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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, 1996
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ______ to ______
Commission File Number: 0-10640
COLLAGEN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2300486
State of Incorporation I.R.S. Employer Identification No.
2500 Faber Place, Palo Alto, California 94303
Telephone: (415) 856-0200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of April 30, 1996, Registrant had outstanding 8,888,323 shares of common
stock, exclusive of 1,675,000 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, 1996 and June 30, 1995 ................................ 3
Condensed Consolidated Statements of Income -
Three and nine months ended March 31, 1996 and 1995 .............. 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended March 31, 1996 and 1995 ........................ 5
Notes to Condensed Consolidated Financial Statements ............. 6-10
Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................. 11-19
PART II Other Information
Other Information ................................................ 20-22
Signatures ....................................................... 23
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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,
1996 1995
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 30,806 $ 6,155
Short-term investments 905 3,229
Accounts receivable, net 10,265 13,402
Inventories, net 8,304 5,056
Other current assets, net 7,192 5,568
------------ ------------
Total current assets 57,472 33,410
Property and equipment, net 15,849 16,506
Intangible assets and goodwill, net 10,629 2,727
Investment in Target Therapeutics, Inc. (1) 118,727 17,570
Other investments & assets, net 11,185 6,693
------------ ------------
$ 213,862 $ 76,906
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,005 $ 2,250
Other accrued liabilities 9,706 10,862
Note payable 5,000
Income taxes payable 9,950 5,902
------------ ------------
Total current liabilities 27,661 19,014
Long-term liabilities:
Deferred income taxes 53,275 8,478
Other long-term liabilities 2,814 1,494
Stockholders' equity:
Preferred stock, $.01 par value, authorized:
5,000,000 shares; none issued and outstanding -- --
Common stock, $.01 par value, authorized: 28,950,000
shares, issued: 10,562,783 shares at March 31, 1996
(10,519,632 shares at June 30, 1995), outstanding: 8,887,783
shares at March 31, 1996 (9,019,632 shares at June 30, 1995) 106 106
Additional paid-in capital 64,581 63,855
Retained earnings 36,933 17,273
Cumulative translation adjustment (630) (604)
Unrealized gain on available-for-sale investments 64,866
Treasury stock, at cost, 1,675,000 shares at March 31, 1996
(1,500,000 shares at June 30, 1995) (35,744) (32,710)
------------ ------------
Total stockholders' equity 130,112 47,920
------------ ------------
$ 213,862 $ 76,906
============ ============
(1) At March 31, 1996, the Company's investment in Target Theurapeutics, Inc.
has been classifed as available-for-sale and shown at estimated fair value.
At June 30, 1995, the investment was accounted for by the equity method.
(See Note 3.)
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,
----------------------- -----------------------
1996 1995 1996 1995
-------- -------- -------- --------
Revenues:
Product sales $ 16,587 $ 17,032 $ 50,410 $ 51,334
Other -- -- 2,000 1,000
-------- -------- -------- --------
16,587 17,032 52,410 52,334
-------- -------- -------- --------
Costs and expenses:
Cost of sales 5,207 4,451 14,278 13,667
Selling, general & administrative 10,051 7,443 28,820 22,774
Research & development 3,424 2,233 8,928 7,271
Acquired in-process research and development -- -- 14,800 --
-------- -------- -------- --------
18,682 14,127 66,826 43,712
-------- -------- -------- --------
Income (loss) from operations (2,095) 2,905 (14,416) 8,622
Other income (expense):
Net gain on investments, principally Target Therapeutics, Inc. 36,285 2,569 67,672 3,344
Equity losses of affiliates, net (690) (427) (783) (796)
Interest income 291 138 742 353
Interest expense (35) (28) (87) (83)
-------- -------- -------- --------
Income before income taxes 33,756 5,157 53,128 11,440
Provision for income taxes 14,356 2,649 32,809 5,380
-------- -------- -------- --------
Net income $ 19,400 $ 2,508 $ 20,319 $ 6,060
======== ======== ======== ========
Net income per share $ 2.14 $ .26 $ 2.24 $ .64
======== ======== ======== ========
Shares used in calculating per share information 9,084 9,556 9,086 9,530
======== ======== ======== ========
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,
-----------------------
1996 1995
-------- --------
Cash flows from operating activities:
Net income $ 20,319 $ 6,060
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Acquired in-process research and development 14,800 --
Depreciation and amortization 4,429 3,060
Gain on investments, net (67,672) (3,344)
Changes in assets and liabilities:
Income taxes payable 4,048 2,997
