees, of whom 11 were engaged in medical affairs and regulatory affairs, 97 of whom were engaged in sales and marketing, 94 of whom were involved in production and quality control and 79 of whom were engaged in finance and administration. None of the Company's employees is covered by a collective bargaining agreement. EXECUTIVE OFFICERS The following table sets forth the names, ages and positions of the executive officers of the Company as of September 1, 1998:
NAME AGE POSITION(S) ---- --- ----------- Gary S. Petersmeyer....... 51 President, Chief Executive Officer and Director William Dimmer............ 54 Vice President, Human Resources & Administrative Services Charlene Andros 41 Vice President, General Counsel Friedman................ Norman L. Halleen......... 45 Vice President, Finance and Chief Financial Officer Reinhard Koenig, M.D. .... 38 Vice President, Medical/Regulatory Affairs, Worldwide Rebecca A. Stirn.......... 45 Vice President, North American Marketing Strategy
Mr. Petersmeyer joined the Company as President, Chief Operating Officer and a director of the Company in February 1995. In February 1997, Mr. Petersmeyer became the Company's Chief Executive Officer. Prior to joining the Company, 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 Executive 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. Mr. Dimmer joined the Company as Vice President, Human Resources and Administrative Services in July 1998. Prior to joining the Company, Mr. Dimmer was Principal/Consultant for PRAGMA International from April 1994 to June 1998. From January 1991 to April 1994, he was Vice President of Human Resources for JAMONT, S.A. in Brussels, Belgium. Mr. Dimmer was Director of Human Resources for Syntex 13 15 Pharmaceutical Corporation from April 1982 to December 1991, located in Maidenhead, England and Palo Alto, California. Ms. Friedman joined the Company as General Counsel and Assistant Secretary in February 1996. Prior to joining Collagen, Ms. Friedman practiced law for thirteen years, representing corporate and individual clients in the litigation of product liability, commercial and general liability cases. Ms. Friedman joined Collagen from the law firm of Lillick & Charles in San Francisco. From 1993 to 1995, she practiced with Warner & Stackpole in Boston. Ms. Friedman practiced at Murphy, DeMarco & O'Neill, Boston from 1983 through 1993. She is a member of the California and Massachusetts bars. Mr. Halleen joined the Company as Vice President, Finance and Chief Financial Officer in February 1997. From July 1989 to January 1997, Mr. Halleen ran his own business as a finance consultant in Hong Kong. In addition, from October 1993 through June 1996, he served as Chief Financial Officer of the Dutra Group, a privately held company in the construction/marine dredging business. Subsequent to Mr. Halleen leaving the Dutra Group, the Dutra Group filed an application for reorganization under Chapter 11 under the U.S. Bankruptcy Court, Northern District of California in January 1997. Prior to July 1989, he was employed for 10 years with Syntex Corporation, serving in various positions, including Regional Director of Finance for the Asia/Pacific region. Dr. Koenig joined the Company as Vice President, Medical Affairs, Worldwide in October 1996. From May 1995 until October 1996, he was employed by Genentech, Inc., a manufacturer of biotechnology products as the Director, Medical Information and Drug Experience. From January 1989 until May 1995, Dr. Koenig was employed by Boehringer Mannheim Therapeutics in Germany and the U.S. in various positions in medical affairs and clinical research, including the position of Director, Medical Affairs. Ms. Stirn joined the Company as Vice President, Global Marketing Strategy in January 1996. In January 1998, Ms. Stirn became Vice President, North American Marketing Strategy. Prior to joining the Company, Ms. Stirn provided consulting services to the Company from March 1995 to December 1995. From January 1988 to February 1995, Ms. Stirn consulted and served on the board of directors for several non-profit institutions. From September 1986 to December 1987, Ms. Stirn served as Vice President of Marketing at CEMAX, Inc., a company engaged in three-dimensional medical imaging and computer-aided design of custom implants. From June 1981 to October 1985, Ms. Stirn was employed by CooperVision, Inc. While employed by CooperVision, Inc., Ms. Stirn served as Vice President of Marketing, Optics Division and in various other marketing positions. ITEM 2. PROPERTIES The Company's principal executive, marketing, and research activities are located at 1850 Embarcadero Road, Palo Alto, California. The Company has subleased this property from Cohesion under a lease that expires June 30, 1999 and contains a renewal option. The Company's international facilities, which amount to approximately 20,000 square feet in total, are leased under various leases which contain renewal options. In 1989, the Company completed a sale-leaseback transaction relating to its 50,000 square foot manufacturing facility in Fremont, California. The facility lease term extends for fifteen years with four five-year renewal options. The Company commenced commercial manufacturing in this facility in November 1990. In addition, the Company leases approximately 11,000 square feet of warehouse space in Fremont, California. The Company continues to be committed under various leases for the 20,000 square foot facility located in Neuchatel, Switzerland for its discontinued breast implant business, LipoMatrix, until June 30, 2001. The Company has included in its $11.0 million (before taxes) provision for the disposal of LipoMatrix $900,000 for future lease commitments and estimated restoration expense for this facility. The Company is actively seeking to sublease this facility. The Company believes that its facilities are adequate to meet its requirements for at least the next twelve months. 14 16 ITEM 3. LEGAL PROCEEDINGS The Company is involved in various legal actions arising in the ordinary course of business, the majority of which involve product liability claims alleging personal injuries as a result of injectable products. 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 the Company's business, results of operations or financial condition. The Company faces an inherent business risk of exposure to product liability claims alleging that the use of the Company's technology or products has resulted in adverse effects. Such risks will exist even 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 the Company will avoid significant product liability claims and negative publicity in the future. 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 the Company. It is possible that adverse product liability actions could negatively affect the Company's ability to obtain and maintain regulatory approval for its products. 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, 1998. 15 17 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 (prior to the Spinoff of Cohesion Technologies, Inc.) for the Company's Common Stock for each fiscal quarter for the fiscal years ended June 30, 1998 and 1997 as reported by The Nasdaq Stock Market Summary of Activity(TM).
FISCAL YEAR ENDED JUNE 30, ----------------------------------- 1998 1997 ----------------- --------------- QUARTER ENDED HIGH LOW HIGH LOW ------------- ------- ------- ------ ------ September 30........................ $19.875 $16.625 $20.25 $16.50 December 31......................... 20.875 18.00 21.50 18.00 March 31............................ 22.125 16.75 26.00 18.25 June 30............................. 22.00 17.75 19.75 13.75
HOLDERS OF RECORD At September 4, 1998 there were approximately 839 holders of record of the Company's Common Stock. DIVIDENDS The Company declared a cash dividend of $.10 per share on its common stock payable to stockholders of record on June 30, 1998, in addition to a $.10 per share dividend declared and paid earlier in fiscal 1998. In fiscal 1997, the Company declared a cash dividend of $.10 per share on its common stock payable to stockholders of record on June 30, 1997, in addition to a $.10 per share dividend declared and paid earlier in fiscal 1997. While the Company does not expect to pay dividends in the near future, the Board of Directors will re-evaluate the Company's dividend policy on a semi-annual basis. 16 18 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED JUNE 30, -------------------------------------------------------------- 1998(1) 1997(1) 1996(1) 1995(1) 1994(1) -------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) OPERATING RESULTS Revenues...................... $ 82,772 $ 68,335 $ 68,285 $72,560 $65,552 Research and development expenses.................... 22,715 14,087 9,175 9,943 9,366 Operating income (loss) (2)... (18,564) (1,767) 6,589 11,854 8,607 Gain from investments, net (1)......................... 19,096 24,458 82,093 5,110 -- Net income (loss)............. (14,083) 7,371 26,652 8,760 4,920 Net income (loss) per share -- Basic: Continuing operations....... $ (0.21) $ 1.68 $ 5.66 $ 1.20 $ 0.63 Discontinued operations..... (1.37) (0.84) (2.67) (0.26) (0.12) -------- -------- -------- ------- ------- Net income (loss) per share -- Basic...... $ (1.58)(3) $ 0.84(3) $ 2.99(3) $ 0.94(3) $ 0.51(3) ======== ======== ======== ======= ======= Shares used in calculating income (loss) per share information -- Basic........ 8,913 8,804 8,915 9,270 9,592 Net income (loss) per share -- Diluted: Continuing operations....... $ (0.21) $ 1.66 $ 5.56 $ 1.18 $ 0.62 Discontinued operations..... (1.37) (0.83) (2.62) (0.25) (0.12) -------- -------- -------- ------- ------- Net income (loss) per share -- Diluted.... $ (1.58) $ 0.83 $ 2.94 $ 0.93 $ 0.50 ======== ======== ======== ======= ======= Shares used in calculating income (loss) per share information -- Diluted...... 8,913 8,930 9,075 9,460 9,896 FINANCIAL POSITION Cash, cash equivalents and short-term investments...... $ 15,927 $ 23,498 $ 25,367 $ 9,384 $12,736 Total assets........ 166,339 184,640 163,007 76,906 74,505 Long-term obligations excluding minority interest.................... 31,982 39,126 31,118 9,972 9,507 Total stockholders' equity............ 100,640 120,085 103,008 47,920 49,082 ADDITIONAL INFORMATION Repurchase of common stock.... $ 2,253 $ 2,546 $ 5,510 $11,282 $13,847 Cash dividends declared per share....................... 0.20 0.20 0.18 0.15 0.10
- --------------- (1) In the first five months of fiscal 1996 and in fiscal 1995 and 1994, financial information is presented with Target Therapeutics, Inc. ("Target") accounted for under the equity method. In January 1997, Boston Scientific and Target jointly announced the signing of a definitive agreement to merge in a tax-free stock-for-stock transaction. Gains from sales of portions of the Company's investment in Boston Scientific (formerly Target) contributed $20.4 million, $9.2 million, $85.8 million, and $6.0 million to fiscal years 1998, 1997, 1996, and 1995 pre-tax earnings, respectively. In addition, in fiscal 1997, the Company recorded an additional $15.4 million, resulting from the sale of its holdings in Prograft to W.L. Gore and Associates, Inc. (2) Includes in-process research and development charges of $10.6 and $3.0 million in fiscal years 1998 and 1996, respectively. (3) Includes effect of adopting Statement of Financial Accounting Standard No. 128 ("SFAS 128"). The adoption of SFAS 128 resulted in no significant impact for fiscal years 1998, 1997, 1996, 1995 and 1994. 17 19 ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion describes the financial condition and results of operations of Collagen Aesthetics, Inc. (formerly known as Collagen Corporation for fiscal 1998) before the Spinoff of Cohesion Technologies, Inc. ("Cohesion") on August 18, 1998. THE COMPANY Except for historical information contained herein, the matters discussed in this report are forward-looking statements, the accuracy of which is necessarily subject to risks and uncertainties. These risks include among others, the timing of product introductions, receipt of regulatory approvals, clinical efficacy of and market demand for products, product development cycles, results of clinical studies, development and rate of growth of new markets, potential unfavorable publicity regarding the Company or their respective products and possible reversal of sales among other matters discussed in this report. Actual results are subject to risks and uncertainties and actual events and results may differ significantly from the discussion of such matters in the forward-looking statements. Such differences may be based upon factors within the Company's control, such as strategic planning decisions by management and reallocation of internal resources, or on factors outside of the Company's control, such as scientific advances by third parties, introduction of competitive products and delays by regulatory and tax authorities, and those in the Company's 1998 Proxy Statement for Special Meeting of Stockholders and factors set forth under the heading "Factors That May Affect Future Results of Operations." The Company designs, develops, manufactures and markets on a worldwide basis biomedical devices for the treatment of defective, diseased, traumatized or aging human tissues. The Company's core products are used principally in facial aesthetic applications, the treatment of stress urinary incontinence, and bone repair. The Company markets its facial aesthetic products directly and through a network of international distributors and its stress urinary incontinence and bone repair products through marketing partners. SPINOFF AND NAME CHANGE In October 1997, the Company announced that it would proceed to separate its Aesthetic Technologies Group and its Collagen Technologies Group into two, independent, publicly-traded companies. In December 1997, the Company purchased substantially all of the remaining outstanding shares of Cohesion Corporation and integrated Cohesion Corporation into the Company's Collagen Technologies Group. The Collagen Technologies Group was spun off as a separate company on August 18, 1998, named Cohesion Technologies, Inc., to Collagen Corporation stockholders via a tax-free distribution. On August 12, 1998, the stockholders of the Company approved a corporate name change from Collagen Corporation to Collagen Aesthetics, Inc. which better reflects the Company's focus on serving the facial aesthetic medical marketplace. The Spinoff was designed to separate two distinct businesses with significant differences in their markets, products, research needs, investment needs, employee retention and compensation plans and plans for growth. The Company's Board believed the separation into two independent companies would enhance the ability of each to focus on strategic initiatives and new business opportunities, improve cost structures and operating efficiencies and create incentives that are more attractive and appropriate for the recruitment and retention of key employees. As a consequence, the Company believes that investors will be able to evaluate better the merits of the two groups of businesses and their future prospects. Based on the approved Spinoff, the Company anticipates that cost of sales as a percentage of sales will increase slightly as a result of introducing new product line extensions, with higher costs per unit, partially offset by lower manufacturing costs per unit for collagen-based injectable products. The Company expects lower SG&A spending, lower R&D spending, and higher interest income in fiscal 1999. The Company does not expect to record any significant gains or losses on investments since substantially all investments in affiliates, including Boston Scientific Corporation ("Boston Scientific") and Innovasive Devices, Inc. ("Innovasive Devices") were allocated to Cohesion. 18 20 DISCONTINUED OPERATIONS On June 30, 1998, the Board of Directors of the Company approved the discontinuation of the operations of LipoMatrix of Neuchatel, Switzerland, and authorized efforts to sell the wholly-owned subsidiary, thereby allowing the Company's aesthetic operations to dedicate further resources to its core business which includes products for soft tissue reconstruction and augmentation, skin care and stress urinary incontinence. The Company recorded net losses from the discontinued operations of $5.3 million, $9.1 million, and $24.7 million in fiscal years 1998, 1997 and 1996, respectively. Further, a provision of $8.6 million, net of an income tax benefit of $2.5 million, has been recorded in fiscal 1998 for the loss on disposal of net assets of LipoMatrix including estimated future costs. The Company expects to dispose of the assets by December 31, 1998. INVESTMENTS AND ACQUISITIONS The Company increased its ownership position in Cohesion Corporation of Palo Alto, California from approximately 81% to 99% in December 1997 and integrated Cohesion Corporation into the Company's Cohesion Technologies Group. Cohesion Corporation is a privately-held company developing proprietary products for hemostasis and tissue adhesion, biosealants and adhesion prevention barriers for surgical applications. In connection with the Company's December 1997 investment in Cohesion Corporation, $10.5 million of the purchase price was allocated to in-process research and development, which was expensed at the time of the investment. The Company will provide minimal R&D support to Cohesion as needed. The $10.5 million December 1997 purchase price includes cash compensation amounts of approximately $3.8 million associated with the purchase of certain vested employee stock options. Cohesion determined the amounts to be allocated to in-process technology for Cohesion Corporation based on whether technological feasibility had been achieved and whether there was any alternative future use after taking into consideration the potential for both usage of the technology in different products and for resale of the technology. The products and programs related to the in-process technology acquired are currently in the clinical trial and pre-clinical trial stages, respectively. The Company acquired in-process technology related to surgical hemostasis and sealing products under development, which utilized liquid-based biomaterials and related delivering systems. Cohesion Technologies expects to benefit from the in-process technology within the next three years, provided that sufficient pre-clinical and clinical data has been generated, submitted to regulatory authorities, and cleared for commercial sale by those regulatory authorities. Seeking to capitalize on recent technical successes in expressing recombinant collagen in mouse milk, in February 1996, the Company made an additional equity investment of approximately $4.5 million in Pharming, B.V. of The Netherlands ("Pharming"), bringing the Company's ownership percentage in Pharming to approximately 12%. At June 30, 1998 the Company's ownership position in Pharming was approximately 6%, which included an additional $2.5 million invested in fiscal 1998. Pharming is dedicated to the development and worldwide commercialization of human health care products produced in transgenic animals. The Company and Pharming will attempt to produce collagen in the milk of transgenic cattle. 19 21 RESULTS OF OPERATIONS The following table shows, for the periods indicated, the percentage relationship to product sales of certain items in the Consolidated Statements of Operations.
PERCENT OF PRODUCT SALES -------------------------- YEARS ENDED JUNE 30, 1998 1997 1996 -------------------- ------ ------ ------ Product sales.......................................... 100% 100% 100% Other revenue.......................................... -- -- 3% ---- --- --- Costs and expenses: Cost of sales........................................ 29% 25% 24% Selling, general and administrative.................. 51% 57% 51% Research and development............................. 27% 21% 14% Restructuring expense................................ 2% -- -- Purchased in-process research and development........ 13% -- 5% ---- --- --- Income (loss) from operations.......................... (22)% (3)% 10% ---- --- ---
PRODUCT SALES. Product sales of $82.8 million in fiscal 1998 increased $14.5 million or 21% versus fiscal 1997 sales of $68.3 million, compared to a $2.0 million or 3% increase from fiscal 1996 sales of $66.3 million. The $14.5 million increase in fiscal 1998 over fiscal 1997 was due primarily to an increase in revenue from direct sales of Contigen(R) Bard collagen implant ("Contigen implant"), to physician customers by C.R. Bard, Inc. ("Bard"), the introduction of SoftForm(TM) facial implant ("SoftForm implant"), an increase in international sales of Hylaform(R) viscoelastic gel ("Hylaform gel") and an increase in U.S. sales of injectable collagen products, partially offset by a decrease in international sales of injectable collagen products and a decrease in sales of Collagraft(R) bone graft matrix implant and Collagraft(R) bone graft matrix strip ("Collagraft bone graft products") to the Company's marketing partner, Zimmer. The $2.0 million increase in fiscal 1997 over fiscal 1996 was due primarily to an increase in revenue from direct sales of Contigen implant to physician customers by Bard, the Company's marketing partner for Contigen implant, an increase in both international and U.S. sales of injectable collagen products and the introduction of Hylaform gel, partially offset by a decrease in sales of Collagraft bone graft products. Worldwide sales of facial aesthetic products in fiscal 1998 were $63.0 million or 9% higher than fiscal 1997 sales of $57.9 million, compared to a 3% increase in fiscal 1997 from fiscal 1996 sales of $56.5 million. The $5.1 million increase in worldwide sales of facial aesthetic products in fiscal 1998 resulted from a corresponding 9% increase in units sold. The Company believes the increase in facial aesthetic products sales primarily was due to the introduction of SoftForm implant, a full year of HylaForm gel sales, and the continuation of U.S. marketing programs designed to increase average treatment volume per patient and to attract and retain new and existing patients, the implementation of a new sales incentive program for its sales force, and contact made with physicians not previously purchasing collagen injectable products as a result of the introduction of SoftForm implant. The $1.4 million increase in worldwide sales of facial aesthetics products in fiscal 1997 over fiscal 1996 resulted from an 8% increase in units sold, partially offset by decreases in average sales prices. The Company believes that the improved unit performance in fiscal 1997 over 1996 resulted from the implementation of marketing programs in the United States designed to increase average treatment volume per patient for injectable collagen products and to attract and retain new and existing patients, the addition of Hylaform gel, which was launched in Europe in November 1996, and strong distributor sales. Exchange rates unfavorably impacted international sales in United States dollars by $2.3 million and $1.1 million in fiscal 1998 and 1997, respectively, and favorably affected international sales by $457,000 in fiscal 1996. The Company anticipates continued growth in worldwide sales of plastic surgery and dermatological products in United States dollars during fiscal 1999. 20 22 Revenue recorded from Contigen implant sales was $17.7 million in fiscal 1998 or 124% higher than fiscal 1997 sales of $7.9 million, compared to an increase of $1.7 million or 27% from fiscal 1996 sales of $6.2 million. Revenue recorded from Contigen implant sales over the three year period included:
YEARS ENDED JUNE 30, --------------------- 1998 1997 1996 ----- ---- ---- (IN MILLIONS) Shipments of Contigen implant to Bard....................... $10.4 $1.2 $0.3 Income from Bard's direct sales to physician customers...... 7.3 6.7 5.9 ----- ---- ---- $17.7 $7.9 $6.2 ===== ==== ====
The $9.8 million increase in fiscal 1998 over fiscal 1997 was due to increases in shipments of Contigen implant to Bard. The $1.7 million increase in fiscal 1997 over fiscal 1996 was due to the resumption of shipments of Contigen implant to Bard during the fourth quarter of fiscal 1997 in accordance with the Company's sales agreement with Bard. The Company expects that revenues from Contigen implant sales in fiscal 1999 will be similar to sales in fiscal 1998. A number of uncertainties exist surrounding the marketing and distribution of Contigen implant. The Company's primary means of distribution for this product is through a third party firm -- Bard. The Company's business and financial results could be adversely affected in the event that Bard is unable to market the product effectively, anticipate customer demand accurately, or effectively manage industry-wide pricing and cost containment pressures in health care. Sales of Collagraft bone graft products in fiscal 1998 were $1.5 million, 22% lower than fiscal 1997 sales of $1.9 million, compared to a $1.2 decrease in fiscal 1997 from fiscal 1996 sales of $3.1 million. The $0.4 million decrease in fiscal 1998 over fiscal 1997 and the $1.2 million decrease in fiscal 1997 over 1996 was due to lower sales by Zimmer and a consequent decrease in shipments from the Company. Sales of Collagraft were transferred to Cohesion Technologies as a result of the Spinoff in August 1998. OTHER REVENUE. Other revenue in fiscal year 1996 consisted of a milestone payment of $2.0 million from Bard in accordance with the Company's agreement with Bard. The final milestone payment of $2.0 million was paid to the Company on September 30, 1995. COST OF SALES. Cost of sales as a percentage of product sales averaged 29%, 25% and 24% in fiscal years 1998, 1997 and 1996, respectively. The higher cost of sales as a percentage of product sales in fiscal 1998 over 1997 and 1997 over 1996 primarily was due to the introduction of product line extensions from third parties, Hylaform gel in fiscal 1997, SoftForm implant in fiscal 1998 and increased direct sales of Contigen implant to physician customers by Bard in fiscal 1997 also contributed to increases. Both Hylaform gel and SoftForm implant are manufactured by third parties and Contigen implant is distributed by a third party and as a result these products are sold at a lower margin. SG&A. Selling, general and administrative ("SG&A") expenses totaled $42.5 million in fiscal 1998, $38.8 million in fiscal 1997 and $33.7 million in fiscal 1996, representing 51%, 57%, and 51% of product sales, respectively. The $3.7 million, or 10%, increase in fiscal 1998 over fiscal 1997 was primarily due to expenses related to the separation of the Aesthetic Technologies Group and Cohesion Technologies, Inc., marketing costs related to SoftForm implant and Hylaform gel and sales commissions which more than offset the expenses incurred in fiscal 1997 to prepare for trial in the Company's trade secret lawsuit against Matrix Pharmaceuticals. SG&A expenses increased $5.1 million, or 15%, in fiscal 1997 over fiscal 1996, due primarily to payments made to the Company's former Chief Executive Officer, Howard Palefsky, in accordance with Mr. Palefsky's separation agreement and costs associated with existing loans to Mr. Palefsky, legal expenses incurred in connection with the Matrix lawsuit, and higher international sales and marketing costs associated with the commercial introduction of Hylaform gel. R&D. R&D expenses, which include expenditures for regulatory compliance, were $22.7 million in fiscal 1998, $14.1 million in fiscal 1997 and $9.2 million in fiscal 1996. The $8.6 million increase in R&D spending in fiscal 1998 over fiscal 1997 was primarily attributable to the ramp up of expenses to support programs, 21 23 including clinical trials, for CoSeal and Costatis(TM) Hemostat Device and the ramp-up of the recombinant program. The $4.9 million increase in R&D spending in fiscal 1997 over fiscal 1996 was primarily attributable to the inclusion of a full year of R&D expenses for Cohesion Corporation as a result of the Company increasing its ownership percentage to 81% in June 1996. PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. The charge for purchased in-process research and development ("in-process R&D") of $10.6 million in fiscal 1998 was due to the non-recurring charge related to the purchase of substantially all of the remaining shares of Cohesion Corporation, including the purchase of certain vested employee stock options. INCOME (LOSS) FROM OPERATIONS. The operating loss was $18.6 million in fiscal 1998 and $1.8 million in fiscal 1997, compared to operating income of $6.6 million in fiscal 1996. The loss in fiscal 1998 primarily was due to acquired in-process R&D, representing the purchase of substantially all of the remaining shares of Cohesion Corporation, the ramp-up of R&D expenses to support planned development programs, including clinical trials for Costasis(TM) hemostat and Coseal, the ramp-up of the Company's human collagen recombinant program, and expenses related to the separation of the Aesthetic Technologies Group and Cohesion Technologies, Inc., partially offset by higher Contigen implant sales and sales from product line extensions. The loss in fiscal 1997 was due primarily to the inclusion of the operating results of Cohesion Corporation, expenses in connection with the Matrix lawsuit and a charge for officer separation costs. The income in fiscal 1996 was due primarily to other revenue recorded (consisting of a $2.0 million milestone payment received from Bard), higher Collagraft sales and lower R&D and SG&A expenses, partially offset by the acquisition-related, non-recurring in-process R&D charge of $3.0 million related to Cohesion Corporation. IMPACT OF FOREIGN EXCHANGE RATES. The impact of foreign exchange rates from fiscal 1997 to fiscal 1998 resulted in a decrease in revenue of approximately $2.3 million and a decrease in operating expenses of approximately $2.6 million, resulting in a net increase in operating income of approximately $300,000 on an equivalent local currency basis. The impact of foreign exchange rates from fiscal 1996 to fiscal 1997 resulted in a decrease in revenue of approximately $1.1 million and a decrease in operating expenses of approximately $1.7 million, resulting in a net increase in operating income of approximately $600,000 on an equivalent local currency basis. Until December 1994, the Company's policy was to hedge material foreign currency transaction exposures. At June 30, 1998, 1997 and 1996, no foreign currency transaction exposures were hedged. Unhedged net foreign assets were $6.5 million, $7.6 million and $14.5 million at June 30, 1998, 1997 and 1996, respectively. The Company plans to investigate hedging options in fiscal 1999 in order to minimize the effect of currency fluctuations on the Company's results of operations. NET GAIN ON INVESTMENTS, PRINCIPALLY BOSTON SCIENTIFIC (FORMERLY TARGET). In fiscal 1998, the Company recorded a net pre-tax gain on investments of $19.1 million, resulting primarily from the sale of 332,340 shares of Boston Scientific common stock. In fiscal 1997, the Company recorded a net pre-tax gain on investments of $9.1 million resulting primarily from the sale of 330,000 shares of Target common stock. In fiscal 1996, the Company sold 1,792,000 shares of common stock of Target and recorded a net pre-tax gain on investments of $82.1 million (after the recording of a $4.0 million reduction in the carrying value of certain equity investments due to a decline in value determined to be other than temporary). On January 20, 1997, Boston Scientific Corporation of Natick, Massachusetts ("Boston Scientific") and Target jointly announced the signing of a definitive agreement to merge in a tax-free stock-for-stock transaction. On April 8, 1997, the merger was completed and, as a result, the Company received approximately 1,365,200 shares of Boston Scientific common stock in exchange for the Company's 1,275,888 shares of Target common stock. Pursuant to the merger agreement, the Company was restricted from selling its shares of Boston Scientific common stock until the expiration of applicable pooling-of-interests restrictions, which occurred during the first quarter of fiscal 1998. The investment in Boston Scientific was allocated to Cohesion Technologies prior to the Spinoff of Cohesion Technologies (see Note 17, "Subsequent Events"). To hedge against fluctuations in the market value of a portion of the Boston Scientific common stock, the Company entered into costless collar instruments (see Note 5, "Investment in Boston Scientific Corporation (Target Therapeutics, Inc.")). 