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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the quarter period ended March 31, 1995
OR
/ / Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the transition period from ______ to ______
Commission File Number: 0-10640
COLLAGEN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2300486
State of Incorporation I.R.S. Employer Identification No.
2500 Faber Place, Palo Alto, California 94303
Telephone: (415) 856-0200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of March 31, 1995, Registrant had outstanding 9,308,132 shares of common
stock, exclusive of 1,200,000 shares held by the Registrant as treasury stock.
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COLLAGEN CORPORATION
INDEX
PART I. Financial Information Page No.
--------
Condensed Consolidated Balance Sheets -
March 31, 1995 and June 30, 1994 ......................................... 3
Condensed Consolidated Statements of Income -
Three and nine months ended March 31, 1995 and 1994 ...................... 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended March 31, 1995 and 1994 ................................ 5
Notes to Condensed Consolidated Financial Statements ..................... 6-8
Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................................... 9-17
PART II. Other Information
Other Information ........................................................ 18
Signatures . . ........................................................... 19
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PART I. FINANCIAL INFORMATION
COLLAGEN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
March 31, June 30,
1995 1994
---------- ---------
ASSETS
Current assets:
Cash, cash equivalents and short-term investments $ 14,458 $ 12,736
Accounts receivable, net 12,491 12,241
Inventories 4,719 3,861
Other current assets 4,152 3,305
-------- --------
Total current assets 35,820 32,143
Property and equipment, net 16,555 17,108
Intangible assets 2,211 2,243
Investment in Target Therapeutics, Inc. 17,522 17,499
Other investments & assets 6,173 5,512
-------- --------
$ 78,281 $ 74,505
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,670 $ 1,420
Accrued liabilities 8,619 10,245
Income taxes payable 7,248 4,251
-------- --------
Total current liabilities 17,537 15,916
Long-term liabilities:
Deferred income taxes 8,240 8,240
Other long-term liabilities 1,443 1,267
Stockholders' equity:
Preferred stock, $.01 par value, authorized
5,000,000 shares; none issued and outstanding -- --
Common stock, $.01 par value, authorized 28,950,000
shares; issued 10,508,132 shares at March 31, 1995
(10,354,633 shares at June 30, 1994) 105 104
Additional paid-in capital 63,380 61,172
Retained earnings 15,248 9,882
Cumulative translation adjustment (701) (648)
Treasury stock, at cost, 1,200,000 shares at March 31, 1995
(937,500 shares at June 30, 1994) (26,971) (21,428)
-------- --------
Total stockholders' equity 51,061 49,082
-------- --------
$ 78,281 $ 74,505
======== ========
See accompanying notes.
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COLLAGEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- ----------------------
1995 1994 1995 1994
-------- -------- -------- --------
Revenues:
Product sales $ 17,032 $ 15,588 $ 51,334 $ 45,826
Other -- -- 1,000 1,000
-------- -------- -------- --------
17,032 15,588 52,334 46,826
-------- -------- -------- --------
Costs and expenses:
Cost of sales 4,451 4,382 13,667 12,972
Research & development 2,233 2,424 7,271 6,989
Selling, general & administrative 7,443 6,681 22,774 20,973
-------- -------- -------- --------
14,127 13,487 43,712 40,934
-------- -------- -------- --------
Income from operations 2,905 2,101 8,622 5,892
Other income (expense):
Gain on investments, net 2,569 -- 3,344 --
Equity in earnings (losses) of affiliates, net (427) (117) (796) (154)
Interest income 138 120 353 403
Interest expense (28) -- (83) --
-------- -------- -------- --------
Income before income taxes 5,157 2,104 11,440 6,141
Provision for income taxes 2,649 852 5,380 2,852
-------- -------- -------- --------
Net income $ 2,508 $ 1,252 $ 6,060 $ 3,289
======== ======== ======== ========
Net income per share $ .26 $ .13 $ .64 $ .33
======== ======== ======== ========
Shares used in calculating per share information 9,556 9,854 9,530 9,972
======== ======== ======== ========
See accompanying notes.
