-----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, RTKwlqVPQ8nNVi8DNPHu9vEUxw5/r1M6SDClR0bMCWSwjZlhY8sKaIbhZqfx043m OQid5RR+e4G5CihsyRTBSQ== 0000891618-96-002133.txt : 19960927 0000891618-96-002133.hdr.sgml : 19960927 ACCESSION NUMBER: 0000891618-96-002133 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960926 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLLAGEN CORP /DE CENTRAL INDEX KEY: 0000021686 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 942300486 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-10640 FILM NUMBER: 96634842 BUSINESS ADDRESS: STREET 1: 2500 FABER PL CITY: PALO ALTO STATE: CA ZIP: 94303 BUSINESS PHONE: 4158560200 10-K 1 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K /X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended JUNE 30, 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 or other jurisdiction (I.R.S. Employer of incorporation or Identification No.) organization) 2500 FABER PLACE, PALO ALTO, CA 94303 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 856-0200 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE (Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 month ( or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / 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 6, 1996 , on the Nasdaq Stock Market, was approximately $128,272,131. 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 6, 1996, Registrant had 8,690,110 shares of Common Stock outstanding. Parts of the Proxy Statement for Registrant's 1996 Annual Meeting of Stockholders are incorporated by reference to Parts III and IV of this Form 10-K Report. Page 1 2 PART I ITEM 1. BUSINESS GENERAL Collagen Corporation (the "Company") designs, develops, manufactures and markets on a worldwide basis high quality biocompatible products for the treatment of defective, diseased, traumatized or aging human tissues with the goal of superior physician and patient satisfaction for its products. The Company has grown by identifying medical applications for its technology, developing innovative products and building markets with respected healthcare professionals, either directly or with marketing and technology partners. The Company's core products are principally used in reconstructive and cosmetic applications, the treatment of stress urinary incontinence, and bone repair. The Company focuses on development of new products based upon biomaterials, especially collagen, for sale in human healthcare markets worldwide. CORE TECHNOLOGY The foundation of the Company's current business is the collagen protein family, around which the Company has developed proprietary technology and patented materials, processes and uses. Collagen is a family of naturally occurring proteins that serve as the basic structural building blocks of the tissues found in skin, cartilage, bone, tendons, ligaments, arterial walls, nerve sheaths and other organs and tissues of the body. Collagen is present in all mammals in higher concentration than any other protein and is quite similar among species. There are at least fifteen types of collagen, the most common of which is the type primarily used in the Company's commercial products and products under development. The Company has developed proprietary processes to purify its bovine (cow)-source collagen on a commercial scale and to manufacture "tissue-like" implants from the resulting materials. These proprietary processes alter the immunological profile of the bovine-source collagen, thus minimizing the potential for causing an allergic reaction. The result is a purified and sterilized fibrous collagen material that can be easily injected or implanted into the human body. The potential for causing an allergic reaction arising from the injection of bovine-source collagen is relatively low. Based on the Company's statistics, approximately 97% of men and women tested show no allergic reaction to a skin test and can be treated with the bovine-source collagen injection. The 3% that show an allergic reaction to the skin test display typical symptoms of hypersensitivity, which include redness, itchiness and swelling. An additional 1-2% of the people treated develop an allergic reaction after one or more injections. In August 1995, the Company added triglycerides as its second core technology when the Company entered into a stock purchase agreement with certain of the stockholders of LipoMatrix, Incorporated ("LipoMatrix"), a developer and manufacturer of the Trilucent(TM) breast implant ("Trilucent implant"), to 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. The Company completed the closing of the aforementioned acquisition of LipoMatrix in January 1996. LipoMatrix is developing a proprietary family of biocompatible products. Trilucent implant, which is currently being sold in eight European countries, achieves biocompatibility by utilizing soybean oil, which has a long history of parenteral use in human beings as a filler. Since the neutral triglycerides of the soybean oil have the same radiodensity as human fat, Trilucent implant provides Page 2 3 a radiolucency profile superior to that seen with saline and silicone filled implants, which may result in more meaningful mammograms to facilitate detection of breast cancer. Laminated into the implant shell is an electronic transponder, which will allow non-invasive implant identification. During fiscal 1997, the Company expects to introduce the Trilucent implant in additional countries and also begin an expanded United States clinical trial. STRATEGY The Company's strategy consists of the following principal elements: Expand Existing Medical Franchise. The Company has a 15-year involvement with the cosmetic procedure-oriented segments of the plastic surgery and dermatology markets. Medical procedures for aesthetics in those markets are generally paid for by the patient and therefore are not commonly subject to reimbursement constraints imposed by third party payors. The recently developed Trilucent implant is another example of a high value product for the cosmetic and reconstructive plastic surgery market. The Company's objectives include developing, in-licensing, and acquiring additional products related to this market. Broaden Therapeutic Applications. The Company has developed innovative medical products that take advantage of the physical and biological properties of collagen, and has developed proprietary collagen technology platforms that could lead to new applications for product development. In addition, The Company has implemented an "affiliate" program to expand its new product development activities outside of the areas of its core competence, such as vascular stents and grafts, ophthalmology, and bioadhesives. Enhance Biomaterials Technology. The Company has substantial research, pre-clinical, clinical and regulatory expertise in the development of collagen-based medical devices. The Company's current objectives include improving the clinical persistence of current collagen materials and reducing or eliminating allergic reactions arising from the bovine source of current collagen products. In order to facilitate the Company's overall strategy, during fiscal 1996 the Company reorganized its efforts into two operating divisions, the Aesthetic Technologies Group and the Collagen Technologies Group. The Aesthetic Technologies Group capitalized on the Company's long-time medical franchises in plastic surgery, dermatology and cosmetic medicine and focuses on cosmetic and reconstructive medical technology products. The Collagen Technologies Group, on the other hand, is focused on the development (by the Company and its affiliates) of products and businesses utilizing innovative collagen-based medical technologies. Where applicable, the following discussions will be distinguished along divisional lines. PRODUCTS, MARKETS AND METHODS OF DISTRIBUTION AESTHETIC TECHNOLOGIES GROUP: Aesthetic Technologies offers products for soft tissue augmentation, breast reconstruction and augmentation, and stress urinary incontinence. In the United States, the Company markets a line of injectable products (Zyderm(R) I implant, Zyderm(R) II implant and Zyplast(R) implant) for soft tissue augmentation of the face and will market a new product for deep facial wrinkles, SoftForm(TM) facial implant ("SoftForm implant"), in the second half of fiscal 1997. Internationally, the Company also markets its Zyderm and Zyplast injectable products for the face; the Trilucent implant for breast reconstruction, augmentation and replacement of previously implanted breast implants; and expects to market a new product for facial wrinkles, Hylaform(R) viscoelastic gel, in the second or third quarter of fiscal 1997. In addition, the Company's product for stress urinary incontinence, Page 3 4 Contigen(R) Bard collagen implant ("Contigen implant"), is currently marketed on a worldwide basis through its marketing partner, C.R. Bard ("Bard"). Cosmetic and Reconstructive Surgery Facial Implants. The Company has three principal products for the treatment of skin contour defects: Zyderm(R) I implant, Zyderm(R) II implant (collectively, "Zyderm implants"), and Zyplast(R) implant ("Zyplast implant"), a cross-linked collagen product. These products are sterile devices, composed of highly purified bovine dermal collagen, dispersed in a saline solution containing a small amount of lidocaine and packaged in a sterile syringe. They are injected with a fine gauge needle into depressed layers of skin to elevate the area to surface contour. Depending on the indication and the product (or product combination) used, most patients can achieve considerable correction in one treatment session. The implants take on the texture and appearance of normal host tissue and are subject to similar stresses and aging processes. Consequently, supplemental treatments are often necessary after initial treatment, depending on the location and original cause of the skin deformity. In June 1996, the Company entered into a distribution agreement with Biomatrix, Inc. (of Ridgefield, New Jersey) to market a new injectable product, Hylaform(R) viscoelastic gel ("Hylaform gel") for facial wrinkles. The Company paid $5.0 million for these distribution rights. Hylaform gel has the potential to bring the clinical benefits of injectable therapy to a new group of patients - - those desiring "same day" treatments (no prior test dose is necessary in the markets where the product is currently approved), as well as those who are sensitive to bovine collagen, and potentially giving doctors and patients a broader range of options to treat age-related wrinkles and scars. Biomatrix, Inc. received CE mark approval for Hylaform gel in December 1995, allowing this product to be marketed throughout Europe. The Company plans to begin marketing Hylaform gel in Western European countries in the second or third quarter in fiscal 1997. The Company holds exclusive marketing and distribution rights to Hylaform gel in the United States, Canada, Australia and selected additional markets, upon the United States Food and Drug Administration ("FDA") approval. Also in June 1996, the Company entered into an in-licensing agreement with Tissue Technologies, Inc. (of San Francisco, California) to market a new implant, SoftForm implant, for deep facial wrinkles. The SoftForm implant is tube-shaped and composed of expanded polytetrafluoroethylene ("ePTFE"). This product is designed to complement Zyderm and Zyplast implants as well as the Hylaform gel products by offering a sub-dermal (under the skin), persistent treatment to those patients with deep furrows. The SoftForm implant is expected to offer these patients a one-time surgical treatment with minimal healing time and if desired, is reversible. The product received marketing clearance from the FDA in April 1996 under a 510(k) application and is anticipated to be launched in the United States in the second half of fiscal 1997 (subject to supply of product from Tissue Technologies, Inc.), with subsequent launches internationally as regulatory approvals are obtained. The Company believes that opportunities exist in the market for its facial implants based on: 1) the growing market for aesthetic procedures among the "baby boomer" generation; 2) consistent overseas strength and further geographical expansion potential; 3) an expansion in the number of new technologies for facial rejuvenation potentially offering new features and benefits; and 4) the Company's increased focus on patient satisfaction. While not anticipated, factors such as negative publicity, adverse rulings by regulatory authorities or in connection with product liability lawsuits, introduction of competitive products by third parties or other loss of market acceptance for the Company's principal products may significantly and adversely affect the Company's business, financial condition and results of operations. Worldwide sales and worldwide unit sales of Zyderm and Zyplast implants increased 10% and 16%, respectively, in fiscal 1996 over fiscal 1995, compared to a 18% and 17% increase in fiscal 1995 over fiscal 1994. The United States sales of Zyderm and Zyplast implants, which represented approximately 46% of worldwide sales of Zyderm and Zyplast implants in fiscal 1996, increased 3% over fiscal 1995 sales, compared to a 12% increase in fiscal 1995 over fiscal 1994. Revenue growth Page 4 5 in fiscal 1995 was due to unit growth, while revenues in fiscal 1994 were stimulated by a price increase. Unit sales of these implants in the United States increased 10% in fiscal 1996 over fiscal 1995, compared to a 5% increase in fiscal 1995 over 1994. International sales of Zyderm and Zyplast implants, which represented approximately 54% of worldwide sales of Zyderm and Zyplast implants in fiscal 1996, increased 16% over fiscal 1995 sales, compared to a 26% increase in fiscal 1995 over fiscal 1994. International unit sales of these implants increased 21% in fiscal 1996 over fiscal 1995, compared to a 29% increase in fiscal 1995 over fiscal 1994. The Company has expanded and intends to expand further its direct selling efforts in certain international markets. There can be no assurance that difficulties associated with a transition to direct marketing efforts will not have an adverse effect on the Company's results of operations. The Company markets its Zyderm and Zyplast implants directly to physicians in the United States, ten European countries, Canada, Australia and New Zealand. The Company markets its products through distributors in all other international markets. The Company has granted exclusive distribution rights for Zyderm and Zyplast implants in Japan. Over the past two years, the Company has appointed a number of new foreign distributors for its injectable collagen products. In the United States, the Company markets primarily to the aesthetically oriented dermatologists and plastic surgeons through a direct sales force. Approximately 4,000 dermatologists and plastic surgeons in the United States have purchased Zyderm and Zyplast implants from the Company in the past year. The Company utilizes a variety of methods to promote its aesthetic products to patients and physicians. To stimulate demand at the patient level, the Company conducts consumer marketing awareness programs, such as public relations events, health and beauty magazine advertising, direct mailing campaigns and patient seminars. The Company's marketing efforts to physicians consists of on-going training, education and promotional activities. Examples of physician marketing activities may include: in-office training and education, presence at medical meetings, and direct mail campaigns. The Company has emphasized physician education to ensure proper training 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 marketing programs. Market research conducted during fiscal 1996, revealed that many patients were not receiving enough collagen material per treatment to provide for full correction and that existing, high prices for the product did not enable patients to purchase more. The introduction of larger syringe fill volumes offers more material with minimal increase in cost and injection time and an opportunity for more complete correction at only a slight increase in treatment cost. The Company benefits from this strategy due to increased patient satisfaction and because the marginal price charged for the incremental material, relative to the marginal cost of the material, economically favors the larger syringes. In addition to larger syringes, the United States has also introduced programs which further encourage more complete correction at the initial treatment and on an ongoing basis. Breast Implants. The patented Trilucent implant was developed by female radiologists seeking a breast implant which minimized the amount of breast tissue obscured by breast implants during mammography and was biocompatible in the event of a leak or rupture. Trilucent implant utilizes soybean oil, which has a long history of parenteral use in human beings as a filler. To aid in radiolucency, the neutral triglycerides of the soybean oil were selected to have the same radiodensity as human fat. Neither saline nor silicone-filled gel implants have this radiolucent profile. Mammography has been demonstrated to be important in the detection of early stage breast cancer. In 1992, the Company participated in the formation of LipoMatrix, the developer and manufacturer of the Trilucent implant. During fiscal 1996, the Company increased its ownership interest in LipoMatrix from approximately 40% to 100% of the outstanding securities on a fully diluted basis. By the end of fiscal 1996, Trilucent implant was being sold in eight European countries and clinical data had been gathered on more than 200 patients treated in Europe and over 70 patients in the United States and Canada. The Company recorded $2.4 million in sales from Trilucent implant during fiscal 1996. During fiscal 1997, the Company expects to introduce Trilucent implant in additional European countries and begin a pivotal United States clinical trial. Despite lack of FDA Page 5 6 approval in the United States, consumer interest in the United States appears high, demonstrated by telephone inquiries from both physicians and interested consumers. Contigen Implant. According to the National Institutes of Health, more than ten million Americans suffer from urinary incontinence, or the involuntary loss of urine. While comprehensive data are not available as to the incidence of a form of stress urinary incontinence called intrinsic sphincter deficiency ("ISD"), the Company has estimated, based upon physician survey information, that as many as one million of these persons suffer from ISD, a poor or nonfunctioning bladder outlet mechanism that may be helped by a locally injected bulking agent. The Company and its marketing and distribution partner, C.R. Bard, Inc. ("Bard"), received approval from the FDA to produce and market Contigen implant in September 1993 for the treatment of ISD. ISD occurs among all demographic groups, but its incidence increases with age and is twice as high in women as men. Management and treatment alternatives have historically included absorbent products, behavior modification, medication and surgery. Contigen implant injections may improve stress incontinence caused by stretched pelvic muscles from childbirth, decreased tone in the pelvic muscles supporting the bladder (often associated with menopause and aging) and prostate surgery. Contigen implant is a sterile, highly purified bovine dermal collagen that is lightly crosslinked and dispersed in a saline solution. Contigen implant is injected into the submucosal tissues of the urethra and/or bladder neck, and into the tissues adjacent to the urethra. The injection of Contigen implant creates increased tissue bulk and subsequent coaptation (joining) of the urethral lumen. After injection, the suspended collagen forms a soft cohesive network of fibers. Over time, the implant takes on the appearance of normal host tissue. Pursuant to the terms of an agreement between the Company and Bard, Bard purchases commercial products, including Contigen implant, developed under this agreement. In addition, the Company receives a percentage of Bard's direct sales to physician customers. Bard holds exclusive worldwide marketing and distribution rights to Contigen implant. Bard recently received reimbursement codes for Contigen implant in the United Kingdom, France and Japan, clearing the way for the product to be marketed in these countries. In the United States, Bard is working with the Association for People with Urinary Disease to inform incontinence suffers about the benefits of Contigen implant. The Company recorded approximately $6.2 million, $16.5 million, and $16.7 million of revenue from sales of Contigen implant in fiscal 1996, 1995 and 1994, respectively. Of such revenue, $.3 million, $13.4 million and $15.9 million was derived from sales of Contigen implant to Bard and $5.9 million, $3.1 million and $789,000 from Bard's direct sales to physicians in fiscal 1996, 1995 and 1994, respectively. (See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Product Sales"). For the uncertainties or risk factors that exist surrounding the marketing and distribution of the Company's cosmetic and reconstructive products, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting Future Results of Operations". Page 6 7 COLLAGEN TECHNOLOGIES GROUP: Orthopedics. The Company and its orthopedic marketing partner, Zimmer, Inc. ("Zimmer"), a wholly-owned subsidiary of Bristol-Myers Squibb, received approval from FDA in May 1993 to produce and market Collagraft(R) bone graft matrix implant ("Collagraft implant"). Collagraft(R) bone graft matrix strip ("Collagraft strip"), a "premixed" formulation which is an early "ready-to-mix" Collagraft implant formulation, was subsequently approved in January 1994. Collagraft implant and Collagraft strip (collectively, "Collagraft bone graft products"), when used with autogenous bone marrow, is indicated for use in acute long bone fractures and traumatic osseous defects to provide a matrix for the repair process of bone. Bone graft substitute eliminates the need for patients to undergo a painful autograft bone grafting procedure, which involves harvesting patients' own bone from another site, and it prevents the transmission of human infectious agents and inconsistent results from allograft procedures (bone graft supplied through a bone bank). During surgery, Collagraft strip or Collagraft implant is mixed with the patient's own bone marrow and is placed into the fracture site providing a scaffolding around which new bone will grow. Medical conditions, which may require bone grafting, include acute long bone fractures and certain tumors and cysts. Collagraft bone graft products are a mixture of purified fibrillar collagen and hydroxyapatite/tricalcium phosphate ceramic ("HA/TCP") and are supplied sterile in both a strip form (premixed) and a ready-to-mix form. Hydroxyapatite is a substance which is biocompatible and is minimally resorbed. Tricalcium phosphate is radiopaque, biocompatible and biodegradable. Its degradation products can be reconstituted by the body to form new bone mineral allowing for bone deposition. An agreement between the Company and Zimmer provides for the development and distribution of collagen and other biologically-based products for orthopedic applications. The Company will manufacture approved products and sell them to Zimmer, which has exclusive marketing rights for Collagraft bone graft products in the United States and Asia. The Company holds marketing rights for Collagraft bone graft products in Europe, Canada, Africa and the Middle East. Collagraft bone graft products are currently sold only in the United States and the Company does not anticipate substantial sales outside the United States for the foreseeable future. Sales of Collagraft bone graft products to Zimmer in fiscal 1996, 1995 and 1994 totaled $3.1 million, $3.0 million and $2.7 million, respectively. Fiscal 1994 represented the first full year of sales for Collagraft bone graft products. For the uncertainties or risk factors that exist surrounding the marketing and distribution of Collagraft bone graft products, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations- Factors Affecting Future Results of Operations". Other Medical Products. During fiscal 1995, the Company expanded its product offerings to include a line of collagen-based materials for research applications and other custom needs. Sales of these products have not been material in fiscal 1996 or fiscal 1995. 