22 24 NET GAIN ON INVESTMENT IN PROGRAFT. In fiscal 1997, the Company recorded an additional net pre-tax gain on investments of $15.4 million, resulting from the sale of its holdings in Prograft to W.L. Gore and Associates, Inc. EQUITY IN EARNINGS/LOSSES OF AFFILIATE COMPANIES. Equity in losses of other affiliate companies in fiscal 1998 was $0.2 million compared to $1.0 million in fiscal 1997 and $1.8 million in fiscal 1996. The decrease in equity in other affiliates' losses in fiscal 1998 over fiscal 1997 primarily was due to minimal research & development activity at one affiliate company. The decrease in equity in other affiliates' losses in fiscal 1997 over fiscal 1996 was due primarily to recording no Cohesion Corporation equity losses as a result of the Company increasing its ownership percentage to 81% in June 1996. Equity in earnings of Target was $1.4 million in fiscal 1996. The decrease in fiscal 1997 over fiscal 1996 in equity in Target's earnings was due to the Company's ownership percentage falling from approximately 29% at June 30, 1995 to approximately 11% at June 30, 1996. In December 1995, when the Company's ownership interest fell below 20%, the Company changed from the equity to the cost method of accounting for its investment in Target. INTEREST INCOME AND EXPENSE. Interest income was $1.0 million in fiscal 1998, $1.1 million in fiscal 1997 and $1.1 in fiscal 1996. The decrease in fiscal 1998 over fiscal years 1997 and 1996 was due primarily to lower average short-term investment balances and lower average interest rates. Interest expense was $56,000 in fiscal 1998, $473,000 in fiscal 1997 and $297,000 in fiscal 1996. Interest expense in fiscal 1997 and fiscal 1996 related primarily to borrowings under the Company's $15 million revolving credit facility, which was paid in full and canceled in June 1997. (see Note 7 of Notes to Consolidated Financial Statements). Interest expense in fiscal 1998 decreased as a result of no outstanding borrowings during the year. The increase in interest expense in fiscal 1997 over fiscal 1996 was due primarily to a full year of interest expense on the revolving credit line compared to six months in fiscal 1996. INCOME TAXES. The Company recorded a $3.2 million income tax provision on $1.3 million of pretax income for fiscal 1998. The tax provision resulted primarily from the in-process research and development expenses related to the purchase of substantially all of the remaining shares of Cohesion Corporation, a substantial portion of which in not deductible for income tax purposes. The effective tax rate was approximately 37% for fiscal 1997 and 44% for fiscal 1996. The higher effective tax rate in fiscal 1996 primarily was due to the impact of non-deductible items such as losses from foreign subsidiaries and equity losses in affiliates. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1998, the Company's cash, cash equivalents and short-term investments were $15.9 million compared to $23.5 million at June 30, 1997. Net cash used in operating activities was $5.8 million for fiscal 1998 compared with $1.3 million in fiscal 1997. For fiscal 1998, the $5.8 million of net cash used in operating activities was mainly attributable to $16.3 million of net loss after adjusting for depreciation and amortization expense, equity in losses (earnings) of affiliate companies, gain on investments (net of taxes paid) and loss on disposal of fixed assets, partially offset by the $11.4 million write-down of purchased intangibles, inventory and property and equipment of discontinued operations. The $0.4 million of net cash used in investing and the $4.2 million used in financing activities in fiscal 1998 primarily was due to payments of $12.3 million to purchase short-term investments, capital and intangible asset and expenditures of approximately $5.0 million, payments of approximately $3.1 million for additional investments in and loans to affiliates, payments of approximately $2.3 million to repurchase 125,000 shares of the Company's common stock at an average acquisition price of approximately $18.00 per share, repayment of bank borrowings of $2.0 million and payment of cash dividends of approximately $1.8 million to the Company's stockholders in both July 1997 and January 1998, partially offset by net proceeds of $21.1 million from the sale of 332,340 shares of common stock of Boston Scientific and the Company's holdings in other affiliate stock, $9.4 million received from the sale of short-term investments and $1.8 million from the issuance of 180,000 shares of the Company's common stock. 23 25 The Company anticipates capital expenditures, equity investments in, and loans to affiliate companies to be approximately $6.2 million in fiscal 1999. In June 1996, the Board of Directors authorized the Company to repurchase an additional 500,000 shares of the Company's common stock in the open market, of which the Company has repurchased 272,900 shares as of June 30, 1998. Subsequent to June 30, 1998, the Board of Directors approved a continuation of the stock repurchase program previously approved. Under this program, the Company is currently authorized to repurchase up to 500,000 shares of its common stock having an aggregate purchase price not in excess of $5,000,000. In June 1998, the Board of Directors declared a dividend of ten cents per share for stockholders of record as of June 30, 1998. The Company's principal sources of liquidity include cash generated from operations, and its cash, cash equivalents and short-term investments. The Company's capital requirements will depend on numerous factors, including market acceptance and demand for the Company's products; the resources the Company devotes to the development, manufacture and marketing of its products; the progress of the Company's clinical research and product development programs; the extent to which the Company enters into collaborative relationships with third parties and the scope of the Company's obligations in such relationships; the receipt of, and the time required to obtain, regulatory clearances and approvals; the resources required to protect the Company's intellectual property and other factors. The timing and amount of such capital requirements cannot be accurately predicted. Funds may also be used for the acquisition of businesses, products and technologies that are complementary to those of the Company. The Company believes that its current sources of liquidity should be adequate to fund its anticipated capital requirements through at least December 31, 1999. However, during this period or thereafter, the Company may require additional financing. There can be no assurance that such additional financing will be available on terms favorable to the Company or at all. YEAR 2000. The "Year 2000" issue results from the use in computer hardware and software of two digits rather than four digits to define the applicable year. When computer systems must process dates both before and after January 1, 2000, two-digit year "fields" may create processing ambiguities that can cause errors and system failures. The results of these errors may range from minor undetected errors to complete shutdown of an affected system. These errors or failures may have limited effects, or the effects may be widespread, depending on the computer chip, system or software, and its location and function. The effects of the Year 2000 problem are exacerbated because of the interdependence of computer and telecommunications systems in the United States and throughout the world. Because of this interdependence, the failure of one system may lead to the failure of many other systems even though the other systems are themselves "Year 2000 compliant." The Company has reviewed the Year 2000 issue as it may affect the Company's business activity. The Company is implementing a Year 2000 plan (the "Plan") which is designed to cover all of the Company's activities, which will be codified as circumstances change. Under the Plan, the Company is using a five-phase methodology for addressing the issue. The phases are Awareness, Assessment, Renovation, Validation and Implementation. Awareness consists of defining the Year 2000 problem and gaining executive level support and sponsorship. A Year 2000 program team has been established and an overall strategy created. During Assessment, all internal systems, products and supply chain partners are inventoried and prioritized for renovation. The Company believes it has completed a majority of the Awareness and Assessment phases, however, ongoing work will be required in these areas as the Company completes its assessment of existing supply chain partners and enters into new supply chain relationships in the ordinary course of business. Renovation consists of converting, replacing, upgrading or eliminating systems that have Year 2000 problems. Renovation has begun on mission-critical systems and is targeted for completion by December 1998. Validation involves ensuring that hardware and software fixes will work properly in 1999 and beyond and can occur both before and after implementation. Validation will start in the second quarter of fiscal 1999 and continue through December 31, 1999 to allow for thorough testing before the Year 2000. Implementation is the installation of hardware and software components in a live environment. The Company is in the early stages of the Implementation phase. 24 26 The Impact of Year 2000 issues on the Company will depend not only on corrective actions that the Company takes, but also on the way in which Year 2000 issues are addressed by governmental agencies, business and other third parties that provide services or data to, or receive services or data from, the Company, or whose financial condition or operational capability is important to the Company. To reduce this exposure, the Company has an ongoing process of identifying and contacting mission-critical third party vendors and other significant third parties to determine their Year 2000 plans and target dates. Risks associated with any such third parties located outside the United States may be higher insofar as it is generally believed that non-U.S. businesses may not be addressing their Year 2000 issues on as timely a basis as U.S. businesses. Notwithstanding the Company's efforts, there can be no assurance that the Company, mission-critical third party vendors or other significant third parties will adequately address their Year 2000 issues. The Company is developing contingency plans for implementation in the event that the Company, mission-critical third party vendors or other significant third parties fail to adequately address Year 2000 issues. Such plans principally involve identifying alternative vendors or internal remediation. There can be no assurance that any such plans will fully mitigate any such failures or problems. Furthermore, there may be certain mission-critical third parties, such as utilities, telecommunication companies, or material vendors where alternative arrangements or sources are limited or unavailable. Although it is difficult to estimate the total costs of implementing the Plan, through June 1999 and beyond, the Company's preliminary estimate is that such costs will total approximately $600,000. However, although management believes its estimates are reasonable, there can be no assurance, for the reasons stated in the next paragraph, that the actual costs of implementing the Plan will not differ materially from the estimated costs. The Company has incurred approximately $200,000 through June 30, 1998 on this project. A significant portion of total Year 2000 project expenses is represented by existing staff that has been redeployed by this project. The Company does not believe that the redeployment of existing staff will have a material adverse effect on it business, results of operations or financial position. Incremental expense related to the Year 2000 project are not expected to materially impact operating results in any one period. The extent and magnitude of the Year 2000 Problem as it will affect the Company, both before and for some period after January 1, 2000, are difficult to predict or quantify for a number of reasons. Among the most important are lack of control over systems that are used by third parties who are critical to the Company's operation, dependence on third party software vendors to deliver Year 2000 upgrades in a timely manner, complexity of testing inter-connected networks and applications that depend on third party networks and the uncertainty surrounding how others will deal with liability issues raised by Year 2000 related failures. There can be no assurance for example, that systems used by third parties will be adequately remediated so that they are Year 2000 ready by January 1, 2000, or by some earlier date, so as not to create a material disruption to the Company's business. Moreover, the estimated costs of implementing the Plan do not take into account the costs, if any, that might be incurred as a result of Year 2000 related failures that occur despite the Company's implementation of the Plan. Although the Company is not aware of any material operational issues associated with preparing its internal systems for the Year 2000, or material issues with respect to the adequacy of mission-critical third party systems, there can be no assurance that the Company will not experience material unanticipated negative consequences and/or material costs caused by undetected errors or defects in such systems or by the Company's failure to adequately prepare for the results of such errors or defects, including costs of related litigation, if any. The impact of such consequences could have a material adverse effect on the Company's business, financial condition or results of operations. FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS RELIANCE ON LIMITED NUMBER OF KEY PRODUCTS. Sales of the Company's collagen-based injectable products, Zyderm(R) and Zyplast(R) collagen implants ("Zyderm implants" and "Zyplast implant"), SoftForm implant, as well as Contigen implant, accounted for approximately 93% of consolidated product sales for the fiscal year ended June 30, 1998. The Company's product sales may continue to consist primarily of sales of these principal products. Factors such as adverse rulings by regulatory authorities, product liability lawsuits, 25 27 introduction of competitive products by third parties, other loss of market acceptance or other adverse publicity for these principal products may significantly and adversely affect the Company's sales of these products and, as a result, also adversely affect the Company's business, financial condition and results of operations. SUBSTANTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS, FUTURE OPERATING RESULTS UNCERTAIN. The Company's quarterly operating results may vary significantly depending upon factors such as the timing of significant orders and shipments, changes in pricing policies by the Company or its competitors, increased competition, demand for the Company's products, the number, timing and significance of new product and product enhancement announcements by the Company and its competitors, the ability of the Company to develop, introduce and market new and enhanced versions of the Company's products on a timely basis, the mix of direct and indirect sales, the timing of investments in affiliate companies and general economic factors, among others. The Company's expense levels are based, in part, on its expectations of future revenue levels. If revenue levels are below expectations, operating results are likely to be materially adversely affected. In particular, because only a small portion of the Company's expenses varies with revenue in the short term, net income may be disproportionately affected by a reduction in revenue. Due to the foregoing factors, quarterly revenue and operating results have been and will continue to be difficult to forecast. Based upon all of the foregoing, the Company believes that quarterly revenues and operating results may vary significantly in the future and that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. There can be no assurance that the Company's revenue will increase or be sustained in future periods or that the Company will be profitable in any future period. 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 may result in significant volatility in the price of the Company's Common Stock. MANUFACTURING RISKS AND INVENTORY SHORTAGES. Certain of the Company's products, including Hylaform gel, SoftForm implant and Refinity(TM) Medical Skin Solutions ("Refinity skin solutions"), are manufactured for the Company by third parties. As a result, the Company is dependent on these third parties to manufacture and supply products to the Company as required. While the Company has distribution agreements with these third parties, there can be no assurances that these third parties will manufacture and supply quality products on a timely basis or in adequate quantities. Any failure of these third parties to manufacture sufficient quantities of these products or to deliver products that meet the Company's specifications or quality control standards would adversely affect the Company's sales of these products, and as a result, could also adversely affect the Company's business, financial condition and results of operations. The Company relies on a "closed herd" of cattle in order to produce its bovine collagen-based products, including Zyderm implants, Zyplast implant and Contigen implant. In the event of any material diminution in the size of the Company's herd for any reason, including accident or disease, the Company would have a limited ability to quickly increase supply of acceptable cattle. Any such diminution would have a material adverse effect on the Company's ability to sell bovine collagen-based products and, as a result, the Company's business, financial condition and results of operations. COMPETITION. The medical device industry is characterized by rapidly evolving technology and increasing competition under the recent changes in the health care environment. The Company faces intense competition in each of its target product markets. The Company faces direct and indirect competition for its Zyderm implants and Zyplast implant products. At the present time, there is a commercial product in the United States that is directly competitive with Zyderm implants and Zyplast implant, the Company's collagen-based products for plastic surgery and dermatology. This product is a gelatin-based (denatured collagen) injectable commercial product, presently being marketed in the United States and Canada that is directly competitive with Zyderm implants and Zyplast implant. The Company also competes with products derived from human tissue. Collagenesis, Inc. produces a product requiring a biopsy of the patient's tissue, which tissue is then used 26 28 to generate an injectable material. Fat injections require surgical removal of the patient's fatty tissue. Implantable cadaver tissue obtained through tissue banks is sold under the brand name Alloderm and competes directly with the Company's SoftForm implant. Internationally, direct competitors in the injectable product segment have included both government approved and unapproved products which are primarily derived from collagen, hyaluronic acid and silicone. The Company is aware of one foreign company that is marketing internationally a collagen-based material for soft tissue augmentation. The Company is aware of one company in Europe that markets a hylauronic acid-based product called Restylane that is competitive with Hylaform gel. In addition, W.L. Gore, Inc. markets an ePTFE product that is directly competitive with SoftForm implant. The Company's injectable collagen products also compete in the dermatology and plastic surgery markets with substantially different alternative treatments, such as laser treatments, chemical peels, fat injections, dermabrasion, botulinum toxin injections and face lifts. The worldwide alpha hydroxy acid market in which Refinity skin solutions compete is extremely competitive. Worldwide sales of alpha hydroxy acid products total approximately $1.6 billion per year, with the medical segment of this market accounting for approximately 6% to 7% of this total. Large retailers and some door to door companies, as well as the prestige market, such as salon and department stores, participate in the alpha hydroxy market. During the last several years, several large pharmaceutical companies with high product profiles within the dermatology market have purchased or solidified distribution agreements with alpha hydroxy skin care lines. In addition, physicians dispense a significant number of private label in-office peel and take-home products. At the present time, autologous fat, silicone micro-implants and polytetrafluoroethylene (Teflon paste, or PTFE) are directly competing with Contigen implant for the treatment of stress incontinence due to intrinsic sphincter deficiency ("ISD"). Neither silicone 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. In addition, several companies and institutions are engaged in the development of collagen-based and other materials, techniques, procedures and products for use in facial aesthetic applications anticipated to be addressed by the Company's products. Some of these companies and institutions are developing human-based collagen products which, when and if commercially introduced, would have certain competitive advantages over the Company's bovine collagen-based products, including increased biocompatibility. Some of these companies and institutions may have substantially greater capital resources, research and development staffs and facilities, experience in conducting clinical trials and obtaining regulatory approvals, and manufacturing and marketing products than the Company. There can be no assurance that the Company's competitors will not succeed in developing technologies and products that are more effective than any products that have been or may be developed by the Company or that would render the Company's technology and products obsolete or noncompetitive, or that the Company will be able to compete effectively against such competitors based on its abilities to manufacture, market and sell its products. There can be no assurance that such potential competition will not have an adverse effect on the future business or financial condition of the Company. See "Business -- Competition." 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 the Company. These companies and institutions may represent significant long-term competition for the Company. There can be no assurance that the Company's competitors will not succeed in developing technologies and products that are more effective than any which have been or may be developed by the Company or that would render the Company's technology and products obsolete or non-competitive or that the Company will be able to compete effectively against such competitors based on its abilities to manufacture, market and sell its products. There can be no assurance that such potential competition will not have an adverse effect on the future business, financial condition or results of operations of the Company. RAPID TECHNOLOGICAL CHANGE. The Company's industry is characterized by ongoing technological developments, evolving industry standards and rapid changes in customer requirements. The Company's success depends and will depend upon its ability to continue to develop and introduce in a timely manner new products that take advantage of technological advances, to identify and adhere to emerging standards, and to continue to improve the functionality of its products. There can be no assurance that the Company will be 27 29 successful in developing and marketing, on a timely basis or at all, competitive products, product enhancements and new products that respond to technological change, changes in customer requirements and emerging industry standards, or that the Company's enhanced or new products will adequately address the changing needs of the marketplace. The inability of the Company, due to resource constraints, technological or other reasons, to develop and introduce new products or product enhancements in a timely manner would have a material adverse effect on the Company's business, financial condition or results of operations. UNDEVELOPED AND UNCERTAIN MARKETS. Certain of the Company's products are intended for use in new markets the size of which are difficult to independently verify. In particular, the potential market for the Company's Contigen implant product is difficult to estimate because Contigen implant represents a relatively new method of treatment, and the Company believes that most sufferers of stress urinary incontinence do not seek medical treatment. Bard markets Contigen implant primarily to urologists, who may not be the only physicians treating this disorder. Should the markets for such products be more limited than the Company or its marketing partners currently estimate, or should the Company, its distributors and/or its marketing partners fail to penetrate such markets to the extent anticipated, the Company may experience lower than anticipated revenues and a resulting adverse effect on its business, financial condition and results of operations. DEPENDENCE ON MARKETING PARTNERS AND THIRD PARTY DISTRIBUTORS; EFFECT OF INVENTORY FLUCTUATIONS. The Company has entered into exclusive arrangements with Bard for the marketing and distribution of Contigen implant. As a result, the Company's revenues and earnings for these products depend almost entirely upon the continuing efforts of these marketing partners. The Company's business, financial condition and results of operations could be adversely affected in the event that either or both of these parties do not effectively market the Company's products, accurately anticipate customer demand or effectively manage industry-wide pricing and cost-containment pressures in health care. The Company's revenues and earnings have in the past fluctuated and are expected to continue to fluctuate based upon the levels of orders placed by these parties, which are in turn affected by the levels of sales by these distributors and the levels of their inventories. At June 30, 1995, Bard had a significant inventory of Contigen implant and, as a result, took minimal shipments of such product during fiscal 1996. While shipments to Bard resumed during the fourth quarter of fiscal 1997, there can be no assurances that such shipments will continue. The failure to continue shipments of Contigen implant to Bard during fiscal 1999 could have a material adverse effect on the Company's results of operations. In addition, the Company depends upon third party distributors to market its other products in a number of international markets. There can be no assurance that any of such distributors will not cease operations or be unable to satisfy financial obligations to the Company. If a significant distributor were to fail to adequately promote the Company's products or were to cease operations, such failure or cessation could have a material adverse effect on the Company's business, financial condition and results of operations. GOVERNMENT REGULATION AND ADVERSE PUBLICITY. The Company's manufacturing activities and products sold in the United States (other than Refinity skin solutions) are subject to extensive and rigorous regulation by the FDA and by comparable agencies in certain foreign countries where these products are manufactured or distributed. The FDA regulates the manufacture, clinical research and sale of medical devices, including labeling, advertising and record keeping. In order to market products in the United States which are considered by the FDA to be medical devices, the Company will be required to receive 510(k) marketing clearance or premarket approval from the FDA for such products among other regulatory requirements. In order to obtain 510(k) marketing clearance, the Company must show that the product is substantially equivalent to a legally marketed device not requiring FDA approval. In addition, the Company must demonstrate that it is capable of manufacturing the product to the relevant standards. To obtain premarket approval of a product, the Company must submit extensive data, including pre-clinical and clinical trial data to prove the safety and efficacy of the product. Clinical trials are normally done in three phases over two to five years, but may take longer to complete as a result of many factors, including slower than anticipated patient enrollment, difficulty in finding a sufficient number of patients fitting the appropriate trial profile, difficulty in the acquisition of sufficient supply of clinical trial materials or adverse events occurring during the trials. The Company's primary products are currently classified as Class III medical devices, which require premarket approval from the FDA. There can be no assurance that the FDA will not choose to characterize future products of the Company as drugs or biologics rather than medical devices, which have additional 28 30 requirements for approval. Any such change in FDA characterization would potentially lengthen and increase the cost of the approval process. While the Company's other primary products have been approved for sale in the United States, Hylaform gel has not been approved for domestic commercial sale. Medical products whose market applications have not yet been approved by the FDA may be exported only with the specific approval of the FDA. Failure to comply with applicable regulatory requirements can, among other things, result in fines, suspensions of regulatory approvals, product recalls, seizure of products, operating restrictions, injunctions and criminal prosecution. In addition, government regulations may be established that could prevent or delay regulatory approval of the Company's products. Furthermore, compliance with current Good Manufacturing Practices regulations is necessary to receive FDA approval to market new products and to continue to market current products. The process of obtaining FDA and other required regulatory approvals and clearances is lengthy and will require the expenditure of substantial capital and resources. There can be no assurances that the Company or its suppliers will be able to obtain the necessary approvals for Hylaform gel. Moreover, if and when such approval or clearance is obtained, the marketing, distribution and manufacture of such products would remain subject to extensive regulatory requirements administered by the FDA and other regulatory bodies. Failures to comply with applicable regulatory requirements can result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to grant approvals, premarket clearance or premarket approval, withdrawal of approvals and criminal prosecution. Many of the Company's products are marketed internationally and are therefore subject to foreign regulatory requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement, which vary from country to country and are becoming more restrictive throughout the EU. The process of obtaining foreign regulatory approvals can be lengthy and require the expenditure of substantial capital and resources. In particular, the Company's SoftForm implant is not approved for marketing in any international market. There can be no assurance that the Company will be successful in obtaining such approval for SoftForm implant or for the Company's other products. In addition, there can be no assurance that the Company's Refinity skin solutions line will not become subject to FDA regulations or other foreign regulatory requirements. Any delay or failure by the Company or its suppliers to obtain regulatory approvals for its products could have a material adverse effect on the Company's business, financial condition and results of operations. The continuing trend of more stringent FDA oversight in product clearance and enforcement activities has caused medical device manufacturers to experience longer approval cycles, more uncertainty, greater risk and higher expenses. Failure to obtain, or delays in obtaining, the required regulatory approvals for new products, particularly with respect to Hylaform gel, could adversely affect the Company's financial condition and results of operations, as could product recalls. In addition, there can be no assurance that the FDA will give approval to the Company to market its current products for broader or different applications, or that it will grant approval with respect to separate product applications which represent extensions of the Company's basic technology, or that existing approvals or market clearances will not be withdrawn. Further, changes in governmental reimbursement systems, pursuant to which hospitals and physicians are reimbursed for medical procedures at a fixed rate according to diagnosis-related groups or other reimbursements, could have an economic impact on the purchase and use of medical devices. In particular, a material decrease in current reimbursement levels for Contigen implant and its application in the treatment of intrinsic sphincter deficiency ("ISD") could have a material adverse effect on the Company's business, financial condition and results of operations. The collagen used in the Company's products is derived from cow hides. Bovine Spongiform Encephalopathy ("BSE" or "mad cow disease") is a disease, initially reported in cattle in the United Kingdom, characterized by degenerative lesions of the central nervous system. The source of infections in animals derives from eating infected sheep-derived feed. While the disease has been reported in European countries, the Company is not aware of any reports of BSE in United States cattle to date. There can be no assurance that the various foreign or domestic regulatory authorities will not raise issues regarding BSE or other matters 29 31 which may adversely affect the Company's ability to manufacture, market or sell its bovine collagen-based products, which could have a material adverse effect on the Company's business, financial condition and results of operations. In past years, the Company has been the subject of legislative and regulatory investigations relating to, among other things, the safety and efficacy of its injectable collagen products. There can be no assurance that legislative and regulatory investigations or