Other (4,301) (3,955)
-------- --------
Net cash provided by (used in) operating activities (28,377) 4,818
-------- --------
Cash flows from investing activities:
Net proceeds from sale of stock of Target Therapeutics, Inc. 81,338 5,639
Proceeds from sales and maturities of short-term investments 4,043 5,866
Purchase of short-term investments (1,719) (2,926)
Expenditures for property and equipment,net (1,769) (2,209)
Increase in intangible and other assets (1,730) (645)
Expenditures for investments in and loans to affiliates (8,972) (2,547)
Acquisition of LipoMatrix, Incorporated, net of cash balances (22,608) --
Accrued purchase consideration and other costs of
acquisition of LipoMatrix 2,359 --
-------- --------
Net cash provided by investing activities 50,942 3,178
-------- --------
Cash flows from financing activities:
Repurchase of common stock (3,034) (5,543)
Net proceeds from issuance of common stock 726 2,209
Dividends paid (676) --
Proceeds from bank borrowings 5,070 --
-------- --------
Net cash used in financing activities 2,086 (3,334)
-------- --------
Net increase in cash and cash equivalents 24,651 4,662
Cash and cash equivalents at beginning of period 6,155 5,369
-------- --------
Cash and cash equivalents at end of period $ 30,806 $ 10,031
======== ========
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. Investments in
unconsolidated subsidiaries, and other investments in which the Company has
a 20% to 50% interest or otherwise has the ability to exercise significant
influence, are accounted for under the equity method (See note 3).
The condensed consolidated balance sheet as of March 31, 1996, the
condensed consolidated statements of income for the three and nine months
ended March 31, 1996 and 1995, and the condensed consolidated statements of
cash flows for the nine months ended March 31, 1996 and 1995, have been
prepared by the Company, without audit. In the opinion of management, all
necessary adjustments (which include only normal recurring adjustments)
have been made to present fairly the financial position, results of
operations and cash flows at March 31, 1996, and for all periods presented.
Interim results are not necessarily indicative of results for a full fiscal
year. The condensed consolidated balance sheet as of June 30, 1995, has
been derived from the audited consolidated financial statements at that
date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended June
30, 1995, included in the Company's 1995 Annual Report on Form 10-K.
Cash, Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with a maturity from
date of purchase of three months or less to be cash equivalents. Short-term
investments consist principally of bankers acceptances, commercial paper
and master notes and have maturities greater than ninety days, but not
exceeding one year.
The Company's marketable debt and equity securities are classified as
available-for-sale. Their carrying value approximates fair value (other
than the Company's investment in Target stock) because of the short
maturity of these investments. The Company determines the appropriate
classification of marketable debt and equity securities at the time of
purchase and re-evaluates such designation as of each balance sheet date.
Realized and unrealized gains and
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losses were immaterial for the three and nine months ended March 31,
1996 and 1995.
Intangible assets and goodwill
The cost of identified intangible assets (customer lists, purchased
developed technology, etc.) is generally amortized on a straight-line basis
over periods from 2 to 7 years. The excess cost over the fair value of net
assets acquired (goodwill) is generally amortized on a straight-line basis
over periods generally not exceeding 7 years. The carrying value of
intangible assets and goodwill is reviewed on a regular basis for the
existence of facts or circumstances both internally and externally that may
suggest impairment. To date no such impairment has been indicated.
2. Inventories
Inventories consist of the following (in thousands):
March 31, 1996 June 30, 1995
-------------- -------------
Raw materials $ 897 $ 684
Work-in-process 4,450 1,845
Finished goods 2,957 2,527
----------------- ------------------
$ 8,304 $ 5,056
================= ==================
3. Investment in Target Therapeutics, Inc.
During the quarter ended March 31, 1996, the Company sold 740,000 shares of
Target Therapeutics, Inc. ("Target") common stock for a pre-tax gain of
approximately $36.3 million. Target's common stock is quoted on The Nasdaq
Stock Market. The closing price of Target's stock at March 31, 1996, was
$60.625 per share. As of March 31, 1996, the Company's ownership position
in Target was approximately 13% (1.9 million shares). During December 1995,
the Company's interest in Target fell below 20%. Subsequent to that date,
given that the Company does not have the ability to exercise significant
influence, it will no longer account for the investment on the equity
basis.