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COLLAGEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
(In thousands)
Nine Months Ended
March 31,
----------------------
1995 1994
-------- --------
Cash flows from operating activities:
Net income $ 6,060 $ 3,289
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 3,060 2,864
Gain on investments, net (3,344) --
Other adjustments related to changes in
assets and liabilities (958) (586)
-------- --------
Net cash provided by operating activities 4,818 5,567
-------- --------
Cash flows from investing activities:
Proceeds from sale and maturities of short-term investments 5,866 14,348
Purchase of short-term investments (2,926) (9,898)
Net proceeds from sale of stock of Target Therapeutics, Inc. 5,639 --
Increase in long-term investments, intangible and other assets (3,192) (2,517)
Expenditures for property and equipment (2,209) (3,543)
-------- --------
Net cash provided by (used in) investing activities 3,178 (1,610)
-------- --------
Cash flows from financing activities:
Repurchase of common stock (5,543) (13,171)
Net proceeds from issuance of common stock 2,209 2,745
-------- --------
Net cash used in financing activities (3,334) (10,426)
-------- --------
Net increase (decrease) in cash and cash equivalents 4,662 (6,469)
Cash and cash equivalents at beginning of period 5,369 9,294
-------- --------
Cash and cash equivalents at end of period $ 10,031 $ 2,825
======== ========
See accompanying notes.
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COLLAGEN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements include the accounts of
Collagen Corporation ("the Company"), a Delaware corporation, and its
wholly-owned and majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
The condensed consolidated balance sheet as of March 31, 1995, the
condensed consolidated statements of income for the three and nine months
ended March 31, 1995 and 1994, and the condensed consolidated statements of
cash flows for the nine months ended March 31, 1995 and 1994, have been
prepared by the Company, without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows
at March 31, 1995 and for all periods presented have been made. Interim
results are not necessarily indicative of results for a full fiscal year.
The condensed consolidated balance sheet as of June 30, 1994 has been
derived from the audited consolidated financial statements at that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended June
30, 1994 included in the Company's 1994 Annual Report to Stockholders.
Cash, Cash Equivalents and Short-term Investments
Effective July 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 ("FAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." In accordance with FAS 115,
prior period financial statements have not been restated to reflect the
change in accounting principle. The impact of adoption at July 1, 1994 was
immaterial. The Company's debt securities are classified as
available-for-sale and are carried at fair value in cash equivalents and
short-term investments. Unrealized gains and losses, net of tax, are
reported in stockholders' equity and were immaterial for the three and nine
months ended March 31, 1995.
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2. Inventories
Inventories consist of the following (in thousands):
March 31, 1995 June 30, 1994
-------------- -------------
Raw materials $ 566 $ 625
Work-in-process 1,476 1,763
Finished goods 2,677 1,473
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$ 4,719 $ 3,861
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3. Per Share Information
Earnings per share for the three and nine months ended March 31, 1995 and
1994 have been computed based upon the weighted average number of common
and common equivalent shares outstanding. Shares used in the per share
computations are as follows (in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ ------------------
1995 1994 1995 1994
---- ---- ---- ----
Primary
Common stock 9,286 9,549 9,319 9,629
Stock options 270 305 211 343
----- ----- ----- -----
Weighted average number of
common and common
equivalent shares
outstanding 9,556 9,854 9,530 9,972
===== ===== ===== =====
4. Income Taxes
The provision for income taxes for the nine months ended March 31, 1995 and
1994 was computed by applying the estimated annual income tax rates of
approximately 47% and approximately 46%, respectively, to income before
income taxes. The higher effective tax rate in the current fiscal year is
primarily due to increased equity in losses of certain affiliates which is
partially offset by a change in the mix of anticipated foreign and domestic
earnings and a lower effective state income tax rate.
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5. Stock Repurchase Program
In February 1993, the Company's Board of Directors authorized a stock
repurchase program. During the nine months ended March 31, 1995, the
Company repurchased 262,500 shares of its common stock at an average
acquisition price of approximately $21 per share. Subsequent to March 31,
1995, the Company repurchased 300,000 shares of its common stock at an
average acquisition price of approximately $19 per share. Since the
inception of the stock repurchase program in February 1993, the Company has
repurchased 1,500,000 shares of its common stock at an average acquisition
price of approximately $22 per share. The Company currently plans to keep
the repurchased shares as treasury stock and may use this stock in various
company stock benefit plans.