negative publicity from such investigations or future investigations or from the news media will not result in a material adverse effect on the Company's business, financial condition or results of operations. In addition, significant negative publicity could result in an increased number of product liability claims. RISK OF INVESTMENTS IN AFFILIATES. The Company has made equity and debt investments in affiliated companies that are involved in the development of complementary or related technologies or products, and the Company may make additional investments in such companies from time to time in the future. These affiliated companies typically are in an early stage of development and may be expected to incur substantial losses. As a result, the Company has recorded and expects to continue to record a share of the losses in such affiliates attributable to the Company's ownership, which losses which may have an adverse effect on the Company's results of operations. Furthermore, there can be no assurance that any investments in affiliates will result in any return nor can there be any assurance as to the timing of any such return, or that the Company will not lose its entire investment. PRODUCT LIABILITY; INSURANCE. The manufacture and sale of medical products entails significant risk of product liability claims due to disease transmission and other health factors, and product recalls. The Company is involved in various legal actions arising in the ordinary course of business, the majority of which involve product liability claims for personal injury allegedly caused by the Company's products. Any product liability claim could have a material adverse effect on the Company's business, financial condition and results of operations. The Company faces an inherent business risk of exposure to product liability claims alleging that the use of the Company's technology or products has resulted in adverse effects, particularly with respect to claims regarding Trilucent(TM) breast implant ("Trilucent implant"), which is sold in a medical field (breast augmentation, reconstruction and replacement) in which there have been sizable 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. There can be no assurance that the Company 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 the Company. A successful claim brought against the Company for which coverage is denied or in excess of its insurance coverage could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, adverse product liability actions could negatively affect the Company's ability to obtain and maintain regulatory approval for its products. PATENTS AND PROPRIETARY TECHNOLOGY. The Company depends substantially upon its proprietary technological expertise in the extraction, purification, formulation and manufacturing of collagen-based materials and other biomaterials into biomedical products. The Company seeks patents on inventions concerning novel manufacturing processes, compositions of matter, and applications for its proprietary biomaterials. Patent-related litigation is a risk in the medical device industry. There can be no assurance the Company will be successful in the future in obtaining patents or license rights, that patents will be issued for the Company's current patent applications, that the Company will develop additional proprietary technology that is patentable, that any issued patents will provide the Company with any competitive advantages or will not be challenged by third parties, or that patents of others will not have an adverse effect on the Company. No assurance can be given that the processes or products of the Company or its licensors will not infringe patents or proprietary rights of others or that any licenses required under any such patents or proprietary rights would be made available on terms acceptable to the Company. If the Company does not obtain such licenses, it could encounter delays in product introductions while it attempts to design around such patents, or it could 30 32 find that the manufacture, sale or use of products requiring such licenses could be enjoined. In addition, the Company could incur substantial costs in defending itself in suits brought against the Company on such patents or in bringing suits to protect the Company's patents against infringement. In particular, although the Company intends to seek international coverage for all patents held by it, the Company's rights to one currently issued patent covering technology used in its Trilucent breast implant extends only to the United States. Therefore, the Company is not currently able to prevent others from using such technology disclosed in such patent outside of the United States. The Company relies upon trade secret protection for certain unpatented aspects of its proprietary technology. There can be no assurance that others will not independently develop or otherwise acquire substantially equivalent proprietary information or techniques, that others will not otherwise gain access to the Company's proprietary technology or disclose such technology, or that the Company can meaningfully protect its trade secrets. The Company requires its employees and consultants to execute appropriate confidentiality and proprietary information agreements upon the commencement of employment or consulting relationship with the Company. These agreements generally provide that all confidential information developed or made known to the individual by the Company during the course of the individual's relationship with the Company is to be kept confidential and not disclosed to third parties, except in specific circumstances. The agreements generally provide that all inventions conceived by the individual in the course of rendering services to the Company shall be the exclusive property of the Company; however, certain of the Company's agreements with consultants, who typically are employed on a full-time basis by academic institutions or hospitals, do not contain assignment of invention provisions. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for the Company in the event of unauthorized use, transfer or disclosure of such information or inventions. IMPACT OF CURRENCY FLUCTUATIONS; IMPORTANCE OF FOREIGN SALES. Approximately 38% (excluding sales from discontinued operations of LipoMatrix) of the Company's revenues in fiscal 1998 from continuing operations were derived from its international operations. Accordingly, any material decrease in foreign sales would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, because international sales of the Company's products typically are denominated in local currencies, the Company's results of operations have been and are expected to continue to be affected by changes in exchange rates between certain foreign currencies and the United States dollar. There can be no assurance that the Company will not experience unfavorable currency fluctuation effects in future periods, which could have an adverse effect on the Company's operating results. The Company's operations and financial results also may be significantly affected by other international factors, including the imposition of government controls, export license requirements, political instability, trade restrictions, changes in tariffs and difficulties in managing international operations. The Company plans to continue to evaluate hedging options in fiscal 1999 in order to minimize the effect of unfavorable currency fluctuations on the Company's operating results. However, there can be no assurance that hedging options will favorably affect the Company's results of operations. USE OF HAZARDOUS MATERIALS. The Company's operations require the controlled use of hazardous materials. Although the Company believes that its safety procedures for handling such materials comply with the standards prescribed by federal, state and local regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an incident, the Company could be held liable for any damages that result, which could have a material adverse effect on the Company's business, financial condition and results of operations. LIMITED DIVERSITY OF FACILITIES. 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, the Company's manufacturing capacity for collagen-based products is located in one primary facility, with the Company currently maintaining only limited amounts of finished product inventory. While the Company has some limited protection in the form of disaster recovery programs and basic insurance coverage, the Company's operating results and financial condition would be materially adversely affected in the event of a major earthquake, fire or other similar calamity affecting its manufacturing facilities. 31 33 THIRD-PARTY REIMBURSEMENT. In the United States, hospitals, physicians and other healthcare providers that purchase medical devices generally rely on third-party payors, such as private health insurance plans, to reimburse all or part of the costs associated with the treatment of patients. The Company's success will depend upon, among other things, its ability to obtain satisfactory reimbursement from healthcare payors for its products. Certain of the Company's products, including Contigen implant, Collagraft bone graft products, and, in certain circumstances, Trilucent implant, are purchased by hospitals or physicians in the United States, which then bill various third-party payors including Medicare, Medicaid and private insurers for the healthcare services provided to patients. Third-party payors are increasingly challenging the prices charged for medical products and services. There can be no assurance that the reimbursement of treatments using the Company's products will not be subject to such challenges in the future. Given the efforts to control and decrease health care costs in recent years, there can be no assurance that any reimbursement will be sufficient to permit the Company to maintain profitability. Reimbursement systems in international markets vary significantly by country, and by region within some countries, and reimbursement approvals must be obtained on a country-by-country basis. Many international markets have government managed health care systems that govern reimbursement for new devices and procedures. In most markets, there are private insurance systems as well as government-managed systems. There can be no assurance that the Company will obtain reimbursement in any country within a particular time, for a particular amount, or at all. Failure to obtain such reimbursement approvals could have a material adverse effect on the Company's business, financial condition and results of operations. Regardless of the type of reimbursement system, the Company believes that physician advocacy of its products will be required to obtain reimbursement. Availability of reimbursement will depend on the clinical efficacy and cost of the Company's products. There can be no assurance that reimbursement for the Company's products will be available in the United States or in international markets under either government or private reimbursement systems, or that physicians will support and advocate reimbursement for use of the Company's systems for all uses intended by the Company. Failure by physicians, hospitals and other users of the Company's products to obtain sufficient reimbursement from health care payors or adverse changes in government and private third-party payors' policies toward reimbursement for procedures employing the Company's products would have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon a limited number of key management and technical personnel, the loss of any one of which could have a material adverse effect on the Company's business. The Company's future success will depend in part upon its ability to attract and retain highly qualified personnel. The Company competes for such personnel with other companies, academic institutions, government entities and other organizations. There can be no assurance that the Company will be successful in hiring or retaining qualified personnel. Any inability to attract and retain key employees could have a material adverse effect on the Company's business, financial condition and results of operations. NEGATIVE PUBLICITY. The Company had been, and may in the future, be the subject of negative publicity, which can arise from various sources, ranging from the news media on cosmetic procedures in general to legislative and regulatory investigations specific to the Company concerning, among other things, the safety and efficacy of its products. There can be no assurance that such investigations or negative publicity from such investigation 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 foregoing factors are not meant to represent an exhaustive list of the risks and uncertainties attendant to the Company's business. 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 32 34 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk, including changes to interest rates, foreign currency exchange rates and equity investment prices. A discussion of the Company's accounting policies for financial instruments and further disclosures relating to financial instruments is included in the Description of Business and Significant Accounting Policies in the Notes to Consolidated Financial Statements. The Company monitors the risks associated with interest rates, foreign currency exchange rates and equity investment price changes, and its derivative and financial instrument positions. INVESTMENT PORTFOLIO The Company does not use derivative financial instruments in its debt investment portfolio. The Company places its debt investments in instruments that meet high credit quality standards, as specified in the Company's investment policy guidelines; the policy also limits the amount of credit exposure to any one issue, issuer, or type of instrument. The Company does not expect any material loss with respect to its debt investment portfolio. There are inherent risks which may only be partially offset by the Company's hedging programs should there be unfavorable movements in equity investment prices, specifically Boston Scientific Corporation. The estimated exposures discussed below are intended to measure the maximum amount the Company could lose from adverse market movements in interest rates, foreign currency exchange rates and equity investment prices over a given period of time. Loss is defined in the value at risk estimation as fair market value loss. The Company's interest income is sensitive to changes in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on the Company's cash equivalents and short-term investments. The table below provides information about the Company's debt investment portfolio. For debt securities, the table presents principal cash flows and related weighted average fixed interest rates by expected maturity dates. The Company's investment policy requires that all investments mature in 400 days or less.
MATURITIES --------------------------------------------------------- FAIR VALUE FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 TOTAL AT 6/30/98 ------- ------- ------- ------- ------- ------- ---------- (U.S. DOLLARS IN THOUSANDS) DEBT INVESTMENTS Cash Equivalents.................. $ 6,791 -- -- -- -- $ 6,791 $ 6,791 Weighted Average Interest Rate......................... 5.6% 5.6% Short Term Investments............ $ 8,011 -- -- -- -- $ 8,011 $ 8,011 Weighted Average Interest Rate......................... 7.5% 7.5% Total Debt Investments............ $14,802 -- -- -- -- $14,802 $14,802 Weighted Average Interest Rate......................... 6.63% 6.63%
As part of its strategic alliance efforts, the Company invests in equity instruments of biotechnology companies that are subject to fluctuations from market value changes in stock prices. In order to manage the risk of market fluctuations in this stock, the Company entered into certain costless collar instruments ("collars"), to hedge a portion (725,000 shares at June 30, 1998) of the Boston Scientific equity securities against changes in market value. A costless collar instrument is a form of equity collar instrument consisting of a purchased put option and a written call option on a specific equity security such that the cost of the purchased put and the proceeds of the written call offset each other; therefore, there is no initial cost or cash outflow for these instruments. The Company purchased the collars with expiration dates and numbers of 33 35 shares so that the potential adverse impact of movements in market price of the stock will be at least partially offset by an associated increase in the value of the collars.
FAIR VALUE AT 6/30/98 ------------- (U.S. DOLLARS IN THOUSANDS) EQUITY INVESTMENTS Boston Scientific....................................... $73,979 Ownership %........................................... 0.53% Innovasive Devices...................................... $ 7,916 Ownership %........................................... 9% Medarex................................................. $ 1,920 Ownership %........................................... 1% Cosmederm............................................... $ 1,000 Ownership %........................................... 8% Pharming................................................ $ 7,010 Ownership %........................................... 6% Cosmetic Therapeutic.................................... $ 364 Ownership %........................................... 29% ------- Total Portfolio......................................... $92,189 =======
To hedge against fluctuations in the market value of a portion of the Boston Scientific common stock, the Company entered into costless collar instruments that expire quarterly from August 1998 through May 2001 and will require settlement in cash. At June 30, 1998, 725,000 shares, out of 1,032,860 held by Collagen, were hedged using these collars. The call options are collateralized by shares of Boston Scientific common stock held by the Company. At June 30, 1998 the notional amount of the put and call options were $46 million and $70.7 million, respectively. The fair value of the equity collars at June 30, 1998 was $96,000. IMPACT OF FOREIGN CURRENCY RATE CHANGES Approximately 38% (excluding sales discontinued operations of LipoMatrix) of the Company's revenues from continuing operations in fiscal 1998 were derived from its international operations. Accordingly, any material decrease in foreign sales would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, because international sales of the Company's products typically are denominated in local currencies, the Company's results of operations have been and are expected to continue to be affected by changes in exchange rates between certain foreign currencies and the United States dollar. There can be no assurance that the Company will not experience unfavorable currency fluctuation effects in future periods, which could have an adverse effect on the Company's operating results. The Company is exposed to changes in exchange rates in Europe, Pacific Rim countries, Canada, South America and the Middle East. The Company's exposure to foreign exchange rates primarily exists with the Japanese Yen, German Mark, Italian Lira, French Franc and the British Pound. When the U.S. dollar strengthens against the currencies in these countries, the U.S. dollar value of non-U.S. dollar based revenue decreases; when the U.S. dollar weakens, the U.S. dollar value of the non-U.S. dollar-based revenue increases. The impact of foreign exchange rates from fiscal 1997 to fiscal 1998 resulted in a decrease in revenue of approximately $2.3 million and a decrease in operating expenses of approximately $2.6 million, resulting in a net increase in operating income of approximately $300,000 on an equivalent local currency basis. The impact of foreign exchange rates from fiscal 1996 to fiscal 1997 resulted in a decrease in revenue of approximately $1.1 million and a decrease in operating expenses of approximately $1.7 million, resulting in a net increase in operating income of approximately $600,000 on an equivalent local currency basis. Until December 1994, the Company's policy was to hedge material foreign currency transaction exposures. At June 30, 1998, 1997 and 1996, no foreign currency transaction exposures were hedged. 34 36 Unhedged net foreign assets were $6.5 million, $7.6 million and $14.5 million at June 30, 1998, 1997 and 1996, respectively. The Company plans to investigate hedging options in fiscal 1999 in order to minimize the effect of unfavorable currency fluctuations on the Company's operating results. However, there can be no assurance that hedging options will favorably affect the Company's results of operations. The Company's operations and financial results also may be significantly affected by other international factors, including the imposition of government controls, export license requirements, political instability, trade restrictions, changes in tariffs and difficulties in managing international operations. 35 37 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Financial Statements: Consolidated Balance Sheets at June 30, 1998 and 1997..... 37 Consolidated Statements of Operations for the fiscal years ended June 30, 1998, 1997 and 1996..................... 38 Consolidated Statements of Stockholders' Equity for the fiscal years ended June 30, 1998, 1997 and 1996........ 39 Consolidated Statements of Cash Flows for the fiscal years ended June 30, 1998, 1997 and 1996..................... 40 Notes to Consolidated Financial Statements................ 41 Report of Ernst & Young LLP, Independent Auditors......... 59 Supplementary Quarterly Consolidated Financial Data (Unaudited)............................................ 60 Financial Statement Schedule: For the years ended June 30, 1998, 1997 and 1996: Schedule II -- Valuation and Qualifying Accounts.......... 61
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 36 38 CONSOLIDATED BALANCE SHEETS ASSETS
JUNE 30, ---------------------------- 1998 1997 ---------- ---------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Current assets: Cash and cash equivalents................................. $ 7,916 $ 18,381 Short-term investments.................................... 8,011 5,117 Accounts receivable, less allowance for doubtful accounts ($505 in 1998 and $418 in 1997)........................ 13,764 10,722 Inventories, net.......................................... 12,101 10,173 Inventories of discontinued operations, net............... 417 4,121 Other current assets, net................................. 11,016 9,226 -------- -------- Total current assets.............................. 53,225 57,740 Property and equipment, net................................. 14,448 13,945 Property and equipment of discontinued operations, net...... -- 1,315 Intangible assets, net...................................... 6,861 8,687 Purchased intangibles and goodwill of discontinued operations, net........................................... -- 6,078 Investment in Boston Scientific Corporation................. 73,979 83,874 Investment in Innovasive Devices, Inc....................... 7,027 5,670 Investment in Pharming, B.V................................. 7,010 4,510 Loans to officers and employees, net........................ 259 172 Other investments and assets, net........................... 3,530 2,649 -------- -------- $166,339 $184,640 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 3,561 $ 2,363 Accrued compensation...................................... 4,749 3,886 Accrued liabilities....................................... 14,020 8,735 Income taxes payable...................................... 10,606 9,376 Liabilities of discontinued operations, net............... 781 1,020 -------- -------- Total current liabilities......................... 33,717 25,380 Long-term liabilities: Deferred income taxes..................................... 30,589 35,449 Other long-term liabilities............................... 1,393 3,677 -------- -------- Total long-term liabilities....................... 31,982 39,126 Commitments and contingencies Minority interest........................................... -- 49 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: 10,937,830 shares (10,756,935 shares in 1997), outstanding: 8,864,930 shares (8,809,035 shares in 1997)............................................... 109 108 Additional paid-in capital................................ 69,619 67,204 Retained earnings......................................... 32,128 47,999 Cumulative translation adjustment......................... (2,030) (1,529) Unrealized gain on available-for-sale investments......... 43,833 47,069 Treasury stock, 2,072,900 shares in 1998 (1,947,900 shares in 1997)............................................... (43,019) (40,766) -------- -------- Total stockholders' equity........................ 100,640 120,085 -------- -------- $166,339 $184,640 ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 37 39 CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, ---------------------------------------- 1998 1997 1996 ----------- ---------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues: Product sales............................................. $ 82,772 $68,335 $ 66,285 Other..................................................... -- -- 2,000 -------- ------- -------- 82,772 68,335 68,285 Costs and expenses: Cost of sales............................................. 23,958 17,223 15,793 Selling, general and administrative....................... 42,535 38,792 33,728 Research and development.................................. 22,715 14,087 9,175 Restructuring expense..................................... 1,541 -- -- Purchased in-process research and development............. 10,587 -- 3,000 -------- ------- -------- 101,336 70,102 61,696 -------- ------- -------- Income (loss) from operations............................... (18,564) (1,767) 6,589 Other income (expense): Net gain on investments, principally Boston Scientific Corporation (Target Therapeutics, Inc. in 1996)........ 19,096 9,063 82,093 Net gain on investment in Prograft Medical, Inc........... -- 15,395 -- Equity in earnings of Boston Scientific Corporation (Target Therapeutics, Inc. in 1996).................... -- -- 1,430 Equity in losses of other affiliates...................... (151) (970) (1,823) Interest income........................................... 988 1,110 1,145 Interest expense.......................................... (56) (473) (297) -------- ------- -------- Income before income taxes, minority interest and discontinued operations................................... 1,313 22,358 89,137 Provision for income taxes.................................. 3,207 8,325 38,902 Minority interest........................................... (16) (765) (182) -------- ------- -------- Income (loss) from continuing operations.................... (1,878) 14,798 50,417 Discontinued operations: Loss from operations...................................... (5,279) (9,145) (24,682) Benefit for income taxes.................................. 1,630 1,718 917 -------- ------- -------- Loss from discontinued operations, net of taxes........ (3,649) (7,427) (23,765) Provision for disposal.................................... (11,045) -- -- Benefit for income taxes.................................. 2,489 -- -- -------- ------- -------- Provision for disposal, net of taxes................... (8,556) -- -- -------- ------- -------- Total loss from discontinued operations, net of taxes................................................ (12,205) (7,427) (23,765) -------- ------- -------- Net income (loss)........................................... $(14,083) $ 7,371 $ 26,652 ======== ======= ======== Net income (loss) per share -- Basic: Continuing operations..................................... $ (0.21) $ 1.68 $ 5.66 Discontinued operations................................... (1.37) (0.84) (2.67) -------- ------- -------- Net income (loss) per share -- Basic................... $ (1.58) $ 0.84 $ 2.99 ======== ======= ======== Net income (loss) per share -- Diluted: Continuing operations..................................... $ (0.21) $ 1.66 $ 5.56 Discontinued operations................................... (1.37) (0.83) (2.62) -------- ------- -------- Net income (loss) per share -- Diluted................. $ (1.58) $ 0.83 $ 2.94 ======== ======= ======== Shares used in calculating per share information -- Basic... 8,913 8,804 8,915 ======== ======= ======== Shares used in calculating per share information -- Diluted.................................... 8,913 8,930 9,075 ======== ======= ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 38 40 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1998, 1997 AND 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNREALIZED GAIN ON TOTAL ADDITIONAL CUMULATIVE AVAILABLE- STOCK- COMMON PAID-IN RETAINED TRANSLATION FOR-SALE TREASURY HOLDERS' STOCK CAPITAL EARNINGS ADJUSTMENT INVESTMENTS STOCK EQUITY ------ ---------- -------- ----------- ----------- -------- -------- BALANCE AT JUNE 30, 1995... $106 $63,855 $ 17,273 $ (604) $ -- $(32,710) $ 47,920 Sale of common stock under options and employee stock purchase plan...... -- 963 -- -- -- -- 963 Tax benefit relating to stock options............ -- 26 -- -- -- -- 26 Foreign currency translation adjustment... -- -- -- (45) -- -- (45) Dividends declared ($.175 per share)............... -- -- (1,547) -- -- -- (1,547) Treasury stock purchased... -- -- -- -- -- (5,510) (5,510) Unrealized gain on available-for-sale investments.............. -- -- -- -- 34,549 -- 34,549 Net income................. -- -- 26,652 -- -- -- 26,652 ---- ------- -------- ------- ------- -------- -------- BALANCE AT JUNE 30, 1996... 106 64,844 42,378 (649) 34,549 (38,220) 103,008 Sale of common stock under options and employee stock purchase plan...... 2 1,871 -- -- -- -- 1,873 Tax benefit relating to stock options............ -- 489 -- -- -- -- 489 Foreign currency translation adjustment... -- -- -- (880) -- -- (880) Dividends declared ($.20 per share)............... -- -- (1,750) -- -- -- (1,750) Treasury stock purchased... -- -- -- -- -- (2,546) (2,546) Unrealized gain on available-for-sale investments.............. -- -- -- -- 12,520 -- 12,520 Net income................. -- -- 7,371 -- -- -- 7,371 ---- ------- -------- ------- ------- -------- -------- BALANCE AT JUNE 30, 1997... 108 67,204 47,999 (1,529) 47,069 (40,766) 120,085 Sale of common stock under options and employee stock purchase plan...... 1 1,843 -- -- -- -- 1,844 Tax benefit relating to stock options............ -- 572 -- -- -- -- 572 Foreign currency translation adjustment... -- -- -- (501) -- -- (501) Dividends declared ($.20 per share)............... -- -- (1,788) -- -- -- (1,788) Treasury stock purchased... -- -- -- -- -- (2,253) (2,253) Unrealized loss on available-for-sale investments.............. -- -- -- -- (3,236) -- (3,236) Net income (loss).......... -- -- (14,083) -- -- -- (14,083) ---- ------- -------- ------- ------- -------- -------- BALANCE AT JUNE 30, 1998... $109 $69,619 $ 32,128 $(2,030) $43,833 $(43,019) $100,640 ==== ======= ======== ======= ======= ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 39 41 CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEARS ENDED JUNE 30, -------------------------------- 1998 1997 1996 -------- -------- -------- (IN THOUSANDS) Cash flows from operating activities: Net income (loss)...................................... $(14,083) $ 7,371 $ 26,652 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Purchased in-process research and development....... 10,587 -- 3,000 Purchased in-process research & development of discontinued operations........................... -- -- 14,800 Depreciation and amortization....................... 4,899 4,419 4,895 Equity in losses of affiliates...................... 151 969 392 Gain on investments, net of taxes paid of $0 million, $10.8 million and $39.5 million in 1998, 1997 and 1996, respectively....................... (19,096) (13,625) (42,547) Deferred income taxes............................... (2,979) (1,463) (6,659) Tax benefit relating to stock options............... 572 489 26 Write-down of purchased intangibles of discontinued operations........................................ 6,078 -- -- Write-down of inventory and plant and equipment of discontinued operations........................... 5,261 -- -- Decrease (increase) in assets: Accounts receivable............................... (3,042) (1,225) 4,044 Inventories....................................... (1,928) (2,245) (2,513) Other............................................. (105) 2,820 (1,371) Increase (decrease) in liabilities: Accounts payable, accrued liabilities and other... 9,361 271 (185) Income taxes payable.............................. 1,230 1,788 1,686 Other long-term liabilities....................... (2,473) 1,529 (1,181) Net changes in assets and liabilities of discontinued operations........................ (239) (2,387) 1,251 -------- -------- -------- Total adjustments................................... 8,277 (8,660) (24,362) -------- -------- -------- Net cash provided by (used in) operating activities........................................ (5,806) (1,289) 2,290 -------- -------- -------- Cash flows from investing activities: Net proceeds from sales of Boston Scientific Corp. stock, net of taxes paid............................ 20,442 5,578 57,950 Net proceeds from sale of other affiliate stock, net of taxes paid.......................................... 704 9,771 1,447 Proceeds from sales and maturities of short-term investments......................................... 