At March 31, 1996, the Company's shares of Target common stock are
classified as available-for-sale. The unrealized gain on these
available-for-sale securities has been reported as a separate component of
stockholders' equity, net of tax. A summary of the Target stock as of March
31, 1996 (in thousands):
Gross Gross
Unrealized Unrealized Estimated Fair
Cost Gain Losses Value
---- ---- ------ -----
Target Common Stock $ 9,064 $109,663 $ 0 $118,727
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4. Acquisition of LipoMatrix
LipoMatrix is the developer and manufacturer of the Trilucent(TM) breast
implant, which is the first commercially available triglyceride-filled
mammary implant in the world. The Company recently introduced the
Trilucent(TM) implant in Europe and plans to introduce it in most countries
of Western Europe over the remainder of the current fiscal year.
On August 22, 1995, as part of the Company's strategy to expand in its
marketing franchise in cosmetic medicine, the Company entered into a stock
purchase agreement ("Agreement") with certain of the stockholders of
LipoMatrix to purchase approximately 50% of its outstanding securities on a
fully diluted basis. The Company also entered into discussions with certain
of LipoMatrix's management and employees to purchase the remaining 10% of
the outstanding securities of LipoMatrix 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. In connection with the Agreement, certain LipoMatrix's shareholders
granted to the Company an irrevocable proxy covering the voting rights of
approximately 50% of the outstanding securities.
The acquisition of LipoMatrix, which was accounted for as a purchase, had
an aggregate purchase price of approximately $23.7 million, which was
determined as follows:
(in thousands)
Payable to LipoMatrix's shareholders ........... $20,990
Assumption of LipoMatrix's liabilities in excess
of LipoMatrix's assets ......................... 926
Balance of the Company's investment in
LipoMatrix prior to date of acquisition ........ 909
Direct acquisition costs ....................... 830
-------
$23,655
=======
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. The amount allocated to in-process research and
development was expensed in the nine months ended March 31, 1996. The
Company's results of operations for the nine months ended March 31, 1996,
include LipoMatrix's results from August 22, 1995, through March 31, 1996.
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The unaudited pro forma results of operations of the Company for the nine
months ended March 31, 1996 and 1995, respectively, assuming the
acquisition of LipoMatrix occurred on July 1, 1994, on the bases described
above with all material intercompany transactions eliminated, are as
follows:
Nine months ended March 31, 1996 1995
---------------------------------------------------------------------------
(in thousands, except income per share)
Total revenues $52,425 $52,334
Net income 34,103 1,868
Net income per share 3.75 .20
The unaudited pro forma net income and per share amounts above do not
include a charge for in-process research and development of $14.8 million
arising from the acquisition of LipoMatrix. The pro forma results reflect
amortization of acquired goodwill and other intangible assets.
The unaudited pro forma information is not necessarily indicative of the
actual results of operations had the transaction occurred at the beginning
of the periods indicated, nor should it be used to project the Company's
results of operations for any future dates or periods.
5. Stock Repurchase Program
In February 1993, the Company's Board of Directors authorized a stock
repurchase program. Since the inception of the stock repurchase program in
February 1993, the Company has repurchased 1,675,000 shares of its common
stock at an average acquisition price of approximately $21 per share. No
shares were repurchased during the quarter ended March 31, 1996, and of
such date, the Company is authorized to repurchase an additional 125,000
shares under the program. The Company currently plans to keep the
repurchased shares as treasury stock and may use this stock in various
company stock benefit plans.
6. Income Taxes
The provision for income taxes for the nine months ended March 31, 1996 and
1995, was computed by applying the estimated annual income tax rates of
approximately 48% (excluding the impact of the acquired in-process research
and development charge for which no tax benefit is available) and 47%,
respectively, to income before income taxes. The higher effective tax rate
in the current year to date period was primarily due to consolidated losses
in foreign subsidiaries for which no tax benefit is available and increased
write-downs of certain equity investments, partially offset by equity
losses of certain affiliates which decreased as a percentage of income
before income taxes.