6. Net Gain on Investments
During the quarter ended March 31, 1995, the Company sold 135,000 shares of
the common stock of Target Therapeutics, Inc. ("Target") for a pre-tax gain
of approximately $3.2 million. After the sale, the Company's ownership
position in Target was reduced from approximately 32% to approximately 30%.
During the quarter ended December 31, 1994, the Company sold 35,000 shares
of Target for a pre-tax gain of approximately $775,000.
Target's common stock is quoted on the Nasdaq National Market. The closing
price of Target's stock at March 31, 1995 was $36.50 per share. The Company
held 2,124,194 shares of Target's common stock at March 31, 1995.
The Company also recorded an investment reserve of $675,000 in the quarter
ended March 31, 1995.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Collagen Corporation (the "Company") revenues have been derived primarily from
the sale of products principally used in reconstructive and cosmetic
applications for the face, the treatment of stress urinary incontinence, and in
bone repair. The Company markets its reconstructive and cosmetic products
directly and through a network of international distributors and its stress
urinary incontinence and bone repair products through marketing partners.
In addition to joint development arrangements, the Company has an active program
for developing new products through affiliated companies in which the Company
makes equity and debt investments. The Company believes the formation of new
companies allows each to focus its technology on select market segments to bring
products to market efficiently and to expand its proprietary knowledge.
Results of Operations
The following tables show for the periods indicated the percentage relationship
to product sales of certain items in the Condensed Consolidated Statements of
Income and the percentage changes in the dollar amounts of such items from
period to period.
PERCENT CHANGE
3 Mos. Ended
March 31,1995
PERCENT OF PRODUCT SALES Compared to
3 Mos. Ended 3 Mos. Ended 3 Mos. Ended
March 31,1995 March 31,1994 March 31,1994
------------- ------------- -------------
Product sales 100% 100% 9 %
Other revenues -- -- --
- --------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 26% 28% 2 %
Research and development 13% 16% (8)%
Selling, general and administrative 44% 43% 11 %
- --------------------------------------------------------------------------------------------------
Income from operations 17% 14% 38 %
- --------------------------------------------------------------------------------------------------
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PERCENT CHANGE
9 Mos. Ended
March 31,1995
PERCENT OF PRODUCT SALES Compared to
9 Mos. Ended 9 Mos. Ended 9 Mos. Ended
March 31,1995 March 31,1994 March 31,1994
------------- ------------- -------------
Product sales 100% 100% 12%
Other revenues 2% 2% --
- --------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 27% 28% 7%
Research and development 14% 15% 4%
Selling, general and administrative 44% 46% 9%
- --------------------------------------------------------------------------------------------------
Income from operations 17% 13% 46%
- --------------------------------------------------------------------------------------------------
Product sales. Product sales of $17.0 million in the three months ended
March 31, 1995 increased $1.4 million, or 9%, over the same prior-year quarter.
Product sales of $51.3 million in the nine months ended March 31, 1995 increased
$5.5 million, or 12%, over the same prior-year period.
Worldwide sales of plastic surgery and dermatological products for the
three and nine months ended March 31, 1995 were $12.3 million and $36.6 million,
respectively, up 19% and 18% from sales of $10.3 million and $31.1 million,
respectively, for the same prior-year periods. U.S. sales of plastic surgery and
dermatological products, representing 47% and 50% of worldwide sales for the
three and nine months ended March 31, 1995, respectively, increased $234,000 and
$1.9 million, or 4% and 11%, respectively, over the same prior-year periods. The
increase in sales in the current fiscal year periods was primarily due to a
price increase which was effective February 1994 as well as increases in unit
sales which may be attributable to an increase in advertising and public
relations campaigns, and increased physician interest in cosmetic procedures not
reimbursed by third party payors.