9,413 6,634 4,043 Purchases of short-term investments.................... (12,308) (7,968) (4,505) Expenditures for property and equipment................ (5,029) (3,360) (1,677) Increase in intangible and other assets................ (5) (2,726) (6,807) Equity investments and loans to affiliates............. (3,075) (1,928) (14,337) Acquisition of discontinued operations, net of cash balances............................................ -- -- (21,324) Acquisition of interest in Cohesion Corporation, net of cash balances....................................... (10,587) -- (1,256) -------- -------- -------- Net cash provided by investing activities........... (445) 6,001 13,534 -------- -------- -------- Cash flows from financing activities: Repurchase of common stock............................. (2,253) (2,546) (5,510) Net proceeds from issuance of common stock............. 1,844 1,873 963 Cash dividends paid.................................... (1,774) (1,750) (1,340) Proceeds from (repayments of) bank borrowings.......... (2,031) (5,000) 5,000 -------- -------- -------- Net cash used in financing activities............... (4,214) (7,423) (887) -------- -------- -------- Net increase (decrease) in cash and cash equivalents..... (10,465) (2,711) 14,937 Cash and cash equivalents at beginning of period......... 18,381 21,092 6,155 -------- -------- -------- Cash and cash equivalents at end of period............... $ 7,916 $ 18,381 $ 21,092 ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 40 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of Collagen Aesthetics, Inc. (formerly Collagen Corporation, see Note 17, "Subsequent Events") ("Collagen" or the "Company"), a Delaware corporation, and its wholly-owned and majority-owned subsidiaries including Cohesion Technologies, Inc. ("Cohesion"). All significant intercompany accounts and transactions have been eliminated. The Company operates in one industry segment focusing on the development, manufacturing and sale of medical devices. Investments in unconsolidated subsidiaries, and other investments in which the Company has a 20% to 50% interest or otherwise has the ability to exercise significant influence, are accounted for under the equity method. Investments in companies in which the Company has less than a 20% interest with either no readily determinable fair value or with transfer restrictions are carried at cost or estimated realizable value, if less, and those unrestricted investments with a readily determinable fair value are carried at market value with the unrealized gains or losses, net of tax, recorded as a component of stockholders' equity. On August 18, 1998, the Company spun off, in a one-for-one distribution of common stock to the Company's stockholders, Cohesion, which previous to the Spinoff was a wholly-owned subsidiary of the Company. (See Note 17, "Subsequent Events".) In March 1998, the Board of Directors of the Company approved certain agreements between Cohesion and the Company which (i) provided for the transfer, effective January 1, 1998, of certain assets and liabilities relating to the businesses previously conducted by the Cohesion division to Cohesion, and (ii) established contractual arrangements between the Company and Cohesion described below under "Intercompany Agreements with Cohesion Technologies, Inc." The business activities of the Cohesion division focused on the design, development, manufacture and commercialization of innovative resorbable biomaterials, adhesive technologies, and delivery systems in the fields of tissue repair and regeneration. Under the agreements, substantially all investments in affiliates, including Boston Scientific Corporation, and Innovasive Devices, Inc. were allocated to Cohesion. Trade receivables, notes receivable, loans to officers and employees, fixed assets and employee related liabilities were allocated based on specific identification. For assets and liabilities where it was not practical to use the specific identification method, Cohesion was allocated 30% of these assets and liabilities. The 30% allocation was based on a review of the characteristics and activity of these assets and liabilities and business objectives. The officer separation agreement with the Company's former CEO, as described in Note 10, and the costs associated with the agreement have been allocated to Cohesion. Intercompany Agreements with Cohesion Technologies, Inc. The Company has entered into supply, services, research and development, benefits, tax allocation, and distribution agreements with Cohesion effective January 1, 1998. Under the Collagraft Supply Agreement, the Company will supply Cohesion's requirements of Collagraft necessary for Cohesion to fulfill its obligations under its agreement with Zimmer, Inc. at a price that is the greater of a percentage of the sales price or a defined multiplier of the Company's cost. In accordance with the Collagen Supply Agreement, the Company will supply Cohesion products, intermediates and finished materials at a price equal to a multiplier of Collagen's cost. Under the Services Agreement, which is effective through June 30, 1999, Cohesion shall provide the Company with services in the following areas: facilities, telephone, library, investor relations, research and development services (to the extent not provided for by the research and development agreement), and clinical and regulatory. The Company shall provide Cohesion with certain services in the following areas: financial and tax services, health and welfare benefits administration and administration of the 401(k) Savings Plan, administrative, legal, regulatory, quality assurance, medical affairs, and manufacturing services. In accordance with the Recombinant Technology and Development License Agreement, the Company and Cohesion will collaborate to develop recombinant human collagen and provide for cost sharing for the project until certain milestones are met. The Benefits Agreement provides for the continuation or replacement of benefits for the employees transferred to Cohesion and employees remaining with the 41 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Company. The Tax Allocation Agreement provides that the Company will be responsible for all taxes prior to the Distribution Date and Cohesion will be responsible for all of its tax liabilities subsequent to that date. Under the Vitrogen International Distribution Agreement, Collagen International, Inc., a subsidiary of the Company, shall act as Cohesion's distributor in Germany for Vitrogen. 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. Reclassification Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the current year presentation. Cash equivalents, short-term investments and other 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 90 days, but not exceeding one year. 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. The Company determines the appropriate classification of marketable securities at the time of purchase and re-evaluates such designation as of each balance sheet date. All of the Company's debt and equity securities are classified as available-for-sale. The carrying value of available-for-sale debt securities approximates fair value because of the short-term maturity of these investments. Both realized and unrealized gains and losses on debt securities were immaterial as of June 30, 1998, 1997 and 1996 and for the years ended June 30, 1998, 1997 and 1996. Unrestricted available-for-sale equity securities with a readily determinable fair value in which the Company has a less than 20% interest, which includes holdings in Boston Scientific Corporation (holdings in Target Therapeutics prior to April 1997), Innovasive Devices, Inc., and Medarex, Inc., are carried at fair value with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. Restricted equity securities in which the Company has less than a 20% interest are carried at cost or estimated realizable value, if less, and are included in "other investments and assets" in the accompanying balance sheets. In fiscal 1996, the carrying value of certain investments were reduced by $4.0 million to estimated net realizable value. (See Notes 5, "Investment in Boston Scientific Corporation (Target Therapeutics, Inc.)", 6, "Investment in Innovasive Devices, Inc." and 7, "Acquisitions".) The cost of securities sold is based on the specific identification method. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale debt securities are included in interest income. Interest and dividends on securities classified as available-for-sale are included in interest income. Equity Collar Instruments At June 30, 1998, the Company held approximately 1.0 million shares of Boston Scientific common stock. In order to manage the risk of market fluctuations in this stock, the Company entered into certain costless collar instruments ("collars"), to hedge a portion (725,000 shares at June 30, 1998) of the Boston Scientific equity securities against changes in market value. A costless collar instrument is a form of equity collar instrument consisting of a purchased put option and a written call option on a specific equity security 42 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) such that the cost of the purchased put and the proceeds of the written call offset each other; therefore, there is no initial cost or cash outflow for these instruments. The Company purchased the collars with expiration dates and numbers of shares so that the potential adverse impact of movements in market price of the stock will be at least partially offset by an associated increase in the value of the collars. Realized gains and losses on the collars are recorded in other income (expense) with the related gains from the sale of stock. Unrealized gains and losses on these instruments, net of tax, are recorded as an adjustment to unrealized gains and losses on available-for-sale investments, a component of stockholder's equity, with a corresponding receivable or payable recorded. Equity collar instruments that do not qualify for hedge accounting and early termination of these instruments with the sale of the underlying stock, would be recognized in other income (expense). For early termination with the sale of the underlying stock, the intrinsic value will adjust the cost basis of the underlying security. 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....................... 3-7 years Leasehold improvements........................ Term of lease
Intangible assets Intangible assets are amortized using the straight-line method. Patents acquired prior to October 1996 are amortized over a seventeen-year period beginning with the effective date or over the remainder of such period from the date acquired and patents purchased thereafter are expensed when acquired. Trademarks acquired prior to fiscal 1996 are amortized over a twenty-year period beginning with the trademark filing dates and trademarks purchased thereafter are expensed when acquired. The effect of changes in accounting for patents and trademarks were not material to the accompanying financial statements. Purchased product distribution rights and a non-compete covenant are amortized over the lesser of the estimated useful life (generally five years) or the contract period. Purchased intangibles and goodwill The excess cost over the fair value of net assets acquired (goodwill) is generally amortized on a straight-line basis over a period not exceeding seven years. The cost of identified intangibles is generally amortized on a straight-line basis over a period of seven years. The carrying value of goodwill and intangible assets is reviewed on a regular basis for the existence of facts or circumstances both internally and externally that may suggest impairment. During fiscal 1998, the Company wrote-off all intangible assets and goodwill associated with the acquisition of LipoMatrix, Inc. due to impairment (See Note 8). No other impairment has been indicated. Should there be indication of an impairment in the future, the Company will confirm this by comparing the undiscounted expected future cash flows from the impaired assets to the carrying amount of the assets. If the sum of the estimated cash flows is lower, an impairment loss, measured by comparing the fair value of the assets to their carrying amounts, will be recorded if significant. The cash flow estimates that will be used in such calculations will be based on management's best estimates, using appropriate and customary assumptions and projections at the time. 43 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Loans to officers and employees Principal plus accrued interest due from current and former employees totaled approximately $1.5 million and $1.9 million at June 30, 1998 and 1997, respectively, and principal plus accrued interest due from officers totaled approximately $167,000 and $9,000 at June 30, 1998 and 1997, respectively. Included within the amounts due from current and former employees at June 30, 1998 and 1997 are promissory notes totaling, prior to reserves, $1.2 million and $1.6 million, respectively, due from the Company's former Chairman and Chief Executive Officer, Howard Palefsky. All such notes are subject to interest at the lower of 10% per annum or the prime rate. Two loans totaling $425,000 were forgiven on March 15, 1998 and two loans totaling $1.1 million are to be forgiven on March 15, 1999, however the outstanding note is payable immediately if Mr. Palefsky discontinues serving as a consultant to the Company prior to the loan forgiveness date. Due to uncertainties regarding collection, loans to Mr. Palefsky were fully reserved as of June 30, 1997, and the associated expenses were recognized in fiscal 1997. Summary of Fair Value of Financial Instruments The table below summarizes the carrying value and fair value of the Company's financial instruments which are all held for purposes other than trading.
JUNE 30, --------------------------------------- 1998 1997 ------------------ ------------------ CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE -------- ------- -------- ------- Assets: Cash equivalents and short-term investments (See Note 3)...................................................... $14,802 $14,802 $19,285 $19,285 Boston Scientific stock (See Note 5)...................... 73,979 73,979 83,874 83,874 Innovasive Devices stock (See Note 6)..................... 7,027 7,916 5,670 9,917 Medarex stock............................................. 1,920 1,920 500 500 Pharming B.V. stock....................................... 7,010 7,010 4,510 4,510 Other non-public equity securities........................ 1,364 1,364 1,083 1,083 Loans to officers and employees........................... 259 259 172 172 Equity Collar Instruments................................. -- 96 -- --
Revenue Recognition Revenue from product sales is recognized at time of shipment, net of allowances for estimated future returns. Concentration of Credit and Other Risk The Company sells its facial aesthetics 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 ("Collagraft bone graft products") to Zimmer, Inc. ("Zimmer"), the Company's marketing partner for Collagraft bone graft 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. As of June 30, 1998, the Company owned approximately 1.0 million shares of Boston Scientific common stock, valued at approximately $74.0 million (based on a market price of $71.63 per share on such date). 44 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 manufacturing capacity for collagen-based products is located in one primary facility with the Company currently maintaining only limited amounts of finished product inventory. While the Company has some limited protection in the form of disaster recovery programs and basic insurance coverage, the Company's operating results and financial condition would be materially adversely affected in the event of a major earthquake, fire or other similar calamity affecting its manufacturing facilities. Advertising costs The Company expenses advertising costs as incurred. Total advertising expense was $975,000, $900,000 and $1.0 million for 1998, 1997 and 1996, respectively. Stock based compensation The Company accounts for stock based compensation using the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Earnings per share Beginning with fiscal year 1998, basic earnings per share (EPS) and diluted EPS are computed using the methods required by Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). Under SFAS 128, basic EPS is calculated using the weighted average number of common shares outstanding for the period. The computation of diluted EPS includes the effects of stock options, warrants and convertible preferred stock, if such effect is dilutive. Prior period amounts have been restated to conform with the presentation requirements of SFAS 128. Below is a reconciliation between the basic and diluted weighted average common and common-equivalent shares for 1997 and 1996 (there are no reconciling items for 1998):
YEARS ENDED JUNE 30, -------------------- 1997 1996 ------- ------- (IN THOUSANDS) Basic (weighted average common shares outstanding).......... 8,804 8,915 Weighted average common stock options outstanding........... 126 160 ----- ----- Diluted weighted average shares outstanding................. 8,930 9,075 ===== =====
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. At June 30, 1998 and June 30, 1997, no foreign currency transaction exposures were hedged. Unhedged net foreign assets were $6.5 million and $7.6 million at June 30, 1998 and June 30, 1997, respectively. New Accounting Standards In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standard No. 130, "Reporting Comprehensive Income," and Standard No. 131, "Disclosures About Segments of an Enterprise and Related Information," which will be required to be adopted by the Company in 45 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) fiscal 1999. Adoption of these statements is not expected to have a significant impact on the Company's consolidated financial position, results of operations or cash flows. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") which provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. SFAS 133 is effective for years beginning June 15, 1999 and is not anticipated to have an impact on the Company's results of operations or financial condition when adopted. 2. BALANCE SHEET INFORMATION
JUNE 30, ------------------- 1998 1997 ------- -------- (IN THOUSANDS) Other current assets: Deferred taxes............................................ $ 6,925 $ 5,344 Other..................................................... 4,091 3,882 ------- -------- $11,016 $ 9,226 ======= ======== Property and equipment: Machinery and equipment................................... $37,286 $ 33,956 Leasehold improvements.................................... 6,404 6,109 ------- -------- 43,690 40,065 Less accumulated depreciation and amortization............ (29,242) (26,120) ------- -------- $14,448 $ 13,945 ======= ======== Intangible assets: Patents, trademarks, distribution rights and non-compete covenant............................................... $ 9,387 $ 10,793 Organization costs*....................................... 1,865 1,865 ------- -------- 11,252 12,658 Less amortization......................................... (4,391) (3,971) ------- -------- $ 6,861 $ 8,687 ======= ======== Accrued liabilities: Dividends payable......................................... $ 896 $ 881 Accruals for discontinued operations...................... 2,107 -- Accrued restructuring charges............................. 1,541 -- Other accrued liabilities................................. 9,476 8,530 ------- -------- $14,020 $ 8,735 ======= ========
- --------------- * Organization costs are primarily related to the formation of Collagen International, Inc. and are fully amortized as of June 30, 1996. 46 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The following is a summary of available-for-sale debt securities:
JUNE 30, ----------------- 1998 1997 ------ ------- (IN THOUSANDS) Amortized cost which approximates estimated fair value Cash Equivalents: Money market funds........................................ $3,121 $ 2,159 Corporate obligations..................................... 3,670 12,009 $6,791 $14,168 ====== ======= Short-term investments: Corporate obligations..................................... $8,011 $ 5,117 ====== =======
During the years ended June 30, 1998 and 1997, the Company sold available-for-sale debt securities with a fair value at the dates of sale of $9.4 million and $6.6 million, respectively. 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 do not exceed one year at June 30, 1998. 4. INVENTORIES Inventories consist of the following:
JUNE 30, ------------------ 1998 1997 ------- ------- (IN THOUSANDS) Raw materials............................................ $ 1,765 $ 856 Work-in-process.......................................... 3,948 5,122 Finished goods........................................... 6,388 4,195 ------- ------- $12,101 $10,173 ======= =======
5. INVESTMENT IN BOSTON SCIENTIFIC CORPORATION (TARGET THERAPEUTICS, INC.) The Company's investment in Target Therapeutics, Inc. of Fremont, California ("Target") was accounted for under the equity method through November 1995. During December 1995, the Company's ownership interest in Target fell below 20%. Given that the Company did not have the ability to exercise significant influence, the Company began accounting for its investment in Target under the cost method beginning in December 1995. On January 20, 1997, Boston Scientific Corporation ("Boston Scientific") and Target jointly announced the signing of a definitive agreement to merge in a tax-free stock-for-stock transaction. On April 8, 1997, the merger was completed and, as a result, the Company received 1,365,200 shares of Boston Scientific common stock in exchange for the Company's 1,275,888 shares of Target common stock. Pursuant to the merger agreement, the Company was restricted from selling its shares of Boston Scientific common stock until the expiration of applicable pooling-of-interests restrictions, which occurred during the first quarter of fiscal 1998. Boston Scientific is a leading manufacturer of catheter-based devices that can be inserted through small body openings and are used in heart surgery and other operations. Boston Scientific common stock is quoted on the New York Stock Exchange under the symbol BSX. On June 30, 1998, the closing price of Boston Scientific common stock was $71.63 per share. In fiscal 1998, the Company sold 332,340 shares of Boston Scientific common stock for a pre-tax gain of approximately $19.0 million and in fiscal 1997, the Company sold 330,000 shares of Target common stock for a pre-tax gain of approximately $9.2 million. 47 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's shares of Boston Scientific common stock are classified as available-for-sale and have been recorded at fair value. The unrealized gains (estimated fair value less cost) on these available-for-sale securities have been reported as a separate component of stockholders' equity, net of tax. The following is a summary of the aggregate estimated fair value, gross unrealized gains and amortized cost of the Company's investment in Boston Scientific common stock.
JUNE 30, ------------------ 1998 1997 ------- ------- Amortized cost........................................... $ 4,468 $ 5,905 Gross unrealized gains................................... 69,511 77,969 ------- ------- Estimated fair value..................................... $73,979 $83,874 ======= =======
To hedge against fluctuations in the market value of a portion of the Boston Scientific common stock, the Company entered into costless collar instruments that expire quarterly from August 1998 through May 2001 and will require settlement in cash. At June 30, 1998, 725,000 shares were hedged using these collars. No shares were hedged at June 30, 1997. The call options are collateralized by shares of Boston Scientific common stock held by the Company. At June 30, 1998, the notional amount of the put and call options were $46.0 million and $70.7 million, respectively. The fair value of the equity collars at June 30, 1998 was $96,000. The fair value of the purchased puts and the written calls were determined based on quoted market prices at year-end. 6. INVESTMENT IN INNOVASIVE DEVICES, INC. In October 1995, the Company's wholly-owned subsidiary Cohesion Technologies, Inc. ("Cohesion") purchased approximately 844,000 shares of common stock, currently representing approximately 9% of Innovasive Devices, Inc. ("Innovasive Devices") for $4.1 million and entered into a collaborative product development agreement (the "Development Agreement"). Innovasive Devices develops, manufactures, and markets tissue and bone reattachment systems which are particularly relevant to the sports medicine and arthroscopy segments of the orthopedic surgery market. Cohesion and Innovasive Devices are collaborating to develop certain resorbable mechanical tissue-fixation devices utilizing collagen-based biomaterials for applications in orthopedic tissue repairs. Pursuant to the terms of the Development Agreement, Cohesion is performing development activities in accordance with a project plan and Innovasive Devices is reimbursing Cohesion for such activities in accordance with the project budget. Accordingly, over the next several years, the collaboration will require Cohesion's expertise with collagen-based biomaterials and a small percentage of Cohesion's research and development expenditures. In the event that marketable products are developed as a result of this collaboration, Cohesion will have the right to distribute such products for plastic surgery and dermatology applications and will also have rights (but no obligation) to manufacture such products. Prior to October 1996, Cohesion's 844,000 shares of common stock of Innovasive Devices were valued at cost or $4.1 million due to restrictions which prevented the sale of any of Cohesion's shares of common stock of Innovasive Devices. At June 30, 1998, restrictions were no longer applicable to 650,000 shares of common stock which Cohesion holds in Innovasive Devices. The Company carries the portion of its investment in Innovasive Devices, which can be sold within one year, as an available-for-sale investment at market value, or $6.1 million at June 30, 1998, reflecting an unrealized gain of $3.0 million ($6.1 million estimated fair value less $3.1 million cost), which has been included in a separate component of stockholders' equity, net of tax. The remaining 194,000 shares of common stock continue to be valued at cost of $934,000. The investment in Innovasive is included in "other investments and assets" in the accompanying balance sheets. During fiscal 1998 and 1997, the Company did not sell any of its shares of common stock of Innovasive Devices. Innovasive Devices' common stock is quoted on The Nasdaq Stock Market under the symbol IDEA. The closing price of Innovasive Devices' common stock at June 30, 1998, was $9.38 per share. As of July 31, 1998, Innovasive Device's closing stock price was $7.88 per share, resulting in a decrease of $975,000 in the estimated fair value of the non-restricted portion of the Company's investment in Innovasive Devices. 48 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. ACQUISITIONS Cohesion Corporation The Company increased its ownership position in Cohesion Corporation of Palo Alto, California from approximately 40% to 81% in May 1996 and from 81% to approximately 99% in December 1997. Cohesion Corporation is a privately-held company developing novel biomaterials with superior performance characteristics in the area of hemostats, biosealants, and adhesion prevention barriers for surgical applications. In connection with the Company's May 1996, December 1997, and April 1998 investments and purchases of Cohesion Corporation shares, substantially all of the $3.0 million and $10.6 million purchase prices, respectively, were allocated to in-process research and development, which was expensed at the time of the purchases. The $10.5 million December 1997 purchase price includes $3.8 million of cash compensation amounts associated with the purchase of certain vested employee stock options, which amounts were expensed in accordance with the Accounting Principles Board Opinion No. 25. After consideration of the amounts allocated to in-process technology, there was no excess of purchase price over the fair value of the net assets acquired and no goodwill was recorded. The Company determined the amounts to be allocated to in-process technology for Cohesion Corporation based on whether technological feasibility had been achieved and whether there was any alternative future use for the technology. The Company concluded that the in-process technology had no alternative future use after taking into consideration the potential for both usage of the technology in different products and for resale of the technology. At June 30, 1998, there were additional unvested options outstanding providing for the purchase of the remaining shares of Cohesion Corporation common stock. Subsequent to June 30, 1998, the Cohesion Technologies Board of Directors approved a plan to buyout these remaining options, (see Note 17, "Subsequent Events"). The unaudited pro forma results of operations of the Company for fiscal years 1998, 1997 and 1996, assuming the acquisition of Cohesion Corporation shares occurred on July 1, 1995, on the basis described above with all material intercompany transactions eliminated, are as follows:
JUNE 30, -------------------------------- 1998 1997 1996 -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues.............................................. $82,772 $68,335 $68,285 Income (loss) from continuing operations.............. 8,709 14,798 52,543 Net income (loss)..................................... (3,496) 7,371 29,280 Net income (loss) per share -- Basic.................. 0.39 0.84 3.28 Net income (loss) per share -- Diluted................ 0.39 0.83 3.23
The unaudited pro forma net income (loss) and per share amounts above do not include the charges for in-process research and development aggregating $13.6 million arising from the acquisitions of shares of Cohesion Corporation. 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. 8. DISCONTINUED OPERATIONS OF LIPOMATRIX On June 30, 1998, the Board of Directors of the Company approved the discontinuation of the operations of LipoMatrix, Inc. ("LipoMatrix") of Neuchatel, Switzerland, and authorized efforts to sell the wholly-owned subsidiary, thereby allowing the Company's aesthetic operations to dedicate further resources to its core business which includes products for soft tissue reconstruction and augmentation, skin care and stress urinary incontinence. In August 1995, the Company entered into a stock purchase agreement with certain stockholders of LipoMatrix, the developer and the manufacturer of the Trilucenta breast implant ("Trilucent implant"), to 49 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) purchase approximately 50% of the outstanding securities of LipoMatrix on a fully diluted basis. The Company also entered into a stock purchase agreement with certain of LipoMatrix's management and employees to purchase the remaining 10% of the outstanding securities on a fully diluted basis. This purchase increased the Company's ownership interest in LipoMatrix from approximately 40% to 100% of the outstanding securities on a fully diluted basis. The acquisition of LipoMatrix, which was accounted for as a purchase, had an aggregate purchase price of approximately $23.7 million, consisting of payments to LipoMatrix stockholders, the balance of the Company's investment in LipoMatrix at the date of purchase, direct costs and the assumption of LipoMatrix' net liabilities of $926,000. The Company completed the closing of the aforementioned acquisition of LipoMatrix in January 1996 at which time aggregate cash payments of approximately $20.1 million were made by the Company to the selling LipoMatrix stockholders, as well as certain of LipoMatrix's current and former employees. The assets and liabilities assumed by the Company were recorded based on their independently appraised fair values at the date of the acquisition. 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. As of June 30, 1998 all of the assets and liabilities related to discontinued operations are disclosed separately. The in-process research and development represented research and development projects where technological feasibility had not yet been established, major regulatory marketing approvals had not yet been obtained and where there were no alternative future uses or markets. The Company's discontinued operations for fiscal 1996 include 100% of LipoMatrix' results from August 22, 1995, through June 30, 1996 and 40% for July 1, through August 21, 1995. A provision of $8.6 million, net of an income tax benefit of $2.5 million, has been recorded for the loss on disposal of net assets of LipoMatrix including estimated future costs. The Company expects to dispose of the assets by December 31, 1998. Results of operations for LipoMatrix have been presented separately as discontinued operations. The following table summarizes the revenues, loss from operations and loss per share of LipoMatrix for the three fiscal years ended June 30.