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7. Per Share Information
Income per share for the three and nine months ended March 31, 1996 and
1995, have been computed based upon the weighted average number of common
stock and dilutive common stock equivalent shares outstanding. Shares used
in the per share computations are as follows (in thousands):
Three Months Ended Nine Months Ended
------------------ -----------------
March 31, March 31,
--------- ---------
1996 1995 1996 1995
----- ----- ----- -----
Primary:
Common stock 8,885 9,286 8,931 9,319
Stock options 199 270 155 211
----- ----- ----- -----
Weighted average number of
common stock and dilutive
common stock equivalent
shares outstanding 9,084 9,556 9,086 9,530
===== ===== ===== =====
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters discussed in
this report are forward-looking statements that involve certain risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. Potential risks and uncertainties include,
without limitation, those mentioned in this report and, in particular the
factors described below under "Factors That May Affect Future Results of
Operations."
The Company
Collagen Corporation (the "Company") is a technology-based company that
develops, manufactures and markets biomedical devices for the treatment of
defective, diseased, traumatized or aging human tissues.
The Company's revenues are derived primarily from the sale of products
principally used in reconstructive and cosmetic applications, 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.
On August 22, 1995, as part of the Company's strategy to expand in its
marketing franchise in cosmetic medicine, the Company entered into a stock
purchase agreement ("Agreement") with certain of the stockholders of
LipoMatrix, Incorporated ("LipoMatrix"), a developer and manufacturer of the
Trilucent(TM) breast implant ("Trilucent(TM) Implant"), to purchase
approximately 50% of the outstanding securities of LipoMatrix on a fully
diluted basis. The Company also entered into an 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. In connection with the
Agreement, certain LipoMatrix's shareholders granted to the Company an
irrevocable proxy covering the voting rights of approximately 50% of the
outstanding securities.
The acquisition of LipoMatrix, which was accounted for as a purchase, had an
aggregate purchase price of approximately $23.7 million (See Note 4 to Condensed
Consolidated Financial Statements). 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.
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
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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 Consolidated Statements of Income.
PERCENT OF PRODUCT SALES
Three Months Ended Nine Months Ended
------------------ -----------------
March 31, March 31,
--------- ---------
1996 1995 1996 1995
---- ---- ---- ----
Product sales 100% 100% 100% 100%
Other revenues -- -- 4% --
Costs and
expenses:
Cost of sales 31% 26% 28% 27%
Selling,
general and
administrative 61% 44% 57% 44%
Research and
development 21% 13% 18% 14%
Product sales. Product sales of $16.6 million in the three months ended March
31, 1996, decreased approximately $400,000, or 2%, over the same prior-year
quarter. Product sales of $50.4 million in the nine months ended March 31, 1996,
decreased approximately $900,000, or 2%, compared to product sales of $51.3
million for the same prior-year period. The decrease in sales was primarily due
to the decrease in shipments of Contigen(R) Bard(R) Collagen Implant
("Contigen(R) Implant"), partially offset by the favorable impact of foreign
exchange rates of approximately $153,000 and $658,000, respectively, for the
three and nine months ended March 31, 1996, compared with the same periods in
the prior year. (See "Operating Income " below.)
Worldwide sales of plastic surgery and dermatological products for the three and
nine months ended March 31, 1996, were $14.2 million and $43.2 million,
respectively, up 16% and 18% from sales of $12.3 million and $36.6 million,
respectively, for the same periods in the prior year. The increase in sales was
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attributable in part to the launch of the Trilucent(TM) breast implant (a new
triglyceride-filled mammary implant) in Europe. Total unit sales of
Zyderm/Zyplast increased 12% and 21% on a worldwide basis compared with the same
periods in the prior year. The Company believes the increase in sales in the
current fiscal year periods was a result of strong distributor sales, especially
in Japan, an increase in advertising and public relations campaigns, an
improvement in the overall environment for products in the Company's sector of
the health care industry, the launch of new syringe configurations and increased
physician interest in cosmetic procedures not reimbursed by third-party payers.
The Company anticipates continued growth in future worldwide demand for its
plastic surgery and dermatological products, but at rates lower than achieved in
the current year periods.