International unit sales of plastic surgery and dermatological products
for the three and nine months ended March 31, 1995 increased 49% and 29%,
respectively, over the same prior-year periods. The Company believes the
increases in the current fiscal year periods were due to successful marketing
and public relations efforts, as well as strong distributor sales and a recovery
from recessionary economic conditions in Europe. International sales in dollars
were favorably impacted by approximately $421,000 and $1.0 million in the three
and nine months ended March 31, 1995, respectively, due to favorable foreign
exchange rates, compared with the same prior-year periods. (See "Operating
Income" below.) The Company expects growth in future worldwide demand for its
plastic surgery and dermatological products to continue, but at a lower rate.
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For the three months ended March 31, 1995, product sales of Contigen(R)
Bard(R) Collagen Implant ("Contigen(R) Implant") to the Company's marketing
partner, C.R. Bard Inc. ("Bard"), were $4.1 million, which consisted of
shipments of Contigen(R) Implant of $3.2 million and income from Bard's direct
sales of Contigen(R) Implant to physician customers of approximately $924,000,
compared with product sales of $4.1 million for the same prior-year period,
which consisted of shipments of Contigen(R) Implant of $3.7 million and income
from Bard's direct sales to physician customers of approximately $434,000. For
the nine months ended March 31, 1995, product sales of Contigen(R) Implant to
Bard were $12.2 million, which consisted of shipments of Contigen(R) Implant of
$9.7 million and income from Bard's direct sales of Contigen(R) Implant to
physician customers of approximately $2.4 million, compared with product sales
of $12.2 million for the same prior-year period, which consisted of shipments of
Contigen(R) Implant of $11.7 million and income from Bard's direct sales to
physician customers of $434,000. The Company did not record any income from
Bard's direct sales of Contigen(R) Implant to physician customers in the first
half of fiscal year 1994 since Bard's direct sales of the product commenced late
in the prior-year second quarter. Minimum shipment levels of Contigen(R) Implant
to Bard in fiscal 1995 are in accordance with an agreement between the Company
and Bard. Actual shipments of Contigen(R) Implant to Bard in the next quarter
are expected to be at levels similar to those of the current fiscal quarter.
Bard currently has significant inventory of these products. No minimum purchases
are required under this agreement after June 30, 1995, and there can be no
assurance that Bard's purchases of Contigen Implant will not decrease thereafter
to the extent that Bard seeks to reduce its Contigen Implant inventory levels.
Any significant decrease in such purchases could have a material adverse effect
on the Company's operating results. While the Company intends to pursue further
agreements regarding future shipment levels, there can be no assurances that
such agreements will be reached. During the quarter ended December 31, 1994, the
Company's share of sales made by Bard to physician customers increased from 5%
to 10%, pursuant to the terms of an agreement between the Company and Bard.
Future income from Bard's direct sales of Contigen(R) Implant to physician
customers is expected to increase, but is uncertain and may fluctuate
significantly due to market demand.
For the three and nine months ended March 31, 1995, sales of
Collagraft(R) Bone Graft Matrix ("Collagraft(R) Implant") and Collagraft(R) Bone
Graft Matrix Strip ("Collagraft(R) Strip") to the Company's marketing partner,
Zimmer, Inc. ("Zimmer"), were $579,000 and $2.2 million, respectively, compared
to sales of Collagraft(R) Implant of approximately $943,000 and $1.6 million to
Zimmer in the same prior-year periods. The increase in the current nine month
period was primarily due to sales of Collagraft(R) Strip, which the Company
started shipping to Zimmer after receipt of clearance from the FDA to market
Collagraft(R) Strip in January 1994. Due to higher than expected shipments to
Zimmer in the quarter ended September 30, 1994, the Company's sales of the
Collagraft(R) Implant
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and Collagraft(R) Strip in the current fiscal quarter were at a level similar to
those reported in the fiscal quarter ended December 31, 1994. Similar levels are
expected for the next fiscal quarter.