YEARS ENDED JUNE 30, -------------------------------- 1998 1997 1996 --------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues.................................................... $ 3,871 $ 3,477 $ 2,445 ======== ======= ======== Discontinued operations: Loss from operations...................................... $ (5,279) $(9,145) $(24,682) Benefit for income taxes.................................. 1,630 1,718 917 -------- ------- -------- Loss from discontinued operations net of taxes......... (3,649) (7,427) (23,765) Provision for disposal.................................... (11,045) -- -- Benefit for income taxes.................................. 2,489 -- -- -------- ------- -------- Provision for disposal, net of taxes................... (8,556) -- -- Total loss from discontinued operations net of taxes... $(12,205) $(7,427) $(23,765) ======== ======= ======== Net loss per share -- Basic: Loss from discontinued operations of LipoMatrix, Inc...... $ (0.41) $ (0.84) $ (2.66) Loss from disposal of LipoMatrix, Inc..................... (0.96) -- -- -------- ------- -------- Net loss per share -- Basic............................ $ (1.37) $ (0.84) $ (2.66) ======== ======= ======== Net loss per share -- Diluted: Loss from discontinued operations of LipoMatrix, Inc...... $ (0.41) $ (0.83) $ (2.62) Loss from disposal of LipoMatrix, Inc..................... (0.96) -- -- -------- ------- -------- Net loss per share -- Diluted.......................... $ (1.37) $ (0.83) $ (2.62) ======== ======= ========
50 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. RESTRUCTURING EXPENSE In June 1998, the Company decided to restructure its domestic and international operations to reduce costs and facilitate a product refocus. The international effort includes moving the Company's European headquarters from Switzerland to the United Kingdom and terminating seven employees. The domestic effort is substantially smaller and includes the reorganization of the North American Sales force and termination of one employee. As a result of these actions the Company incurred $1.5 million in restructuring charges, consisting of approximately $735,000 for severance costs and approximately $806,000 for facility commitments and moving expenses associated with fixed assets. At June 30, 1998, no employees had been terminated and the Company had approximately $1.5 million of accrued restructuring costs, representing estimated severance costs and facility payments to be paid in fiscal 1999. 10. COMMITMENTS Minimum lease payments Future minimum lease payments under noncancelable operating leases at June 30, 1998 are as follows:
(IN THOUSANDS) 1999........................................... $ 4,632 2000........................................... 3,552 2001........................................... 3,358 2002........................................... 3,102 2003........................................... 3,077 Thereafter..................................... 4,599 ------- Total minimum lease payments......... $22,320 =======
Rental expense was $5.0 million, $4.6 million and $5.3 million in fiscal 1998, 1997 and 1996, respectively. Minimum purchases In 1996, the Company entered into a ten year exclusive worldwide distribution agreement with the supplier of its SoftForm(R) ("SoftForm implant') product. Under the agreement, the Company must meet the minimum purchase requirements in the table below or the supplier has the right to revert the Company's exclusive distribution right to a non-exclusive distribution right, or terminate the agreement.
(IN THOUSANDS) 1999........................................... $ 1,250 2000........................................... 1,438 2001........................................... 1,653 2002........................................... 1,818 2003........................................... 2,000 Thereafter..................................... 6,621 ------- Total minimum purchases.............. $14,780 =======
Payments made to the supplier were $2.5 million and $1.6 million in fiscal 1998 and 1997, respectively. In May 1998, the Company entered into an Import Services Agreement with its Distributor in Japan which requires the Company to pay $1.6 million to the Distributor upon completion of the assignment of all Product Approvals and receipt by the Company's Japanese Subsidiary of Permits corresponding thereto. The assignment date is June 30, 1999 and the assignment consideration due will be successively reduced by ten to twenty percent per month if the assignment takes place after June 30, 1999. 51 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Revolving Line of 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 contained certain financial covenants and restricted the aggregate amount of cash dividends payable by the Company. In December 1995, the $7 million revolving line of credit was increased to $15 million. During fiscal 1996, $5.0 million was borrowed under this agreement. In June 1997, the Company repaid the outstanding balance and canceled the revolving line of credit agreement prior to its expiration date of November 15, 1997. Interest associated with this agreement was, at the Company's option, based on either the prime rate plus 1/2% or the Eurodollar rate plus the lesser of 1 1/4% or the Alternate LIBOR applicable margin. Interest was payable monthly. Additionally, the Company was required to pay, on a quarterly basis, a commitment fee of 3/8 of 1% per annum of the unused portion. Term Loans and Line of Credit Prior to the Company's acquisition of LipoMatrix, LipoMatrix established three term loans and a general credit line with a major bank, totaling $2.9 million (4.1 million Swiss Francs). As of June 30, 1997, $2,100,000 (2.9 million Swiss Francs) had been borrowed against these credit facilities. Borrowings under these credit facilities bear interest at 7% per annum, payable semi-annually in June and December. Interest subsidies totaling 5.075% are received on the term loans annually, resulting in a net interest rate due on the term loans of 1.925%. Semi-annual repayment of these credit facilities began on June 30, 1996. In October 1997, the Company repaid all outstanding amounts. Approximately one-half of these credit facilities were guaranteed by the Swiss Confederation. Bonus Agreement In February 1996, the Company entered into a cash bonus agreement with the Company's Chairman and Chief Executive Officer at that time whereby cash bonuses in the amounts of $325,000, $305,000, $285,000, $265,000 and $245,000 would be paid to him on February 13 of each of the following five years beginning in 1997, providing that he continued to serve the Company on the applicable payment date. On February 10, 1997, Mr. Palefsky resigned as Chief Executive Officer and subsequently resigned as Chairman of the Board of Directors on June 20, 1997, and as a result, the February 13, 1997 payment and future payments were not required to be paid under this bonus agreement. The bonus agreement was replaced by the officer separation agreement. Under the officer separation agreement, Mr. Palefsky will serve as a consultant to the Company for fiscal 1998 and 1999 and as a result, Mr. Palefsky received payments totaling $575,000 during fiscal 1998 and will receive payments totaling $233,000 during fiscal 1999. These payments are expensed as the services are provided. 11. LEGAL MATTERS In May 1997, the Company settled its lawsuit with Matrix Pharmaceuticals, Inc. ("Matrix"), which had been pending since December 1994. The lawsuit involved the Company's claims of trade secret misappropriation against Matrix and two former Collagen employees hired by Matrix in 1992, as well as cross-complaints against the Company by Matrix and the two employees for defamation and violation of state unfair competition law. In exchange for certain consideration, Matrix has agreed that for a period of five years it will not manufacture or sell products that are directly competitive with the Company's current core products. The Company has granted Matrix a nonexclusive license to certain of the Company's intellectual property, for certain nonmonetary consideration. The lawsuit was settled and dismissed with prejudice. All claims by and against all parties have been released. The Company is involved in other legal actions, including product liability 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. 52 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. 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 exercisable on a monthly or yearly basis as determined by the Board of Directors at the date of grant. At June 30, 1998, the total number of shares of common stock reserved for issuance under the Company's current stock option plans was 1,880,155. Stock option activities under the stock option plans were as follows:
WEIGHTED AVERAGE NUMBER NUMBER OPTION EXERCISE PRICE PRICE PER OF SHARES OF SHARES RANGE PER SHARE SHARE EXERCISABLE --------- --------------------- --------- ----------- Outstanding at June 30, 1995............ 1,217,976 $ 4.69 - 28.25 $18.03 851,702 Granted................................. 431,000 17.00 - 20.50 18.09 Exercised............................... (22,154) 16.25 - 22.88 16.26 Forfeitures or expired.................. (145,249) 6.38 - 26.50 20.10 --------- -------------- ------ --------- Outstanding at June 30, 1996............ 1,481,673 4.69 - 28.25 17.88 976,896 Granted................................. 549,250 16.75 - 20.75 18.76 Exercised............................... (146,552) 16.56 - 22.75 9.09 Forfeitures or expired.................. (162,468) 7.25 - 28.25 20.22 --------- -------------- ------ --------- Outstanding at June 30, 1997............ 1,721,903 4.69 - 28.25 18.69 1,016,326 Granted................................. 282,115 16.63 - 21.38 17.80 Exercised............................... (145,955) 4.69 - 20.50 9.02 Forfeitures or expired.................. (325,810) 5.50 - 28.25 19.49 --------- -------------- ------ --------- Outstanding at June 30, 1998............ 1,532,253 6.38 - 28.25 19.27 1,010,275 ========= ============== ====== ========= Available for grant at June 30, 1998.... 347,902 =========
Stock Purchase Plan In 1985, the Company established an employee stock purchase plan (the "1985 Purchase Plan") under which 450,000 shares of the Company's common stock were reserved for issuance to employees. Subsequently, the Company increased the total authorization to 700,000 shares. Under the 1985 Purchase 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 1998, 1997 and 1996, shares issued under the 1985 Purchase Plan were 34,053, 34,769, and 34,084, respectively. The average issuance price per share was $15.52, $15.52 and $17.83 for fiscal years 1998, 1997 and 1996, respectively. At June 30, 1998, 99,087 shares remained available for future sales under this plan. In April 1998, the Board of Directors of the Company authorized the adoption of the 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan") under which 125,000 shares of the Company's common stock were reserved for issuance to employees. Under the 1998 Purchase 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 offering period. The initial offering period under the 1998 Purchase Plan will commence in August 1998. The initial purchase date will occur on December 31, 1998. 53 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Subsequent offering periods consist of four six-month purchase periods, with the last day of each period being designated a purchase date. Stock Compensation The Company has elected to follow Accounting Principles Board Statement No. 25 ("APB No. 25") and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123") requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is generally recognized. Pro forma information regarding net income (loss) and earnings per share is required by SFAS 123 and determined as if the Company had accounted for its employee stock options granted subsequent to June 30, 1995 under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model for the multiple-option approach, with the following weighted-average assumptions for 1998, 1997 and 1996: risk-free interest rate of 5.75%, 6.34% and 5.82%, respectively; volatility factor of the expected market price of the Company's Common Stock of 41%, 43% and 49%, respectively; no dividend payments; and a weighted-average expected life of the option of 4.6, 4.0 and 4.5 years, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company's employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to pro forma net income over the options' vesting period. The Company's pro forma information follows:
YEARS ENDED JUNE 30, -------------------------------------- 1998 1997 1996 ----------- --------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Pro forma net income (loss)................... $(15,703) $5,545 $25,685 Pro forma net income (loss) per share -- Basic.............................. $ (1.76) $ 0.63 $ 2.88 Pro forma net income (loss) per share -- Diluted............................ $ (1.76) $ 0.62 $ 2.83
Because SFAS 123 is applicable only to options granted subsequent to June 30, 1995, its pro forma effect will not be fully reflected until June 30, 1999. The following table summarizes information about stock options outstanding at June 30, 1998:
OPTIONS OUTSTANDING WEIGHTED OPTIONS EXERCISABLE - ---------------------------------------------- AVERAGE ---------------------------- WEIGHTED REMAINING WEIGHTED RANGE OF NUMBER AVERAGE CONTRACTUAL NUMBER AVERAGE EXERCISE PRICES OUTSTANDING EXERCISE PRICE LIFE EXERCISABLE EXERCISE PRICE - ---------------- ----------- -------------- ----------- ----------- -------------- $ 6.38 - $17.00 368,978 $16.06 6.98 216,009 $15.52 17.13 - 18.00 313,227 17.73 7.87 128,282 17.60 18.13 - 9.75 327,956 19.38 6.73 197,780 19.32 19.88 - 22.13 379,092 21.40 5.07 337,649 21.48 22.63 - 28.25 143,000 25.04 5.14 130,555 25.04 - ---------------- --------- ------ ---- --------- ------ $ 6.38 - $28.25 1,532,253 19.27 6.46 1,010,275 19.75 ================ ========= ====== ==== ========= ======
54 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The weighted-average fair values of options granted during the years ended June 30, 1998, 1997 and 1996 were $5.87, $5.75 and $6.67 per share, respectively. Stock Repurchase Program In February 1993, the Company's Board of Directors authorized a stock repurchase program. In fiscal years 1998, 1997 and 1996, the Company repurchased 125,000, 147,900 and 300,000 shares at average acquisition prices of approximately $18, $17 and $18 per share, respectively. In June 1996, the Board of Directors authorized the repurchase of up to an additional 500,000 shares. As of June 30, 1998, an additional 227,100 shares are authorized for repurchase. The Company plans to retain repurchased shares as treasury stock, but may use a portion of the stock in various company stock benefit plans. Subsequent to June 30, 1998, the Board of Directors approved a continuation of the stock repurchase program previously approved (see Note 17, "Subsequent Events"). 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 acquiror 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. 13. INTERNATIONAL SALES AND DISTRIBUTION RIGHTS Export sales were $31.3 million in fiscal 1998, $31.2 million in fiscal 1997 and $30.4 million in fiscal 1996. These export sales are primarily in Europe ($19.6 million, $21.3 million and $21.4 million in fiscal years 1998, 1997 and 1996, respectively) and the Pacific Rim ($9.1 million, $7.6 million and $7.0 million in fiscal years 1998, 1997 and 1996, respectively). No other geographic region accounted for ten percent or more of total sales in any fiscal year. The Company markets its products internationally directly in Canada, nine European countries, Australia and New Zealand and via distributors in other countries. During fiscal 1996, the Company paid commissions based upon a percentage of net sales to its former European distributor, whose contract expired in December 1995. 14. MAJOR CUSTOMER AND PRODUCTS During fiscal years 1998, 1997 and 1996, the Company realized product sales from its marketing partner, Bard, of $17.7 million, $7.9 million and $6.2 million, respectively, which represented 20%, 11% and 9% 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 Contigen implant of $10.4 million, $1.2 million and $300,000 of Contigen implant as well as $7.3 million, $6.7 million and $5.9 million of income from Bard's direct sales to physicians in fiscal years 1998, 1997 and 1996, respectively. In fiscal year 1996, the Company also recorded other revenue of $2.0 million, which consisted of a milestone payment from Bard in accordance with an agreement between the Company and Bard. The final milestone payment of $2.0 million was paid to the Company on September 30, 1995. In fiscal years 1998, 1997 and 1996, 62%, 76% and 82% of product sales, respectively, were derived from Zyderm(R) and Zyplast(R) collagen implant ("Zyderm implants" and "Zyplast implant") products. 15. INCOME TAXES The Company uses the liability method of accounting for income taxes required by SFAS No. 109. 55 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 as of June 30, 1998 and June 30, 1997 are presented below:
JUNE 30, ------------------ 1998 1997 ------- ------- (IN THOUSANDS) Deferred tax liabilities: Unrealized gain on marketable securities.................. $30,061 $32,507 Investments............................................... 1,888 2,507 Intangible assets......................................... 12 378 Foreign earnings and credits (net)........................ 214 56 ------- ------- Total deferred tax liabilities.................... 32,175 35,448 ------- ------- Deferred tax assets: Equity in losses of affiliates............................ 5,700 5,607 Accrued liabilities relating to disposal of LipoMatrix.... 2,935 -- Non-deductible accruals................................... 3,561 2,065 State income taxes........................................ 488 1,864 Accounts receivable....................................... 676 647 Inventories............................................... 482 501 Property, plant & equipment............................... 207 176 Other..................................................... 436 1,380 Valuation allowance....................................... (5,974) (5,881) ------- ------- Total deferred tax assets.............................. 8,511 6,359 ------- ------- Net deferred tax liabilities...................... $23,664 $29,089 ======= =======
The valuation allowance increased by $93,000, decreased by $59,000 and increased by $2.3 million in fiscal years 1998, 1997 and 1996, respectively. Significant components of the provision for income taxes are as follows:
YEARS ENDED JUNE 30, ----------------------------- 1998 1997 1996 ------- ------- ------- (IN THOUSANDS) Current: Federal..................................... $ 1,103 $ 5,442 $36,793 Foreign..................................... 544 553 360 State....................................... 420 2,075 7,491 ------- ------- ------- Total current....................... 2,067 8,070 44,644 ------- ------- ------- Deferred: Federal..................................... (2,328) (971) (5,971) State....................................... (651) (492) (688) ------- ------- ------- Total deferred...................... (2,979) (1,463) (6,659) ------- ------- ------- $ (912) $ 6,607 $37,985 ======= ======= =======
56 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For financial reporting purposes, income (loss) before income taxes includes the following components:
YEARS ENDED JUNE 30, ------------------------------- 1998 1997 1996 -------- ------- -------- (IN THOUSANDS) Domestic operations................................. $(12,017) $15,498 $ 85,816 Foreign operations.................................. (2,978) (2,284) (21,361) -------- ------- -------- $(14,995) $13,214 $ 64,455 ======== ======= ========
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, ------------------------------ 1998 1997 1996 -------- ------- ------- (IN THOUSANDS) Income (loss) before income taxes (including discontinued operations and disposal).............. $(14,995) $13,214 $64,455 ======== ======= ======= Expected tax at 35% or 34%........................... $ (5,243) $ 4,625 $22,559 State income tax, net of federal benefit............. (223) 741 4,422 In-process research and development.................. 2,375 -- 6,230 Non-deductible intangibles........................... 1,699 -- -- Net operating losses of subsidiaries for which no current benefit is realizable...................... 164 1,176 2,166 Equity in losses of affiliates....................... 76 (222) 2,039 Goodwill/intangible amortization..................... 428 530 442 Other................................................ (188) (243) 127 -------- ------- ------- $ (912) $ 6,607 $37,985 ======== ======= =======
16. STATEMENTS OF CASH FLOWS Supplemental disclosures of cash flow information:
YEARS ENDED JUNE 30, ------------------------- 1998 1997 1996 ---- ------ ------- (IN THOUSANDS) Cash paid during the year for: Interest (net of capitalized interest).................. $ 56 $ 473 $ 296 Income taxes (net of refunds)........................... (65) 5,068 42,817 Non-cash financing activity: Dividends declared...................................... $896 $ 881 $ 883
17. SUBSEQUENT EVENTS (UNAUDITED) Spinoff of Cohesion Technologies, Inc. On August 18, 1998 (the "Distribution Date"), the Company spun off, in a one-for-one distribution of common stock to the Company's stockholders, Cohesion Technologies, Inc., which previous to the spin-off was a wholly-owned subsidiary of the Company. The transaction resulted in the distribution of 100% of the outstanding shares of Cohesion. The distribution of shares was declared tax-free for U.S. federal income tax purposes in an IRS ruling. Subsequent to the distribution, Cohesion has been traded on the NASDAQ National Market under the ticker symbol of CSON. CANCELLATION AND REPRICING OF OUTSTANDING STOCK OPTIONS In August 1998, each employee (including officers and directors) and consultant of the Company or any subsidiary of the Company who, immediately prior to the distribution date for the spin-off of Cohesion held a vested stock option to purchase shares of Company common stock will, in connection with the Distribution, 57 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) receive two new options in replacement of the original option, one to acquire shares of Company common stock and the other to acquire shares of Cohesion common stock. Each new option gives the holder the right to purchase a number of shares equal to the number of shares in the original option. Each employee (including officers and directors) and consultant of the Company or any subsidiary of the Company who, immediately prior to the distribution date for the spin-off of Cohesion held an unvested stock option to purchase shares of Company common stock will, in connection with the distribution, receive a new option in replacement of the original option to acquire the same number of shares of common stock of the entity (the Company or Cohesion) for which such optionee was employed or retained as a consultant following the distribution. The exercise price of each new option will be determined in accordance with Emerging Issues Task Force Issue 90-9 as agreed upon by the Company's Board and the Cohesion Board (or any committee thereof), after consultation with legal and accounting advisors. The exercise price, as adjusted in light of the above considerations, is not intended to result in any compensation expense to the Company or Cohesion. All other terms of the new options other than the exercise price will be the same as those of the original options; provided, however, the service as an employee or consultant of Cohesion, or its subsidiaries shall be equivalent to providing service as an employee or consultant of the Company. At the option of the Company's Board or Cohesion Technologies Board, out-of-the-money options may be treated differently. In August 1998 the stockholders of the Company approved the amendment of the Company's 1994 Stock Option Plan to increase the number of shares of common stock reserved for issuance by 70,000 shares from 1,150,000 to 1,220,000 shares, the adoption of the Company's 1998 Employee Stock Purchase Plan and the reservation of 125,000 shares of Company common stock for issuance, and the adoption of the 1998 Directors' Stock Option Plan which reserved 250,000 shares of common stock for issuance. The Company's 1990 Directors' Stock Option Plan was terminated in August 1998. In addition, the Board of Directors approved a continuation of the stock repurchase program previously approved. Under this program, the Company is currently authorized to repurchase up to 500,000 shares of its common stock having an aggregate purchase price not in excess of $5,000,000. In September 1998, Cohesion's Board of Directors approved a program to cancel options to purchase shares of the common stock of Cohesion Corporation (the "Canceled Options"). In connection with such program, Cohesion will pay each holder of Canceled Options a per share amount equal to the excess of $16.70 over the exercise price of the Canceled Option (the "Option Payment"). Cohesion will make this Option Payment ratably over the original vesting period of the Canceled Option so long as the holder thereof remains an employee or consultant of Cohesion or Cohesion Corporation. Corporate Name Change On August 12, 1998, the stockholders of the Company approved a corporate name change from Collagen Corporation to Collagen Aesthetics, Inc. which better reflects the Company's focus on serving the facial aesthetic medical marketplace. The name change has been reflected in the accompanying financial statements. 58 60 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Collagen Aesthetics, Inc. We have audited the accompanying consolidated balance sheets of Collagen Aesthetics, Inc. (formerly Collagen Corporation) as of June 30, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 Aesthetics, Inc. (formerly Collagen Corporation) at June 30, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein. /s/ ERNST & YOUNG LLP Palo Alto, California July 31, 1998 59 61 SUPPLEMENTARY QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) SELECTED QUARTERLY FINANCIAL DATA
QUARTERS ENDED -------------------------------------------------- JUNE 30 MARCH 31 DECEMBER 31 SEPTEMBER 30 ------- -------- ----------- ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FISCAL 1998 Product sales............................................... 22,732 19,232 21,511 19,297 Cost of sales............................................... 6,388 5,567 6,516 5,487 Selling, general and administrative expenses................ 12,470 10,360 9,958 9,747 Acquired in-process research & development.................. 57 -- 10,530 -- Research and development expenses........................... 6,637 5,866 5,177 5,035 Operating loss.............................................. (4,361) (2,561) (10,670) (972) Net gain on investments, principally Boston Scientific Corporation (formerly Target Therapeutics, Inc.).......... 5,358 4,964 2,843 5,932 Net gain on investments, Prograft Medical, Inc.............. -- -- -- -- Loss from discontinued operations, net of taxes............. (828) (733) (1,104) (984) Provision for loss on disposal of discontinued operations, net of taxes.............................................. (8,556) -- -- -- Net income (loss)........................................... (9,346) 1,670 (8,417) 2,010 Net income (loss) per share -- Basic: Continuing operations..................................... $ 0.00 $ 0.27 $ (0.82) $ 0.34 Discontinued operations................................... (1.04) (0.08) (0.13) (0.11) ------- ------- -------- ------- $ (1.04) $ 0.19 $ 0.95 $ 0.23 Net income (loss) per share -- Diluted: Continuing operations..................................... $ 0.00 $ 0.26 $ (0.82) $ 0.34 Discontinued operations................................... (1.04) (0.08) (0.13) (0.11) ------- ------- -------- ------- $ (1.04) $ 0.18 $ 0.95 $ 0.23 Share price*: High...................................................... 22.00 22.125 20.875 19.875 Low....................................................... 17.75 16.75 18.00 16.625 FISCAL 1997 Product sales............................................... $18,240 $15,780 $ 18,351 $15,964 Cost of sales............................................... 4,267 3,778 4,890 4,288 Selling, general and administrative expenses................ 10,572 12,106 9,027 7,087 Research and development expenses........................... 4,331 3,602 3,199 2,955 Operating loss.............................................. (930) (3,706) 1,235 1,634 Net gain on investments, principally Boston Scientific Corporation (formerly Target Therapeutics, Inc.).......... -- -- 3,038 6,184 Net gain on investments, Prograft Medical, Inc.............. 9,063 -- -- -- Loss from discontinued operations, net of taxes............. (1,529) (1,425) (2,033) (2,440) Provision for loss on disposal of discontinued operations, net of taxes.............................................. -- -- -- -- Net income (loss)........................................... 7,614 (3,561) 1,011 2,307 Net income (loss) per share -- Basic: Continuing operations..................................... $ 1.04 $ (0.25) $ 0.35 $ 0.53 Discontinued operations................................... (0.17) (0.16) (0.23) (0.27) ------- ------- -------- ------- $ 0.87 $ (0.41) $ 0.12 $ 0.26 Net income (loss) per share -- Diluted: Continuing operations..................................... $ 1.03 $ (0.25) $ 0.34 $ 0.52 Discontinued operations................................... (0.17) (0.16) (0.23) (0.27) ------- ------- -------- ------- $ 0.86 $ (0.41) $ 0.11 $ 0.25 Share price*: High...................................................... $ 19.75 $ 26.00 $ 21.50 $ 20.25 Low....................................................... 13.75 18.25 18.00 16.50