During the three and nine months ended March 31, 1996, pursuant to terms of an
agreement between the Company and C.R. Bard Inc. ("Bard"), the Company's
marketing partner for Contigen(R) Implant, the Company recorded income of $1.5
million and $4.3 million, respectively, from Bard based on Bard's direct sales
of Contigen(R) Implant to physician customers. In June 1995, the Company
announced that it expected to ship little, if any, Contigen(R) Implant to Bard
during fiscal year 1996 due to excess inventory at Bard. The Company recorded
minimal income from shipments of Contigen(R) Implant to Bard in the nine months
ended March 31, 1996. In the three and nine months ended March 31, 1995,
respectively, the Company recorded income of $3.2 million and $9.7 million,
respectively, from shipments of Contigen(R) Implant to Bard. The Company also
recorded income of approximately $900,000 and $2.4 million, respectively, from
Bard's direct sales of Contigen(R) Implant to physician customers during the
three and nine months ended March 31, 1995, respectively. Future income from
Bard's direct sales of Contigen(R) Implant to physician customers is expected to
continue, but may fluctuate significantly due to market demand. As a result of
the foregoing, total revenues from Contigen(R) Implant during fiscal 1996 are
expected to decline by more than 50 percent compared with fiscal 1995.
For the three and nine months ended March 31, 1996, 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 approximately $664,000 and $2.5 million, respectively, compared
to combined sales of Collagraft(R) Implant and Collagraft(R) Strip of
approximately $579,000 and $2.2 million to Zimmer in the same periods in the
prior year.
A number of uncertainties exist surrounding the marketing and distribution of
Contigen(R) Implant, Collagraft(R) Implant and Collagraft(R) Strip. The
Company's primary means of distribution for these products is through third
party firms, Bard, in the case of Contigen(R) Implant, and Zimmer, in the case
of Collagraft(R) Implant and Collagraft(R) Strip. The Company's business and
financial results could be adversely affected in the event that either or both
of these parties are unable to effectively market the products, accurately
anticipate customer demand, or effectively manage industry-wide pricing and cost
containment pressures in health care.
Other revenues. Other revenues in the nine months ended March 31, 1996,
consisted of a final milestone payment of $2 million from Bard in accordance
with an
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agreement between the Company and Bard. The Company recorded a milestone payment
of $1 million from Bard in the same prior-year period.
Cost of sales. Cost of sales as a percentage of product sales was 31% and 28%
for the three and nine months ended March 31, 1996, compared with 26% and 27%
for the same periods in the prior year. The higher cost of sales as a percentage
of product sales in the current fiscal quarter was primarily due to the
inclusion of initial start up manufacturing costs of Trilucent(TM) Implant,
which is currently being launched in Europe. Unit cost of sales for
collagen-based products was considerably higher in the current fiscal year due
to decreased production volumes, primarily of Contigen(R) Implant. Due to the
high fixed costs of the Company's manufacturing facility, unit cost of sales is
expected to remain highly dependent on the level of output at the Company's
manufacturing facility, which is heavily dependent on production of Contigen(R)
Implant. For all products other than Trilucent(TM) Implant, the Company
anticipates that unit cost will be higher in fiscal 1996 compared to fiscal 1995
as a result of minimal or no shipments of Contigen(R) Implant to Bard. Cost of
sales as a percentage of sales is also contingent on the product mix of future
sales for which demand and pricing characteristics may vary.
SG&A. Selling, general and administrative ("SG&A") expenses were $10.1 million
and $28.8 million for the three and nine months ended March 31, 1996,
respectively, an increase of 35% and 27% over $7.4 million and $22.8 million,
respectively, for the same periods in the prior year. SG&A expenses as a
percentage of product sales were 61% and 57% for the three and nine months ended
March 31, 1996, compared to 44% for both of the same periods in the prior year.
The increase in SG&A expenses in the current fiscal year resulted primarily from
the inclusion of the operating results of LipoMatrix and amortization expenses
on purchased intangibles and goodwill resulting from the acquisition of
LipoMatrix and higher U.S. advertising and public relation campaign expenses.
Additionally, the increase was attributable to the costs of launching
Trilucent(TM) Implant in Europe and higher international spending related to an
overall increase in sales. The Company expects SG&A expenses this fiscal year,
both in absolute dollars and as a percentage of product sales, to be at levels
higher than those of the prior year, primarily due to the inclusion of the
operating results of LipoMatrix, and the continued costs of launching
Trilucent(TM) Implant in Europe.