A number of uncertainties exist surrounding the marketing and
distribution of the Company's new products, Contigen(R) Implant, Collagraft(R)
Implant and Collagraft(R) Strip. The Company's primary means of distribution for
these products is through third party firms, Bard, in the case of Contigen(R)
Implant, and Zimmer, in the case of Collagraft(R) Implant and Collagraft(R)
Strip. The Company's business and financial results could be adversely affected
in the event that either (or both) of these parties, or the Company, is unable
to market the products effectively, accurately anticipate customer demand, or
effectively manage industry-wide pricing and cost containment pressures in
health care.
Other revenues. Other revenue in the nine months ended March 31, 1995
and 1994 consisted of milestone payments of $1.0 million in each period from
Bard in accordance with an agreement between the Company and Bard. Under the
agreement, Bard is scheduled to pay a final milestone payment of $2 million to
the Company on September 30, 1995.
Cost of sales. Cost of sales as a percentage of product sales was 26%
and 27% for the three and nine months ended March 31, 1995, respectively,
compared with 28% for the same prior-year periods. The lower cost of sales as a
percentage of product sales in the current fiscal year periods was primarily due
to increased product revenues resulting from income received from Bard's direct
sales of Contigen(R) Implant to physician customers, which lowered the cost of
sales as a percentage of product sales, as well as the favorable impact of
foreign exchange rates on international product sales. Due to the high fixed
costs of the company's manufacturing facility, unit cost of sales is expected to
remain highly dependent on maintaining the current level of output at the
Company's manufacturing facility, which is heavily dependent on production of
Contigen(R) Implant. Changes in cost of sales as a percentage of sales are
contingent on the product mix of future sales for which demand and pricing
characteristics may vary.
R&D. Research and development ("R&D") expenses, which include
expenditures for regulatory compliance, were $2.2 million and $7.3 million for
the three and nine months ended March 31, 1995, respectively, compared with $2.4
million and $7.0 million for the same periods in the prior year. The increase in
R&D spending in the current fiscal nine month period was primarily attributable
to advancements in soft tissue programs, including clinical trials for
Zyplast II(R) Implant, a concentrated collagen material for soft tissue
augmentation. The Company expects R&D spending this fiscal year to be at levels
slightly higher than those of the prior year.
SG&A. Selling, general and administrative ("SG&A") expenses were $7.4
million and $22.8 million for the three and nine months ended March
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31, 1995, respectively, compared with $6.7 million and $21.0 million in, or
increases of 11% and 9%, respectively, over the same prior-year periods. The
increases in the current fiscal year periods were primarily due to higher
international spending and an unfavorable impact of foreign exchange rates,
partially offset by lower U.S. advertising and public relation campaign
expenses. SG&A expenses as a percentage of product sales were 44% for the three
and nine months ended March 31, 1995, compared to 43% and 46% for the same
prior-year periods. The Company expects SG&A spending in fiscal year 1995 to be
at levels comparable to fiscal 1994.
Operating income. Operating income was $2.9 million and $8.6 million
for the three and nine months ended March 31, 1995, respectively, compared with
$2.1 million and $5.9 million in, or an increase of 38% and 46%, respectively,
over the same prior-year periods. The increases in operating income in the
current fiscal year periods were primarily due to higher product sales,
partially offset by higher operating expenses.
Compared with foreign exchange rates for the same prior-year quarter,
the impact of foreign exchange rates in the current fiscal quarter on operating
income was a net increase of approximately $148,000, resulting from an increase
of approximately $421,000 in revenue on equivalent local currency sales,
partially offset by an increase of approximately $273,000 in operating expenses.
Compared with foreign exchange rates for the same prior-year period, the impact
of foreign exchange rates in the nine months ended March 31, 1995 on operating
income was a net increase of $323,000, resulting from an increase of
approximately $1.0 million in revenue on equivalent local currency sales,
partially offset by an increase of approximately $719,000 in operating expenses.
Gain on investments, net. In the quarter ended March 31, 1995, the
Company sold 135,000 shares of the common stock of Target Therapeutics, Inc.
("Target") for a pre-tax gain of approximately $3.2 million. In November 1994,
the Company sold 35,000 shares of Target for a pre-tax gain of approximately
$775,000. The Company also recorded an investment reserve of $675,000 in the
current fiscal quarter to write-down the carrying value of certain equity
investments due to a decline in value determined to be other than temporary.