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 competition in each of its target product markets. Zyderm and Zyplast implants. The Company faces direct and indirect competition for its products. Internationally, direct competitors in the injectable segment have included both approved and unapproved products primarily derived from collagen, hyaluronic acid and silicone. In the United States, direct competition is very small. Collagen believes it remains in the clear leadership position in the injectable segment in its markets. Indirect competitors to Zyderm and Zyplast implants include, among others, laser treatments, chemical peels, fat injections, dermabrasion, botox injections and face lifts. In addition, several companies are engaged in research and development Page 7 8 activities examining the use of collagen and other biomaterials for the correction of soft tissue defects. There can be no assurance that the Company will not face increased direct and indirect competition in the soft-tissue augmentation market. Trilucent implant. The principal competitors of Trilucent implant are saline implants worldwide, and silicone gel implants outside the United States The Company has identified Mentor Corporation and McGhan Medical Corporation, which market both saline implants and silicone gel implants, as being the Company's primary competitors for breast implants. These companies have greater resources than the Company and have substantially more experience in manufacturing and marketing in the breast implant market. Contigen implant. At the present time, autologous fat, silicon micro-implants and polytetrafluorethane (Teflon paste, or PTFE) are directly competing with Contigen implant for the treatment of stress incontinence due to ISD. Neither silicon micro-implants nor PTFE have been approved by the FDA for use in the United States. Other methods of treatment or amelioration of ISD may be considered competitive with Contigen implant. These include surgery, medication, absorbent products and behavior modification. Collagraft bone graft products. Bone graft substitutes currently are used in a small fraction of bone grafting procedures. The vast majority of bone grafting procedures currently use autograft (autologous bone) taken from the patient's own body and allograft (bone bank bone taken from deceased donors). Collagraft bone graft products belong to a new family of products called bone graft substitutes. The most direct competitor to Collagraft bone graft products is Pro-Osteon, a synthetic bone graft substitute made of a coral-like mineral. A less direct competitor to Collagraft bone graft products is an allograft bone product called Grafton, which is packaged in a syringe and marketed and priced like a bone graft substitute. In addition, several companies and institutions are engaged in the development of collagen-based and other materials, techniques, procedures and products for use in medical applications anticipated to be addressed by the Company's products, including Contigen implant and Collagraft bone graft 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. 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. 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. Certain of the Company's collagen-based products, including the Zyderm implants, were manufactured and sold pursuant to an exclusive license from Stanford University under a United States patent, which expired in April 1993, covering the use of native, solubilized collagen for soft-tissue augmentation. The expiration of this patent may result in increased competition in the market for injectable collagen implants if or when other companies enter that market. MANUFACTURING The Company manufactures its collagen-based products utilizing readily available chemicals and enzymes. The source of its collagen is bovine (cow) dermis. In an attempt to ensure that the hides are free from any herd-threatening disease such as Bovine Spongiform Encephalopathy ("BSE"), the hides are sourced from a closed herd, which requires the physical separation of the herd from other herds, the tracking of the lineage of each animal and the maintenance of each animal under a veterinarian program. The Company obtains HA/TCP solely from Zimmer for the manufacture of Collagraft implant. 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. Page 8 9 The Company's principal products have various refrigerated shelf lives of 30 to 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 its collagen-based products in its Fremont, California facility. While the Company has not experienced any disruptions in its manufacturing schedule during the last two fiscal years and does not anticipate any delays in the future, it is possible that the Company may experience disruptions in its manufacturing schedule as it continues to manufacture products in increasingly larger quantities and with new process improvements. The Company's manufacturing facilities are subject to regulatory requirements and periodic inspection by regulatory authorities, such as the FDA in the United States, and in countries such as the United Kingdom, outside the United States. In June 1995, the Company was inspected by TUV Product Services to ensure that the Company's products met the requirements of the European Medical Directive. After the completion of the inspection, the Company was certified to place the CE Mark on its product packages and to sell its products directly to physicians in most European countries. LipoMatrix produces the Trilucent implant in Neuchatel, Switzerland, where it maintains a facility with a quality system meeting the requirements of ISO9001 and EN46001 quality standards as certified by TUV and SQS Product Services in December 1994. Such certification ensures that the products conform to the essential requirements of the European Medical Directive and allows the CE marking to be placed on the product packages. LipoMatrix may experience disruptions in manufacturing as it manufactures increasingly larger quantities of products. In addition, it may experience a significant shortage of manufacturing capacity if its facility fails to operate as planned. PRODUCT RESEARCH AND DEVELOPMENT The Company maintains an active program of technology and new product development. The Company intends to continue to devote a significant portion of revenues to research and product development activities throughout its product lines to generate significant returns to stockholders. Research and Development ("R & D") expenses for the Company totaled $12.2 million, $9.9 million and $9.4 million in fiscal 1996, 1995 and 1994, respectively. R & D expenses represented 18%, 14% and 15% of product sales for those years. The Company's focus has been in four major areas: 1) new injectable products and enhancements to existing products for the treatment of skin contour defects, 2) Trilucent implant an enhancements, 3) investment in affiliated companies working on a wide variety of medical indications, and 4) joint development programs focused on the orthopedics area. The soft tissue augmentation program has concentrated on improvements relating to two performance criteria-duration of treatment benefit and the elimination of local inflammatory reactions. The Company is exploring several formulations to improve persistence of its Zyderm and Zyplast implants and is also investigating human collagen as an alternative for the potential collagen patients who are allergic to bovine-based products or who elect to minimize this possibility of an allergic reaction to the product. Two potential sources of human collagen are being explored simultaneously: placental-sourced human collagen and recombinant human collagen through transgenic animals and yeast. The Company has an ongoing collaboration with IMEDEX, a subsidiary of Rhone-Poulenc S.A., to develop new products based on the use of human placental-collagen. In addition, the Company has made an equity investment in and is actively collaborating with Pharming, B.V. for the purpose of developing recombinant human collagen. As an enhancement to the Company's business in the area of cosmetic and reconstructive surgery, the Company has added LipoMatrix's breast implant, Trilucent implant, to its product line. Trilucent implants are designed and developed at Lipomatrix' Neuchatel, Switzerland facility in Page 9 10 accordance with EN46001 and ISO9001 and other international standards, including risk analysis, technical files, validation and testing. As part of the Company's growing orthopedics business, the Company acquired approximately 12% of and entered into a collaborative product development agreement, related to developing resorbable or partially resorbable mechanical tissue-fixation devices for applications in orthopedic tissue repairs, with Innovasive Devices, Inc. during fiscal 1996. In addition, the Company is investigating the use of other collagen based biomaterials for use in a variety of orthopedic indications and continues to support its Collagraft bone graft products, which is being marketed and sold in the United States by Zimmer. With regards to investing in new ideas and products, 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 efficiently to market and to advance proprietary know-how at a rapid rate. However, there can be no assurance that these investments will result in positive returns nor can there be any assurance on the timing of any return on such investments. The Company's affiliate investments consist of the following principal elements: New Products in New Market Segments. In fiscal 1994, the Company, together with Target, and Celtrix Pharmaceuticals, Inc., formed Prograft Medical Inc. ("Prograft"). Prograft focuses on the development of proprietary vascular grafts, vascular stents and vascular stent-graft combinations, which may use certain of the Company's biomaterials, for use in the repair and replacement of diseased and damaged blood vessels. As of June 30, 1996, the Company held approximately 21% of the equity of, and has also entered into license and supply agreements with, Prograft. In fiscal 1994, the Company and its founder, Dr. Rodney Perkins, formed Cohesion Corporation (formerly Otogen Corporation), a start-up company which is currently developing surgical tissue adhesives for use in general surgical applications in such areas as plastic surgery, neurology, thoracic surgery and cardiology. In fiscal 1996, the Company increased its ownership position in Cohesion Corporation from approximately 40% to 81%. Cohesion Corporation anticipates that its lead product will begin clinical evaluation in the third or fourth quarter of fiscal 1997. In fiscal 1993, the Company participated in the formation of CollOptics, Inc. to develop collagen-based lenticules, which are custom-made contact lenses for refractive errors. The Company currently holds a 47% ownership interest in CollOptics, Inc. Access to New Technology. In fiscal 1996, the Company has made an equity investment in and is actively collaborating with Pharming, B.V. for the purpose of developing recombinant human collagen. This technology could provide the Company with a source of recombinant human collagen that is chemically identical to native human collagen. The Company and Pharming, B.V. will attempt to produce collagen in the milk of dairy cattle. For the uncertainties or risk factors that exist with the Company's investments in affiliate companies, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting Future Results of Operations". PATENTS AND PROPRIETARY TECHNOLOGY The Company depends substantially upon its proprietary technological expertise in the extraction, purification, and formulation of collagen-based materials and other biomaterials into biomedical products. The Company seeks patents on inventions concerning novel manufacturing processes, composition of matter, and applications for its proprietary biomaterials. At present, the Company holds over 60 issued patents and numerous patent applications. The Company's subsidiary, LipoMatrix, also holds several issued patents and patent applications concerning Page 10 11 Trilucent implant. The Company's license from Stanford University under a United States patent covering the use of native, solubilized collagen for soft tissue augmentation, expired in April 1993. Patent-related litigation is an increasing 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 Company's processes or products 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 other proprietary technology. There is no assurance that others will not independently develop or otherwise acquire substantially equivalent proprietary information or techniques, others will not otherwise gain access to the Company's proprietary technology or disclose such technology, or the Company can meaningfully protect its trade secrets. The Company typically 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. The Company holds several registered trademarks in the United States 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 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, clinical research and sale of medical devices, including labeling, advertising and recordkeeping. The Company's primary 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, Markets and Methods of Distribution," other than Trilucent implant and Hylaform gel, have been approved for sale in the United States. Biomatrix, Inc. submitted a Pre-Market Approval application in August 1995 for Hylaform gel and FDA approval of such product is currently pending. Medical products whose market applications have not yet been approved by the FDA may only be exported from the United States with the specific approval of the FDA. There can be no assurance that the FDA will choose to characterize future products as medical devices rather than drugs or biologics. Any such change in FDA characterization would potentially lengthen and increase the cost of the approval process. Page 11 12 The Company's clinical research program has been and remains subject to the Investigational Device Exemption ("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 Institutional Review Board 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 for commercially available products. The Company anticipates that during fiscal 1997 it will commence United States clinical trials for Trilucent implant pursuant to an FDA-approved IDE. 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 Company's manufacturing, quality control and quality assurance procedures and documentation have been inspected and evaluated by the FDA on a periodic basis since February 1981. 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, including Trilucent implant, 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. 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. A material decrease in current reimbursement levels for treatment of ISD could have a material adverse effect on the Company's business. Sales of medical devices outside the United States are subject to foreign regulatory requirements that vary widely from country to country. The time required to obtain clearance required by foreign countries may be longer or shorter than that required for FDA clearance, and requirements for licensing may differ significantly from FDA requirements. Some countries have historically permitted human studies earlier in the product development cycle than regulations in the United States permit. Other countries, such as Japan, have requirements similar to those of the United States. This disparity in the regulation of medical devices may result in more rapid product clearance in certain countries than in others. EMPLOYEES As of September 1, 1996, the Company employed 379 employees, of which 53 were engaged in research and development, 125 were engaged in sales and marketing, 128 were involved in production and quality control, and 73 were engaged in finance and administration. None of the Company's employees is covered by a collective bargaining agreement. The Company also has a Board of Scientific Advisors which currently consists of five scientists, each of whom is prominent in his field and serves as a professor at a major academic institution. The Company has a consulting agreement with each advisor which ranges from two to three years. Page 12 13 EXECUTIVE OFFICERS The Company has corporate officers that are not executive officers. As of September 13, 1996, the executive officers of the Company, who are elected by and serve at the discretion of the Board of Directors, are as follows:
OFFICER NAME AGE POSITION SINCE - ------------------------------------------------------------------------------------------------------------ Howard D. Palefsky 49 Chairman and Chief Executive Officer 1978 Gary S. Petersmeyer 49 President and Chief Operating Officer 1995 Deborah W. Berard 37 Vice President, Human Resources and Administrative Services 1991 Pierre Comte, Ph.D. 48 Vice President, Collagen Corporation and Chief Executive Officer, 1996 LipoMatrix subsidiary David Foster 39 Vice President, Finance and MIS, and Chief Financial Officer 1990 Michael Levitt 45 Vice President, Operations 1994 Rebecca A. Stirn 43 Vice President, Global Marketing Strategy 1996
Mr. Palefsky joined the Company as President, Chief Executive Officer and Director in March 1978 and served in such capacities until February 1995, when he became the Chairman of the Board and Chief Executive Officer. From 1973 to March 1978, Mr. Palefsky was employed by Alza Corporation where his last position was Vice President, Marketing. Prior to 1973, Mr. Palefsky was employed by Whitehall Laboratories as Assistant to the President. Both Alza Corporation and Whitehall Laboratories are manufacturers of pharmaceutical products. Mr. Palefsky is also a director of Calgene, Inc., Innovasive Devices, Inc., and Target Therapeutics, Inc. In addition, he is a director of Cohesion Corporation, CollOptics, Inc. and Prograft Medical, Inc., each a privately held subsidiary of or company affiliated with the Company. Mr. Petersmeyer joined the Company as President, Chief Operating Officer and Director in February 1995. 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 Operating Officer of Beta Phase, Inc., a medical device manufacturer, and from 1982 to 1986 he was the Executive Vice President and General Manager, Ophthalmic Products Division, of CooperVision, Inc., a manufacturer and distributor of ophthalmic products. Mr. Petersmeyer is also a director of Cardiometrics, Inc. Ms. Berard joined the Company as a member of the Finance staff in February 1982 and served in various Human Resource positions. In 1991, Ms. Berard was promoted to Vice President, Human Resources and Administrative services. Dr. Comte joined the Company as Vice President of Collagen and Chief Executive Officer of LipoMatrix in February 1996. Prior to joining the Company, Dr. Comte was Chief Operating Officer of LipoMatrix from July 1995 to February 1996. From January 1988 to June 1995, Dr. Comte was employed by Sulzer A.G. (Winterthur, Switzerland), an international multi-Technology corporation. Dr. Comte served as the President of Sulzer Medica, Orthopedics Division from February 1991 to June 1995 and as the Managing Director of Intermedics, S.A., a subsidiary of Sulzer A.G., from January 1988 to January 1991. Prior to his employment with Sulzer A.G., Dr. Comte was the General Manager of Cicorel SA, a manufacturer of printed circuit boards, from October 1985 to December 1987. From October 1978 to September 1985, he was employed by the Institut Straumann A.G. "Synthes" (Waldenburg, Switzerland), a manufacturer of orthopedic Page 13 14 implants, first as Project Manager, Neurostimulation Europe from October 1978 to April 1980 and as Head of Research and Development from May 1980 to September 1985. Mr. Foster joined the Company as Financial Analyst in November 1984 and served in various positions in the Company. In 1992, Mr. Foster was appointed Chief Financial Officer. From 1979 to 1984, Mr. Foster was employed by Brown, Vence and Associates, an energy and environmental consulting firm, as Engineering Project Manager. In addition, Mr. Foster serves on the board of directors of Pharming, B.V. Mr. Levitt joined the Company in July 1994 as Vice President, Operations. Prior to joining the Company, Mr. Levitt was employed by Eli Lilly and Company, a manufacturer of pharmaceutical products. During his 18 years with Eli Lilly and Company, Mr. Levitt held positions in sales, research, human resources and operations. Mr. Levitt's last position with Eli Lilly and Company was Director of Pharmaceutical Operations. Ms. Stirn joined the Company as Vice President, Global Marketing Strategy in January 1996. 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. CEMAX, Inc. pioneered the use of three-dimensional medical imaging and computer-aided design of custom implants. From June 1981 to October 1985, Ms. Stirn was employed by CooperVision, Inc., a manufacturer and distributor of ophthalmic products. While employed by CooperVision, Inc., Ms. Stirn served as Vice President of Marketing, Optics Division and in various other positions in the Marketing department. ITEM 2. PROPERTIES The Company's principal executive, marketing, and research activities are presently located in three buildings in Palo Alto, California. The Company has leased these buildings under various leases that expire between June 1999 and November 2004 and contain renewal options. The Company leases a total of approximately 77,000 square feet, of which the Company subleases 22,000 square feet to several of its affiliate companies. The Company's international facilities, which amount to approximately 20,000 square feet in total, are leased under various leases and contain renewal options. In 1989, the Company completed a sale-leaseback transaction relating to its 50,000 square feet 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. LipoMatrix's administrative, research and development, manufacturing and quality assurance functions are located in a 20,000 square foot facility in Neuchatel, Switzerland. The facility is leased under various leases, which expire between March 1997 and December 2005 and contain renewal options. The Company believes that its facilities are adequate to meet its requirements for at least the next twelve months. 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. While the outcome of such matters is currently not determinable, it is management's opinion that these matters, including the matters Page 14 15 discussed below, will not have a material adverse effect on the Company's future consolidated financial position, results of operations or cash flows. 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. 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. In light of regulatory investigations surrounding product safety, the Company announced in September 1991 that it will indemnify physicians against damages and legal fees arising from lawsuits brought to a jury trial alleging a link between collagen injections and Polymyositis and Dermatomyositis. To date, there has not been any impact of this indemnification on the Company's results of operations. There can be no assurance, however, that any future such claims would not have a material adverse effect on the Company's operating results. Because the indemnification program has never been utilized, the Company may discontinue the program in the future. On December 21, 1994, the Company filed suit in Santa Clara County Superior Court against Matrix Pharmaceutical, Inc., ("Matrix") alleging fraud, misappropriation of trade secrets, unfair competition, breach of fiduciary duty, inducing breach of contract, breach of duty of loyalty and tortious interference. 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 of Collagen, was personally named as an additional defendant to the Matrix defamation charge. The Company intends to vigorously contest Matrix's charges. In September 1995, the Company 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. The Company and Matrix have been engaged in discovery since the filing of this lawsuit. 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, 1996. Page 15 16 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS MARKET FOR COMMON STOCK The Company's Common Stock is traded on The Nasdaq Stock Market under the symbol CGEN. The following table presents the high and low sale prices for the Company's Common Stock for each fiscal quarter for the fiscal years ended June 30, 1996 and 1995, as reported by The Nasdaq Stock Market Summary of Activity(TM).