R&D. Research and development ("R&D") expenses, which include expenditures for
regulatory compliance, were $3.4 million and $8.9 million (21% and 18% of
product sales) for the three and nine months ended March 31, 1996, respectively,
an increase of 53% and 23% over $2.2 million and $7.3 million (13% and 14% of
product sales), respectively, for the same periods in the prior year. The
increase in R&D spending in the current fiscal year periods was primarily
attributable to R&D spending incurred by LipoMatrix, partially offset by
completion of soft tissue programs and lower expenses related to ISO 9000
certification. The Company expects R&D spending for this fiscal year, both in
absolute dollars and as a percentage of product sales, to be at levels higher
than those of the prior year due to the inclusion of the operating results of
LipoMatrix.
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Acquired in-process research and development. The charge for acquired in-process
research and development ("in-process R&D") of $14.8 million in the nine months
ended March 31, 1996, was a non-recurring charge related to the acquisition of
LipoMatrix. The value attributed to the in-process R&D was determined by an
independent appraisal.
Operating income/loss. Operating loss was $2.1 million for the three months
ended March 31, 1996, compared with an operating income of $2.9 million from the
same prior-year period. The Company's consolidated operating loss was $14.4
million for the nine months ended March 31, 1996, compared with an operating
income $8.6 million from the same prior-year period. The loss in the current
fiscal year was primarily due to the acquisition-related, non-recurring,
in-process R&D charge of $14.8 million. Excluding this acquisition related,
non-recurring R&D charge, operating income would have been approximately
$384,000, for the nine months ended March 31, 1996, as compared with operating
income of $8.6 million for the nine months ended March 31, 1995. The decrease in
the current fiscal year was primarily due to inclusion of the operating expenses
of LipoMatrix.
Compared with foreign exchange rates for the same prior-year quarter, the impact
of foreign exchange rates in the current fiscal quarter on operating income was
a net increase of $4,000, resulting from an increase of approximately $153,000
in revenue on equivalent local currency sales, partially offset by an increase
of approximately $149,000 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, 1996, on operating income was a net increase of
$56,000, resulting from an increase of approximately $658,000 in revenue on
equivalent local currency sales, partially offset by an increase of
approximately $602,000 in operating expenses.
Gain on investments, net. In the three months ended March 31, 1996, the Company
recorded a net gain on investments of $36.3 million, resulting from the sale of
740,000 shares of Target Therapeutics, Inc. ("Target") common stock. In the nine
months ended March 31, 1996, the Company recorded a net gain on investments of
$67.7 million, resulting from the sale of 1,440,000 shares of common stock of
Target for a pre-tax gain of approximately $71.7 million, partially offset by
the recording of investment reserves of an aggregate of $4.0 million 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 $690,000 for the three months ended March 31, 1996, compared to
equity in losses of $427,000 for the same prior-year quarter. For the nine
months ended March 31, 1996, equity in losses of affiliate companies was
$783,000, compared with losses of $796,000 in the same prior-year period. The
increase in losses in the current fiscal quarter over the same period in the
prior year were due to decreased equity in earnings in Target and increased
losses recognized by other affiliate companies, partially offset by decreased
equity in losses in LipoMatrix, which
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the Company discontinued accounting for under the equity method after its
acquisition in August 1995.
The Company intends to continue to expand its new product development activities
through more equity investments in or loans to affiliate companies. These
affiliate companies typically are in an early stage of development and may be
expected to incur substantial losses which in turn will have an adverse effect
on the Company's 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.
As of December 1995, the Company had less than a 20% interest in Target and does
not have the ability to exercise significant influence. Therefore, the Company
will be accounted for on the cost method.
During the period ending March 31, 1996, Collagen made an initial investment of
$4.5 million in Pharming B.V., an early stage development company. The
investment will be accounted for on the cost method, as the Company holds less
than a 20% interest in Pharming B.V.
Interest income. Interest income was $291,000 and $742,000 for the three and
nine months ended March 31, 1996, respectively, compared with $138,000 and
$353,000 for the same periods in the prior year. The increase in the current
fiscal year was primarily due to higher average short-term investment balances,
resulting primarily from the sale of Target stock, and higher interest rates.