Equity in earnings (losses) of affiliate companies. Equity in losses of
affiliate companies was $427,000 for the three months ended March 31, 1995,
compared with losses of $117,000 for the same prior-year quarter. For the nine
months ended March 31, 1995, equity in losses of affiliate companies was
$796,000, compared with losses of $154,000 in the same prior-year period. The
increases in equity in losses of affiliate companies in the three and nine month
periods in the current fiscal year over the same prior-year periods were
primarily due to increased losses recognized by affiliate companies, partially
offset by increased equity in earnings in Target. The Company currently intends
to continue to make significant
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additional investments in affiliated companies. These affiliated companies
typically are in an early stage of development and may be expected to incur
substantial losses which in turn will have an adverse effect on the Company's
operating results. Furthermore, there can be no assurance that any investments
in affiliates will result in any return nor as to the timing of such return, or
that the Company will not lose its entire investment.
Interest income. Interest income was $138,000 and $353,000 for the
three and nine months ended March 31, 1995, respectively, compared with $120,000
and $403,000 for the same prior-year periods. The increase in the current fiscal
quarter over the same period in the prior year was due to higher average
investment balances and interest rates. The decrease in the current fiscal nine
month period was primarily due to lower average investment balances resulting
from the repurchase of common stock and additional investments in affiliate
companies, partially offset by slightly higher interest rates.
Interest expense. Interest expense of $28,000 and $83,000 in the three
and nine months ended March 31, 1995 was related to a $7 million revolving
credit facility, which the Company finalized with a bank in November, 1994.
Provision for income taxes. The provision for income taxes for the nine
months ended March 31, 1995 and 1994 was computed by applying the estimated
annual income tax rates of approximately 47% and approximately 46%,
respectively, to income before income taxes. The higher effective tax rate in
the current fiscal year is primarily due to increased equity in losses of
affiliates which is partially offset by a change in the mix of anticipated
foreign and domestic earnings and a lower effective state income tax rate.
Liquidity and Capital Resources
At March 31, 1995, the Company's cash, cash equivalents and short-term
investments were $14.5 million compared to $12.7 million at June 30, 1994. Net
cash provided by operating activities was $4.8 million for the nine months ended
March 31, 1995, compared with $5.6 million provided by operating activities for
the same prior-year period.
The $4.8 million of cash provided by operating activities in the nine
month period in the current fiscal year was primarily offset by $5.5 million
used to repurchase 262,500 shares of the Company's common stock at an average
acquisition price of approximately $21 per share, $2.5 million of additional
investments in affiliate companies and the payments of aggregate cash dividend
of approximately $1.6 million, to the Company's stockholders in July 1994 and
January 1995.
The Company anticipates capital expenditures, equity investments in,
and loans to affiliate companies to be approximately $10.0 million in
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fiscal 1995. As of March 31, 1995, the Company's capital expenditures, equity
investments in, and loans to affiliate companies totaled approximately $5.1
million. The Company anticipates that the Board of Directors will review the
possibility of declaring an additional dividend before the end of the current
fiscal year. In addition, subsequent to March 31, 1995, the Company repurchased
300,000 shares of its common stock at an average acquisition price of
approximately $19 per share.
The Company's principal sources of liquidity include cash generated
from operations and its cash, cash equivalents and short-term investments. In
addition, during the fiscal quarter ended September 30, 1994, the Company's
Board of Directors authorized the Company to sell portions of its holdings of
approximately 2.3 million shares of Target's common stock. In the current fiscal
quarter, the Company sold 135,000 shares of Target common stock for a pre-tax
gain of approximately $3.2 million. In November, 1994, the Company sold 35,000
shares of its Target common stock for a pre-tax gain of approximately $775,000.
The aggregate pre-tax sales proceeds of these two sales were approximately $5.6
million. The Company anticipates that stock sales pursuant to the authorization
will be made from time to time, under SEC Rule 144, with the objective of
generating cash, for, among other things, further investments in both current
and new affiliate companies. In addition, the Company established a $7.0 million
revolving credit facility with a bank in November 1994. The Company may use
funds from this source for general corporate purposes. The Company believes that
these sources should be adequate to fund its anticipated cash needs through at
least the next twelve months.