Fiscal year ended June 30 1996 1995 ---- ---- Quarter ended High Low High Low ------------- ---- --- ---- --- September 30 $21.50 $15.00 $22.75 $17.25 December 31 21.25 17.00 24.00 19.25 March 31 23.50 19.25 28.25 21.50 June 30 22.75 18.75 22.50 15.00
HOLDERS OF RECORD At September 6, 1996 there were approximately 980 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 14, 1996, in addition to a $.075 per share dividend declared and paid earlier in fiscal 1996. In fiscal 1995, the Company declared a cash dividend of $.075 per share on its common stock payable to stockholders of record on June 15, 1995, in addition to a $.075 per share dividend declared and paid earlier in fiscal 1995. The Board of Directors expects to review the potential for future dividends semi-annually. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following data have been derived from consolidated financial statements that have been audited by Ernst & Young LLP, independent auditors. The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. Page 16 17
Years ended June 30, 1996(1) 1995(1) 1994(1) 1993(1) 1992(2) - ------------------------------------------------------------------------------------------------------------------ (In thousands, except per share amounts) OPERATING RESULTS Revenues $ 70,730 $72,560 $65,552 $49,743 $67,182 Research and development expenses 12,170 9,943 9,366 8,767 12,023 Operating income (loss) (17,592) (4) 11,854 8,607 (3,859) (6,294) Gain from investments, net (1) 82,093 5,110 -- 20,323 9,439 Income from continuing operations 26,652 8,760 4,920 9,732 1,408 Net income 26,652 8,760 4,920 8,743 1,147 Income per share: Continuing operations 2.94 .93 .50 .95 .14 Net income 2.94 .93 .50 .85 .11 FINANCIAL POSITION Cash, cash equivalents and short-term $ 25,367 $ 9,384 $12,736 $19,630 $44,686 investments Total assets 163,007 76,906 74,505 76,206 95,479 Long-term obligations excluding minority interest (3) 8,784 1,786 31,118 9,972 9,507 Total stockholders' equity 103,001 47,920 49,082 54,936 57,174 Book value per share at June 30 11.74 (3) 5.31 5.21 5.64 5.71 ADDITIONAL INFORMATION Repurchase of common stock $ 5,510 $11,282 $13,847 $ 7,581 $ -- Sales per employee 185 225 195 157 131 Net income (loss) per employee 72 28 15 28 2 Cash dividends declared per share .175 .15 .10 -- -- Return on sales 39% 12% 8% 18% 2% Return on equity 26% 18% 10% 16% 2% Shares used in calculating income (loss) per share information 9,075 9,460 9,896 10,267 10,232 Total employees 371 318 336 316 512
(1) As a result of the sale of portions of the Company's shares of Target Therapeutics, Inc. ("Target"), the Company's ownership position in Target decreased to below 50% in December 1992. The first five months in fiscal 1996 and 1995, 1994 and 1993 financial information is presented with Target accounted for under the equity method. All previous years contain consolidated results of Target (see Notes 1 and 4 to the Consolidated Financial Statements). Gains from sales of portions of the Company's investment in Target contributed $85.8 million, $6.0 million, $20.3 million, and $10.2 million to fiscal 1996, 1995, 1993 and 1992 pre-tax earnings, respectively. (2) Includes consolidated results of Target. (3) Includes effect of adopting Statement of Financial Accounting Standard No. 115 ("SFAS #115") due to change from equity basis of accounting to the cost method in fiscal 1996. The incremental book value per share as a result is approximately $3.94 and the incremental long-term obligations excluding minority interest is $23.9 million. (4) Includes in-process research and development charges of $17.8 million. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE COMPANY 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 Page 17 18 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". Collagen Corporation (the "Company") is a technology-based company that develops, manufactures and markets biomedical devices for the treatment of defective, diseased, traumatized or aging human tissues. The Company's revenues have been derived primarily from the sale of products used in reconstructive and cosmetic applications for the face, the treatment of stress urinary incontinence, and in bone repair. The Company markets its reconstructive and cosmetic products directly and through a network of international distributors and its stress urinary incontinence and bone repair products through marketing partners. ACQUISITIONS AND INVESTMENTS On August 22, 1995, as part of the Company's strategy to expand its marketing franchise in aesthetic and reconstructive technology, 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 implant"), to 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 (See Note 6 to the Consolidated Financial Statements). The Company completed the closing of the aforementioned acquisition of LipoMatrix in January 1996. In October 1995, the Company purchased approximately 844,000 shares of common stock or approximately 12% in Innovasive Devices, Inc. (of Marlborough, Massachusetts) and entered into a collaborative product development agreement with Innovasive Devices, Inc. ("Innovasive Devices"). The Company and Innovasive Devices are collaborating to develop certain resorbable or partially resorbable mechanical tissue-fixation devices utilizing collagen-based biomaterials for applications in orthopedic tissue repairs. Innovasive Devices is a company that develops, manufactures, and markets tissue and bone reattachment systems which are particularly relevant to the sports medicine and arthroscopy segments of the orthopedic surgery market. 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), bringing the Company's ownership percentage in Pharming, B.V. to approximately 12%. Pharming, B.V. is dedicated to the development and worldwide commercialization of human health care products produced in transgenic animals. Collagen and Pharming, B.V. will attempt to produce collagen in the milk of dairy cattle. The Company increased its ownership position in Cohesion Corporation (of Palo Alto, California) from approximately 40% to 81% on May 29, 1996. Cohesion Corporation is a privately-held company that is developing novel biomaterials with superior performance characteristics in the areas of tissue adhesives, hemostats, biosealants, and adhesion prevention. In connection with the Company's investment in Cohesion Corporation, $3.0 million was allocated to in-process research and development, which was expensed at the time of the investment. Cohesion Corporation anticipates that its lead product will begin clinical evaluation in the third or fourth quarter of fiscal 1997. On June 4, 1996, the Company entered into an in-licensing agreement with Tissue Technologies, Inc. (of San Francisco, California) to market a new implant for deep facial wrinkles. Page 18 19 The product had received marketing clearance from the United States Food and Drug Administration ("FDA") in April 1996 under a 510(K) application and is anticipated to be launched in the United States in the second half of fiscal 1997, with subsequent launches internationally as regulatory approvals are obtained. Additionally, on June 17, 1996, the Company entered into a distribution agreement with Biomatrix, Inc. (of Ridgefield, New Jersey) to market a new injectable product, Hylaform(R) viscoelastic gel for facial wrinkles. The Company paid $5.0 million for these distribution rights. Biomatrix, Inc. received CE mark approval for Hylaform(R) viscoelastic gel in December 1995, allowing this product to be marketed throughout Europe. The Company plans to begin marketing Hylaform(R) viscoelastic gel outside the United States in the second or third quarter in fiscal 1997. In addition to internal research and development ("R&D") and joint product development arrangements, the Company has an active program for developing new products through affiliated companies in which the Company makes equity and debt investments. The Company believes the formation of new companies allows each to focus its technology on select market segments to bring products to market efficiently and to expand its proprietary knowledge. RESULTS OF OPERATIONS The following table shows, for the periods indicated, the percentage relationship to product sales of certain items in the Consolidated Statements of Income.
Percent of Product Sales ---------------------------- Years ended June 30, 1996 1995 1994 - ----------------------------------------------------------------------------- Product sales 100% 100% 100% Other revenue 3% 1% 2% - ----------------------------------------------------------------------------- Costs and expenses: Cost of sales 28% 26% 29% Research and development 18% 14% 15% Selling, general and administrative 57% 45% 44% Acquired in-process research and development 26% -- -- - ----------------------------------------------------------------------------- Income (loss) from operations (26)% 17% 13% - -----------------------------------------------------------------------------
PRODUCT SALES. Product sales of $68.7 million in fiscal 1996 decreased $2.9 million or 4% versus fiscal 1995 sales of $71.6 million, which in turn increased $7.0 million or 11% over fiscal 1994 sales of $64.6 million. The $2.9 million decrease in fiscal 1996 over 1995 was primarily due to a decrease in shipments of Contigen(R) Bard(R) collagen implant ("Contigen implant"), partially offset by a $7.4 million increase in worldwide sales of plastic surgery and dermatological products. The $7.0 million increase in fiscal 1995 over 1994 was primarily due to growth in worldwide sales of plastic surgery and dermatological products. The table below outlines the two components of product sales for Contigen implant over the three year period. Page 19 20
Years ended June 30, 1996 1995 1994 - ------------------------------------------------------- ----- ----- ----- (In millions) Shipments of Contigen implant to Bard $ .3 $13.4 $15.9 Income from Bard's direct sales to physician customers 5.9 3.1 .8 ----- ----- ----- $ 6.2 $16.5 $16.7 ===== ===== =====
The Company did not record any income from Bard's direct sales to physician customers until fiscal 1994 as Bard's sales to customers commenced late in the second quarter of fiscal 1994. Fiscal 1995 sales to Bard represent minimum shipment levels made in accordance with an agreement between Bard and the Company. For fiscal 1996 there was no agreement for sales to Bard. At June 30, 1995, Bard had a significant inventory of these products and as a result, the Company made minimal shipments to Bard in fiscal 1996 as expected. Future income from shipments of Contigen(R) implant to Bard is expected to resume in the third or fourth quarter of fiscal 1997. Worldwide sales of the Company's other aesthetic and reconstructive products in fiscal 1996 were $58.9 million or 14% higher than fiscal 1995 sales of $51.5 million, compared to a 18% increase in fiscal 1995 over fiscal 1994 sales of $43.5 million. The increase in sales in fiscal 1996 was attributable in part to the launch of the Trilucent implant (a triglyceride-filled mammary implant) in Europe. The Company believes that the increase in sales in fiscal 1995 was due to a combination of a price increase and a growth in demand. International sales in dollars were impacted favorably by exchange rates by $457,000 in fiscal 1996 and $1.6 million in fiscal 1995. The Company anticipates continued growth in future worldwide product sales in dollars in these markets. Worldwide unit sales of the Company's other aesthetic and reconstructive products increased approximately 16% in fiscal 1996 over fiscal 1995 and 17% in fiscal 1995 over 1994. The Company believes the improved performance in both fiscal 1996 and 1995 was a result of strong distributor sales, especially in Japan, successful international marketing and public relations efforts by the Company's subsidiaries, the launch of new syringe configurations, and continued improving economic conditions in Europe. Domestically, implementation of United States marketing programs designed to both increase average treatment volume per patient and to attract and retain new and existing patients, have favorably impacted overall unit sales. Collagraft(R) bone graft matrix and Collagraft(R) bone graft matrix strip ("Collagraft bone graft products") are for the treatment of acute long bone fractures and traumatic osseous defects. Sales of Collagraft implant and Collagraft strip to Zimmer, Inc. totaled $3.1 million, $3.0 million and $2.7 million in fiscal years 1996, 1995 and 1994, respectively. Fiscal 1994 represented the first full fiscal year of sales of Collagraft bone graft products. A number of uncertainties exist surrounding the marketing and distribution of Contigen implant and Collagraft bone graft products. The Company's primary means of distribution for these products is through third party firms, Bard, in the case of Contigen implant, and Zimmer, in the case of Collagraft bone graft products. The Company's business and financial results could be adversely affected in the event that either or both of these parties are unable to market the products effectively, anticipate customer demand accurately, or effectively manage industry-wide pricing and cost containment pressures in health care. OTHER REVENUE. Other revenue in fiscal years 1996, 1995 and 1994 consisted of milestone payments of $2.0 million, $1.0 million and $1.0 million, respectively, 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. COST OF SALES. Cost of sales as a percentage of product sales averaged 28%, 26% and 29% in fiscal 1996, 1995 and 1994, respectively. The increase in fiscal 1996 over 1995 in cost of sales as a Page 20 21 percentage of product sales was primarily due to the inclusion of start up manufacturing costs of Trilucent implant, which continues to be launched in additional countries. Unit cost of manufacturing for collagen-based products was considerably higher in fiscal 1996 than in fiscal 1995 due to decreased production volumes, primarily of Contigen implant. The decrease in cost of sales as a percentage of product sales in fiscal 1995 over 1994 was primarily due to increased product revenues resulting from income received from Bard's direct sales of Contigen implant to physician customers as well as the favorable impact of foreign exchange rates on international product sales in fiscal 1995. Additionally, cost of sales reflected slightly lower unit costs due to increased production volumes in fiscal 1995 and 1994, primarily from Contigen implant. Due to the high fixed costs of the Company's manufacturing facility, unit cost of manufacturing is expected to remain highly dependent on the level of output at the Company's manufacturing facility, which is heavily dependent on production of Contigen implant. The Company anticipates that overall unit costs will be lower in fiscal 1997 compared to fiscal 1996 as a result of the expected resumption of Contigen implant shipments to Bard beginning in the third or fourth quarter of fiscal 1997 and the increased production volumes of Trilucent implant. In addition 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 totaled $39.0 million in fiscal 1996, $32.2 million in fiscal 1995 and $28.6 million in fiscal 1994, representing 57%, 45%, and 44% of product sales, respectively. SG&A expenses increased by $6.8 million, or 21% in fiscal 1996 over fiscal 1995, primarily due to the operating results of LipoMatrix and amortization resulting from the acquisition of LipoMatrix. Additionally, higher United States advertising and public relation campaign expenses, costs of launching Trilucent implant in Europe, higher international spending related to an overall increase in sales and increased international infrastructure, contributed to this increase. The $3.5 million, or 12% increase in fiscal 1995 over fiscal 1994 was primarily due to higher international sales and marketing spending, including the unfavorable impact of foreign exchange rates. The Company expects SG&A expenses in fiscal 1997, both in absolute dollars and as a percentage of product sales, to be at levels higher than those of fiscal 1996, primarily due to the continued costs of launching Trilucent implant in additional countries. R&D. R&D expenses, which include expenditures for regulatory compliance, were $12.2 million (18% of product sales) in fiscal 1996, $9.9 million (14% of product sales) in fiscal 1995, and $9.4 million (15% of product sales) in fiscal 1994. The increase in R&D spending in fiscal 1996 over 1995 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 R&D spending increase in fiscal 1995 over fiscal 1994 was primarily attributable to advancements in soft tissue programs, including clinical trials for Zyplast(R) II Implant (a concentrated collagen material for soft tissue augmentation), which the Company decided to discontinue at the end of fiscal 1995. The Company expects internal R&D spending to increase significantly in fiscal 1997. PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. The charge for purchased in-process research and development ("in-process R&D") of $17.8 million in fiscal 1996 was due to the $14.8 million non-recurring charge related to the acquisition of LipoMatrix and the $3.0 million non-recurring charge related to the increase in ownership from approximately 40% to 81% in Cohesion Corporation. OPERATING INCOME. Operating loss was $17.6 million in fiscal 1996, compared to operating income of $11.9 million in fiscal 1995 and operating income of $8.6 million in fiscal 1994. The loss in the fiscal 1996 was primarily due to the acquisition-related, non-recurring, in-process R&D charges of $17.8 million related to LipoMatrix and Cohesion Corporation. Excluding these acquisition related, non-recurring R&D charges, operating income would have been approximately $208,000 in fiscal 1996. Additionally, the decrease in operating income in fiscal 1996 was to a large extent due to the inclusion of the operating expenses of LipoMatrix subsequent to the acquisition in August 1995. The 38% increase in operating income in fiscal 1995 over 1994 was attributable primarily to improved sales of other aesthetic and reconstructive products, partially offset by increased SG&A expenses. The improvement in operating income in fiscal 1995 over 1994 was primarily the result Page 21 22 of increased sales of Contigen implant and Collagraft bone graft products, as well as decreased SG&A expenses. IMPACT OF FOREIGN EXCHANGE RATES. The impact of foreign exchange rates from fiscal 1995 to 1996 resulted in an increase in revenue of approximately $457,000 and an increase in operating expenses of approximately $440,000, resulting in a net increase in operating income of approximately $17,000 on equivalent local currency basis, compared to an increase in revenue of approximately $1.6 million and an increase in operating expenses of approximately $1.1 million, resulting in a net increase in operating income of approximately $500,000 from fiscal 1994 to fiscal 1995. GAIN ON INVESTMENTS. In fiscal 1996, the Company recorded a net gain on investments of $82.1 million (pre-tax gain of approximately $86.1 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), resulting primarily from the sale of 1,792,000 shares of common stock of Target Therapeutics, Inc. ("Target"). In fiscal 1995, the Company sold 245,000 shares of common stock of Target for a pre-tax gain of approximately $6.0 million. In addition, the Company recorded an investment reserve of $925,000 to write-down the carrying value of certain equity investments due to a decline in value determined to be other than temporary. In fiscal 1994, the Company did not sell any shares of common stock of Target. EQUITY IN EARNINGS/LOSSES OF AFFILIATE COMPANIES. Equity in earnings of Target was $1.4 million in fiscal 1996 compared to $2.4 million and $1.7 million in fiscal 1995 and 1994, respectively. Equity in Target's earnings decreased in 1996 over 1995 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. Equity in Target's earnings increased in fiscal 1995 over 1994 due to increased earnings of Target, partially offset by the Company's reduced ownership interest resulting from the sale of Target shares. Equity in losses of other affiliate companies in fiscal 1996 was $2.3 million compared to $3.6 million in fiscal 1995 and $1.9 million in fiscal 1994. The decrease in equity in other affiliates' losses in fiscal 1996 over 1995 was primarily due to lower LipoMatrix equity losses as a result of the Company acquiring LipoMatrix in August 1995, partially offset by increased losses of other affiliates. Equity in affiliates' losses increased in fiscal 1995 over 1994 due to additional investments made in affiliate companies. The Company intends to continue to expand its new product development activities through more equity investments in or loans to affiliate companies during fiscal year 1997. These affiliate companies typically are in an early stage of development and may be expected to incur substantial losses which in turn will have an adverse effect on the Company's operating results. There can be no assurance that these investments will result in positive returns nor can there be any assurance on the timing of any return on investment, or that the Company will not lose its entire investment. INTEREST INCOME AND EXPENSE. Interest income was $1,145,000 in fiscal 1996, $487,000 in fiscal 1995 and $510,000 in fiscal 1994. The increase in fiscal 1996 over 1995 was primarily due to higher average short-term investment balances, resulting primarily from the sale of Target stock, and higher interest rates. The decrease in fiscal 1995 over fiscal 1994 was due to lower average investment balances, partially offset by higher interest rates. Interest expense of $296,00 in fiscal 1996 was related primarily to borrowings under the $15 million revolving credit facility and the $3.3 million credit facility (4.1 million Swiss Francs) established by LipoMatrix prior to its acquisition by the Company. (See Note 7 of the Consolidated Financial Statements.) Interest expense of $91,000 in fiscal 1995 was related primarily to the revolving credit facility. Page 22 23 INCOME TAXES. The Company's effective income tax rate was approximately 46% for fiscal 1996 (excluding the impact of the purchased in-process research and development charges for which no tax benefit is available) compared to 46% for fiscal 1995 and 44% for fiscal 1994. The 46% effective tax rate in fiscal 1996 was higher than the statutory rate due primarily to state taxes, consolidated losses in foreign subsidiaries and increased write-downs of certain equity investments for which no tax benefit is available currently. The increase in fiscal 1995 compared to fiscal 1994 is due primarily to increased non-deductible equity in losses of affiliates and investment reserves. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1996, the Company's cash, cash equivalents and short-term investments were $25.4 million compared to $9.4 million at June 30, 1995. Net cash used in operating activities was $36.3 million for fiscal 1996, compared with $10.3 million of net cash provided by operating activities for fiscal 1995. For fiscal 1996, the $36.3 million of net cash used in operating activities was mainly attributable to $39.6 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 $51.8 million was primarily due to a pre-tax gain of approximately $85.8 million ($97.5 million proceeds less cost basis of $11.7 million) from the sale of 1,792,000 shares of common stock of Target by the Company during fiscal 1996, $5.5 million received from credit facilities, and $1.0 million from the issuance of approximately 56,000 shares of the Company's common stock, partially offset by the net payments of approximately $21.7 million for the acquisition of LipoMatrix, payments of approximately $14.3 million for additional investments in and loans to affiliates, payments of approximately $5.5 million to repurchase 300,000 shares of the Company's common stock at an average acquisition price of approximately $18.00 per share, payment of $5.0 million made to Biomatrix for the distribution rights to market Hylaform viscoelastic gel, capital expenditures of approximately $2.6 million, net payments of $1.3 million made to increase the Company's ownership in Cohesion Corporation from 40% to approximately 81%, and the payments of aggregate cash dividends of approximately $1.3 million to the Company's stockholders in July 1995 and January 1996. For fiscal year 1995, the $10.3 million of cash provided by operating activities was offset by $11.3 million used to repurchase 562,500 shares of the Company's common stock at an average acquisition price of approximately $20 per share, $5.7 million of additional investments in and loans to affiliate companies and the payments of aggregate cash dividends of approximately $1.6 million to the Company's stockholders in July 1994 and January 1995. The Company anticipates capital expenditures, equity investments in, and loans to affiliate companies to be approximately $12.0 million in fiscal 1997. 