Income tax. The provision for income taxes for the nine months ended
March 31, 1996 and 1995, was computed by applying the estimated annual income
tax rates of approximately 48% (excluding the impact of the acquired in-process
research and development charge for which no tax benefit is available) and 47%,
respectively, to income before income taxes. The higher effective tax rate in
the current year to date period was primarily due to consolidated losses in
foreign subsidiaries for which no tax benefit is available and increased
write-downs of certain equity investments, partially offset by equity losses of
certain affiliates which decreased as a percentage of income before income
taxes.
Liquidity and Capital Resources
At March 31, 1996, the Company's cash, cash equivalents and short-term
investments were $31.7 million compared to $9.4 million at June 30, 1995. Net
cash used in operating activities was approximately $28.4 million in the nine
months ended March 31, 1996, compared to approximately $4.8 million of net cash
provided by operating activities for the same prior-year period.
The $28.4 million of net cash used in operating activities was mainly
attributable to $26.1 million of estimated tax payments made during the year, of
which a significant portion was related to estimated taxes due on the sales of
Target stock. Net cash provided by investing and financing activities of
approximately $53.0 million was
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primarily due to a pre-tax gain of approximately $71.7 million ($81.3 million
proceeds less cost basis of $9.6 million) from the sale of 1,440,000 shares of
common stock of Target by the Company during the nine months ended March 31,
1996, and $5.0 million received from the revolving credit facility, partially
offset by payments of approximately $22.6 million for the acquisition of
LipoMatrix, payments of approximately $9.0 million for additional investments in
and loans to affiliates, payments of approximately $3.0 million to repurchase
125,000 shares of the Company's common stock at an average acquisition price of
approximately $18.00 per shares, and payments of an aggregate cash dividend of
approximately $676,000 to the Company's stockholders in July 1995.
The Company anticipates capital expenditures, equity investments in, and loans
to affiliate companies to be approximately $23.6 million in fiscal 1996. As of
March 31, 1996, the Company's capital expenditures, equity investments in, and
loans to affiliate companies totaled approximately $10.7 million. In June 1995,
the Company was authorized by the Board of Directors to repurchase an additional
300,000 shares of the Company's common stock in the open market, of which the
Company has repurchased 175,000 shares as of March 31, 1996.
The Company's principal sources of liquidity include cash generated from
operations and its cash, cash equivalents and short-term investments. In
addition, during the fiscal quarter ended September 30, 1994, the Company's
Board of Directors authorized the Company to sell portions of its holdings then
of approximately 2.3 million shares of Target's common stock. Between July 1,
1994 and March 31, 1996, the Company sold an aggregate of 2,630,000 (adjusted
for a two-for-one stock spilt) shares of Target common stock for an aggregate
pre-tax gain of approximately $77.4 million ($89.7 million proceeds less cost
basis of $12.3 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, which
was subsequently increased to $15.0 million in December 1995. As of April 30,
1996, $10.0 million of this credit facility remained unused. The Company
believes that these sources should be adequate to fund its anticipated cash
needs through at least the next twelve months.
Factors That May Affect Future Results of Operations
A large portion of the Company's revenues in recent years has come from its
international operations. As a result, the Company's operations and financial
results could be significantly affected by international factors, including
numerous regulatory agencies, changes in foreign currency exchange rates and
foreign economic and political conditions generally. The Company's operating
strategy takes into account changes in these factors over time; however, the
Company's results of operations could be significantly affected in the short
term by fluctuations in foreign currency exchange rates or disruptions to
shipments.
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All of the Company's manufacturing capacity for collagen products, the majority
of its research and development activities, its corporate headquarters, and
other critical business functions are located near major earthquake faults. In
addition, all of the Company's manufacturing capacity for collagen-based
products and Trilucent(TM) Implant are located in two primary facilities (one
for collagen-based products and one for Trilucent(TM) Implant), with the Company
currently maintaining only limited amounts of finished product inventory. While
the Company has some limited protection in the form of disaster recovery
programs and basic insurance coverages, the Company's operating results and
financial condition would be materially adversely affected in the event of a
major earthquake, fire or other similar calamity, affecting its manufacturing
facilities.
The Company is involved in various legal actions arising in the course of
business, some of which involve product liability and intellectual property
claims. The Company operates in an industry susceptible to claims that may
allege that the use of the Company's technology or products has resulted in
adverse effects or infringes on third-party technology. With respect to product
liability claims, such risks will exist even with respect to those products that
have received or in the future may receive regulatory approval for commercial
sale. It is possible that adverse product liability or intellectual property
actions could negatively affect the Company's future results of operations.