- --------------- * Share price not adjusted for August 1998 Cohesion Spinoff. THE COMMON STOCK OF THE COMPANY IS TRADED OVER-THE-COUNTER ON THE NASDAQ STOCK MARKET UNDER THE SYMBOL CGEN. THE COMPANY DECLARED A CASH DIVIDEND OF $.10 PER SHARE ON ITS COMMON STOCK PAYABLE TO STOCKHOLDERS OF RECORD ON JUNE 30, 1998, IN ADDITION TO A $.10 PER SHARE DIVIDEND DECLARED AND PAID EARLIER IN FISCAL 1998. IN FISCAL 1997, THE COMPANY DECLARED A CASH DIVIDEND OF $.10 PER SHARE ON ITS COMMON STOCK PAYABLE TO STOCKHOLDERS OF RECORD ON JUNE 30, 1997, IN ADDITION TO A $.10 PER SHARE DIVIDEND DECLARED AND PAID EARLIER IN FISCAL 1997. WHILE THE COMPANY DOES NOT EXPECT TO PAY DIVIDENDS IN THE NEAR FUTURE, THE BOARD OF DIRECTORS WILL RE-EVALUATE THE DIVIDEND POLICY ON A SEMI-ANNUAL BASIS. SEE CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY. 60 62 SCHEDULE II COLLAGEN AESTHETICS, INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JUNE 30, 1996, 1997 AND 1998
ADDITIONS BALANCE AT CHARGED TO BEGINNING OF COSTS AND BALANCE AT DESCRIPTION PERIOD EXPENSES DEDUCTIONS(1) END OF PERIOD ----------- ------------ ---------- ------------- ------------- (IN THOUSANDS) 1996 Allowance for doubtful accounts.......... $383 $ 33 $41 $375 1997 Allowance for doubtful accounts.......... $375 $ 71 $28 $418 1998 Allowance for doubtful accounts.......... $418 $169 $82 $505
- --------------- (1) Write-off of uncollectible accounts 61 63 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 the information under the caption "Election of Directors" in the Company's Proxy Statement for its Annual Meeting of Stockholders filed on or about September 28, 1998 (the "Proxy Statement"). See "Business -- Executive Officers" in Item I of this Annual Report on Form 10-K for information concerning the Company's executive officers. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the information under the caption "Compensation of Executive Officers" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the information under the caption "Common Stock Ownership of Certain Beneficial Owners and Management" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the information under the caption "Certain Relationships and Related Transactions" in the Proxy Statement. 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. FINANCIAL STATEMENTS AND SCHEDULES Financial Statements and Financial Statement Schedule II -- See Index to Consolidated Financial Statements at Item 8 of this report 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. 2. EXHIBITS
EXHIBIT NUMBER NOTES DESCRIPTION -------------- ----- ----------- 2.1** (22) Separation and Distribution Agreement by and between Collagen Corporation and Cohesion Technologies, Inc. dated January 1, 1998 3.1 (8) Certificate of Incorporation of Collagen Subsidiary, Inc. 3.2 Certificate of Merger of Collagen Corporation, a California corporation, into Collagen Subsidiary, Inc., a Delaware corporation 3.3 (12) By-Laws of Collagen Corporation, as amended 3.4 (17) By-Laws of Collagen Corporation, as amended on August 9, 1996, effective October 30, 1996 3.5 (9) Preferred Shares Rights Agreement between the Registrant and the Bank of New York dated November 29, 1994 10.24 (1) Collaborative Research and Distribution Agreement with Zimmer, Inc. dated as of June 26, 1985
62 64
EXHIBIT NUMBER NOTES DESCRIPTION -------------- ----- ----------- 10.27 (1) Distribution Agreement between Registrant and Lederle (Japan), Ltd. dated as of June 26, 1985 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* 1985 Employee Stock Purchase Plan, as amended 10.44* (12) 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 10K 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* (16) 1994 Stock Option Plan, as amended 10.63 (8) 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* (8) Promissory Note of Howard D. Palefsky dated August 3, 1994 10.66 (8) Revised Form of Agreement Regarding Proprietary Information and Inventions between Registrant and all employees or consultants 10.67 (9) Credit Agreement, dated November 15, 1994, by and between the Bank of New York and the Registrant, as amended January 24, 1995 10.67(a) (12) Second Amendment, Third Amendment and Fourth Amendment dated June 30, 1995, September 30, 1995, and December 26, 1995, respectively, to Credit Agreement dated November 15, 1994 by and between the Bank of New York and the Registrant
63 65
EXHIBIT NUMBER NOTES DESCRIPTION -------------- ----- ----------- 10.67(b) (13) Fifth Amendment, dated March 29, 1996, to Credit Agreement dated November 15, 1994 by and between the Bank of New York and the Registrant 10.67(c) (15) Sixth Amendment, dated June 28, 1996, to Credit Agreement dated November 15, 1994 by and between the Bank of New York and the Registrant 10.67(d) (16) Seventh Amendment, dated September 30, 1996, to Credit Agreement dated November 15, 1994 by and between the Bank of New York and the Registrant 10.67(e) (17) Eighth Amendment, dated December 31, 1996, to Credit Agreement dated November 15, 1994 by and between the Bank of New York and the Registrant 10.68 (9) 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 10K for the fiscal year ended June 30, 1989 10.70* (11) Letter of Acceptance of Employment by and between Gary Petersmeyer and the Registrant, dated December 19, 1994 10.71** (11) License, Supply and Option Agreement, dated March 24, 1995 by and between LipoMatrix, Incorporated and Registrant 10.72** (11) Distributor Agreement dated March 24, 1995 by and between LipoMatrix, Incorporated and the Registrant 10.73** (11) Coordination Agreement dated March 24, 1995, by and between LipoMatrix Incorporated and the Registrant's wholly-owned subsidiary, Collagen International Incorporated 10.74* (11) Promissory Note of Howard D. Palefsky dated June 5, 1995 10.75** (11) 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 10K for the fiscal year ended June 30, 1989 10.76 (10) Stock Purchase Agreement dated August 22, 1995 between the Registrant and certain stockholders of LipoMatrix, Incorporated 10.77* (12) Promissory Note between Howard D. Palefsky and the Registrant dated December 11, 1995 10.78* (14) Bonus Agreement between Howard D. Palefsky and the Registrant dated February 20, 1996 10.79* (14) Promissory Note between Howard D. Palefsky and the Registrant dated February 20, 1996 10.80* (13) Amended and Restated Secured Loan Agreement between Ross R. Erickson and the Registrant dated December 31, 1995 10.81* (15) Letter of Acceptance of Employment by Pierre Comte and the Registrant dated March 21, 1995 10.82 (15) Loan Agreement between the Registrant and Cohesion Corporation dated May 24, 1996
64 66
EXHIBIT NUMBER NOTES DESCRIPTION -------------- ----- ----------- 10.83** (15) Worldwide Medical Product Distribution Agreement between Registrant and Tissue Technologies, Inc. dated June 4, 1996 10.84** (15) Distribution Agreement between Registrant and Biomatrix, Inc. dated June 17, 1996 10.85* (16) Repaid Promissory Note from Reid W. Dennis to the Registrant, dated July 22, 1996 10.86* (17) License, Supply and International Distribution Agreement between Registrant and Cosmederm Technologies, Inc., dated September 6, 1996 10.88* (18) Agreement between Howard D. Palefsky and the Registrant dated March 15, 1997 10.89* (18) Employment Agreement between Gary Petersmeyer and the Registrant dated February 7, 1997 10.90* (18) Form of Management Continuity Agreement between certain officers of the Company and the Registrant dated February 7, 1997 10.91* (19) Employment Contract between Registrant and Jean-Pierre Capdevielle dated January 9, 1997 10.92** (19) Distribution Agreement between Registrant and Lederle (Japan), LTD. dated June 30, 1997 10.93** (20) License Agreement between Registrant and Tristrata Technology, Inc. dated September 1, 1997 10.94** (21) Manufacturing Agreement between Registrant and Laboratoire Perouse Implant dated December 16, 1997 10.95** (22) Chemical Peel Manufacturing and Sales License Amendment with Cosmederm Technologies, Inc., dated February 27, 1998 10.97** (22) Collagen Supply Agreement by and between Collagen Corporation and Cohesion Technologies, Inc. dated January 1, 1998 10.98** (22) Recombinant Technology Development and License Agreement by and between Collagen Corporation and Cohesion Technologies, Inc. dated January 1, 1998 10.99 (22) Tax Allocation and Indemnity Agreement by and between Collagen Corporation and Cohesion Technologies, Inc. dated January 1, 1998 10.100 (22) Services Agreement by and between Collagen Corporation and Cohesion Technologies, Inc. dated January 1, 1998 10.101 (22) Benefits Agreement by and between Collagen Corporation and Cohesion Technologies, Inc. dated January 1, 1998 10.102 (22) Vitrogen International Distribution Agreement by and between Collagen Corporation and Cohesion Technologies, Inc. dated January 1, 1998 10.103 (22) Assignment and License Agreement by and between Collagen Corporation and Cohesion Technologies, Inc. dated January 1, 1998 10.104** (22) Collagraft Supply Agreement by and between Collagen Corporation and Cohesion Technologies, Inc. dated January 1, 1998 10.105** Import Services Agreement by and among Collagen Corporation (Collagen KK) and Lederle (Japan), Ltd. Dated May 18, 1998 21.1 List of Subsidiaries
65 67
EXHIBIT NUMBER NOTES DESCRIPTION -------------- ----- ----------- 23.1 Consent of Ernst & Young LLP, Independent Auditors 24.1 Power of Attorney (see page 42) 27.1 Financial Data Schedule (EDGAR version only)
- --------------- * Constitutes a management contract or compensatory contract, plan or arrangement. ** Confidential treatment is requested for a portion of this document. Notes to Exhibits: (1) Incorporated by reference to the same exhibits filed with the 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 the Registrant's Current Report on Form 8-K dated March 31, 1989. (3) Incorporated by reference to the same exhibits filed with the 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 the 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 the 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 the 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 the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1993. (8) Incorporated by reference to the same exhibits filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1994 (9) Incorporated by reference to the same exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1994. (10) Incorporated by reference to exhibit 2.1 filed with the Registrant's Current Report on Form 8-K dated September 6, 1995. (11) Incorporated by reference to the same exhibits filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 (12) Incorporated by reference to the same exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1995 (13) Incorporated by reference to exhibit 10.76 originally filed with the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1995 (14) Incorporated by reference to the same exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996 (15) Incorporated by reference to the same exhibits filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (16) Incorporated by reference to the same exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1996 (17) Incorporated by reference to the same exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1996 (18) Incorporated by reference to the same exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997 (19) Incorporated by reference to the same exhibits filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1997 66 68 (20) Incorporated by reference to the same exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997 (21) Incorporated by reference to the same exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1997 (22) Incorporated by reference to the same exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998 b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed by Registrant during the fiscal quarter ended June 30, 1998. 67 69 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 AESTHETICS, INC. /s/ GARY S. PETERSMEYER -------------------------------------- Gary S. Petersmeyer President, Chief Executive Officer, and Director (Principal Executive Officer) Dated: September 22, 1998 68 70 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/ GARY S. PETERSMEYER President, Chief Executive September 22, 1998 - ------------------------------------------ Officer, and Director (Principal Gary S. Petersmeyer Executive Officer) /s/ NORMAN L. HALLEEN Vice President and Chief September 22, 1998 - ------------------------------------------ Financial Officer (Principal Norman L. Halleen Financial and Accounting Officer) /s/ ANNE L. BAKAR Director September 22, 1998 - ------------------------------------------ Anne L. Bakar /s/ FULTON COLLINS Director September 22, 1998 - ------------------------------------------ Fulton Collins /s/ WILLIAM G. DAVIS Director September 22, 1998 - ------------------------------------------ William G. Davis /s/ GERALD LAZARUS, M.D. Director September 22, 1998 - ------------------------------------------ Gerald Lazarus, M.D.
69 71 COLLAGEN AESTHETICS, INC. FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED JUNE 30, 1998 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBIT PAGE - ------- ------- ------------ 10.105** Import Services Agreement by and among Collagen Corporation (Collagen KK) and Lederle (Japan), Ltd. dated May 18, 1998 21.1 List of Subsidiaries 23.1 Consent of Ernst & Young LLP, Independent Auditors 24.1 Power of Attorney (see page 42) 27.1 Financial Data Schedule (EDGAR version only)
- --------------- ** Confidential treatment is requested for a portion of this document. EX-10.105 2 IMPORT SERVICES AGREEMENT 1 IMPORT SERVICES AGREEMENT by and among COLLAGEN CORPORATION COLLAGEN KK and LEDERLE (JAPAN), LTD. 2 Application for an order granting confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934 has been or will be timely made. Confidential portions of this document have been redacted and marked with an [***] and have been filed with the Securities and Exchange Commission separately with such application. IMPORT SERVICES AGREEMENT This Agreement is made as of May 18, 1998, by and among COLLAGEN CORPORATION, a California corporation with offices at 2500 Faber Place, Palo Alto, California 94303 ("Collagen"), COLLAGEN KK, a Japanese corporation with a registered address at Kita-Aoyama 1-2-3, Minato-ku, Tokyo ("CKK"), and LEDERLE (JAPAN), LTD., a Japanese joint stock company with offices, at 10-3, Kyobashi, 1.-chome, Chuo-ku, Tokyo, Japan ("Lederle"). WHEREAS, Collagen and Lederle entered into a Distribution Agreement dated June 26, 1985 and renewals of the Distribution Agreement most recently dated July 1, 1997 (the "Current Distribution Agreement") pursuant to which Collagen granted Lederle the exclusive distribution rights for the Products (as defined below) in the Territory (as defined below); and WHEREAS, the Current Distribution Agreement will expire on June 30, 1998; and WHEREAS, Collagen and Lederle have agreed that responsibility for marketing and sales of the Products should be assumed by CKK, a subsidiary of Collagen International, Inc. which will be actively supported and assisted by Lederle; NOW THEREFORE, in consideration of the mutual promises contained herein, the parties hereto agree as follows: 1. DEFINITIONS As used in this Agreement: (a) "Products" shall mean Zyderm(R) and Zyplast(R) Collagen Implants as sold by Collagen in the United States and future versions of Zyderm(R) and Zyplast(R) Collagen Implants which are developed and marketed by Collagen during the term of this Agreement for use in skin contour correction and dermal augmentation using needle implantation. (b) "Territory" shall mean Japan. (c) Best Efforts" shall mean a party's reasonable business efforts consistent with its overall business objectives and commensurate with products of like nature, volume and market potential. (d) "Product Approvals" shall mean all approvals (shonin) granted by the Japanese Ministry of Health and Welfare for or in connection with the importation and/or distribution of any Products to Japan, including but not limited to the following: 3
Approval No. Subject Product Date of Approval Date of Application ------------ --------------- ---------------- ------------------- (62B)1096 Zyderm I November 6 ,1987 February 5, 1987 Test Implant (62B)1100 Zyderm II November 6, 1987 July 3, 1987 (03B)0016 Zyplast January 11, 1991 April 17, 1990
(e) "First Year" shall mean the initial period of twelve (12) months from the date hereof, and the terms "Second Year" and "Third Year" shall mean the successive periods of twelve (12) months thereafter following. 2. APPOINTMENT OF LEDERLE AS IMPORTER AND DISTRIBUTION AGENT (a) APPOINTMENT: Subject to the terms and conditions of this Agreement, Collagen hereby appoints Lederle as exclusive importer, and CKK appoints Lederle as its exclusive distribution agent of the Products in the Territory. Lederle accepts these appointments. (b) INDEPENDENT CONTRACTORS: It is understood that Lederle of the first part and Collagen and CKK of the second part are respectively independent contractors and are engaged in the operation of their own businesses. Neither party has any authority to enter into any contracts or assume any obligations for the other party or make any warranties or representations on behalf of the other party. 3. OBLIGATIONS OF LEDERLE (a) IMPORTATION OF PRODUCTS, ETC.: Lederle agrees to use its Best Efforts to investigate, maintain government approval for and to import the Products, at its own expense, into the Territory, until such time as all Product Approvals have been transferred to CKK, and upon CKK's instructions and on CKK's behalf to distribute the Products within the territory, exercising the same diligence and adhering to the same standards which it employs with respect to its own pharmaceutical products. In particular, Lederle shall at its own expense: (i) Until such time as all Product Approvals have been transferred to CKK, exercise due diligence to obtain and maintain government approvals necessary hereunder to import the Products into the Territory and to sell the Products to CKK, and to diligently proceed to secure, as may be required from time to time, customs clearances and currency authorizations and any permits necessary therefore in the Territory. Lederle shall keep Collagen and CKK fully informed of the status of the Product Approvals and of any changes in the regulatory requirements for the Territory. 2 4 (ii) Submit to Collagen regular monthly offtake forecasts for the Products in the Territory and to update Collagen on a timely basis with information concerning competitive products and procedures. (iii) Sell the Products only to CKK and, upon CKK's instructions and on CKK's behalf, distribute the Products for use only by physicians for treatment of patients in the Territory in compliance with local laws and regulations and good commercial practice and for uses and applications approved by Collagen for the Products. (iv) Should the requirements of the Japanese Ministry of Health and Welfare or any other relevant governmental body related to or affecting the Products change, the parties agree to review these procedures to ensure continued conformity. (b) QUALITY CONTROL: As importer of the Products, Lederle shall be responsible for performing all necessary quality control required under Japanese laws and practice. (c) MARKETING SUPPORT and Advice: To enable CKK to market and sell the Products effectively and efficiently, Lederle shall make available all information and material in its possession or control pertaining to the Products, the relevant market, customers and groups of customers, and shall ensure that its sales and marketing staff and any other personnel with knowledge or experience in marketing the Products are available on a priority basis to assist CKK on a priority basis as and when required by CKK. In addition, Lederle shall provide CKK management with such information, advice and counsel as CKK's management may request. (d) REPORTS: Lederle shall at its expense submit regular monthly reports to CKK setting forth sales of the Products effected by Lederle on CKK's behalf in the Territory for the previous month (including prices, unit sales and other information as may be reasonably requested by Collagen from time to time). (e) PROTOCOLS: Lederle undertakes to continue to comply with the following listed protocols previously provided to Lederle and attached hereto as Exhibit B: (i) International Marketing Recall Guideline (ii) International Marketing Shipments to Customers Guideline (iii) International Marketing Receiving of Collagen Products Guideline (iv) International Marketing Report of Technical and Medical Complaints Guidelines (f) PERFORMANCE OF OBLIGATIONS: Lederle understands, acknowledges, and agrees that the continued maintenance of an image of excellence and high level of ethical marketing of the Products is essential to the continued success of both parties 3 5 hereto. Accordingly, Lederle hereby agrees that it shall, at all times: (i) conduct business in a manner that reflects favorably at all times on the Products and the good name, goodwill, and reputation of Collagen; (ii) avoid deceptive, misleading or unethical practices that are or might be detrimental to Collagen, the Products, or the public, including without limitation the making or offering of any payment to any government official for the purpose of influencing any act or decision of such official in furtherance of this Agreement; (iii) make no false or misleading representations, either orally or in any written material, with regard to Collagen or the Products; (iv) not publish or employ, or cooperate in the publication or employment of, any misleading or deceptive advertising material with regard to Collagen or the Products; (v) make no representations, warranties or guarantees to customers or to the trade with respect to the specifications, indications, capabilities, or features of the Products that are inconsistent with the literature distributed by Collagen and (vi) not enter into any contract or engage in any practice detrimental to the interests of Collagen in the Products. Violation of any of the provisions in the foregoing subsection 3(e) and in this subsection 3(f) shall constitute a material breach of this Agreement. 4. OBLIGATIONS OF COLLAGEN (a) REQUIREMENTS OF LEDERLE: Collagen shall for as long as Lederle acts as importer hereunder supply Lederle's requirements for the Products in the Territory based on CKK's requirements and consistent with Collagen's commitments to its other customers. CKK's requirements for the Products shall be subject to review and consent by Lederle, which consent shall not be unreasonably withheld. (b) IMPORTATION SUPPORT: To assist Lederle in importing the Products in the Territory, Collagen shall provide to Lederle, free of charge, certificates of analysis concerning the Products purchased by Lederle, certificates of free sale, and any other documents which Lederle may require for registration purposes, at Lederle's request. (c) TRADEMARK LICENSE: Collagen hereby grants to Lederle the non-exclusive right and license to use Collagen's trademarks Zyderm(R) and Zyplast(R) for the Products in the Territory for the term of this Agreement, but only in connection with the importation of the Products purchased from Collagen in the Territory and sale thereof to CKK. Lederle shall be required to use Collagen's trademark with respect to all sales of the Products. Such trademark license shall continue in effect for the Territory while Lederle retains its importation rights in the Territory under this Agreement. All right, title and interest to Collagen's trademark (except the right to use such trademark set forth herein) shall remain with Collagen. Lederle shall not have the right to use Collagen's name in any advertising or promotion or otherwise without Collagen's prior written consent. Upon Lederle's request Collagen shall at its expense file trademark registrations in the Territory. 4 6 5. TERMS AND CONDITIONS OF SALE (a) TERMS OF ORDERS: All purchases of the Products by Lederle from Collagen during the term of this Agreement shall be subject to the terms and conditions of this Agreement and to Collagen's Terms and Conditions of Sale as Collagen may establish from time to time, provided that in the event of any conflict between the terms of this Agreement and the Terms and Conditions of Sale of Collagen, this Agreement shall be controlling. Any printed or standard terms and conditions contained in Lederle's purchase order form shall be disregarded. All purchase orders submitted by Lederle to Collagen shall be subject to acceptance by Collagen at its offices at Palo Alto, California, which acceptance shall not be unreasonably withheld. (b) PACKAGING: All quantities of the Products shall be in the form of U.S. packaging with Japanese labeling and Japanese pack inserts, to be shrink wrapped in Fremont, California. The Product will be shipped to Japan in this fashion and resold by Lederle who will not break the shrink wrapping. (c) QUALITY CONTROL: Lederle shall check the quality of the Products in accordance with Collagen's instructions as may be given from time to time and shall at all times comply with applicable governmental regulations relating to the Products including but not limited to quality and safety regulations. (d) PRICE AND PAYMENT: Collagen shall sell the Products to Lederle for the prices in accordance with Exhibit A hereto. All taxes, fees, duties and other charges with respect to the sale by Collagen to Lederle of the Products (excluding income taxes, franchise taxes and taxes based on income) shall be paid by Lederle or, if paid by Collagen or CKK be forthwith reimbursed by Lederle. All payments shall be made within one hundred and twenty (120) days from the date of shipment of the Products to Lederle. If Lederle fails to make any payment to Collagen when due, except where CKK is in default of any payment pursuant to Section 6 (d), (i) Collagen may terminate this Agreement upon giving thirty (30) days' written notice if within that period of thirty (30) days Lederle continues in its failure to make payment to Collagen; and/or (ii) Collagen may, without affecting its rights under this Agreement, cancel or delay any future shipments of the Products to Lederle. Collagen will in each case invoice Lederle in Japanese yen at yen/dollar conversion rates fixed for the half-year periods commencing on January 1 and July 1, respectively which will be communicated to Lederle. All payments to Collagen pursuant to this Agreement shall be made in Japanese currency. (e) WARRANTY: Collagen warrants that the Products sold to Lederle will at all times comply with the requirements of and regulations adopted pursuant to the U.S. Federal Food Drug and Cosmetic Act. 5 7 Collagen further represents and warrants and hereby agrees to hold Lederle harmless from any and all liability, causes of action, damages and/or judgments, including but not limited to attorneys' fees, costs and expenses for any defect which may arise from or due to Collagen's actions in not manufacturing the Products for Lederle in accordance with applicable US Food and Drug Administration ("FDA") rules and regulations and/or in accordance with the IDE/PMA filed and amended by Collagen with respect to the Products which have been approved by the FDA. Collagen will provide, when requested by Lederle, certification that to the best of its knowledge it is in compliance with U.S. laws, statutes, rules, regulations and relevant orders relating to the manufacture, use, distribution and sale of the Products. If Lederle finds any deficiency in quantity and/or any defect in quality of the Products delivered hereunder, Lederle shall promptly give Collagen written notice of such deficiency or defect, and Collagen, upon receiving such notice shall discuss the deficiency or defect with Lederle and will work with Lederle to insure Collagen's obligations under this Agreement with regard to quantity and quality of supply are being met. Lederle shall not be obligated to pay for Products with any claimed deficiencies or defects until such claims are resolved. In the event Collagen agrees that such defect in quality and/or quantity are its responsibility, Collagen shall promptly and without charge to Lederle make up for such deficiency and/or replace such defective Products with Products meeting specifications for Products. Collagen shall bear the costs of return of such defective Products to Collagen. EXCEPT AS SET FORTH ABOVE, COLLAGEN MAKES NO WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE PRODUCTS, INCLUDING WITHOUT LIMITATION ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. (f) Collagen will continue to furnish from time to time samples for testing as may be requested by the Japanese authorities free of charge. 