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 and declared a dividend of ten cents per share for stockholders of record as of June 14, 1996. The Company's principal sources of liquidity include cash generated from operations, sales of Target stock, and its cash, cash equivalents and short-term investments. During the fiscal quarter ended September 30, 1994, the Company's Board of Directors authorized the Company to sell portions of its holdings of Target's common stock. During fiscal 1995 and 1996, the Company sold an aggregate of 2,982,500 shares of Target common stock (adjusted for a two-for-one stock spilt) for an aggregate pre-tax gain of approximately $91.9 million ($105.8 million proceeds less cost basis of $13.9 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 June 30, 1996, $10.0 million of this credit facility remained unused. Additionally, the Company has a $3.3 million (4.1 million Swiss Francs) credit facility that was established by LipoMatrix prior to the Company's acquisition of Page 23 24 LipoMatrix , of which $1.4 million (1.8 million Swiss Francs) remained unused as of June 30, 1996. 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 Reliance on Key Products. Sales of the Company's collagen-based injectable products, Zyderm I Collagen implant and Zyderm II Collagen implant (collectively, "Zyderm implant") and Zyplast implant, as well as Trilucent implant accounted for approximately 86% of consolidated product sales for the fiscal year ended June 30, 1996. The Company's product sales may continue to consist primarily of sales of these principal products. Factors such as adverse publicity, adverse rulings by regulatory authorities, product liability lawsuits, introduction of competitive products by third parties or other loss of market acceptance 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. Dependence on Marketing Partners and Third Party Distributors; Effect of Inventory Fluctuations. The Company has entered into certain exclusive arrangements with Bard for the marketing and distribution of the Company's Contigen implant product and with Zimmer for the marketing and distribution of the Collagraft bone graft products. As a result, the Company's revenues and earnings for these products depend substantially upon the continuing efforts of these marketing partners. The Company's business and financial condition 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 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 future shipments to Bard are expected to resume during fiscal 1997, there can be no assurances that such actions will occur. The failure to resume shipments of Contigen implant to Bard during fiscal 1997 and any significant decrease in purchases of Collagraft bone graft products by Zimmer could have a material adverse effect on the Company's operating results. In addition, the Company depends upon third party distributors to market its other products in a number of international markets. Difficulties in the Company's relationship with these distributors and changes in distribution arrangements may adversely affect the Company's business, financial condition and results of operations. Governmental Regulation and Adverse Publicity. The Company's manufacturing activities and products sold in the United States 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 recordkeeping. The Company's primary products are classified as Class III medical devices, which require pre-market approval from the FDA. While the Company's other primary products have been approved for sale in the United States, Trilucent implant is currently in clinical trials in the United States and, accordingly, has not been approved for domestic commercial sale. Medical products whose market applications have not yet been approved by the FDA may only be exported with the specific approval of the FDA. There can be no assurance that the FDA will choose to characterize future products as medical devices rather than drugs or biologics. Any such change in FDA characterization would potentially lengthen and increase the cost of the approval process. 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. Page 24 25 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 Trilucent implant, 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 Company's basic technology, or that existing approvals 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. 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") 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. The disease has been reported in European countries with less than one percent of cattle being affected. The Company is not aware of any reports of BSE in United States cattle to date. Furthermore, United States cattle are not fed sheep-derived protein and the United States prohibits all importation of British cattle. All of the Company's injectable collagen products are currently derived from the hides of United States cattle. In response to the heightened awareness of BSE in Europe, the Company currently uses "closed herds" that are controlled as to lineage, feed, and separation from other animals. There can be no assurance that the various foreign or domestic regulatory authorities will not raise issues regarding BSE or other matters which may adversely affect the Company's ability to manufacture, market or sell its products. 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 significant equity and debt investments in affiliated companies that are involved in the development of complementary or related technologies or products, and the Company currently intends to continue to make significant additional investments 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 have had and will continue to 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. Effect of Ownership Interest in Target. As of June 30, 1996, the Company owned approximately 1.6 million shares of Target Common Stock, representing approximately 11% of the outstanding shares of Target Common Stock valued at over $65 million (based on a market price of $41 per share on such date). The Company's earnings have been significantly favorably affected in recent periods by revenues resulting from the sale of portions of the Company's holdings in Target. The Company has engaged in regular open-market sales of its Target Common Stock and expects to continue such sales. The Company's ownership of Target may also be further reduced through additional equity offerings by Target that dilute the Company's ownership interest. The market price of Target's Common Stock is highly volatile and, as a medical device manufacture, Target is subject to a number of the same factors affecting its operations as the Company, as well as additional factors not applicable to the Company. Readers are encouraged to review Target's public filings for a Page 25 26 detailed understanding of the nature of Target's business and the risk and uncertainties associated with it. Any significant downward fluctuation in the market price for Target Common Stock could adversely impact the Company's earnings (due to lower returns per share on sales of such stock) as well as the value of the Company's total assets as stated on its balance sheet (based on a lower carrying value for the Target investment, which as of June 30, 1996, represented approximately 40% of the value of the Company's total assets). Competition. The medical device industry is characterized by rapidly evolving technology and increasing competition. At the present time there is a commercial product in the United States that is directly competitive with Zyderm and Zyplast implants, the Company's collagen-based products for cosmetic and reconstructive surgery. This product is a gelatin-based (denatured collagen) product for soft tissue augmentation presently being marketed in the United States and Canada. The Company is also aware of one foreign company which is marketing internationally a the collagen-based material for soft tissue augmentation. In addition, several companies are engaged in research and development activities relating to the use of collagen and other biomaterials for the correction of soft tissue defects. The Company's injectable collagen products also compete in the dermatology and plastic surgery markets with substantially different alternative treatments, such as surgery and topical applications. In addition, several companies and institutions are engaged in the development of collagen-based and other materials, techniques, procedures and products for use in medical applications anticipated to be addressed by the Company's Contigen implant and Collagraft bone graft products. Furthermore, several companies market mammary implants that do or will compete with the Trilucent implant. Some of these companies and institutions may, and with respect to certain of the companies marketing products competitively Trilucent implant certainly do, 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. 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. Certain of the Company's collagen-based products, including the Zyderm implants, were manufactured and sold pursuant to an exclusive license from Stanford University under a United States patent, which expired in April 1993, covering the use of native, solubilized collagen for soft-tissue augmentation. The expiration of this patent may result in increased competition in the market for injectable collagen implants if and as other companies enter that market. Undeveloped and Uncertain Markets. Certain of the Company's products, including those marketed by its marketing partners, 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 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. Furthermore, Contigen implant is marketed to urologists, whom the Company believes generally are not the primary care physician for individuals seeking treatment for 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. Patents and Proprietary Technology. The Company depends substantially upon its proprietary technological expertise in the extraction, purification, and formulation 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. Page 26 27 Patent-related litigation is an increasing 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. There can be no assurance that others will not independently develop similar products, duplicate any of the Company's products, or design around any patents used by the Company. No assurance can be given that the Company's processes or products 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. Product Liability; Insurance. The Company is involved in various legal actions arising in the ordinary course of business, the majority of which involve product liability claims. While the outcome of such matters currently is not determinable it is management's opinion that these matters will not have a material adverse effect on the Company's future consolidated financial position 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 implant, which is sold in a medical field (breast reconstruction and augmentation) 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. In light of regulatory investigations surrounding product safety, the Company announced in September 1991 that it would indemnify physicians against damages and legal fees arising from lawsuits brought to a jury trial alleging a link between the Company injections and Polymyositis and Dermatomyositis. To date, there has not been any impact of this indemnification on the Company's results of operations. There can be no assurance, however, that any future such claims would not have a material adverse effect on the Company's operating results. Because the indemnification program has never been utilized, the Company may discontinue the program in the future. Impact of Currency Fluctuations; Importance of Foreign Sales. Approximately 44% of the Company's revenues in fiscal year 1996 came from its international operations. 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. Although the effect of currency fluctuations on the Company's operating results were positive during fiscal 1996, 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. Company's operations and financial results also may be significantly affected by other international factors, including changes in governmental regulations or import and export restrictions, and foreign economic and political conditions generally. Page 27 28 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, all of the Company's manufacturing capacity for collagen-based products and Trilucent implant are located in two primary facilities (one for collagen-based products and one for Trilucent 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 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. 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. Third-Party Reimbursement. Certain of the Company's products, including Contigen implant, the Collagraft bone graft products, and, in certain circumstances, Trilucent implant are purchased by hospitals or physicians, which, in the United States, 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. 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 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. Page 28 29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Financial Statements: Consolidated Balance Sheets at June 30, 1996 and 1995 30 Consolidated Statements of Income for the fiscal years ended June 30, 1996, 1995 and 1994 31 Consolidated Statements of Stockholders' Equity for the fiscal years ended June 30, 1996, 1995 and 1994 32 Consolidated Statements of Cash Flows for the fiscal years ended June 30, 1996, 1995 and 1994 33 Notes to Consolidated Financial Statements 34 Report of Ernst & Young LLP, Independent Auditors 47 Supplementary Quarterly Consolidated Financial Data (Unaudited) 48 Financial Statement Schedule: For the years ended June 30, 1996, 1995 and 1994: Schedule II - Valuation and Qualifying Accounts 49
Schedules not listed above have been omitted because they are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or notes thereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable Page 29 30 CONSOLIDATED BALANCE SHEETS
Years ended June 30, 1996 1995 - ---------------------------------------------------------------------------------------------------- (In thousands, except share and per share amounts) ASSETS Current assets: Cash and cash equivalents $ 21,676 $ 6,155 Short-term investments 3,691 3,229 Accounts receivable, less allowance for doubtful accounts ($375 in 1996 and $383 in 1995) 9,508 13,402 Inventories 9,563 5,056 Other current assets 11,496 5,568 --------- --------- Total current assets 55,934 33,410 Property and equipment, net 15,147 16,506 Intangible assets, net 7,231 2,727 Purchased intangibles and goodwill, net 7,593 -- Investment in Target Therapeutics, Inc. 65,841 17,570 Loans to officers and employees 2,024 759 Other investments and assets 9,237 5,934 --------- --------- $ 163,007 $ 76,906 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,824 $ 2,250 Accrued compensation 2,387 2,908 Accrued liabilities 9,482 7,954 Income taxes payable 7,588 5,902 Notes payable 5,079 -- --------- --------- Total current liabilities 28,360 19,014 Long-term liabilities: Deferred income taxes 27,674 8,478 Other long-term liabilities 3,444 1,494 --------- --------- Total long-term liabilities 31,118 9,972 Commitments and contingencies Minority interest 528 -- 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: 10,575,614 shares (10,519,632 shares in 1995), outstanding: 8,775,614 shares (9,019,632 shares in 1995) 106 106 Additional paid-in capital 64,844 63,855 Retained earnings 42,378 17,273 Cumulative translation adjustment (656) (604) Unrealized gain on available-for-sale investments (1) 34,549 -- Treasury stock, 1,800,000 shares in 1996 (1,500,000 shares in 1995) (38,220) (32,710) --------- --------- Total stockholders' equity 103,001 47,920 --------- --------- $ 163,007 $ 76,906 ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Page 30 31 CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) Revenues: Product sales $ 68,730 $ 71,560 $ 64,552 Other 2,000 1,000 1,000 -------- -------- -------- 70,730 72,560 65,552 -------- -------- -------- Costs and expenses: Cost of sales 19,312 18,584 18,940 Selling, general and administrative 39,040 32,179 28,639 Research and development 12,170 9,943 9,366 Purchased in-process research and development 17,800 -- -- -------- -------- -------- 88,322 60,706 56,945 -------- -------- -------- Income (loss) from operations (17,592) 11,854 8,607 Other income (expense): Net gain on investments, principally Target Therapeutics, Inc. 82,093 5,110 -- Equity in earnings of Target Therapeutics, Inc. 1,430 2,417 1,675 Equity in losses of other affiliates (2,325) (3,577) (1,944) Interest income 1,145 487 510 Interest expense (296) (91) -- -------- -------- -------- Income before income taxes and minority interest 64,455 16,200 8,848 Provision for income taxes 37,985 7,440 3,928 Minority interest (182) -- -- -------- -------- -------- Net income $ 26,652 $ 8,760 $ 4,920 ======== ======== ======== Net income per share $ 2.94 $ .93 $ .50 ======== ======== ======== Shares used in calculating per share information 9,075 9,460 9,896 ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Page 31 32 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unrealized Total Additional Cumulative Gain on Stock- Years ended Common Paid-In Retained Translation Available holders' June 30, 1996, 1995 & 1994 Stock Capital Earnings Adjustment for Sale Treasury Equity Investment Stock - ------------------------------------------------------------------------------------------------------------------------------ (In thousands, except per share amounts) BALANCE AT JUNE 30, 1993 $ 101 $ 56,925 $ 5,905 $ (414) $ -- $ (7,581) 54,936 Sale of common stock under options and employee stock purchase plan 3 2,909 -- -- -- -- 2,912 Tax benefit relating to stock options -- 1,338 -- -- -- -- 1,338 Foreign currency translation adjustment -- -- -- (234) -- -- (234) Dividends declared ($.10 per share) -- -- (943) -- -- -- (943) Treasury stock purchased -- -- -- -- -- (13,847) (13,847) Net income -- -- 4,920 -- -- -- 4,920 --------- --------- --------- --------- -------- -------- ------- BALANCE AT JUNE 30, 1994 104 61,172 9,882 (648) -- (21,428) 49,082 Sale of common stock under options and employee stock purchase plan 2 2,300 -- -- -- -- 2,302 Tax benefit relating to stock options -- 383 -- -- -- -- 383 Foreign currency translation adjustment -- -- -- 44 -- -- 44 Dividends declared ($.15 per share) -- -- (1,369) -- -- -- (1,369) Treasury stock purchased -- -- -- -- -- (11,282) (11,282) Net income -- -- 8,760 -- -- -- 8,760 --------- --------- --------- --------- -------- -------- ------- BALANCE AT JUNE 30, 1995 106 63,855 17,273 (604) -- (32,710) 47,920 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 -- -- -- (52) -- -- (52) Dividends declared ($.175 per share) -- -- (1,547) -- -- -- (1,547) Treasury stock purchased -- -- -- -- -- (5,510) (5,510) Unrealized gain on available-for-sale securities -- -- -- -- 34,549 -- 34,549 Net income -- -- 26,652 -- -- -- 26,652 --------- --------- --------- --------- --------- --------- --------- BALANCE AT JUNE 30, 1996 $ 106 $ 64,844 $ 42,378 $ (656) $ 34,549 $ (38,220) $ 103,001 ========= ========= ========= ========= ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Page 32 33 CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Years ended June 30, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------ (Dollars in thousands) Cash flows from operating activities: Net income $ 26,652 $ 8,760 $ 4,920 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Purchased in-process research and development 17,800 -- -- Depreciation and amortization 6,378 4,368 3,909 Equity in losses of affiliates 895 1,160 269 Gain on investments, net (82,093) (5,110) -- Deferred income taxes (6,660) 238 553 Tax benefits relating to stock options 26 383 1,338 Decrease (increase) in assets: Accounts receivable 4,033 (1,161) (2,968) Inventories (4,150) (1,195) 306 Other (1,828) (737) 16 Increase (decrease) in liabilities: Accounts payable, accrued liabilities and other 874 1,709 764 Income taxes payable 1,686 1,651 1,720 Other long-term liabilities 137 224 (126) -------- -------- -------- Total adjustments (62,902) 1,530 5,781 -------- -------- -------- Net cash provided by (used in) operating activities (36,250) 10,290 10,701 -------- -------- -------- Cash flows from investing activities: Net proceeds from sales of Target Therapeutics, Inc. stock 97,496 8,379 -- Net proceeds from sale of other affiliate stock 1,447 -- -- Proceeds from sales & maturities of short-term investments 4,043 7,366 15,331 Purchases of short-term investments (4,505) (3,126) (12,362) Expenditures for property and equipment (2,559) (4,385) (4,011) Increase in intangible and other assets (6,807) (1,385) (269) Equity investments and loans to affiliates (14,337) (5,737) (2,378) Acquisition of LipoMatrix, Inc., net of cash balances (21,709) -- -- Accrued purchase consideration and other costs of acquisition of LipoMatrix 385 -- -- Acquisition of Cohesion Corporation, net of cash balances (1,256) -- -- -------- -------- -------- Net cash provided by (used in) investing activities 52,198 1,112 (3,689) -------- -------- -------- Cash flows from financing activities: Repurchase of common stock (5,510) (11,282) (13,847) Net proceeds from issuance of common stock 963 2,302 2,910 Cash dividends paid (1,340) (1,636) -- Proceeds from bank borrowings 5,460 -- -- -------- -------- -------- Net cash used in financing activities (427) (10,616) (10,937) -------- -------- -------- Net increase (decrease) in cash and cash equivalents 15,521 786 (3,925) Cash and cash equivalents at beginning of period 6,155 5,369 9,294 -------- -------- -------- Cash and cash equivalents at end of period $ 21,676 $ 6,155 $ 5,369 ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Page 33 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Collagen Corporation (the "Company"), a Delaware corporation, and its wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. 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 are carried at cost or estimated realizable value, if less. In fiscal 1996 and 1995, investments were written down by $4.0 million and $925,000, respectively, to estimated net realizable value. (See Notes 4, 5 and 6). 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 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 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 at June 30, 1996 and 1995. Available-for-sale equity securities, which includes holdings in Target Therapeutics, Inc., are carried at fair value with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. The amortized cost of debt securities in this category 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. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. Page 34 35 INVENTORIES Inventories are valued at the lower of cost, determined on a standard cost basis which approximates average cost, or market. PROPERTY AND EQUIPMENT Depreciation and amortization of property and equipment which is stated at cost are provided on the straight-line method over estimated useful lives as follows: Machinery and equipment 5 - 10 years Leasehold improvements Term of lease