The Company has been and may be in the future the subject of negative publicity,
which can arise from various sources, ranging from the news media on cosmetic
procedures in general to legislative and regulatory investigations specific to
the Company concerning, among other things, the safety and efficacy of its
products. The Company is confident of the safety and effectiveness of its
products; however, there can be no assurance that such investigations or
negative publicity from such investigations or from the news media will not
result in a material adverse effect on the Company's future financial position,
its results of operations or the market price of its stock. In addition,
significant negative publicity could result in an increased number of product
liability claims.
The Company's manufacturing activities and products sold in the United States
are subject to extensive and rigorous regulations by the FDA and by comparable
agencies in certain foreign countries where these products are manufactured or
distributed. The FDA regulates the manufacture and sale of medical devices in
the U.S., including labeling, advertising and record keeping. Failure to obtain,
or delays in obtaining, the required regulatory approvals for new products
(including, without limitation, Trilucent(TM) Implant), as well as product
recalls, both inside and outside of the U.S. could adversely affect the Company.
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
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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.
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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 tortuous
interference. The Company alleges that Matrix, which uses collagen for
certain drug delivery applications, unlawfully obtained the Company's
confidential and proprietary information relating to Collagen's
products and operations by hiring ten former employees that the Company
alleges had access to or were knowledgeable about the Company's
proprietary information. On February 12, 1995, Matrix denied the
Company's allegations and filed a cross-complaint charging the Company
with, among other things, unfair competition, defamation and restraint
of trade. Matrix also has requested certain declamatory relief. Howard
Palefsky, the Company's Chairman of the Board and Chief Executive
Officer, was personally named as an additional defendant to the Matrix
defamation charge. In September 1995, Collagen filed an amended
complaint naming two additional former employees, and alleging the
acquisition of additional proprietary information obtained unlawfully.
On November 3, 1995, those two additional former employees filed a
cross-complaint against the Company and Mr. Palefsky, claiming damages
for, among other things, libel, invasion of privacy and intentional
infliction of emotional distress. Collagen and Matrix have been engaged
in discovery since the filing of this lawsuit.
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
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Item 5. Other Information
On February 9, 1996, both Becky Stirn, Vice President of Global
Marketing Strategy, and Pierre Comte, Vice President and Chief
Operating Officer of Trilucent(TM) Operations, were appointed officers
of the corporation. Effective February 15, 1996, Carol Harner was
appointed Vice President of Scientific Affairs.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 10.67 (b) - Second Amendment, Third Amendment, Fourth
Amendment, and Fifth Amendment dated June 30, 1995, September 30, 1995,
December 26, 1995, and March 29, 1996, respectively, to Credit
Agreement dated November 15, 1994, by and between the Bank of New York
and the Registrant (such Credit Agreement previously filed as Exhibit
10.67 with Registrant's Quarterly Report on Form 10-Q for the quarter-
ended December 31, 1994).
Exhibit 10.78 - Bonus Agreement between Howard D. Palefsky and the
Registrant dated February 13, 1996.
Exhibit 10.79 - Promissory Note between Howard D. Palefsky and the
Registrant dated February 20, 1996.
Exhibit 27 - Financial Data Schedule.
B. Reports on Form 8-K
None
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COLLAGEN CORPORATION
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
Exhibit 10.67(b) Second Amendment, Third Amendment,
Fourth Amendment, and Fifth Amendment
dated June 30, 1995, September 30,
1995, December 26, 1995, and March 29,
1996, respectively, to Credit Agreement
dated November 15, 1994, by and
between the Bank of New York and the
Registrant (such Credit Agreement
previously filed as Exhibit 10.67 with
Registrant's Quarterly Report on Form 10-
Q for the quarter-ended December 31,
1994).
Exhibit 10.78 Bonus Agreement between Howard D.
Palefsky and the Registrant dated
February 13, 1996
Exhibit 10.79 Promissory Note between Howard D.
Palefsky and the Registrant dated
February 20, 1996.
Exhibit 27 Financial Data Schedule.
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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 9, 1996 /s/David Foster
---------------------------
David Foster
Vice President and
Chief Financial Officer
(Principal Financial
and Accounting Officer)
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