6. DISTRIBUTION OF PRODUCTS (a) Lederle shall at its own risk and expense warehouse Products imported in its own name or that of CKK hereunder, and shall upon CKK's instruction and in CKK's name distribute such Products to customers. Payments made by customers shall be remitted directly to an account or accounts to be designated by CKK. (b) Lederle shall maintain complete and accurate records including full particulars of each shipment and shall on or before the fifteenth (15th) day of each month or at such other times as CKK may request furnish CKK with fully particularized reports of all shipments effected during the previous calendar month. (c) As full consideration for Lederle's importation and distribution of Products during the First Year, CKK shall pay to Lederle a sum corresponding to the quantities of Products actually shipped to customers during the First Year and calculated at the prices set forth in subsection (d) of Section 5 ("Terms and Conditions of Sale") 6 8 hereof to which shall be added a margin of [***]; provided that, for all Products shipped to customers on a complimentary basis during the First Year, Lederle shall be reimbursed in an amount equivalent to the price paid by Lederle to Collagen to which shall be added a handling charge of five per cent (5%). (d) Payments by CKK to Lederle shall be made within one hundred and twenty (120) days of the end of the calendar month for the Products sold during that calendar month. If CKK fails to make any payment to Lederle when due, Lederle may terminate this Agreement upon giving thirty (30) days' written notice, if within that period of thirty (30) days CKK continues in its failure to make payment due to Lederle, and/or without affecting its rights under this agreement or incurring any liability to Collagen and/or CKK, cancel or delay any further orders of the Products to Collagen. All payments to Lederle by CKK pursuant to this Agreement shall be made in Japanese currency. (e) Title in any Products distributed by Lederle pursuant to this Section 6 shall remain with Lederle until such goods have been delivered to a customer, at which moment title shall be deemed to have passed momentarily to CKK and immediately thereafter to such customer. Lederle shall assume, and shall fully insure against, all risks (including force majeure) in relation to Products from the time of shipment by Collagen until such time as risk passes to CKK and the respective customer. (f) Lederle shall strictly observe all relevant rules and regulations and adhere to the highest standards of professional practice in the U.S. and Japan in relation to its warehousing management of the Products and all related record-keeping in accordance with Collagen policies. (g) CKK shall immediately notify Lederle of any and all incidences of side effects or adverse reactions with respect to Products which come to its attention from customers in the Territory. Collagen shall notify Lederle of any and all incidences of side effects or adverse reactions which the U.S. Food and Drugs Administration (FDA) requires Collagen to communicate to its distributors or which Collagen is required to report to the FDA. 7. ASSIGNMENT OF APPROVALS (a) Lederle shall transfer and assign any and all Product Approvals to CKK and exercise its Best Efforts to cooperate with CKK, and Lederle and CKK shall each exercise their best efforts so that all Product Approvals are registered in favor of CKK on or before June 30, 1999 (the "Assignment Target Date"). (b) Without limitation to the generality of the foregoing, Lederle shall in particular: (i) Transfer and deliver to CKK any and all documents (including without limitation all supporting documentation and material clinical reports and other *** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 7 9 records) submitted or supplied to the Ministry of Health and Welfare (MHW), and any correspondence or other documents exchanged with or received from MHW, in connection with any Product Approvals or applications therefor, whether pursuant to Art. 14 of the Pharmaceutical Affairs Law, Art. 21(6) of the Implementing Regulations to the Pharmaceutical Affairs Law, or otherwise. (ii) Execute a form of assignment or assignment contract in a form acceptable to CKK and to MHW for purposes of effecting the transfer and assignment of the Product Approvals to CKK, and assist in the filing and further prosecution of the application for transfer of product approvals, including if requested liaison with MHW on CKK's behalf. Following the filing of the application for transfer of the application for transfer of product approvals, CKK shall contact MHW once every month to ascertain whether or not MHW has issued corresponding permits to add medical devices as products to be imported (the "Permits"). CKK shall thereupon take delivery of the Permits within ten (10) business days. (c) Lederle shall execute all relevant documents, do any and all things, take all necessary or appropriate steps and provide any advice or support required or requested by CKK to ensure that all Product Approvals are validly assigned to and assumed by CKK by or before the Assignment Target Date. Collagen and Lederle shall jointly ensure that Lederle will have sufficient stocks of all Products to supply CKK's requirements until CKK is in a position to import stocks in its own name, any excess inventory of the Products to be purchased by CKK in the manner stipulated in Section 7(e) hereunder. (d) CKK will as soon as practicable establish suitable facilities to enable it to be licensed by MHW as importer of the Products, and will notify Lederle at an early stage of the date when, it expects such facilities to have been established. Upon receipt of CKK's notification, Lederle shall - without prejudice to any other obligations hereunder - make best efforts to ensure that the Product Approvals are transferred to CKK with the utmost expedition. (e) Following the assignment of Product Approvals to CKK, Lederle shall cease all further importation and sale of Products and shall promptly sell to CKK, and CKK shall purchase from Lederle, all Products then in Lederle's inventory considered by CKK's Quality Assurance Department to be in good condition for sale. If any Products are considered not to be in good condition, Lederle may request that CKK re-confirm the quality of such Products in the presence of Lederle representatives. The price for any Products purchased by CKK shall be the price Lederle paid Collagen for the Products to which shall be added actual costs incurred by Lederle in connection with the customs clearance, transportation and landing, transitory warehousing and insurance of such Products by independent third-party contractors, as well as Consumption Tax at the then applicable rate. For the avoidance of doubt, any additional cost and expense to 8 10 relabel or otherwise modify the Products sold to CKK shall be for CKK's account. 8. ASSIGNMENT CONSIDERATION (a) Within thirty (30) days of completion of the assignment of all Product Approvals and receipt by CKK of Permits corresponding thereto, Collagen shall pay to Lederle the sum of [***] as consideration for the assignment of the Product Approvals (hereinafter "Assignment Consideration"). Without prejudice to any other remedies Collagen and CKK may have, no Assignment Consideration shall be payable in the event that any Product Approvals have lapsed or otherwise become incapable of being assigned to CKK. (b) In the event that Permits confirming CKK's ownership of all of the Product Approvals (hereinafter collectively "Certificates") have not been received by CKK by the Assignment Target Date, the amount of the Assignment Consideration shall be successively reduced by [***] of the original amount for the first, second or third month or fraction thereof elapsing between July 1, 1999 and the first business day on which assignment of the Product Approvals to CKK shall have been completed and CKK shall have received the last of the Certificates, and shall likewise be reduced by [***] for the fourth, fifth and sixth month or fraction thereof thus elapsing. (c) The provisions of the foregoing subsection (b) of this Section 8 shall not apply in the event that, Lederle having carried out and fulfilled all of its obligations under Section 7 and Section 3 hereof, the transfer of the Product Approvals to CKK and registration of the Product Approvals in CKK's name is delayed due to: (i) CKK's failure to take all reasonable steps to secure a license under the Pharmaceutical Affairs Law enabling it to act as importer of the Products no later than ninety (90) days prior to the Assignment Target Date; or (ii) Suspension or review of any Product Approvals by MHW, provided that Lederle shall have notified CKK and Collagen of the commencement of any such suspension or review, or of any fact or development liable to occasion such suspension or review by MHW, within five (5) business days from the earliest date on which Lederle became or could with reasonable diligence have become aware thereof. 9. ONGOING SUPPORT AND DISTRIBUTION (a) Following the transfer of the Product Approvals to CKK, Lederle shall to the extent required by CKK continue to warehouse and distribute Products on CKK's ***CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 9 11 behalf in accordance with the provisions of Section 6 ("Distribution of Products") hereof. (b) Lederle shall at all times closely cooperate with CKK and use its good offices generally to assist and support CKK's marketing of the Products and to ensure that the transfer of Product distribution to CKK is adequately explained to and accepted in the market. Any statements etc. to be addressed to customers, government entities and other affected parties shall without exception be submitted to CKK for approval prior to circulation. (c) As full and exclusive consideration for Lederle's distribution of Products imported by Lederle or CKK and shipped to customers pursuant to this Section 9, CKK shall pay the following amounts as commission to Lederle: (i) FOR ALL PRODUCTS (IF ANY) SHIPPED TO CUSTOMERS DURING THE FIRST YEAR: an amount to be calculated according to subsection (c) of Section 6 ("Distribution of Products") hereof. (ii) FOR ALL PRODUCTS SHIPPED TO CUSTOMERS DURING THE SECOND YEAR: an amount equivalent to [***] of CKK's net selling price for such Products. (iii) FOR ALL PRODUCTS SHIPPED TO CUSTOMERS DURING THE THIRD YEAR: an amount equivalent to [***] of CKK's net selling price for such Products. Lederle shall be entitled at its own cost and expense to have an internationally recognized firm of accountants audit CKK's books of account and other records to the extent required to confirm CKK's net selling price for Products. (d) Lederle accepts and agrees that the payments stipulated in the foregoing subsection (c) fully compensate it for the value of any goodwill, customer information, marketing data made or to be made available to CKK, any services rendered, costs incurred, personnel transferred, and any rights Lederle may have acquired in connection with its importation and sales of Products. (e) In the event that the Product Approvals shall not have been transferred to CKK and registered in CKK's name on or before the Assignment Target Date, Lederle shall continue to import the Products in such quantities and for such period as CKK may consider necessary. Upon shipment of such Products to customers, Lederle shall invoice CKK for the yen equivalent of the purchase price of such Products as set forth in Exhibit A hereof, to which shall be added a commission in an amount equivalent to the commission to which Lederle would have been entitled under subsection (c) above had the Product Approvals been transferred; provided that Lederle shall not be entitled to any other or further consideration, *** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 10 12 reimbursement or other payment in this case. Payments shall be made in accordance with the payment terms set forth in subsection (d) of Section 6 ("Distribution of Products") hereof. 10. SECONDMENT AND TRANSFER OF KEY PERSONNEL (a) At CKK's request, Lederle will exercise its Best Efforts to second suitable Lederle personnel (up to a total of eight (8) individuals) with knowledge of the Products to CKK. (b) Lederle shall afford Collagen and CKK adequate opportunities to interview and select appropriate individuals amongst Lederle's staff. CKK's initial list of secondment request shall be delivered to Lederle no later than May 25, 1998 for an effective secondment as of July 1, 1998. Thereafter, CKK may from time to time request further secondments as required until December 31, 1998. (c) Upon receipt of CKK's list, Lederle will, subject to such individuals' consent, second the individuals named therein to CKK. Salaries, normal retirement benefits required to be paid under Lederle's general staff rules, and employer's social insurance (shakai hoken) contributions (hereinafter collectively "Staff Expenses") as well as existing allowances incurred by Lederle during and in respect of the period of secondment shall be reimbursed by CKK, provided that CKK shall be under no obligation to reimburse Lederle in respect of any increases in Staff Expenses other than those that would have occurred in the ordinary course of Lederle's operations had the individual not been seconded. Lederle shall invoice CKK by the fifteenth day of each calendar month for Staff Expenses and allowances paid during the preceding calendar month. CKK shall pay the invoiced amounts within fifteen days of receipt of Lederle's invoice by remittance to an account with a bank in Japan designated by Lederle. Lederle shall prior to each secondment advise CKK in writing of the amounts of Staff Expenses actually paid to or in respect of the respective individual during each of the preceding twenty-four (24) calendar months prior to the secondment. Lederle and Collagen and CKK will consult and agree on bonus levels for seconded personnel in line with Lederle general policies. Any travel expenses and other business costs incurred by seconded staff will be for CKK's account. (d) In relation to post-retirement shokutaku personnel seconded by Lederle, CKK shall determine within six (6) months from the commencement of secondment whether to retain such personnel as its own personnel. Thereafter, the individual concerned shall at his option be released by Lederle and retained by CKK. (e) In relation to regular employees (sei shain) seconded by Lederle to CKK, CKK shall in each case decide within two (2) years from the commencement of secondment whether to seek the transfer of such personnel to CKK and shall notify Lederle at least ninety (90) days prior to the expiration of the said period. Thereafter, the individual concerned shall at his option be released by Lederle and 11 13 employed by CKK on such terms and conditions as the individual and CKK may agree prior to such transfer. Upon transfer of any employee to CKK, Lederle shall forthwith pay to such employee any retirement allowance and other benefits which according to Lederle's internal rules shall have accrued to such employee until the time of such transfer. Notwithstanding the transfer, Lederle shall remain liable and shall hold CKK harmless from and against any and all claims for retirement benefits or other emoluments to which the transferred employee may be entitled by virtue of any period of such individual's service with Lederle prior to such transfer; provided that Lederle shall not be responsible for any claims for retirement benefits or other emoluments to which the transferred employee is or claims to be entitled by virtue of any period of service with CKK after such transfer. (f) CKK shall have the unfettered right to terminate the secondment of any seconded staff with sixty (60) days' written notice to Lederle at any time during two (2) years from the date of commencement of the secondment. Upon receipt of such notice from CKK terminating any secondment, Lederle shall promptly arrange the return of any such staff to its own office. (g) Save as otherwise provided herein, the parties' rights and obligations in relation to any employees seconded from Lederle to CKK shall be governed by the Secondment Terms attached hereto as Exhibit C. (h) Save as stipulated in this Section 10 and in the Secondment Terms, Lederle shall be solely responsible for all Staff Expenses and other costs payable to or in respect of any Lederle employees currently or formerly seconded to CKK, and shall hold CKK harmless from and against any claims by employees or other parties for any such Staff Expenses or other costs. (i) For the avoidance of doubt, the parties confirm that the personal preferences and legal rights of individuals to be transferred or seconded to CKK will be respected. Nothing in this section shall be interpreted as derogating from the parties' duty to comply with all mandatory provisions of the Labor Standards Law. (j) The parties hereto agree each to defend any legal action brought against any party by any employee transferred or seconded hereunder and recognize that such actions will be governed by Japanese law and adjudicated upon by the Japanese courts. The parties shall make such payments to one another as may be required to give effect to the rights and obligations among the parties hereto in relation to any such employee and such legal actions as set forth herein. 11. CONFIDENTIAL INFORMATION Collagen, CKK and Lederle agree that during the term of this Agreement and any subsequent agreement under which Lederle obtains distribution rights to the Products 12 14 from Collagen or any affiliate or subsidiary of Collagen and for a period of five years thereafter each shall keep completely confidential and shall not publish or otherwise divulge or use for its own benefit or for the benefit of any third party any information of a proprietary nature furnished to it (the "receiving party") by the other party (the "disclosing party") without the prior written approval of the disclosing party in each instance, except to the extent that it is necessary to divulge such information for the purposes of this Agreement or the obtaining of governmental approval for the investigation or marketing of the Products. Nothing in this Section 11 shall prevent disclosure or use of information (i) already known to the receiving party; (ii) which is or becomes public knowledge (iii) which is properly acquired by the receiving party from a third party having the right to convey such information. Information of a proprietary nature shall include but not be limited to information concerning a party's products, proposed products, marketing plans, methods of manufacture, customers or any other information or materials in whatever form not generally known to the public. 12. DEFENSE OF LEGAL ACTIONS AND INDEMNIFICATION (a) LEGAL ACTIONS: Lederle agrees that Collagen shall defend, or at its option settle, any claim, suit or proceeding brought against Lederle on the issue of infringement of any Japanese patent, trademark or other intellectual property right by reason of the Products sold hereunder or the use thereof, subject to the limitations hereinafter set forth. Collagen shall have sole control of any such action or settlement negotiations, and Collagen agrees to pay, subject to the limitations hereinafter set forth, any final judgment entered against Lederle or its customers on such issue. Lederle agrees that Collagen at its sole option shall be relieved of the foregoing obligations unless Lederle or its customers notifies Collagen in writing within fifteen (15) days after it becomes aware of any such claim, suit or proceeding and gives Collagen authority to proceed as contemplated herein, and, at Collagen's expense, gives Collagen proper and full information and assistance to settle and/or defend such claim, suit or proceeding. Notwithstanding the foregoing, Collagen assumes no liability for any modification or combination of the Products with other products or for any unauthorized or improper use or application of the Products. (b) INDEMNIFICATION BY COLLAGEN: Collagen agrees to indemnify Lederle and to hold Lederle harmless from and against any and all claims made by any person or entity arising out of Collagen's manufacture, importation, testing, marketing, distribution and sale of the Products hereunder, where and to the extent that such damages are attributable to fault by Collagen or its employees or agents in the manufacture of the Products. Collagen hereby indemnifies and holds Lederle harmless from and against any and all claims made against Lederle where and to the extent that damages are alleged to have been caused without any fault of Lederle by previously unknown or undetected adverse effects or counterindications not disclosed by Collagen in its package insert (as updated from time to time), in U.S. Registration applications for the Products provided to Lederle, or otherwise notified by Collagen to Lederle from time to time. 13 15 (c) INDEMNIFICATION BY LEDERLE: Lederle agrees to indemnify Collagen and CKK and to hold Collagen and CKK harmless from and against any and all claims made by any person or entity arising out of Lederle's actions hereunder (including Lederle's importation, testing, and distribution of the Products prior to the transfer of the Product Approvals to CKK, or arising out of Lederle's warehousing, management and distribution of Products thereafter pursuant to any provisions under Section 6 ("Distribution of Products") hereof), where and to such extent the damages are attributable to the fault of Lederle or its employees or agents. 13. TERM AND TERMINATION (a) TERM: This Agreement shall commence on July 1, 1998, and shall continue in effect until June 30, 2001 unless earlier terminated in accordance with the provisions hereof. (b) EXTENSION OF TERM: (i) Notwithstanding the provisions of the foregoing subsection (a), CKK and Collagen shall have the unfettered right to extend the term of this Agreement for a further two (2) years under the terms and conditions in effect at the end of the original term. (ii) In the event that the Product Approvals shall not have been transferred to and registered in favor of CKK on or before May 31, 2001, CKK and Collagen shall, notwithstanding the provisions of the foregoing subsection (a), have the unfettered right to extend the term of this Agreement for such further term as they may in their unfettered discretion consider appropriate, such term not to exceed (6) years. In this case, the commission payable to Lederle during the period of any such extension pursuant to subsection (c)(iii) of Section 9 ("Ongoing Support and Distribution") hereof shall, notwithstanding any other provision herein, be reduced to (***) of CKK's selling price for such Products unless such failure to transfer the Product Approvals is demonstrably due to the reasons set forth in subsection (c) of Section 8 ("Assignment Consideration"). (iii) In the event of any extension of the term hereof pursuant to the foregoing subsection, Lederle shall have the right to terminate the agreement upon giving one hundred and eighty (180) days' advance written notice, provided always that Lederle shall not be permitted to terminate the Agreement unless and until all of the Product Approvals have been assigned to CKK. (c) TERMINATION: 14 *** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 16 (i) Without prejudice to any other provisions herein, either Collagen and CKK or Lederle may, at their option, terminate this Agreement as of the end of the Second Year upon giving one hundred and eighty (180) days' prior written notice to Lederle or Collagen and CKK, respectively. (ii) Either party may terminate this Agreement upon thirty (30) days' written notice in the event that the other party shall have committed a serious breach of any of its material obligations hereunder and such other party shall have failed to correct such breach (if remediable) within thirty (30) days of receipt of a written notice to remedy such breach. (iii) This Agreement shall terminate automatically without further notice or action by either party if the other party shall become insolvent, shall make or seek to make an arrangement with or an assignment for the benefit of creditors, or if proceedings in voluntary or involuntary bankruptcy shall be instituted by, on behalf of or against such other party, or if a receiver or trustee of such other party's property shall be appointed. (d) EFFECT OF TERMINATION: In the event of expiration or termination of this Agreement for any reason: (i) Lederle shall terminate all importation or distribution activities in the Territory immediately upon expiration, non-renewal or termination (collectively, "Termination") of this Agreement and, except as otherwise provided herein, all rights and obligations of the parties hereunder shall cease; provided, however, that Termination shall not relieve the parties of any obligations, including Lederle's obligations to pay purchase prices, accrued prior to said Termination and CKK's obligation to purchase inventory pursuant to Section 7(e) hereof. The obligations of Collagen and Lederle pursuant to Section 7 ("Assignment of Approvals") hereof shall survive any Termination of this Agreement. Nothing herein shall limit any remedies which a party may have for the other's default, except as set forth in subsection (g) of Section 15 ("Limitation of Damages"). (ii) Upon Termination, Lederle shall promptly sell to CKK all Products then in Lederle's inventory considered by CKK's Quality Assurance Department to be in good condition for sale. The price for any Products purchased by CKK shall be the price Lederle paid Collagen for such Products to which shall be added actual costs incurred by Lederle in connection with the customs clearance, transportation and landing, transitory warehousing and insurance of such Products by independent third-party contractors, as well as Consumption Tax at the then applicable rate. Any products not acquired by CKK shall be destroyed forthwith in such manner as to prevent any possibility of reuse. 15 17 14. NO COMPETITION The parties confirm and acknowledge that (i) Collagen has provided and Lederle has received extensive and valuable proprietary technical and commercial know-how and other business secrets in connection with this Agreement and the preceding Distribution Agreements, (ii) such business secrets are capable of exploitation in connection with products other than the Products; and (iii) the provisions of this Article 14 are necessary and reasonable to protect Collagen's and CKK's business secrets while enabling Lederle to make use thereof for the purposes set forth in this Agreement. (a) During the term hereof and for one (1) year (or such shorter period as may be permitted under applicable statutes) thereafter, Lederle shall refrain from importing, manufacturing or selling, or being directly or indirectly involved in the importation, manufacture or sale of any product which is functionally similar, or competitive with, any Products, whether in the territory or elsewhere. (b) During the term hereof and for one (1) year (or such shorter period as may be permitted under applicable statutes) thereafter, Lederle shall not sell any Products to any party other than CKK, or export or otherwise sell any Products within or outside the Territory in any manner. 