INTANGIBLE ASSETS Intangible assets are amortized using the straight-line method. Patents are amortized over a seventeen-year period beginning with the effective date or over the remainder of such period from the date acquired. Trademarks are amortized over a twenty-year period beginning with the trademark filing dates. Purchased product distribution rights are amortized over their estimated useful lives (generally five years). 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. In 1995, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS #121"). Adoption of SFAS#121 in fiscal 1997 is not expected to have a material impact on the Company's financial position or results of operations. LOANS TO OFFICERS AND EMPLOYEES Principal plus accrued interest due from current and former employees totaled approximately $378,000 and $267,000 at June 30, 1996 and 1995, respectively, and principal plus accrued interest due from officers totaled approximately $1,646,000 and $492,000 at June 30, 1996 and 1995, respectively. Included within the amounts due from officers at June 30, 1996 is $450,000 of promissory notes secured by shares of the Company's stock and repayable five years from the date of issuance and an unsecured promissory note of $1,080,000, due from the Company's Chairman and Chief Executive Officer. The $1,080,000 note is repayable at any time and payable immediately upon the termination of his employment with the Company. All such notes are subject to interest at the lower of 10% per annum or the prime rate. REVENUE RECOGNITION Revenue from product sales is recognized at time of shipment, net of allowances for estimated future returns. CONCENTRATION OF CREDIT RISK The Company sells its plastic surgery and dermatological products primarily to physicians and pharmacies in North America, Europe and the Pacific Rim. The Company sells Contigen(R) Bard collagen implant ("Contigen implant") to C.R. Bard, Inc. ("Bard"), its marketing partner for Contigen implant, and Collagraft(R) bone graft matrix implant and Collagraft(R) bone graft matrix strip to Zimmer, Inc., the Company's marketing partner for Collagraft(R) bone graft products. The Company performs ongoing credit evaluations of its customers and generally does not require Page 35 36 collateral. The Company maintains reserves for potential credit losses and such losses have been within management's expectations. The Company allows, on occasion, its customers to return product for credit, and also allows customers to return defective or damaged product for credit or replacement. Written authorization from the Company is required to return merchandise. Some domestic and foreign customers are subject to extended payment terms. These practices have not had a material effect on the Company's working capital. ADVERTISING COSTS The Company expenses advertising costs as incurred. Total advertising expense was $1,036,000 and $840,000 for 1996 and 1995, respectively, and was not material for fiscal 1994. EARNINGS PER SHARE Earnings per share have been computed based upon the weighted average number of common and dilutive common equivalent shares outstanding. Common equivalent shares result from stock options. FOREIGN CURRENCY TRANSLATION The functional currency for each foreign subsidiary is its respective foreign currency. Accordingly, all assets and liabilities related to these operations are translated at the current exchange rates at the end of each period. The resulting cumulative translation adjustments are recorded directly to the accumulated foreign currency translation adjustment account included in stockholders' equity. Revenues and expenses are translated at average exchange rates in effect during the period. Foreign currency transaction gains and losses are included in results of operations. Until December 1994, the Company's policy was to hedge material foreign currency transaction exposures. At June 30, 1996 and June 30, 1995, no foreign currency transaction exposures were hedged. Unhedged net foreign assets were $14.5 million and $10.4 million at June 30, 1996 and June 30, 1995, respectively. Page 36 37 2. BALANCE SHEET INFORMATION
Years ended June 30, 1996 1995 - -------------------------------------------------------------------------------------------------- (In thousands) Inventories: Raw materials $ 1,148 $ 684 Work-in-process 3,630 1,845 Finished goods 4,785 2,527 -------- -------- $ 9,563 $ 5,056 ======== ======== Other current assets: Deferred taxes $ 5,104 $ 3,142 Other 6,392 2,426 -------- -------- $ 11,496 $ 5,568 ======== ======== Property and equipment: Machinery and equipment $ 32,107 $ 24,095 Leasehold improvements 6,862 11,937 -------- -------- 38,969 36,032 Less accumulated depreciation and amortization (23,822) (19,526) -------- -------- $ 15,147 $ 16,506 ======== ======== Intangible assets: Patents, trademarks and distribution rights $ 8,802 $ 3,630 Organization costs* 1,892 1,887 -------- -------- 10,694 5,517 Less amortization (3,463) (2,790) -------- -------- $ 7,231 $ 2,727 ======== ======== Accrued liabilities: Dividends payable $ 883 $ 676 Treasury stock payable 976 -- Other accrued liabilities 7,623 7,278 ======== ======== $ 9 ,482 $ 7,954 ======== ========
* Organization costs are primarily related to the formation of Collagen International, Inc. and are fully amortized as of June 30, 1996. Page 37 38 3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The following is a summary of available-for-sale securities (other than Target Therapeutics, Inc. stock):
AMORTIZED COST WHICH APPROXIMATES ESTIMATED FAIR VALUE Years ended June 30, 1996 1995 ----------------------------------------------------------------------------- (In thousands) Cash Equivalents: Money market funds $ 3,693 $ 519 Corporate obligations 8,836 1,638 United States Government obligations 1,988 -- ------- ------- $14,517 $ 2,157 ======= ======= Short-term investments: Municipal obligations $ -- $ 972 Corporate obligations 3,691 2,257 ------- ------- $ 3,691 $ 3,229 ======= =======
During the years ended June 30, 1996 and 1995, the Company sold available-for-sale investments with a fair value at the dates of sale of $4.0 million and $7.3 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, 1996. 4. INVESTMENT IN TARGET THERAPEUTICS, INC. ("TARGET") The Company's investment in Target was accounted for under the equity method through November 1995. During December 1995, the Company's interest in Target fell below 20%. Given that the Company does 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. In fiscal 1996, the Company sold 1,792,000 shares of Target common stock for a pre-tax gain of approximately $85.8 million and in fiscal 1995, the Company sold 245,000 shares of Target common stock for a pre-tax gain of approximately $6.0 million. The Company's ownership position in Target as of June 30, 1996 was approximately 11%. Condensed financial information for Target is shown below:
BALANCE SHEET INFORMATION As of June 30, 1995 - -------------------------------------------------------------------------------- (In thousands) Current assets $58,002 Property and equipment 7,704 Other 6,484 ------- Total assets $72,190 ======= Current liabilities $11,110 Long-term liabilities 107 Stockholders' equity 60,973 ------- Total liabilities and stockholders' equity $72,190 ======= Collagen Corporation's share of net assets $17,570 =======
Page 38 39
STATEMENT OF INCOME INFORMATION Years ended June 30, 1995 1994 ----------------------------------------------------------------------------- (In thousands) Net sales $ 50,937 $ 38,275 Costs and expenses (42,058) (32,260) Interest and other income 2,081 1,894 -------- -------- Income before income taxes 10,960 7,909 Provision for income taxes (3,097) (2,780) -------- -------- Net income $ 7,863 $ 5,129 ======== ========
Target's common stock is quoted on The Nasdaq Stock Market. The closing price of Target's stock at June 30, 1996 was $41 per share. The Company held 1,605,888 shares of Target's common stock at June 30, 1996. At June 30, 1996, the Company's shares of Target common stock are classified as available-for-sale and have been recorded at the estimated fair value of $65.8 million. The $58.4 million unrealized gain ($65.8 million estimated fair value less $7.4 million cost) on these available-for-sale securities has been reported as a separate component of stockholders' equity, net of tax. As of August 2, 1996, Target's closing stock price was $33 ae per share, resulting in a decrease of $11.6 million in the estimated fair value of the Company's holdings in Target Therapeutics, Inc. 5. INVESTMENT IN INNOVASIVE DEVICES, INC. In October 1995, the Company purchased approximately 844,000 shares of common stock or approximately 12% in Innovasive Devices, Inc. (of Hopkington, Massachusetts) and entered into a collaborative product development agreement with Innovasive Devices, Inc. ("Innovasive Devices"). The Company and Innovasive Devices are collaborating to develop certain resorbable or partially resorbable mechanical tissue-fixation devices utilizing collagen-based biomaterials for applications in orthopedic tissue repairs. Innovasive Devices is a company that develops, manufactures, and markets tissue and bone reattachment systems which are particularly relevant to the sports medicine. Innovasive Devices completed a public offering of its securities in June 1996. At June 30, 1996, Innovasive Devices' closing price on the Nasdaq Stock Market was $10 per share. Due to restrictions which prevent the sale of any of the Company's shares of Innovasive Devices until October 1997, this investment is valued at cost of $4,064,000 at June 30, 1996. 6. AQUISITIONS LipoMatrix LipoMatrix, Incorporated ("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. In fiscal 1996, the Company introduced the Trilucent implant in most countries of Western Europe. On August 22, 1995, as part of the Company's strategy to expand in its marketing franchise in aesthetic and reconstructive products, 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 a stock purchase agreement 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. Page 39 40 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 shareholders, 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. The amount allocated to in-process research and development was expensed at the time of the acquisition. The Company's results of operations for fiscal 1996, include LipoMatrix' results from August 22, 1995, through June 30, 1996. The unaudited pro forma results of operations of the Company for fiscal years 1996 and 1995, respectively, assuming the acquisition of LipoMatrix occurred on July 1, 1993, on the basis described above with all material intercompany transactions eliminated, are as follows:
Years ended June 30, 1996 1995 - -------------------------------------------------------------------------------- (In thousands, except income per share) Total revenues $70,745 $72,560 Net income 40,436 3,054 Net income per share 4.46 .32
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. Cohesion Corporation The Company increased its ownership position in Cohesion Corporation (of Palo Alto, California) from 40% to approximately 81% on May 29, 1996. Cohesion Corporation is a privately-held company that is developing novel biomaterials with superior performance characteristics in the areas of tissue adhesives, hemostats, biosealants, and adhesion prevention. In connection with the Company's investment in Cohesion Corporation, $3.0 million was allocated to in-process research and development, which was expensed at the time of the investment and $2.5 million was allocated to tangible assets. Cohesion Corporation anticipates that its lead product will begin clinical evaluation in the third or fourth quarter of fiscal 1997. 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. Proforma information related to the purchase acquisition of Cohesion Corporation has not been presented as the results of operations of Cohesion are not material to the Company's operating results. Page 40 41 7. COMMITMENTS MINIMUM LEASE PAYMENTS Future minimum lease payments under noncancelable operating leases at June 30, 1996 are as follows:
- -------------------------------------------------------------------------------- (In thousands) 1997 $ 5,057 1998 4,682 1999 4,494 2000 3,467 2001 3,407 Thereafter 10,753 ------- Total minimum lease payments $31,860 =======
Rental expense was $5.3 million, $4.7 million and $4.6 million in fiscal 1996, fiscal 1995 and fiscal 1994, respectively. MINIMUM PURCHASES Future minimum purchases required by the distribution agreement with Tissue Technologies, Inc. at June 30, 1996 are as follows:
- -------------------------------------------------------------------------------- (In thousands) 1997 $ 500 1998 750 1999 1,250 2000 1,438 2001 1,653 Thereafter 10,440 ------- Total minimum purchases $16,031 =======
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 contain certain financial covenants and restricts the aggregate amount of cash dividends. In December 1995, the $7 million revolving line of credit was increased to $15 million. During fiscal 1996, $5 million was borrowed under this agreement leaving $10 million of this credit facility unused as of June 30, 1996, and no amounts were borrowed under this agreement as of June 30, 1995. Interest associated with this agreement is 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 is payable monthly. Additionally, the Company is required to pay, on a quarterly basis, a commitment fee of 3/8 of 1% per annum of the unused portion. This credit facility expires on November 15, 1997. Page 41 42 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 $3.3 million (4.1 Swiss Francs). As of June 30, 1996, $1.4 million (1.8 million Swiss Francs) of these credit facilities is unused. 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, and continues over a period not to exceed ten years. Approximately one-half of these credit facilities is 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 whereby cash bonuses in the amounts of $325,000, $305,000, $285,000, $265,000 and $245,000 will be paid to him on February 13 of each of the next five years beginning in 1997, providing that he continue to serve the Company on the applicable payment date. 8. LEGAL MATTERS The Company is involved in legal actions, including product liability and intellectual property claims, arising in the ordinary course of business. While the outcome of such matters is currently not determinable, it is management's opinion that these matters will not have a material adverse effect on the Company's consolidated financial position or results of its operations. 9. 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, 1996, the total number of shares of common stock reserved for issuance under the Company's current stock option plans was 1,877,073. Page 42 43 Stock option activities under the stock option plans were as follows:
- -------------------------------------------------------------------------------------------------------- NUMBER NUMBER OPTION PRICE OF SHARES OF SHARES RANGE PER SHARE EXERCISABLE - -------------------------------------------------------------------------------------------------------- Outstanding at June 30, 1994 1,250,980 $ 4.69 -- $ 28.25 780,412 Granted 142,350 17.88 -- 25.00 Exercised (128,918) 5.13 -- 22.75 Canceled or expired (46,436) 5.50 -- 26.50 ---------------------------------------------------------------------- Outstanding at June 30, 1995 1,217,976 4.69 -- 28.25 851,702 Granted 431,100 17.00 -- 20.50 Exercised (22,154) 16.25 -- 22.88 Canceled or expired (145,249) 6.38 -- 26.50 ---------------------------------------------------------------------- Outstanding at June 30, 1996 1,481,673 $ 4.69 -- $ 28.25 669,539 ====================================================================== Available for grant at June 30, 1996 395,400 =========
STOCK PURCHASE PLAN In 1985, the Company established an employee stock purchase plan under which 450,000 shares of the Company's common stock were reserved for issuance to employees. Subsequently, the Company increased the authorization to 600,000 shares. Under the plan, the Company's employees, subject to certain restrictions, may purchase shares at a price per share that is the lesser of 85 percent of the fair market value as of the beginning or close of the yearly offering period. For fiscal 1996, 1995 and 1994, shares issued under the plan were 34,084, 36,100, and 32,741, respectively. The average issuance price per share was $17.83, $19.28 and $19.00 for fiscal 1996, 1995 and 1994, respectively. At June 30, 1996, 67,909 shares remained available for future sales under this plan. STOCK REPURCHASE PROGRAM In February 1993, the Company's Board of Directors authorized a stock repurchase program. In fiscal 1996, 1995 and 1994, the Company repurchased 300,000, 562,500 and 567,500 shares at average acquisition prices of approximately $18, $20 and $24 per share, respectively. In June 1996, the Board of Directors authorized the repurchase of up to an additional 500,000 shares. The Company plans to retain repurchased shares as treasury stock, but may use a portion of the stock in various company stock benefit plans. STOCKHOLDER RIGHTS PLAN In November 1994, the Board of Directors approved a stockholder rights plan which would entitle stockholders to purchase stock in the Company or in an acquirer of the Company at a discounted price in the event of certain hostile efforts to acquire control of the Company. The rights may only be exercised, if at all, upon the occurrence of certain events unless earlier redeemed pursuant to the plan. The rights expire on November 28, 2004. Page 43 44 10. INTERNATIONAL SALES AND DISTRIBUTION RIGHTS Export sales were $32.6 million in fiscal 1996, $26.1 million in fiscal 1995 and $20.8 million in fiscal 1994. These export sales are primarily in Europe, Canada and the Pacific Rim. The Company markets its products internationally directly in Canada, ten European countries, Australia and New Zealand and via distributors in other countries. 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. 11. MAJOR CUSTOMER AND PRODUCTS During fiscal 1996, 1995 and 1994, the Company realized product sales from its marketing partner, Bard of $6.2 million, $16.5 million and $16.7 million, respectively, which represented 9%, 23% and 26% of product sales. Bard has exclusive worldwide marketing and distribution rights for Contigen implant, a product introduced in fiscal 1994. These amounts were comprised of product sales of $.3 million, $13.4 million and $15.9 million of Contigen implant as well as $5.9 million, $3.1 million and $0.8 million of income from Bard's direct sales of Contigen implant to physicians in fiscal 1996, 1995 and 1994, respectively. In fiscal years 1996, 1995 and 1994, the Company also recorded other revenue of $2.0 million, $1 million and $1 million, respectively, which consisted of milestone payments 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 1996 and 1995, 82% and 72% of sales were derived from Zyderm/Zyplast products. 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 and Trilucent implant are located in two primary facilities (one for collagen-based products and one for Trilucent 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 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. 12. INCOME TAXES The Company uses the liability method of accounting for income taxes required by SFAS No. 109. 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, 1996 and June 30, 1995 are presented below: Page 44 45
June 30, 1996 1995 - ------------------------------------------------------------------------------------ (In thousands) Deferred tax liabilities: Property, plant & equipment $ 132 $ 332 Intangible assets 512 651 Investments 3,154 7,491 Foreign earnings and credits (net) 16 4 Unrealized gain on Target Therapeutics, Inc. stock 23,860 -- -------- -------- Total deferred tax liabilities 27,674 8,478 -------- -------- Deferred tax assets: Accounts receivable 361 948 Inventories 472 15 State income taxes 2,726 731 Equity in losses of affiliates 5,665 3,419 Non-deductible accruals 1,876 1,893 Other 608 360 Valuation allowance (5,940) (3,595) -------- -------- Total deferred tax assets 5,768 3,771 -------- -------- Net deferred tax liabilities $ 21,906 $ 4,707 ======== ========
The valuation allowance increased by $2,345,000, $1,998,000 and $717,000 in fiscal 1996, 1995 and 1994, respectively. Significant components of the provision for income taxes are as follows:
Years ended June 30, 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------- (In thousands) Current: Federal $ 36,793 $ 6,358 $ 2,732 Foreign 360 164 187 State 7,491 979 456 -------- -------- -------- Total current 44,644 7,501 3,375 -------- -------- -------- Deferred: Federal (5,971) (368) 352 State (688) 307 201 -------- -------- -------- Total deferred (6,659) (61) 553 -------- -------- -------- $ 37,985 $ 7,440 $ 3,928 ======== ======== ========
Page 45 46 For financial reporting purposes, income before income taxes includes the following components:
Years ended June 30, 1996 1995 1994 - -------------------------------------------------------------------------------- (In thousands) Domestic operations $ 85,816 $ 16,171 $ 8,636 Foreign operations (21,361) 29 212 ----------------------------------- $ 64,455 $ 16,200 $ 8,848 ===================================
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, 1996 1995 1994 - ---------------------------------------------------------------------------------- (In thousands) Income before income taxes $ 64,455 $ 16,200 $ 8,848 ==================================== Expected tax at 35% or 34% $ 22,559 $ 5,670 $ 3,008 State income tax, net of federal benefit 4,422 832 434 In-process research and development 6,230 Net operating losses of subsidiaries for which no current benefit is realizable 2,166 80 (45) Equity in losses of affiliates 2,039 1,549 660 Tax credits recognized (98) (153) (315) Foreign Sales Corporation benefit (49) (102) (150) Benefit from favorable tax settlement -- (543) -- Other 716 107 336 ------------------------------------ $ 37,985 $ 7,440 $ 3,928 ====================================
13. STATEMENTS OF CASH FLOWS Supplemental disclosures of cash flow information:
Years ended June 30, 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- (In thousands) Cash paid during the year for: Interest (net of capitalized interest) $ 296 $ 91 $ -- Income taxes (net of refunds) 42,817 5,518 (54) Non-cash financing activity: Dividends declared $ 883 $ 676 $ 943
Page 46 47 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders, Collagen Corporation We have audited the accompanying consolidated balance sheets of Collagen Corporation as of June 30, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1996. 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 based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Collagen Corporation at June 30, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 1996 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 August 2, 1996 Page 47 48 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 1996 Product sales $ 18,320 $ 16,587 $ 18,883 $ 14,940 Other revenue -- -- -- 2,000 Cost of sales 5,034 5,207 5,074 3,997 Selling, general and administrative expenses 10,220 10,051 10,467 8,302 Research and development expenses 3,242 3,424 2,925 2,579 Purchased in-process research and development 3,000 (2) -- -- 14,800 (1) Operating income (loss) (3,176) (2,095) 417 (12,738) Net gain on investments, principally Target Therapeutics, Inc. 14,421 36,285 20,921 10,466 Net income (loss) 6,333 19,400 9,470 (8,551) Net income (loss) per share .70 2.14 1.05 (.95) Share price: High $ 22-3/4 $ 23-1/2 $ 21-1/4 $ 21-1/2 Low 18-3/4 19-1/4 17 15
FISCAL 1995
Quarters ended June 30 March 31 December 31 September 30 - ----------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) Product sales $20,226 $17,032 $18,870 $15,432 Other revenue -- -- -- 1,000 Cost of sales 4,917 4,451 4,810 4,406 Selling, general and administrative expenses 9,405 7,443 8,107 7,224 Research and development expenses 2,672 2,223 2,504 2,534 Operating income 3,232 2,905 3,449 2,268 Net gain on investments, principally Target Therapeutics, Inc. 1,766 2,569 775 -- Net income 2,700 2,508 2,245 1,307 Net income per share .29 .26 .24 .14 Share price: High $ 22-1/2 $ 28-1/2 $ 24 $ 22-3/4 Low 15 21-1/2 19-1/4 17-1/4
(1) Represents charge of $14.8 million for in-process research and development costs in connection with the acquisition of LipoMatrix. (2) Represents charge of $3.0 million for in-process research and development costs in connection with the acquisition of Cohesion Corporation.. 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 shareholders of record on June 14, 1996, in addition to a $.075 per share dividend declared and paid earlier in fiscal 1996. In fiscal 1995, the Company declared a cash dividend of $.075 per share on its common stock payable to shareholders of record on June 15, 1995, in addition to a $.075 per share dividend declared and paid earlier in fiscal 1995. The Board of Directors expects to review the potential for future dividends semi-annually. See Consolidated Statements of Stockholders' Equity. Page 48 49 SCHEDULE II COLLAGEN CORPORATION VALUATION AND QUALIFYING ACCOUNTS Years ended June 30, 1994, 1995 and 1996