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Factors That May Affect Future Results of Operations
The Company's manufacturing activities and products sold in the United
States are subject to extensive and rigorous regulations by the FDA and by
comparable agencies in certain foreign countries where these products are
manufactured or distributed. The FDA regulates the manufacture and sales of
medical devices in the U.S., including labeling, advertising and recordkeeping.
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 both inside and outside of the U.S. could adversely affect the
Company, as could product recalls.
A large portion of the Company's revenues in recent years has come from
its international operations. As a result, the Company's operations and
financial results could be significantly affected by international factors,
including numerous regulatory agencies, changes in foreign currency exchange
rates and foreign economic and political conditions generally. The Company's
operating strategy takes into account changes in exchange rates over time;
however, the Company's results of operations can be significantly affected by
fluctuations in foreign currency exchange rates.
Although the Company has been the subject of recent positive publicity,
it has been and may be in the future the subject of negative publicity, which
can arise from various sources, ranging from the news media on cosmetic
procedures in general to legislative and regulatory investigations specific to
the Company concerning, among other things, the safety and efficacy of its
collagen-based products. The Company has cooperated fully with all such
investigations and is confident of the safety and effectiveness of its
collagen-based products; however, there can be no assurance that such
investigations or negative publicity from such investigations or from the news
media will not result in a material adverse effect on the Company's future
financial position, its results of operations or the market price of its stock.
In addition, significant negative publicity could result in an increased number
of product liability claims.
The Company is involved in various legal actions arising in the course
of business, some of which involve product liability claims. The Company
operates in an industry susceptible to significant product liability claims that
may allege 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. It is possible that adverse product liability actions could
negatively affect the Company's ability to obtain and maintain regulatory
approval for its products.
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All of the Company's manufacturing capacity, the majority of its
research and development activities, its corporate headquarters, and other
critical business functions are located near major earthquake faults. In
addition, all of the manufacturing capacity is located in a single facility,
with the Company currently maintaining only limited amounts of finished product
inventory. 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.
Due to the factors noted above, as well as other factors that may
affect the Company's operating results, the Company's future earnings and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in revenue or earnings from levels expected by securities
analysts could have an immediate and significant adverse effect on the trading
price of the Company's common stock in any given period. Additionally, the
Company may not learn of, or be able to confirm, such shortfalls until late in
the fiscal quarter, or following the end of the quarter, which could result in
an even more immediate and adverse effect on the trading price of the Company's
common stock. Finally, the Company participates in a highly dynamic industry,
which often results in significant volatility of the Company's common stock
price.
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PART II. OTHER INFORMATION
COLLAGEN CORPORATION
Item 1. Legal Proceedings
On December 21, 1994, the Company filed suit against Matrix
Pharmaceutical, Inc., ("Matrix") alleging fraud, misappropriation of
trade secrets, unfair competition, breach of fiduciary duty, inducing
breach of contract, breach of duty of loyalty and tortious
interference. The Company alleges that Matrix, which uses collagen for
certain drug delivery applications, unlawfully obtained the Company's
confidential and proprietary information relating to the Company's
products and operations by hiring ten former employees that the
Company alleges had access to or were knowledgeable about the
Company's proprietary information. On February 12, 1995, Matrix denied
the Company's allegations and filed a cross-complaint charging the
Company with, among other things, unfair competition, defamation and
restraint of trade. Matrix also has requested certain declaratory
relief. Howard Palefsky, Chairman of the Board and Chief Executive
Officer, was personally named as an additional defendant to the Matrix
defamation charge. The Company intends to vigorously contest Matrix'
charges.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 27 - Financial Data Schedule
B. Report on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COLLAGEN CORPORATION
Date: May 12, 1995 /s/David Foster
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David Foster
Vice President and
Chief Financial Officer
(Principal Financial
and Accounting Officer)
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EXHIBIT INDEX
Ex. 27 Financial Data Schedule