15 GENERAL PROVISIONS (a) GOVERNING LAW: This Agreement shall be governed by and interpreted in accordance with the laws of the State of California and the United States excluding the Convention on Contracts for the Sale of Goods and that body of laws known as conflicts of laws. (b) ARBITRATION: Any dispute or claim arising out of or in relation to this Agreement shall be finally settled by binding arbitration under the ICC Rules of Arbitration of the International Chamber of Commerce by one (1) arbitrator appointed in accordance with such Rules. The arbitration shall be held in Tokyo, Japan, should either Collagen and/or CKK be the party or parties demanding arbitration, or in San Francisco, California, should Lederle be the party demanding arbitration, Judgment on the award rendered by the arbitrator may be enforced by any court of competent jurisdiction. Legal costs (including attorneys' fees) incurred by either Lederle or Collagen and CKK in connection with the successful enforcement or defense of any rights hereunder shall be reimbursed in full by the unsuccessful party. (c) ENTIRE AGREEMENT: This Agreement represents the entire agreement and understanding among the parties hereto with respect to distribution of the Products, supersedes all previous agreements and understandings related thereto and may only be amended or modified in writing signed by authorized representatives of the parties hereto. 16 18 (d) INTEREST: Any sums payable hereunder but unpaid for more than thirty (30) days from the date when payment became due shall bear interest at a rate of fifteen (15) per cent per annum until full and final payment. The parties acknowledge that any default to make payments as due constitutes a breach of this Agreement, and that the aforesaid interest rate constitutes a fair and reasonable pre-estimate of direct and indirect losses likely to be suffered by the respective payee as a result of any payment default. (e) ASSIGNMENT: Neither Collagen or CKK nor Lederle shall assign any of its rights or obligations pursuant to this Agreement except to a successor to substantially all of its business by merger or other form of reorganization. (f) NOTICES: Any notice required or permitted to be given hereunder shall be in writing and in English and sent by facsimile (with confirmation sent by registered airmail) or by pre-paid registered air mail, return receipt requested, addressed to the parties at their respective addresses as the parties may designate in writing. Notice, including notice of change of address, shall be deemed served on the business day following transmission in the case of notice sent by facsimile or seven (7) days after deposit in the mail for notice sent by pre-paid registered airmail. (g) LIMITATION OF DAMAGES: Save as provided herein, no party shall be liable to any other for incidental, consequential or punitive damages, even if such other party shall have advised such party of the possibility of the same. (h) FORCE MAJEURE: Each of the parties hereto shall be excused from the performance of its obligations hereunder in the event and to the extent that 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 such party, 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. (i) SHAREHOLDERS NOT LIABLE: Shareholders of Lederle and Collagen shall have no responsibility or liability with respect to rights and obligations contained in this Agreement. (j) HEADINGS: Headings contained herein are for convenience only and shall not affect the interpretation of any of the provisions of this Agreement. 17 19 (k) NO WAIVER. Failure by a party to assert any rights hereunder shall not be construed as a waiver of those or any other rights. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their authorized representatives as of the day and year first above written. COLLAGEN CORPORATION LEDERLE (JAPAN), LTD. By /s/ GARY S. PETERSMEYER By Gary S. Petersmeyer Title C.E.O. Title COLLAGEN KK By /s/ NORMAN HALLEEN Norman Halleen Title Director 18 20 (k) NO WAIVER. Failure by a party to assert any rights hereunder shall not be construed as a waiver of those or any other rights. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their authorized representatives as of the day and year first above written. COLLAGEN CORPORATION LEDERLE (JAPAN), LTD. By By /s/ JIRO HAYASHI Jiro Hayashi Title Title President, Lederle (Japan), Ltd. COLLAGEN KK By Title 18 21 EXHIBIT A PRODUCTS CODE PRICE (US$) [***] *** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 22 EXHIBIT B (i) Collagen Contact Personnel (ii) International Marketing Recall Guideline (iii) International Marketing Receiving of Collagen Products Guideline (ii) International Marketing Shipments to Customers Guideline (iii) International Marketing Report of Technical and Medical Complaints Guidelines 23 Collagen International, Inc. COLLAGEN CONTACT PERSONNEL
TITLE NAME PHONE FAX Placing Orders Export Supervisor Tim Andrews 1-510-623 2413 1-650-354 4894 Medical Information and Product Safety Manager of Medical Information and Product Safety Karen Heide 1-650-354 4926 1-650-354 4695 and 1-650-354 4894 Technical Complaints International Marketing Specialist Maria Andres 1-650-354 4647 1-650-354 4894 Marketing Communications International Marketing Specialist Maria Andres 1-650-354 4647 1-650-354 4894 Regulatory International Regulatory Associate Cecilia Kalinowski 1-650-354 4953 1-650-354 4894 Trademarks Litigations Specialist Pam Campbell 1-650-354 4686 1-650-856 0208
All the above communications should always be copied to John Sampson, Director of Distributor Markets in France: Tel: 33-1-39-88 85 85 Fax: 33-1-39-88 79 00 24 March 1998 Revision 1 24 Collagen International, Inc. INTERNATIONAL MARKETING RECALL GUIDELINE In the event that Collagen Corporation should determine the recall of a product or product lot, this will be advised to the distributor by fax. The distributor will: 1. Recover from customer, whenever possible, unused product and keep it in quarantine in his warehouse, pending decision from Collagen Corporation. Collagen may, at its discretion, either credit product quarantined or replace it. 2. Distributor undertakes, if requested, to provide proof of destruction of quarantined product and to report back to Collagen product successfully recalled from field or warehouse. 25 May 1995 Revision 0 25 Collagen International, Inc. INTERNATIONAL MARKETING SHIPMENTS TO CUSTOMERS GUIDELINE A. Gel ice bags shall be placed along the inside styrene walls of the shipping carton. To avoid freezing the product, it shall not be packed with the gel ice bags until they thaw to the acceptable shipping temperature range. 1. The ice bag temperature is measured by sandwiching a temperature probe between 2 ice bags until the probe meter is stable and resting within the correct ice shipping range of -2 Degrees to 0 Degrees C. B. Syringes can sit in a controlled room-temperature environment (up to 27 Degrees C) for a maximum of 8 hours in preparation for shipment. C. Products sealed into cartons designed as above (A) can be considered protected from unacceptable temperatures for at least 3 days. D. The objective when shipping collagen is to provide maximum protection. The following instructions shall be visible on all shipping documentation in an appropriate language: Products are perishable and packed with gel ice bags. If delayed, place cartons in refrigeration: +2 to +8 Degrees C DO NOT DELAY. DO NOT FREEZE 25 May 1995 Revision 0 26 Collagen International, Inc. INTERNATIONAL MARKETING RECEIVING OF COLLAGEN PRODUCTS GUIDELINE A. Upon receipt open each Shipping carton and confirm that the syringes are still "cool" to the touch (between 2 Degrees - 25 Degrees C). If the product feels "warm" notify the Export Supervisor, (ES) at once for further instructions: B. Verify the contents of each carton e.g., Collagen code and lot number, expiration date and quantity. Report any discrepancies to the ES immediately for further instructions. C. Immediately following receiving inspection, all syringes shall be stored between 2 Degrees - 10 Degrees C. D. Styrene shipping cartons and gel ice refrigerant bags are re-usable. 25 May 1995 Revision 0 27 INTERNATIONAL MARKETING REPORT OF TECHNICAL AND MEDICAL COMPLAINTS GUIDELINES DEFINITIONS: Complaint - Information received that constitutes a complaint refers to any written or oral expression of dissatisfaction relative to the identity, quality, durability, reliability, safety, effectiveness, or performance of one of Collagen Corporation's marketed products. Technical Complaint - Complaints of a technical nature are complaints that are not of a medical nature, e.g. complaints regarding the syringe, syringe cap, needles, etc. Medical Complaint - Complaints of a medical nature are those complaints that involve a human being. GUIDELINES: A. Technical Complaints Technical complaints from national customers should be forwarded to the International Marketing Specialist, ensuring that sufficient information is available for investigation by Collagen Corporation. B. Medical complaints Medical complaints should be forwarded to the Manager of Medical Information and Product Safety within 48 hours of initial receipt of information, using the attached form (International Clinical Report). Distributors are responsible for submitting local reports to their regulatory agencies in accordance with local regulations in the countries of their responsibility. Collagen International distributors are responsible for maintaining a tracking system for Collagen and LipoMatrix implants delivered to physicians, and for instructing doctors to maintain a data base of patients to whom Collagen implants have been administered. 11 July 1997 Revision 1 28 COLLAGEN CORPORATION INTERNATIONAL COMPLAINT REPORT FORM For Internal use only: Complaint No. ___________________ ARM No. _______________________ DESCRIPTION OF THE COMPLAINT ORIGINATOR OF THE COMPLAINT: [ ] Physician [ ] Patient [ ] Distributor DOES THIS COMPLAINT INVOLVE A HUMAN BEING? [ ] Yes (Medical Complaint) [ ] No (Technical Complaint) DESCRIPTION: ___________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ================================================================================ PHYSICIAN INFORMATION Name _________________________________ Specialty ______________________________ Address ________________________________________________________________________ City _________________________________ Country ________________________________ Postal Code _____________ Telephone _____________________ Fax Number ___________ ================================================================================ PRODUCT INFORMATION
- ---------------------------------------------------------------------------------------------------------------- PRODUCT NAME(S) PRODUCT PRODUCT VIGILANCE(TM) ID IMPLANT IS PRODUCT BEING CATALOG/ LOT NUMBER VOLUME RETURNED? CODE NUMBER(S) IF NO, EXPLAIN NUMBER(S) - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- WAS THIS THE FIRST TIME THE DEVICE WAS USED? [ ] YES [ ] NO (EXPLAIN IN DESCRIPTION ABOVE) ================================================================================================================ REPORTED BY: _______________ DATE COMPLAINT RECEIVED BY COLLAGEN OR LIPOMATRIX / / DD MMM YY
CONTINUE TO PAGE 2 FOR MEDICAL COMPLAINTS Page 1 29 COLLAGEN CORPORATION INTERNATIONAL COMPLAINT REPORT FORM For Internal use only: Complaint No. ________ ARM No. _________ MEDICAL COMPLAINT INFORMATION
PATIENT ___, ____ BIRTH __/___/__ OR AGE ___ SEX ____ WEIGHT ______ HEIGHT ____ Initial Last First Date DD MMM YY yrs M/F kgs/lbs cm/inches __________________________________________________________________________________________ INDICATION FOR WAS THIS THE FIRST TIME THE DATE OF (LAST) WHAT SITES WERE IMPLANTATION/DIAGNOSIS PATIENT WAS IMPLANTED WITH IMPLANTATION IMPLANTED? THIS PRODUCT? Y/N DD/MMM/YY __________________________________________________________________________________________ __________________________________________________________________________________________
__________________________________________________________________________________________ LOCAL SYMPTOM(S) AT IMPLANT SITE(S) SITE(S) INCIDENT DATE RESOLUTION DATE DD/MMM/YY DD/MMM/YY __________________________________________________________________________________________ __________________________________________________________________________________________
Were the local symptoms considered by the physician to be product related? [ ] Yes [ ] Probably [ ] Possibly [ ] Probably not [ ] No Diagnosis or etiology for local symptoms:_________________________________
__________________________________________________________________________________________ NON-LOCAL SYMPTOM(S) SITE(S) INCIDENT DATE RESOLUTION DATE DD/MM/YY DD/MM/YY __________________________________________________________________________________________ __________________________________________________________________________________________
Were the non-local symptoms considered by the physician to be product related? [ ] Yes [ ] Probably [ ] Possibly [ ] Probably not [ ] No Diagnosis or etiology for non-local symptoms:______________________________ CONCOMITANT MEDICAL INFORMATION Relevant History __________________________________________________________ Test Site Evaluation: (Zyderm and Zyplast only) DD MMM YY Test Date __/___/__ Lot #_______ Test Response Positive? [ ] Yes [ ] No Retest Date __/___/__ Lot #_______ Retest Response Positive? [ ] Yes [ ] No Concomitant Medical Products _______________________________________________ Lab Work ___________________________________________________________________ Precipitating Events _______________________________________________________ Residual/Sequelae___________________________________________________________ TREATMENT INFORMATION: Was treatment required for the symptoms? [ ] Yes [ ] No
EFFECTIVE? __________________________________________________________________________________________ DATE MEDICAL OR SURGICAL INTERVENTION ROUTE YES NO __________________________________________________________________________________________ __________________________________________________________________________________________
- ------------------------------- -------------------------------- Collagen/Lipomatrix/Distributor Collagen/Lipomatrix/Distributor Reporter Name (please print) Reporter Signature Page 2 30 COLLAGEN CORPORATION INTERNATIONAL COMPLAINT REPORT FORM Continue to page 3 for Implant Retrieval Record as appropriate Page 3 31 COLLAGEN CORPORATION INTERNATIONAL COMPLAINT REPORT FORM For Internal Use only: Complaint No. _____________ ARM No. _____________ IMPLANT RETRIEVAL RECORD Has this complaint been previously reported? Yes [ ] No [ ] If Yes, Physician's Name: ________________, Patient's Initials: ______, Original Complaint No. (if known): ____________, Date of Explantation: ________ REASON FOR REMOVAL Routine series [ ] Liability claims [ ] Allergy [ ] Complaint [ ] Clinical Pain [ ] Research [ ] Investigation [ ] Infection [ ] Documentation [ ] Failure [ ] Other (specify) ______________
ADDITIONAL INFORMATION Antibiotics pre-op [ ] peri-op [ ] post-op [ ] prophylactic [ ]
Relevant pharmaceuticals duration _____________________________________________ _______________________________________________________________________________ Post-operative treatment ______________________________________________________ _______________________________________________________________________________ DEVICE DIAGNOSIS (PER TRIAGE) Observations prior to removal (functional) Objectives _______________________________________________________________ Observational ____________________________________________________________ Observations at removal Yes No Doubt N/A Yes No Doubt N/A Normal tissue [ ] [ ] [ ] [ ] Bone reaction [ ] [ ] [ ] [ ] Bursal fluid [ ] [ ] [ ] [ ] Discoloration [ ] [ ] [ ] [ ] Scar tissue [ ] [ ] [ ] [ ] Implant debris [ ] [ ] [ ] [ ] Loose implant [ ] [ ] [ ] [ ] Infection [ ] [ ] [ ] [ ] Granulation tissue [ ] [ ] [ ] [ ] Other (specify) [ ] [ ] [ ] [ ]
Additional Material Provided for Analyses Yes No Mammographs [ ] [ ] how many______ Tissue [ ] [ ] type____ origin____ Bacteriology specimen [ ] [ ] type____ origin____ Immunology specimen [ ] [ ] type____ origin____ Fluid [ ] [ ] type____ origin____ Photographs [ ] [ ] Pathology reports [ ] [ ] Surgical reports [ ] [ ] Additional documentation (specify)_____________________________________________
___________________________ _ _/_ _ _/_ _ Physician Signature DD MMM YY 32 EXHIBIT C SECONDMENT TERMS 33 SECONDMENT TERMS THESE SECONDMENT TERMS GOVERN, AS BETWEEN LEDERLE AND CKK, the conditions of labor, expenses, burdens therefor and the like for those individuals (hereinafter, "Seconded Persons") to be seconded and to perform work while maintaining their status as employees of Lederle. ARTICLE 1. SECONDMENT (SHUKKO). 1. LEDERLE and CKK shall agree by advance mutual consultation as to the identity of each Seconded Person, the persons who are the object thereof (taishousha), the period of secondment as well as the organizational assignment (shozoku), position (chii), responsible duties (tantou-gyoumu) and place of performance of work for the Seconded Person at CKK's place of business, and in the event that there will occur change to any of the same following secondment, notice thereof shall be given to LEDERLE by CKK no less than one month prior thereto and the consent of LEDERLE shall be obtained. 2. The period of secondment of a Seconded Person shall be two (2) years in principle. However, with regard to an individual being employed for a period previously determined by LEDERLE, in principle the period of secondment shall be from the day of commencement of the secondment until the expiration day of such determined period. 3. The time of commencement of secondment as well as the day of return each shall be the day of LEDERLE's official order (hatsureibi). ARTICLE 2. WORK. Seconded Persons, in principle, shall obey CKK's employee work rules (shuugyou-kisoku) and standing work orders and provisions (fukumu-kiritsu), and shall perform work in accordance with CKK's directions and orders (shiki-meirei). However, LEDERLE's rules and provisions shall apply with regard to salary (kyuuyo), severance allowances (taishoku-kin), severance (taishoku), dismissal (kaiko), retirement age (teinen), temporary work suspensions (kyuushoku) and the like. ARTICLE 3. WORK HOURS, DAYS OFF, LEAVES. 1. CKK's rules and provisions shall apply with regard to work hours (roudou-jikan) and days off (kyuujitsu). 2. Without regard to the foregoing Paragraph, LEDERLE's rules and provisions shall apply with regard to annual paid leave (nenji-yuukyuu-kyuuka) as well as special paid leave (tokubetsu-yuukyuu-kyuuka). ARTICLE 4. SALARY, SEVERANCE ALLOWANCE. Salary (kyuuyo) and severance allowance (taishoku-kin) shall be provided for as follows: 1) Salary: The salary (kyuuyo), bonuses (shouyo), housing allowances (juutaku teate, juutaku-hi hojo teate), family allowance (fuyou teate), meal allowance (regional allowance -- chiiki teate), commuting allowance (tsuukin teate), overtime allowance (jikangai teate) and sales allowance (gaikin teate) of Seconded Persons during the period of secondment shall be paid, subtracting miscellaneous deductions (sho-koujyogaku), by LEDERLE in accordance with LEDERLE's rules and provisions. However, when there occur difficulties in application of LEDERLE's salary rules and provisions (kyuuyo-kitei-ni-yori- gatai-jiyuu) with regard to a Seconded Person's responsible duties (tantou-gyoumu) and the like as assigned by CKK, LEDERLE and CKK shall determine the handling of the same by mutual consultation. 2) Severance Allowance: 1 34 Severance allowance (taishoku-kin) to be paid at the time of severance (taishoku) of Seconded Persons from LEDERLE shall be paid by LEDERLE in accordance with LEDERLE's own rules and provisions. ARTICLE 5. SOCIAL INSURANCE (SHAIKAI HOKEN) LEDERLE will continue to provide health insurance (kenkou hoken), welfare annuity insurance (kousei nenkin hoken) employment insurance (koyou hoken) and workmen's accident compensation (roudousha saigai hoshou) coverage for all Seconded Persons. CKK will provide workmen's accident compensation insurance (roudousha saigai hoshou hoken) coverage. ARTICLE 6. BUSINESS TRAVEL EXPENSES. CKK's rules and provisions shall apply with regard to business travel expenses (shutchou-ryohi) and travel allowances (shutchou nittou). ARTICLE 7. WELFARE BENEFITS. Welfare benefits (fukuri-kousei), in principle, shall be pursuant to LEDERLE's rules and provisions. However, CKK may apply its own rules and provisions to additionally established benefit items. ARTICLE 8. PERSONNEL EVALUATIONS. Personnel evaluations (jinji-kouka) of Seconded Persons shall be made initially by CKK and, using the same as a reference, shall be determined finally by LEDERLE pursuant to LEDERLE's own rules and provisions. Further, CKK shall provide to LEDERLE data and information necessary for such purpose. ARTICLE 9. WORK ADMINISTRATIVE MATTERS. Administrative matters regarding the work (kinmu-kanri) of Second Persons shall be performed by CKK, with report thereof to be provided LEDERLE in writing each month. ARTICLE 10. BURDENS FOR EXPENSES. 1. The respective burdens for expenses (hiyou-no-futan) with regard to Seconded Persons shall be as follows: 1) Salary (kyuuyo), bonuses (shouyo) and various allowances (sho-teate): To be borne in full by CKK. 2) Health insurance premiums (kenkou-hoken-ryou), welfare pension insurance premiums (kousei-nenkin-hoken-ryou), employment insurance premiums (koyou-hoken-ryou): CKK shall bear portion to be borne by the enterprise. 3) Workmen's accident compensation insurance premiums (roudousha-saigai-hoshou-hoken-ryou): To be borne in full by CKK. 4) Workmen's accident compensation (roudousha-saigai-hoshou): In addition to payments determined by law there shall be made supplementary payments as determined by LEDERLE and with the burden therefor to be borne by CKK. 5) Reserves for severance payments (taishoku-kyuuyo-hikiatekin): 2 35 Reserves for severance payments shall be accumulated by LEDERLE, with CKK to reimburse the amount corresponding thereto. 6) Business Travel Expenses (shutchou-ryohi) and Travel Allowances: To be borne in full by CKK. 7) Congratulations & Condolence Money (keichou-mimai-kin): To be borne by both parties in accordance with the respective rules and provisions of LEDERLE and CKK. 8) Regular Physical Examinations (teiki-kenkou-shindan) and other safety & hygiene (anzen-eisei) expenses: CKK shall bear portion to be borne by the enterprise. 9) Welfare benefits (fukuri-kousei): The burden for welfare benefits shall be determined by separate consultation and agreement of LEDERLE and CKK. However, in the event that the rules and provisions of CKK are applied in the manner provided in the proviso of Article 7, above, CKK shall bear the burden therefor. 10) Expenses regarding Training & Education (koushuu-kyouiku): CKK shall bear the total burden therefor when needed for the performance of CKK's work duties. However, in principle LEDERLE shall bear the burden in cases where a Seconded Person participates in LEDERLE's own employee education and the like. 11) Relocation expenses upon commencement & termination of secondment (tenkyo-hiyou): In the cases of the commencement of secondment and where at the termination of secondment, Seconded Persons will return to LEDERLE necessitating relocation, CKK shall bear the total burden as to the expenses therefor. 2. CKK shall pay by remittance and pursuant to invoice therefor from LEDERLE, to the account designated by LEDERLE, the costs and expenses to be borne by CKK. ARTICLE 11. PERSONAL CHANGES. In the event of any change in the family situation, address or other personal circumstances of a Seconded Person, LEDERLE and CKK shall mutually notify the other without delay. Furthermore, matters for which notice is required shall be separately determined. ARTICLE 12. CHANGE TO CONDITIONS OF WORK, ETC. In the event of revision to rules and provisions concerning established work hours (shotei-roudou-jikan), days off (kyuujitsu), leaves (kyuuka), travel expenses (ryohi), welfare benefits (fukuri-kousei) or like change to work conditions (roudou-jouken) by either LEDERLE or CKK, the other party shall be informed without delay. ARTICLE 13. COMMENDATIONS & SANCTIONS (HYOU-SHOU, SEISAI). In principle, commendations and sanctions shall be determined pursuant to CKK's rules and provisions. However, with regard to dismissal (kaiko), commendation for long years of continuous service and other items 3 36 separately determined by agreement between LEDERLE and CKK, the rules and provisions of LEDERLE shall be followed. ARTICLE 14. MAINTENANCE OF CONFIDENTIALITY. 1. Neither LEDERLE nor CKK shall divulge or disclose to a third party any business related secret of the opposite party learned in the course of performance of this Agreement. However, there shall be excepted from the foregoing publicly known matters and matters which become public other than through the responsibility of the party itself. 2. Both LEDERLE and CKK shall cause Seconded Persons to maintain as confidential each other's business secrets, and shall not allow the other party's business secrets to be disclosed or divulged, nor to be used for the party's own benefit or other purposes. ARTICLE 15. COMPENSATION FOR DAMAGES (SONGAI-BAISHOU). LEDERLE and CKK may demand from the opposite party compensation for damages in the event that the opposite party has breached the duty to maintain confidentiality pursuant to the preceding Article, or in the event of there having been suffered damages pursuant to a Seconded Person's breach of business order and discipline (kigyou-chitsujo-ihan) or the like. ARTICLE 16. EARLY TERMINATION. Pursuant to proper grounds therefor, when LEDERLE or CKK find it necessary to terminate this Agreement, or to change, suspend or stop the secondment of individual Seconded Persons, they may terminate this Agreement or make such stoppage or the like to secondment upon three (3) months' prior notice thereof to the opposite party. ARTICLE 17. PERSONS RESPONSIBLE FOR LIAISON. LEDERLE and CKK hereby determine that the following individuals are the responsible liaison persons with regard to this Agreement through whom shall occur necessary communications, notifications and coordination between the parties: LEDERLE: Personnel Manager (Head, Personnel Section) CKK: Personnel Manager ARTICLE 18. PROHIBITION OF RE-SECONDMENT. CKK may not re-second Seconded Persons to another company or the like. ARTICLE 19. ADDITIONAL MATTERS. With regard to matters not provided for in this Agreement or should there arise doubt as to the content hereof, LEDERLE and CKK shall mutually consult thereon with a spirit of good faith and sincerity, and shall resolve the same. 4 EX-21.1 3 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 COLLAGEN AESTHETICS, INC. SUBSIDIARIES* OF COLLAGEN AESTHETICS, INC. 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.
PERCENT OWNERSHIP OF OUTSTANDING VOTING SECURITIES AT AUGUST 25, JURISDICTION OF NAME 1998 INCORPORATION ---- ------------- --------------- Collagen International, Inc................................. 100% Delaware Collagen Biomedical Pty., Limited**......................... 100% Australia Collagen Vertrieb Biomedizischer, Produkte GmbH**........... 100% Austria Collagen, S.A.**............................................ 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 Biomedical Iberica, S.A.**......................... 90% Spain Collagen, S.A.**............................................ 100% Switzerland LipoMatrix, Incorporated.................................... 100% Virgin Islands Collagen (U.K) Ltd.......................................... 100% United Kingdom Collagen International Sales Corporation.................... 100% Virgin Islands Collagen KK**............................................... 100% Japan
- --------------- * Excludes certain subsidiaries, which, considered in the aggregate as a single subsidiary, did not constitute a significant subsidiary as of June 30, 1998. ** Subsidiary of Collagen International, Inc. EX-23.1 4 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 2-93777, 33-21252, 33-39684, 33-73674, 33-80038, 33-21213 and 33-43429) 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 Aesthetics, Inc. (formerly Collagen Corporation) of our report dated July 31, 1998, with respect to the consolidated financial statements and schedule of Collagen Aesthetics, Inc. included in this Annual Report (Form 10-K) for the year ended June 30, 1998. /s/ ERNST & YOUNG LLP Palo Alto, California September 25, 1998 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 12-MOS JUN-30-1998 JUL-01-1997 JUN-30-1998 7,916 0 13,764 0 12,101 53,225 14,448 0 166,339 33,526 0 0 0 109 100,531 166,339 82,772 82,772 23,958 23,958 77,378 0 56 1,313 3,207 (1,878) (12,205) 0 0 (14,083) (1.58) (1.58) FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
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