Additions Balance at charged to beginning of costs and Balance at Description Period expenses Deductions (1) end of period - -------------------------------------------------------------------------------------------------------------------------- (In thousands) 1994 Allowance for doubtful accounts $416 $ -- $ 63 $353 1995 Allowance for doubtful accounts $353 $ 46 $ 16 $383 1996 Allowance for doubtful accounts $383 $ 33 $ 41 $375
- ---------- (1) Write-off of uncollectable accounts Page 49 50 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT The information required by this item concerning the Company's directors is incorporated by reference from pages 3-5 of the Company's Proxy Statement for its Annual Meeting of Stockholders filed on or about September 27, 1996 (the "Proxy Statement"). See "Business - Executive Officers" in Item I of this Form 10-K Annual Report for information concerning the Company's executive officers. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from pages 13-17 of the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from pages 11-12 of the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from pages 19-22 of 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 - 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. Page 50 51 2. Exhibits
EXHIBIT NUMBER NOTES DESCRIPTION ------ ----- ----------- 3.1 (9) Certificate of Incorporation of Collagen Subsidiary, Inc. 3.2 (9) Certificate of Merger of Collagen Corporation, a California corporation, into Collagen Subsidiary, Inc., a Delaware corporation 3.3 (12) By-Laws, as amended 10.24 (1) Collaborative Research and Distribution Agreement with Zimmer, Inc. dated as of June 26, 1985 10.27 (1) Distribution Agreement between Registrant and Lederle (Japan), Ltd. dated as of June 26, 1985 10.34 (2) Agreement for Sale and Leaseback of Manufacturing Facility between Registrant and Heleasco Seven, Inc. 10.36 (3) Amended and Restated Development and Distribution Agreement with C.R. Bard, Inc., dated as of August 4, 1989 10.38 (4) Agreement for Sale and Leaseback of Manufacturing Facility between Registrant and Heleasco Seven, Inc. dated September 25, 1989 10.39 (4) Agreement for Sale and Leaseback of Manufacturing Facility between Registrant and Heleasco Seven, Inc. dated December 29, 1989 10.40 (4) Amended and Restated Promissory Note of Dale A. Stringfellow, dated September 7, 1990 10.41 (4) Amended and Restated Promissory Note Secured by Deed of Trust by Dale A. Stringfellow, dated September 7, 1990 10.42 (4) 1984 Incentive Stock Option Plan, as amended 10.43 (4) 1985 Employee Stock Purchase Plan, as amended 10.44 (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 10-K for the fiscal year ended June 30, 1985 10.61* (7) Letter Agreement, dated April 26, 1991 and May 21, 1993 by and between Collagen Corporation and A. Neville Pelletier 10.62 (8) 1994 Stock Option Plan 10.63 (9) Renewed Lease for 2500 Faber Place, Palo Alto, California dated December 1, 1992 between Registrant and Leonard Ely, Shirley Ely, Carl Carlsen and Mary L. Carlsen 10.65* (9) Promissory Note of Howard D. Palefsky dated August 3, 1994 10.66 (9) Revised Form of Agreement Regarding Proprietary Information and Inventions between Registrant and all employees or consultants
- ---------- * Constitutes a management contract or compensatory contract, plan or arrangement. Page 51 52 10.67 (10) Credit Agreement, dated November 15, 1994, by and between the Bank of New York and the Registrant, as amended January 24, 1995 10.67(a) (13) Second Amendment, Third Amendment and Fourth Amendment dated June 30, 1995, September 30, 1995, an December 26, 1995, respectively, to Credit Agreement dated November 15, 1994 by and between the Bank of New York and the Registrant 10.67(b) (14) 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) Sixth Amendment, dated June 28, 1996, to Credit Agreement dated November 15, 1994 by and between the Bank of New York and the Registrant 10.68 (10) Letter Agreement, dated October 7, 1994, by and between C.R. Bard. Inc. and the Registrant, amending the Amended and Restated Development and Distribution Agreement dated August 4, 1989 between the Parties originally filed as Exhibit 10.36 to the Registrant's Form 10-K for the fiscal year ended June 30, 1989 10.70* (12) Letter of Acceptance of Employment by and between Gary Petersmeyer and the Registrant, dated December 19, 1994 10.71** (12) License, Supply and Option Agreement, dated March 24, 1995 by and between LipoMatrix, Incorporated and Registrant 10.72** (12) Distributor Agreement dated March 24, 1995 by and between LipoMatrix, Incorporated and Registrant 10.73** (12) Coordination Agreement dated March 24, 1995, by and between LipoMatrix Incorporated and Registrant's wholly owned subsidiary, Collagen International Incorporated 10.74* (12) Promissory Note of Howard D. Palefsky dated June 5, 1995 10.75** (12) Letter Agreement, dated July 10, 1995 by and between C.R. Bard, Inc. and the Registrant , amending the Amended and Restated Development and Distribution Agreement dated August 4, 1989 between the Parties originally filed as Exhibit 10.36 to the Registrant's Form 10-K for the fiscal year ended June 30, 1989 10.76 (11) Stock Purchase Agreement dated August 22, 1995 between the Registrant and certain stockholders of LipoMatrix, Incorporated 10.77 (13) Promissory Note between Howard D. Palefsky and the Registrant dated December 11, 1995 10.78 (15) Bonus Agreement between Howard D. Palefsky and the Registrant dated February 20, 1996 10.79 (15) Promissory Note between Howard D. Palefsky and the Registrant dated February 20, 1996 10.80 (14) Amended and Restated Secured Loan Agreement between Ross R. Erickson and the Registrant dated December 31, 1995 10.81* Letter of Acceptance of Employment by and Pierre Comte and the Registrant dated March 21, 1995 10.82 Loan Agreement between the Registrant and Cohesion Corporation dated May 24, 1996 10.83** Worldwide Medical Product Distribution Agreement between Registrant and Tissue Technologies, Inc. dated June 4, 1996
- ---------- ** Confidential treatment is requested for a portion of this document. * Constitutes a management contract or compensatory contract, plan or arrangement. Page 52 53 10.84** Distribution Agreement between Registrant and Biomatrix, Inc. dated June 17, 1996 11.1 Statement Regarding Weighted Average Common and Common Equivalent Shares Used in Computation of Per Share Income 21.1 List of Subsidiaries 23.1 Consent of Ernst & Young LLP, Independent Auditors 24.1 Power of Attorney (see page 42) 27.1 Financial Data Schedule (EDGAR version only)
Notes to Exhibits: (1) Incorporated by reference to the same exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1985. (2) Incorporated by reference to the same exhibits filed with Registrant's Current Report on Form 8-K dated March 31, 1989. (3) Incorporated by reference to the same exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1989. (4) Incorporated by reference to the same exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1990. (5) Incorporated by reference to the same exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1991. (6) Incorporated by reference to the same exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1992. (7) Incorporated by reference to the same exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1993. (8) Incorporated by reference to Exhibit 4.1 filed with Registrant's Registration statement of Form S-8 (No. 33-80038) which became effective June 9, 1994. (9) Incorporated by reference to the same exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1994 (10) Incorporated by reference to the same exhibits filed with Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1994. (11) Incorporated by reference to exhibit 2.1 filed with Registrant's Current Report on Form 8-K dated September 6, 1995. (12) Incorporated by reference to the same exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 (13) Incorporated by reference to the same exhibits filed with Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1995 (14) Incorporated by reference to exhibit 10.76 originally filed with Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1995 (15) Incorporated by reference to the same exhibits filed with Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996 ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K (CONT'D) b) Reports on Form 8-K. No reports on Form 8-K were filed by Registrant during the fiscal quarter ended June 30, 1996. - -------------------------------------------------------------------------------- ** Confidential treatment is requested for a portion of this document. Page 53 54 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. COLLAGEN CORPORATION /s/ Gary S. Petersmeyer ------------------------ Gary S. Petersmeyer President and Chief Operating Officer Dated: September 20, 1996 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Howard D. Palefsky and David Foster, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Page 54 55 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - -------------------------------------------------------------------------------------------------------------------- /s/ Howard D. Palefsky Chairman of the Board of Directors and Chief - ---------------------- Executive Officer (Principal Executive Officer) September 20, 1996 Howard D. Palefsky /s/ Gary S. Petersmeyer President, Chief Operating Officer, and Director September 20, 1996 - ----------------------- Gary S. Petersmeyer /s/ David J. Foster Vice President and Chief Financial Officer - ------------------- (Principal Financial and Accounting Officer) September 20, 1996 David J. Foster /s/ Anne L. Bakar Director September 16, 1996 - ----------------- Anne L. Bakar /s/ John R. Daniels, MD Director September 20, 1996 - ----------------------- John R. Daniels, MD /s/ William G. Davis Director September 20, 1996 - -------------------- William G. Davis /s/ Reid W. Dennis Director September 17, 1996 - ------------------ Reid W. Dennis /s/ Craig W. Johnson, Esq. Director September 20, 1996 - -------------------------- Craig W. Johnson, Esq. /s/ Michael F. Mee Director September 16, 1996 - ------------------ Michael F. Mee /s/ Rodney Perkins, MD Director September 20, 1996 - ---------------------- Rodney Perkins, MD /s/ Roger H. Salquist Director September 16, 1996 - --------------------- Roger H. Salquist
Page 55 56 COLLAGEN CORPORATION FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED JUNE 30, 1996 INDEX TO EXHIBITS
Sequentially Exhibit Numbered Page Number Exhibit - -------------------------------------------------------------------------------------------------------------------- 10.67(c) Sixth Amendment, dated June 28, 1996, to Credit Agreement dated November 15, 1994 by and between the Bank of New York and the Registrant 10.81* Letter of Acceptance of Employment by and Pierre Comte and the Registrant dated March 21, 1995 10.82 Loan Agreement between the Registrant and Cohesion Corporation dated May 24, 1996 10.83** Worldwide Medical Product Distribution Agreement between Registrant and Tissue Technologies, Inc. dated June 4, 1996 10.84** Distribution Agreement between Registrant Biomatrix, Inc. dated June 17, 1996 11.1 Statement Regarding Weighted Average Common and Common Equivalent Shares Used in Computation of Per Share Income 21.1 List of Subsidiaries 23.1 Consent of Ernst & Young LLP, Independent Auditors 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. Page 56 EX-10.67 2 SIXTH AMENDMENT TO THE CREDIT AGREEMENT 1 EXHIBIT 10.67c SIXTH AMENDMENT TO THE CREDIT AGREEMENT This SIXTH AMENDMENT TO THE CREDIT AGREEMENT (this "Amendment") is dated as of June 28, 1996 and entered into by and among Collagen Corporation, a Delaware corporation (the "Borrower"), and The Bank of New York (the "Bank"), and is made with reference to that certain Credit Agreement dated as of November 15, 1994, by and among the Borrower and the Bank, as amended (the "Credit Agreement"). Capitalized terms used herein without definition shall have the same meanings herein as set forth in the Credit Agreement. RECITALS WHEREAS, the Borrower and the Bank desire to amend the Credit Agreement to adjust certain of the financial covenants set forth therein and to make certain other amendments as set forth below; and WHEREAS, the Bank is willing to agree to the requested amendments, subject to the terms of this Amendment. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein, the parties hereto agree as follows: SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT 1.1. AMENDMENT TO SECTION 5.12(C) Section 5.12 of the Credit Agreement is hereby amended by deleting the section entitled "Aggregate Amount" and the section entitled "Fiscal Year End" and inserting in their place and stead the following: Aggregate Fiscal Amount Year End --------- -------- $17,335,000 6/30/96 $ 6,000,000 6/30/97 1.2. AMENDMENT TO SCHEDULE 5.11 (PERMITTED DEBT) Schedule 5.1 (Permitted Debt) which currently states "None" thereon, is hereby deleted in its entirety, and the new Schedule 5.11 attached hereto as Schedule 5.11 (new) shall be substituted in its place. 2 1.3. AMENDMENT TO SCHEDULE 5.12 (PERMITTED INVESTMENTS) The portion of Schedule 5.12 (Permitted Investments) labeled "Collagen Corporation Summary of Investments in Affiliates" dated October 25, 1994, a copy of which is attached to this Amendment as Exhibit 1, is hereby deleted and the new Summary of Investments attached hereto as Exhibit 2 shall be substituted in its place. 1.4. AMENDMENT TO SECTION 5.15 (INTEREST COVERAGE RATIO) The Bank hereby suspends the applicability of Section 5.15 of the Credit Agreement (Interest Coverage Ratio) for the fiscal quarter of the Borrower ending June 30, 1996. This suspension is effective only with respect to such fiscal quarter ending June 30, 1996. Section 5.15 shall be applicable for each fiscal quarter of the Borrower ending after June 30, 1996. SECTION 2. EFFECTIVENESS OF THIS AMENDMENT This Amendment shall be effective upon the Bank's receipt of: 2.1. AMENDMENT. A duly executed counterpart of this Amendment; 2.2. COHESION DOCUMENTS. A Security Agreement in the form of Exhibit E to the Credit Agreement and Subsidiary Guaranty in the form of Exhibit G to the Credit Agreement duly executed by Cohesion Corporation ("Cohesion"), which is hereby designated by the Bank as a "Designated Subsidiary" pursuant to Section 3.8 of the Credit Agreement; and 2.3. COHESION SECRETARY'S CERTIFICATE. A certificate, dated as of the date hereof, of the Secretary or Assistant Secretary of Cohesion (i) attaching a true and complete copy of the resolutions of its Board of Directors and of all documents evidencing other necessary corporate action (in form and substance satisfactory to the Bank) taken by it to authorize the Security Agreement and Subsidiary Guaranty entered into by Cohesion (ii) attaching a true and complete copy of its Certificate of Incorporation and By-Laws, (iii) setting forth the incumbency of its officer or officers who may sign such documents, including therein a signature specimen of such officer or officers and (iv) attaching a certificate of good standing of the Secretary of State of the jurisdiction of its incorporation and of each other jurisdiction in which it is qualified to do business. SECTION 3. BORROWER'S REPRESENTATIONS AND 3 WARRANTIES In order to induce the Bank to enter into this Amendment and to amend the Credit Agreement in the manner provided herein, the Borrower represents and warrants to the Bank that the following statements are true, correct and complete: 3.1. CORPORATE POWER AND AUTHORITY. The Borrower has all requisite corporate power and authority to enter into this Amendment and to carry out the transactions contemplated by, and perform its obligations under, the Credit Agreement. 3.2. AUTHORIZATION OF AGREEMENTS. The execution, delivery and performance of this Amendment, and the performance of the Credit Agreement have been duly authorized by all necessary corporate action by the Borrower. 3.3. NO CONFLICT. The execution, delivery and performance by the Borrower of this Amendment and the performance by the Borrower of the Credit Agreement do not and will not (i) violate any provision of any law, rule or regulation applicable to the Borrower or any of its Subsidiaries, the Certificate of Incorporation or Bylaws of the Borrower or any of its Subsidiaries or any order, judgment or decree of any court or other agency of the government binding on the Borrower or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any Contract of the Borrower or any of its Subsidiaries, (iii) result in or require the creation or imposition of any Lien upon any of their properties or assets, or (iv) require any approval of stockholders or any approval or consent of any Person under any Contract of the Borrower or any of its Subsidiaries except for such approvals or consents which have been obtained on or before the date hereof and disclosed in writing to the Bank. 3.4. GOVERNMENTAL CONSENTS. The execution and delivery by the Borrower of this Amendment and the performance by the Borrower of the Credit Agreement do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any Federal, state or other governmental authority or regulatory body or other Person. 3.5. BINDING OBLIGATION. This Amendment and the Credit Agreement when executed and delivered, will be the legally valid and binding obligations of the Borrower, enforceable against it in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. 4 3.6. INCORPORATION OR REPRESENTATIONS AND WARRANTIES FROM CREDIT AGREEMENT. The representations and warranties contained in Article 4 of the Credit Agreement are and will be true, correct and complete in all material respects on and as of the date hereof to the same extent as though made on and as of that date, except to the extent that such representations and warranties specifically relate to an earlier date, in which case they are true, correct and complete in all material respects as of such earlier date. 3.7. ABSENCE OF DEFAULT. No event has occurred and is continuing or will result from the execution of this Amendment which would constitute and Event of Default or a Potential Event of Default. SECTION 4. MISCELLANEOUS 4.1. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS. (a) On and after the date hereof, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import referring in the other Loan Documents to the "Credit Agreement", "thereunder", "thereof" or words of like import referring to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended by this Amendment. (b) Except as specifically amended by this Amendment, the Credit Agreement, Pledge Agreement and the other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. (c) The execution, delivery and performance of this Amendment shall not, constitute a waiver of any provision of, or operate as a waiver of any right, power or remedy of the Bank under, the Credit Agreement, the Pledge Agreement or any of the other Loan Documents. 4.2. FEES AND EXPENSES. Borrower acknowledges that all costs, fees and expenses as described in Section 8.2 of the Credit Agreement incurred by the Bank and its counsel with respect to this Amendment and the documents and transactions contemplated hereby shall be for the account of the Borrower. 4.3. EXECUTION IN COUNTERPART. This Amendment may be executed in any number of counterparts, and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts taken together shall constitute but one and the same instrument. 5 4.4. HEADINGS. Section and subsection headings in this Amendment are included herein for convenience of reference only and shall not constitute a apart of this Amendment for any other purpose or be given any substantive effect. 4.5. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO AND ALL OTHER ASPECTS HEREOF SHALL BE DEEMED TO BE MADE UNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first above written by their respective officers thereunto duly authorized. COLLAGEN CORPORATION By: /S/ David Foster ----------------- Name: David Foster ------------ Title: Vice President and ------------------ Chief Financial Officer ----------------------- THE BANK OF NEW YORK By: /s/ Elizabeth T. Ying ---------------------- Name: Elizabeth T. Ying ----------------- Title: Vice President -------------- 6 SCHEDULE 5.11 (NEW) Permitted Debt 1. Indebtedness of Cohesion Corporation, a consolidated subsidiary of the Borrower, pursuant to that certain Loan Agreement, dated as of May 24, 1996, between Cohesion Corporation and the Borrower. 2. Debt of LipoMatrix pursuant to the Credit Suisse Loan Agreement (reference: Third Amendment to the Credit Agreement dated September 30, 1995) 7 SUPPLEMENT TO SECURITY AGREEMENT SUPPLEMENT, dated as of June 28, 1996, made by COHESION CORPORATION, a California corporation (the "New Grantor") to the Security Agreement, dated as of November 15, 1994 (the "Security Agreement"), by and among Collagen Corporation, a Delaware corporation (the "Borrower"), each Guarantor party thereto and THE BANK OF NEW YORK (the "Lender"). A. Reference is made to the Credit Agreement, dated as of November 15, 1994, (as amended, modified or supplemented from time to time, the "Credit Agreement"), between the Borrower and the Lender. B. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Security Agreement or the Credit Agreement, as the case may be. C. The Grantors have entered into the Security Agreement in order to induce the Lender to enter into the Credit Agreement and make the Other Loans. Pursuant to the Credit Agreement, the Lender may require certain Subsidiaries of the Borrower to be added under the Credit Agreement as Designated Subsidiaries, in which event said Subsidiary shall be required to enter into the Guaranty as an additional Guarantor. Section 22 of the Security Agreement provides that such Subsidiaries of the Borrower may become Grantors under the Security Agreement by the execution and delivery of an instrument in the form of this Supplement. The New Grantor is a Subsidiary of the Borrower and is executing this Supplement in accordance with the requirements of the Credit Agreement to become a Grantor under the Security Agreement in order to induce the Lender to make additional Other Loans and as consideration for Loans previously made. Accordingly, the Lender and the New Grantor agree as follows: 1. In accordance with Section 22 of the Security Agreement, by signing this Supplement, the New Grantor (a) shall be, and shall be deemed to be, a "Grantor" under, and as such term is defined in, the Security Agreement with the same force and effect as if originally named therein as a Grantor, (b) shall have made, and shall be deemed to have made, the representations and warranties contained in Section 6 of the Security Agreement on and as of the date hereof, and (c) shall have made, and shall be deemed to have made, all of the covenants and agreements of a Grantor set forth in the Security Agreement. 8 2. The New Grantor represents and warrants to the Lender that this Supplement has been duly authorized, executed and delivered by it and constitutes its legal, valid and binding obligations, enforceable against it in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or an action at law). 3. Except as expressly supplemented hereby, the Security Agreement shall remain in full force and effect. 4. This Supplement shall be governed by and construed in accordance with the laws of the State of New York without regard to conflicts of laws rules. 5. Every provision of this Supplement is intended to be severable, and if any term or provision hereof shall be invalid, illegal or unenforceable for any reason, the validity, legality and enforceability of the remaining provisions hereof or thereof shall not be affected or impaired thereby, and any invalidity, illegality or unenforceability in any jurisdiction shall not affect the validity, legality or enforceability of any such term or provision in any other jurisdiction. 6. For purposes of Section 19 of the Security Agreement, the address of the New Grantor is as follows: COHESION CORPORATION 2500 Faber Place Palo Alto, CA 94303 Telecopier No.: (415) 856-1430 Telephone No.: (415) 856-0200 Attention: Chief Financial Officer 7. The New Grantor agrees to reimburse the Lender for its reasonable out-of-pocket expenses in connection with this Supplement, including the reasonable fees, other charges and disbursements of counsel to the Lender. 8. This Supplement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument. This Supplement shall become effective when the Lender shall have received counterparts of this Supplement that, when taken together, bear the signatures of the New Grantor and the Lender. The New Grantor and the Lender have duly executed this Supplement to the Security Agreement as of the day and year first above written. 9 COHESION CORPORATION By: /s/ Frank DeLustro ------------------- Name: Frank DeLustro -------------- Title: CEO and President ----------------- THE BANK OF NEW YORK By: /s/ Elizabeth Ying ------------------ Name: Elizabeth T. Ying ----------------- Title: Vice President -------------- [SCHEDULES CORRESPONDING TO THE SCHEDULES IN THE SECURITY AGREEMENT ARE TO BE ATTACHED] 10 STATE OF California ) ) ss.: COUNTY OF Santa Clara ) On the 1ST day of August, 1996, before me personally came Frank A. DeLustro, to me known, who, being by me duly sworn, did depose and say that he/she resides at 2500 Faber Place Palo Alto, CA 94303, and that he/she is the CEO & President of COHESION CORPORATION, the corporation described in and which executed the foregoing instrument; and that he/she signed his/her name thereto by order of the board of directors of said corporation. /s/ Denise M. Vaillancourt -------------------------- Notary Public Commission Expires: Feb.9, 2000 11 SCHEDULE 6 (b) to Security Agreement Dated as of June 28, 1996 PART A - Chief Executive Office and Chief Place of Business: Cohesion Corporation 2500 Faber Place Palo Alto, California 94303 (Santa Clara County) PART B - Other Offices and Places of Business: None PART C - Location of Equipment and Inventory: Cohesion Corporation 2500 Faber Place Palo Alto, California 94303 (Santa Clara County) 12 SCHEDULE 6 (e) to Security Agreement Dated as of June 28, 1996 LIST OF PATENTS AND TRADEMARKS PATENTS Patent # Issue Date Title - -------- ---------- ----- 5,290,552 March 1, 1994 Surgical Adhesive Material TRADEMARKS - ---------- None 13 SUPPLEMENT TO GUARANTY AND SUBORDINATION AGREEMENT SUPPLEMENT, dated as of June 28, 1996, made by COHESION CORPORATION, a California corporation having an office at 2500 Faber Place, Palo Alto, California 94303, (the "New Guarantor") to the Guaranty (the "Guaranty"), dated as of November 15, 1994, made by each Guarantor party thereto and COLLAGEN CORPORATION, a Delaware corporation (the "Borrower") to THE BANK OF NEW YORK ("BNY"). A. Reference is made to the Credit Agreement, dated as of November 15, 1994, between the Borrower and BNY (as the same may be amended, extended, increased, modified, refunded or refinanced from time to time, the "Credit Agreement"). B. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Guaranty or the Credit Agreement, as the case may be. Accordingly, BNY and the New Guarantor agree as follows: 1. In accordance with Section 10 of the Guaranty, by signing this Supplement, the New Guarantor (a) shall be, and shall be deemed to be, a "Guarantor" under, and as such term is defined in, the Guaranty with the same force and effect as if originally named therein as a Guarantor, (b) shall have made, and shall be deemed to have made, the representations and warranties contained in Section 4 of the Guaranty on and as of the date hereof, and (c) shall have made, and shall be deemed to have made, all of the covenants and agreements of a Guarantor set forth in the Guaranty. 2. Except as expressly supplemented hereby, the Guaranty shall remain in full force and effect. 3. This Supplement shall be governed by and construed in accordance with the laws of the State of New York without regard to conflicts of laws rules. 4. Every provision of this Supplement is intended to be severable, and if any term or provision hereof shall be invalid, illegal or unenforceable for any reason, the validity, legality and enforceability of the remaining provisions hereof or thereof shall not be affected or impaired thereby, and any invalidity, illegality or unenforceability in any jurisdiction shall not affect the validity, legality or enforceability of any such term or provision in any other jurisdiction. 14 5. For purposes of Section 7 of the Guaranty, the address of the New Grantor is as follows: COHESION CORPORATION 2500 Faber Place Palo Alto, CA 94303 Telecopier No.: (415) 856-1430 Telephone No.: (415) 856-0200 Attention: Chief Financial Officer 6. This Supplement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument. This Supplement shall become effective when BNY shall have received counterparts of this Supplement that, when taken together, bear the signatures of the New Grantor and BNY. The New Grantor and BNY have duly executed this Supplement to the Guaranty as of the day and year first above written. COHESION CORPORATION By: /s/ Frank DeLustro ------------------ Name: Frank DeLustro -------------- Title: CEO & President --------------- THE BANK OF NEW YORK By: /s/ Elizabeth Ying ------------------ Name: Elizabeth Ying -------------- Title: Vice President -------------- 15 STATE OF California ) ) ss.: COUNTY OF Santa Clara ) On the 1st day of August, 1996, before me personally came Frank DeLustro, to me known, who, being by me duly sworn, did depose and say that he/she resides at 2500 Faber Place Palo Alto, CA 94303, and that he/she is the CEO & President of COHESION CORPORATION, the corporation described in and which executed the foregoing instrument; and that he/she signed his/her name thereto by order of the board of directors of said corporation. /s/ Denise M. Vaillancourt -------------------------- Notary Public Commission Expires: Feb.9, 2000 EX-10.81 3 EMPLOYMENT CONTRACT WITH PIERRE COMTE, PHD 1 EXHIBIT 10.81 EMPLOYMENT CONTRACT BETWEEN LIPOMATRIX, INC. 24, PUITS GODET CH - 2000 NEUCHATEL (HEREINAFTER REFERRED TO AS "THE COMPANY") AND PIERRE COMTE, PhD WIESENSTRASSE 8A 8700 KUSNACHT SWITZERLAND (HEREINAFTER REFERRED TO AS "EMPLOYEE") 2 P O S I T I O N CHIEF OPERATING OFFICER - reporting to the Chief Executive Officer STARTING DATE Date of initial employment, from the date of signing of this contract, shall be not later than the end of the notice period legally required under Employee's current employment contract with current employer. However, recognizing that Employee will be attending courses at the Harvard Business School, Boston, MA, USA, during the period April through June, 1995, and that Employee will do so with the permission of current employer, and that Employee will use accrued vacation-time to personally fund the first two months of the course, but will not receive funding for the final month, then and under said circumstances, Company agrees to pay Employee a stipend of CHF12,000 to allow Employee to complete the Harvard Business School course work, provided that Employee officially starts work for Company on July 1, 1995. RIGHTS AND DUTIES Rights and duties of the Employee are determined by the legal prescriptions regarding the Employment Agreement in general, the Company's Employee Handbook, by Employee's Job Description, annual goals and budgets, as well as by the decisions and guidelines of the Board of Directors. PROBATION PERIOD 90 workdays. Employee's activity and performance will be reviewed at the end of this period and afterwards on a calendar year-end basis. OTHER ACTIVITIES Without the agreement of the Chief Executive Officer, Employee is not authorized to accept other mandates - remunerated or not - with third parties in the field of medical devices (for example, to be a Member of boards, committees of professional associations, etc.). SALARY AND OTHER COMPENSATION Annual gross salary CHF 250,000, payable in thirteen (13) monthly installments of CHF 19,231 each. Family Allowance This allowance will be paid to Employee, if applicable, according to the rules existing in the Canton of Neuchatel . 13th Salary A 13th monthly salary payment will be paid to Employee at the end of each year, on a pro rata temporis basis. Equity Sharing Employee will be granted an option to purchase 100,000 shares of Common Stock of LipoMatrix, Inc., at an exercise price equal to it's current value of U.S.$ 0.20 per share, under the Company's Stock Option Plan. This option will vest over a period of 4 years (with twelve months vesting one year after employment commences and thereafter in monthly increments). This stock option is subject to the approval of the Board of Directors. 3 Relocation Expenses/Housing Allowance LMI will reimburse relocation costs for you and your family and your personal possessions to your new domicile in Neuchatel Canton when that time comes (after the current school year)- subject to an acceptable, documented estimate. During the time you may spend working for LipoMatrix prior to relocating to Neuchatel, the Company agrees to provide suitable, temporary living accommodations for a period of up to three months from start date. Performance Bonus Company will pay a Performance Bonus of CHF 15,000 to Employee at conclusion of Calendar Year 1995, on a pro rata temporis basis, subject, in part, to the successful completion of objectives determined mutually by himself and CEO (i.e., 75% of bonus is based on performance against objectives, 25% at CEO discretion). SALARY/COMPENSATION AND PERFORMANCE REVIEWS The Company bases salary increases and bonus compensation on performance. Salary/bonus review will occur on an annual basis shortly after the end of each calendar year. Performance review will occur periodically, but not less than annually. VACATION 25 days vacation + Swiss legal Holidays. OVERTIME Overtime work will not be paid or compensated. SOCIAL BENEFITS Standard LipoMatrix benefit package will be applied (per Employee Handbook, current and future revisions). In addition, salary-protection insurance sufficient to ensure full income in the event of disability will be paid by the Company. TERMINATION: Under this employment contract, Employee may be terminated upon written notice as follows: a) By mutual agreement of both parties b) By the company (i) if the Employee shall die, or (ii) immediately for cause (defined as fraud, dishonesty, gross negligence, willful misconduct, theft, conviction of crime, unethical business conduct or engaging in activities prohibited under this agreement, or (iii) for any reason during the probationary period, provided that the company will pay Employee the balance of salary to the completion of the entire probationary period, plus 3 months' additional salary, or (iv) if the company determines that Employee is unable to meet performance criteria. In such case, the Employee will be given termination notice of 6 months or severance pay in an equivalent amount in lieu of notice period outstanding. SPECIAL SEVERANCE CLAUSE: In the event that loss of Employee's position with the Company occurs due to no fault of his own (i.e., through change of ownership, elimination of the COO position, or should LipoMatrix leave Switzerland), Employee will receive severance pay equal to one year of full salary. NOTICE PERIOD: Should Employee desire to leave the employ of LipoMatrix, a 3 month notice period must be observed 4 PATENTS AND INVENTIONS In the course of his work Employee could make or participate in the elaboration of inventions and innovations patented or not. The Company reserves the right to have exclusive propriety on these inventions or innovations, even if said inventions or innovations are made outside Employee's described position. Employee will be entitled to no special compensation in relation with these inventions or innovations. NON COMPETITION CLAUSE Upon the termination of this contract by either party, Employee will refrain from any activity which could be competitive to the Company (such as creating a competitive company for his own profit, or working for a direct competitor to the Company). This restriction is valid in Europe for one year and is specific to the field of mammary implants, specific devices under development or in production by the Company (at the time of contract termination), and/or any passive radiofrequency identification device that can be implanted in the human body for medical information management. CONFIDENTIALITY Apart from and independently or other general obligations, Employee is bound by absolute confidentiality concerning anything Employee might learn in the course of Employee's activities for the Company. This includes management, operations, financial situation, research and development projects, and manufacturing processes of the Company. Any documents, plans, reports, drawings. etc. that Employee may create or come across either directly or indirectly cannot under any circumstance be communicated to a third party. The confidentiality agreement remains in force even after termination of this contract by either party. JURISDICTION This contract is governed by Swiss Law. The place of jurisdiction is Neuchatel (Switzerland). Pierre Comte, PhD LipoMatrix, Inc. - -------------------------------------- --------------------------------------- Employee Name /s/ Pierre Comte /s/ Terry Knapp - -------------------------------------- --------------------------------------- Employee's Signature Signed on behalf of the Company /s/ 21 March 1995 /s/ 19 March 1995 - -------------------------------------- --------------------------------------- Date Date EX-10.82 4 LOAN AGREEMENT WITH COHESION CORPORATION 1 EXHIBIT 10.82 LOAN AGREEMENT This Loan Agreement ("Agreement") is entered into as of May 24, 1996 ("Effective Date"), by and between Cohesion Corporation, a California corporation having its principal place of business at 2500 Faber Place, Palo Alto, California 94303 (the "Company), Collagen Corporation, a Delaware corporation having its principal place of business at 2500 Faber Place, Palo Alto, California 94303 ("Collagen"), and, with respect to Sections 4, 5 and 6.1 hereof, Rodney Perkins, M.D. WHEREAS, concurrently herewith, the Company and Collagen are entering into a Series A Preferred and Common Stock Purchase Agreement (the "Purchase Agreement"), a License Agreement and certain related agreements pursuant to which Collagen is making an equity investment in the Company and the Company is licensing certain technology from Collagen; WHEREAS, Collagen is willing, pursuant to the terms and conditions of this Agreement, to loan the Company up to $5,000,000 in cash installments; and . WHEREAS, Collagen and Dr. Perkins desire to provide for the sale and transfer of 25,000 shares of the Company's Common Stock from Dr. Perkins to Collagen for each $1,000,000 advanced to the Company by Collagen pursuant to this Agreement. NOW, THEREFORE, the parties hereby agree as follows: SECTION 1. LOAN AND NOTES 1.1 Loan. Collagen agrees, on the terms of and subject to the conditions specified in this Agreement, to lend to the Company, from time to time and at the request of the President of the Company, up to an aggregate of $5,000,000 (the "Loan Amount"). Each loan shall be evidenced by a promissory note (the "Note") dated as of the date of the loan and in the form of Exhibit A (each a "Note" and collectively the "Notes"). 1.2 Installments. (a) The Company shall be entitled to borrow funds from Collagen in installments until such time as the Company shall have borrowed the entire Loan Amount, subject to the following: (i) The Company shall give Collagen a written request ("Loan Request") for each installment, signed by the President of the Company and specifying (A) the amount of the requested installment and (B) the date upon which the Company will receive the 2 funds from Collagen, which date must be at least ten (10) days following Collagen's receipt of the Loan Request; (ii) Loan Requests may be made (A) at any time after the Company's President, in his discretion, determines that the funds raised by the Company under the Purchase Agreement have been substantially spent or committed to be spent or (B) immediately prior to an initial public offering of the Company's Common Stock; (iii) The minimum amount that may be loaned to the Company at any one time shall be $1,000,000; and (iv) Each installment must be evidenced by a fully executed Note. (b) In addition, Collagen may from time to time in its sole discretion upon ten (10) days prior notice to the Company advance all or a portion of the Loan Amount not previously loaned to the Company, subject to subsections 1.2(a)(iii) and (iv) above. 1.3 Loan Term; Interest. The term of the Loan will begin on the Effective Date and end on the earlier of five (5) years from the date of the first advance hereunder or the date the Notes are converted pursuant to Section 4 of this Agreement (the "Expiration Date"), such period hereinafter being referred to as the "Loan Term." During the Loan Term, all sums loaned to the Company pursuant to this Agreement less any amounts repaid by the Company (the "Outstanding Balance") will bear interest as set forth in the Notes. Subject to the terms hereof, the Outstanding Balance and all accrued interest shall be due and payable on the Expiration Date. 1.4 Prepayment and Repayment. The Outstanding Balance and all accrued interest may be prepaid without penalty with thirty (30) days prior written notice to Collagen. Amounts borrowed by Company under this Agreement may not be reborrowed following repayment by Company of such amounts. SECTION 2. REPRESENTATIONS AND WARRANTIES. 2.1 Authorization. Each of the Company and Collagen represents and warrants to the other party that the execution, delivery and performance of this Agreement by such party has been duly authorized by all requisite corporate action, and this Agreement constitutes a valid and binding obligation of such party enforceable in accordance with its terms, subject as to enforcement of remedies to applicable bankruptcy, insolvency, reorganization or similar laws relating to or affecting the enforcement of creditors' rights. 2.2 Governmental Consents. The Company represents and warrants to Collagen that it has obtained all consents, approvals, orders and authorizations from, and made all registrations, qualifications and filings with, all appropriate federal and state governmental authorities (other than the filing of a notice pursuant to Section 25102(f) of the California Corporations Code, which filing shall be completed after the closing hereunder) that may be required in connection with the consummation of the transactions contemplated herein. -2- 3 2.3 Investment Representations. Collagen represents to the Company that it is acquiring the Note to be issued to Collagen and any securities issued upon conversion of the Note for investment and not with a view towards distribution to the public within the meaning of the Securities Act of 1933, as amended. Collagen understands that the Notes, and any securities issued upon conversion thereof will be legended in form satisfactory to the Company's counsel restricting transfer except in compliance with securities laws. Collagen represents to the Company that it is familiar with the business and affairs of the Company, and has had access to all information which it has requested concerning the Company. SECTION 3. DEFAULT. For purposes of this Agreement, the term "default" shall include any of the following: (a) Company's failure to meet its obligations under this Agreement; and (b) The filing of a petition in bankruptcy or under any similar insolvency law by Company, the making of an assignment for the benefit of creditors, or if any voluntary petition in bankruptcy or under any similar insolvency law is filed against Company and such petition is not dismissed within ninety (90) days after the filing thereof. Upon each such default pursuant to Section 3(a) above, the Company shall have forty-five (45) days to cure such default after receipt of written notice of default from Collagen specifying the nature of the Company's default. If the Company is unable to cure its default within forty-five (45) days, Collagen may, at its option, accelerate repayment of Outstanding Balance, in which case the Outstanding Balance, and all interest accrued thereon shall be due and payable on the ninetieth (90th) day following the date of Collagen's written notice of default. SECTION 4. CONVERSION 4.1 Conversion Upon a Public Offering. In the event of a closing of the Company's sale of its Common Stock in a firm commitment underwriting pursuant to a registration statement under the Securities Act of 1933, as amended (a "Public Offering"), then upon the closing of the Public Offering all of the outstanding unpaid principal balance and accrued interest under the Notes shall be converted into fully paid and nonassessable shares of Common Stock of the Company, at the price per share at which such Common Stock is sold to the public (prior to deduction for underwriting discounts and expenses). 4.2 Conversion Upon a Merger. In the event of (i) a merger or consolidation of the Company with or into any other corporation pursuant to which the shareholders of the Company hold less than fifty percent (50%) of the voting securities of the surviving corporation or (ii) a sale of all or substantially all of the assets of the Company (each an "Acquisition"), then immediately prior and subject to the closing of the Acquisition all of the outstanding unpaid principal balance and accrued interest under the Notes shall be converted into fully paid and nonassessable shares of Common Stock of the Company at a price per share equal to the consideration per share to be received in the Acquisition by the holders of the Company's Common Stock. In the event such consideration includes securities or other non-cash -3- 4 consideration to be paid to shareholders of the Company, such consideration shall be valued for purposes of conversion under this Section 4.2 using the method used to value the consideration paid to other shareholders of the Company in the Acquisition. 4.3 Notice. In the event of a Public Offering or Acquisition, the Company shall give Collagen not less than twenty (20) days prior written notice of the proposed closing date of such transaction. 4.4 Issuance of Securities on Conversion. As soon as practicable after conversion of the Notes, the Company at its expense will cause to be issued in the name of and delivered to Collagen a certificate or certificates for the number of fully paid and nonassessable shares of capital stock of the Company to which Collagen shall be entitled on such conversion, together with any other securities and property to which Collagen is entitled on conversion under the terms of this Agreement. No fractional shares will be issued on conversion of the Note. If on conversion of the Note a fraction of a share results, the Company will pay the cash value of that fractional share, calculated on the basis of the applicable conversion price. SECTION 5. CONSIDERATION FOR LOAN; TERMINATION OF LOAN 5.1 Termination. If the Company raises funds through the sale of equity securities to a party other than Collagen after the date of this Agreement and before a total of $5,000,000 has been loaned hereunder (a "Financing") and Collagen is given notice of and the opportunity to participate in the Financing pursuant to Section 2.1 of the Amended and Restated Rights Agreement of even date herewith, then (a) if Collagen elects not to participate in the Financing or elects to participate as to an amount less than the remaining undrawn portion of the Loan Amount, the Loan Amount shall be thereafter reduced by an amount equal to the amount of equity funds raised in the Financing from parties other than Collagen; provided that in no case shall the Loan Amount be reduced below the actual loans previously advanced to the Company hereunder; and (b) if Collagen elects to participate in the Financing, the amount invested by Collagen in the Financing will be credited towards Collagen's $5,000,000 loan commitment under this Agreement and deemed to be an advance against the Loan Amount for purposes of this Section 5. 5.2 Consideration for Loan. For each $1,000,000 of the Loan Amount advanced by Collagen to the Company, Dr. Perkins agrees to sell and transfer to Collagen, and Collagen agrees to purchase from Dr. Perkins, 25,000 shares of Common Stock at a purchase price of $.70 per share up to a maximum of 125,000 shares of Common Stock. If the Loan Amount is reduced under Section 5.1(a), then the maximum number of shares subject to this Section 5.2 shall be reduced on a prorata basis. -4- 5 SECTION 6. MISCELLANEOUS 6.1 Amendment. No amendment or waiver of any provision of this Agreement or the Notes, nor consent to any departure by the Company therefrom, shall be effective unless the same shall be in writing and signed by Collagen, by the Company and, with respect to any amendment or waiver of the provisions of Sections 4, 5 or 6.1 hereof, by Dr. Perkins. 6.2 Notices. All notices, requests, demands and other communications under this Agreement or the Notes shall be in writing and shall be deemed to have been duly "given" on the date of delivery, if delivered personally or if sent by facsimile (with receipt acknowledged) to the party to whom notice is to be given, or on the third business day after mailing if mailed by first class mail, registered or certified, postage prepaid and properly addressed as follows: If to Collagen: If to the Company: Collagen Corporation Cohesion Corporation 2500 Faber Place 2500 Faber Place Palo Alto, CA 94303 Palo Alto, CA 94303 Fax Number: (415) 354-4752 Fax Number: (415) 354-4801 Attention: President Attention: President Any party may change its address or facsimile number for purposes of this Section 5.2 by giving the other party written notice of the new address or number in the manner set forth above. 6.3 No Waiver; Remedies. No failure on the part of Collagen to exercise, and no delay on the part of Collagen in exercising, any right hereunder or under the Notes shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder or under the Notes preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 6.4 Costs, Expenses and Taxes. Each party shall pay its own costs and expenses, including legal fees and expenses, incurred by it in connection with the preparation, execution and delivery of this Agreement, the Notes, and any other documents to be delivered hereunder. If the Company fails to pay when due the principal of, or any interest on, the Notes, or fails to comply with any other provisions of this Agreement or the Notes, the Company will pay on demand all costs and expenses, including without limitation reasonable attorneys' fees and legal expenses, incurred by Collagen in connection with collecting any sums due on or on account of the Loan or in otherwise enforcing any of its rights under this Agreement or the Notes. 6.5 Binding Effect; Governing Law. This Agreement and the Notes shall be binding upon and inure to the benefit of the Company and Collagen and their respective successors and assigns, except that neither party shall have the right to assign its rights hereunder or any interest herein without the prior written consent of the other party. This Agreement and the Notes shall -5- 6 be governed by, and construed in accordance with, the internal laws of the State of California (without reference to any principles of conflicts of laws). 6.6 Counterparts. This Agreement may be executed in counterparts, each of which shall be an original, and all of which together shall constitute one instrument. 6.7 Term. The term of this Agreement shall run from the date hereof through the Expiration Date, unless earlier terminated by Collagen in accordance with Section 3. The provisions of Section 2 shall survive early termination of this Agreement. COLLAGEN CORPORATION COHESION CORPORATION By /s/ Howard Palefsky By /s/ Frank DeLustro ------------------------------------- ---------------------------------- Howard Palefsky Frank DeLustro Chairman and Chief Executive President and Chief Executive Officer Officer FOR PURPOSES OF SECTIONS 4, 5 AND 6.1: /s/ Rodney Perkins ---------------------------------- Rodney Perkins -6- 7 EXHIBIT A PROMISSORY NOTE $__________ Palo Alto, California __________, 199__ For value received, Cohesion Corporation, a California corporation (the "Company"), located at 2500 Faber Place, Palo Alto, California 94303, promises to pay to the order of Collagen Corporation, a Delaware corporation ("Collagen") located at 2500 Faber Place, Palo Alto, California 94303, or any subsequent holder of this Promissory Note ("Holder"), the principal sum of _______________________________ Dollars ($_________) together with interest from the date hereof on the terms and conditions set forth herein. The term of this Promissory Note shall commence on ___________ and end on _____________. During the term of this Promissory Note the unpaid principal shall bear interest, adjusted quarterly on the first day of each calendar quarter, equal to the higher of (i) the rate of ten percent (10%) per annum, 365 day basis, or (ii) the prime lending rate as reported in the Wall Street Journal on such date; provided however, that the rate at which interest will accrue on unpaid principal under this Promissory Note will not exceed the highest rate permitted by applicable law. Principal and interest shall be payable in lawful money of the United States of America, without any deduction on any nature by way of set off, counterclaim, or otherwise. Pursuant to the terms and conditions of Section 4 of that certain Loan Agreement dated as of May 24, 1996 by and between Collagen and the Company ("Loan Agreement"), the principal sum of this Promissory Note, together with the interest accrued thereon (the "Repayment Amount"), is subject to Holder's conversion rights and/or obligations under Section 4 of the Loan Agreement. Upon conversion of the Repayment Amount, this Promissory Note shall terminate and the Company's obligations to pay the Repayment Amount to Holder shall be extinguished. This Promissory Note may be prepaid in cash at any time without penalty, subject to Holder's conversion rights as set forth in Section 4 of the Loan Agreement. The Company waives presentment for payment, protest, notice of protest and notice of prepayment of this Promissory Note. The Company agrees to reimburse Holder for all its reasonable costs and expenses, including reasonable attorneys' fees, in connection with the enforcement of this Promissory Note. This Promissory Note shall be governed and construed according to the laws of the State of California and shall be binding on the successors and assigns of the Company. COHESION CORPORATION By: ___________________________ Title: ___________________________ Date: ___________________________ EX-10.83 5 WORLDWIDE MEDICAL PRODUCT DISTRIBUTION AGREEMENT 1 EXHIBIT 10.83 WORLDWIDE MEDICAL PRODUCT DISTRIBUTION AGREEMENT This Worldwide Medical Product Distribution Agreement (the "Agreement") is effective as of May 31, 1996, between Collagen Corporation, a Delaware corporation with an address at 2500 Faber Place, Palo Alto, California 94303 ("Distributor") and Tissue Technologies, Inc., a corporation organized under the laws of California, with its principal place of business at 1370 Green Street, San Francisco, California 94109 (the "Supplier"). WHEREAS, Supplier is engaged in the development of products comprised of E-PTFE tubes for soft tissue augmentation and management of facial wrinkles; WHEREAS, Distributor is engaged in the marketing and sale of medical products for soft tissue augmentation and management of facial wrinkles; WHEREAS, Distributor wishes to be appointed Supplier's exclusive distributor of the Products in the Territory (as such terms are hereinafter defined), and Supplier wishes to appoint Distributor as its sole exclusive distributor; WHEREAS, Distributor wishes to purchase Product(s) from Supplier, and Supplier wishes to sell Product(s) to Distributor for exclusive marketing and sale of the Product(s) in the Territory on the terms and subject to the conditions set forth herein. NOW THEREFORE, in consideration of the premises and of the mutual covenants of the parties hereto, the parties agree: 1. DEFINITIONS 1.1 "First Commercial Sale" shall mean the first transfer of title to a Product by Distributor to a third party, excluding Distributor's subsidiaries or affiliates, for monetary consideration. 1.2 "Government Agency" shall include all local, national, and supranational bodies with the legal authority to establish rules, regulations, standards and guidelines (or to issue certificates of compliance with these), covering the design, manufacturing, and marketing of the Products in the Territory. This will include without limitation the United States Food and Drug Administration. 1.3 "Initial Period" shall mean the term beginning as of the First Commercial Sale of Product(s) and ending on *** . - -------------------- ***Confidential treatment requested -1- 2 1.4 "Intellectual Property Rights" shall include all patents, copyrights, and other proprietary rights or applications therefor, including Supplier's rights under the Exclusive License Agreement between Supplier and The Regents of the University of California ("The Regents") dated December 1, 1993 appended hereto as Exhibit A, which the Supplier may at any time during the term of this Agreement own, license, adopt, use, or register with respect to the Products. 1.5 "Net Sales" means the amounts actually received from the sale of Products by Distributor or its subdistributor for cash or other forms of monetary consideration, in accordance with Generally Accepted Accounting Principles, less the following deductions: (a) allowances, rejections, returns, and volume discounts, (b) freight , transport packaging, insurance charges associated with transportation, and (c) taxes, tariff, or import/export duties. 1.6 "Product(s)" means any and all of those products described in Schedule A, and identified by a separate Product Specification (as hereinafter defined). 1.7 "Product Specification" shall mean any document that defines the manufacturing requirement of a Product, including but not limited to packaging configuration, labeling, material components, and information relating to material composition and release tests that may be certified pursuant to a Certificate of Analysis. Each Product Specification shall be incorporated into this Agreement as an Appendix to Schedule A. 1.8 "Territory" means any and all of the countries, or parts thereof, referred to in Schedule B. 2. APPOINTMENT OF THE DISTRIBUTOR 2.1 Supplier hereby appoints the Distributor, and the Distributor hereby accepts this appointment, as Supplier's sole and exclusive (subject to Section 5.9, Minimum Purchase) authorized distributor, with the right to grant subdistributorships, for the promotion, marketing, distribution and sale of Products in the Territory. As a result, Supplier will not sell Products in the Territory, other than through Distributor. 3. MILESTONE PAYMENTS 3.1 So long as the Supplier is not in breach of any material provision of this Agreement, and upon the occurrence of the following events, the Distributor shall make the following milestones payments to the Supplier: (a) *** upon the execution of this Agreement; (b) *** within *** days of Supplier's notice to the Distributor of the issuance of a United States patent claiming Supplier's soft tissue augmentation device; and (c) *** upon *** of the Effective Date. - -------------------- ***Confidential treatment requested -2- 3 4. PRICE, FORECASTS, PURCHASE ORDER, DELIVERY, ACCEPTANCE, TRANSFER OF TITLE, FEES AND PAYMENT 4.1 Prices. Subject to the provisions of this Agreement, the Supplier shall sell Products to the Distributor at the unit prices set forth in Schedule A. The Purchase Price constitutes payment for the manufacturing cost of the Products and royalties due Supplier for Distributor's exclusive distribution right. Nothing herein shall obligate the Distributor to pay any additional past or future royalties to any third party, unless expressly included in this Agreement. The unit price set forth in Schedule A includes the cost of the Product, all expenses relating to packaging and labeling of the Products, all freight insurance premiums, and all freight charges to the mutually agreed upon delivery site(s) listed in Schedule D. 4.2 Forecasts. The Distributor shall provide non-binding, rolling twelve (12) month forecasts of Distributor's anticipated requirements of Products, updated *** , throughout the term of this Agreement. Such twelve (12) month forecast shall be based on Distributor's fiscal year cycle, beginning on July 1st and ending on June 30th. 4.3 Purchase Orders. (a) Purchase orders shall be submitted by the Distributor in writing. During the Initial Period, purchase orders in any given year must meet the minimum purchase requirements set forth in Schedule C. In the event that the Supplier is unable to fulfill the terms of any purchase order, the Supplier shall so inform the Distributor in writing within five (5) business days of the Supplier's receipt of such purchase order. Any orders in the ordinary course of business, consistent with normal ordering practices, that are rejected or unfullfilled by Supplier shall be deducted from the minimum purchase requirement, in any given year, as set forth in Schedule C. Purchase orders shall be deemed accepted and binding by the Supplier unless the Supplier rejects any purchase order in writing by return facsimile within five (5) business days of the Supplier's receipt of such purchase order. (b) Distributor, may at its option, either reschedule delivery of any Products or cancel any order or portion thereof, upon written notice to Supplier. A "reschedule" is defined as changing all or any portion of those Products scheduled for shipment on any ship date by moving the ship date later in time. Distributor shall have a right to cancel or reschedule any order for later shipment provided such request is received by Supplier at least thirty (30) days in advance of the original ship date. - -------------------- ***Confidential treatment requested -3- 4 4.4 Delivery. Products shall be sold to the Distributor F.O.B. delivery site(s) listed in Schedule D. Supplier shall deliver an invoice to Distributor for each unit of Product sold to Distributor pursuant to Distributor's purchase order. Distributor agrees to conform its purchase orders to the minimum quantity of Products shipped to a particular delivery site as set forth in Schedule D. 4.5 Acceptance. The Distributor shall within ten (10) business days inspect each shipment of Products after delivery. In the event the Distributor determines that any shipment, or part thereof, is incomplete, damaged or defective, the Distributor shall so inform the Supplier in writing within such ten (10) business days. All Products shall be deemed accepted by the Distributor unless any such delivery, or part thereof, is rejected in writing by return facsimile within such ten (10) business days period. 4.6 Transfer of Title. Title to and ownership of Products shall pass to the Distributor upon acceptance by the Distributor, and the Distributor shall thereafter be responsible for any damage or loss of such Products. Supplier shall bear all risk of loss of, or damage to, all units of Products up to the time the Products are accepted by Distributor. 4.7 Fees. The Distributor shall be responsible for payment of customs and other duties and any taxes in the Territory and for obtaining any import and export licenses that may be required by proper authorities in the Territory. 4.8 Payments. Payment for Products shall be made in United States dollars. During the Initial Period, Distributor shall pay Supplier within *** after receipt of an invoice, and acceptance of the Products by the Distributor. Subsequent to the Initial Period, Distributor shall pay Supplier in arrears, within *** after Distributor's quarter end close. The calculation for such payments are described in Schedule A. 5. GENERAL OBLIGATIONS OF THE DISTRIBUTOR 5.1 Inventory Levels. The Distributor shall maintain an inventory of Products reasonably sufficient to meet *** of anticipated sales of the Products in the Territory. The Distributor shall store the Products under secure conditions and in compliance with all pharmaceutical or medical device laws applicable to storage of the Products. 5.2 Independent Agent. The Distributor shall conduct its business in the purchase and resale of Products as a principal for its own account and at its own expense and risk. The Distributor, its agents and employees are not the legal representatives, employees or agents of Supplier for any purpose and have no right or authority to incur any expenses on behalf of Supplier or to assume or create, in writing or otherwise, any obligations of any kind, express or implied, in the name of or on behalf of Supplier. Nothing contained in this Agreement shall create the relationship of partners, joint ventures, employer and employee, principal and agent, or any similar relationship, between Supplier and the Distributor. - -------------------- ***Confidential treatment requested -4- 5 5.3 Regulatory Approvals and Compliance. (a) Excluding the United States, Distributor shall obtain and own all regulatory approvals, certificates, registrations, licenses, and permits related to the Products unless prohibited by local law. In the event that necessary approvals, certificates, registrations, licenses, and permits required to sell and distribute the Products in the Territory are required by local law to be owned by, or held in the name of Supplier, Supplier agrees that it shall provide reasonable assistance to Distributor in order to obtain any and all applicable regulatory approvals required by Government Agencies under the laws and/or regulations of any jurisdiction in order to market the Products within the Territory, including but not limited to, meeting relevant standards and guidelines, preclinical, clinical, and safety approvals required by Government Agencies. Regulatory approvals, certificates, registrations, licenses, and permits filed during the term of this Agreement, excluding U.S. filings, and in the name of Supplier shall be assigned to Distributor upon termination of this Agreement. Distributor shall promptly inform Supplier of any changes in regulatory or compliance status that might significantly affect the marketing of the Products in the Territory; (b) the Distributor agrees not to sell or distribute the Products in any country within the Territory until such time as all product licenses and approvals required by the laws of such country have been obtained; (c) the Distributor shall comply with any recalls for the Products issued by Supplier or applicable Government Agencies; (d) the Distributor shall maintain a record of any customer complaints or comments and promptly forward information relating to such complaints or comments to Supplier; the Distributor shall also disclose to Supplier promptly via facsimile any Medical Device Report ("MDR") related to the Products subject to the Code of Federal Regulations, 21 CFR Part 803, and/or subject to the Medical Device Vigilance System of the European Commission Guidelines, MED DEV 03/93, rev 2. 5.4 Sales Effort. The Distributor shall employ an appropriate number of sales personnel, maintain a suitable organization, and use its commercially reasonable efforts to actively market and sell the Products in the Territory. 5.5 Marketing Effort. The Distributor shall use its commercially reasonable efforts to promote the Products to persons engaged in all appropriate medical specialties, including but not limited to plastic surgery, dermatology, ENT (ear, nose, and throat), aesthetic and cosmetic medicine and other related areas of the medical profession. 5.6 Liability Insurance. The Distributor shall, if required by local law, obtain, and pay premiums and all costs associated with liability insurance in an amount sufficient to satisfy local laws and commercial practices. 5.7 License Fees and Taxes. The Distributor shall pay all license fees, taxes and other fees including, but not limited to, sales, use, service use, occupation, service occupation, personal property and excise taxes, assessments or taxes which may be assessed or levied by any national, state or local government, and any departments and subdivisions thereof, against the Distributor for the distribution and sale of the Products which are ordered by the Distributor and are under the Distributor's control. 5.8 Import/Export Licenses. The Distributor shall, at its own expense, pay all import and export licenses and permits, pay customs charges and duty fees, and take all other actions required to accomplish the export and import of the Products purchased by the -5- 6 Distributor; the Distributor understands that Supplier is subject to regulation by agencies of the U.S. Government (including without limitation the U.S. Department of Commerce) which prohibit export or diversion of certain technical products to certain countries; the Distributor warrants that it will comply in all respects with the export and re-export restrictions set forth in the export license for every Product purchased under this Agreement. 5.9 Minimum Purchase Requirement. (a) During the Initial Period and subject to Section 4.3(a), the Distributor agrees to purchase the number of units of Product(s) represented by the United States dollar amount set forth for each time period in Schedule C. In the event that (i) the Distributor fails to satisfy such minimum purchase requirement during the Initial Period, (ii) the Supplier provides written notice of such failure to the Distributor, and (iii) the Distributor fails to cure such condition within ninety (90) day of its receipt of such notice, the Supplier shall have the option to either (i) revert Distributor's exclusive distribution right to a non-exclusive distribution right, or (ii) terminate this Agreement. (b) For each twelve-month period after the Initial Period and until the termination of this Agreement, to maintain Supplier's exclusive appointment of Distributor, the Distributor agrees to purchase the number of units of Product(s) represented by the United States dollar amount set forth for each time period in Schedule C. In the event that (i) the Distributor fails to satisfy such minimum purchase requirement for any twelve-month period subsequent to the Initial Period, (ii) the Supplier provides written notice of such failure to the Distributor, and (iii) the Distributor fails to cure such condition within ninety (90) day of its receipt of such notice, the Distributor shall be deemed to be a nonexclusive distributor of the Products and the Supplier shall be entitled to appoint another nonexclusive distributor for the Territory. If Distributor's rights become non-exclusive, then all minimum purchase requirements shall become null and void. (c) Within the United States or the European Economic Area, if in any given period (i) the Supplier is unable to meet all applicable regulatory requirements by Government Agencies of a particular country relating to Supplier's obligations under this Agreement, and therefore Distributor is unable to obtain regulatory approval in such particular country, or (ii) the Supplier and Distributor fail to agree upon Product Specifications within *** after receiving all applicable regulatory approvals required by Government Agencies in a particular country, and Distributor's supply of Product(s) is interrupted, then Distributor's minimum purchase requirement for such interrupted period shall be reduced by *** for so long as Supplier is unable to meet Distributor's supply requirement. 5.10 Financial Audit. Payments made by Distributor to Supplier, excluding payments made pursuant to an invoice for delivery of Product(s) during the Initial Period, shall be subject to reasonable audit by Supplier upon sixty (60) days prior written notice, and at Supplier's expense, not more often than once in any twelve month period. Supplier's audit shall be limited to sales reports, order entry, and shipping records on Product(s). If such audit discloses an error between reported numbers and actual numbers by 5% or more, then Distributor shall pay Supplier's audit expenses. 6. GENERAL OBLIGATIONS OF SUPPLIER 6.1 Fulfillment of Purchase Orders. Following receipt and acceptance of a purchase order from the Distributor for Products, Supplier shall use all commercially reasonable endeavors to fulfill such purchase order without undue delay (subject, however, to normal - -------------------- ***Confidential treatment requested -6- 7 manufacturing lead times) and to deliver the Products in accordance with the Distributor's instructions. 6.2 Initial Product Delivery. Supplier shall use its commercially reasonable efforts to manufacture and deliver at least *** units of Products by *** . 6.3 Manufacturing Compliance. Supplier shall manufacture and deliver Products which meet the Product Specifications, including packaging and labeling in multiple languages as needed, mutually agreed upon by the parties and which conform at all times to applicable regulations. Supplier shall have the primary responsibility for manufacturing compliance of the Products in the Territory as required by Government Agency rules and regulations, including but not limited to, recalls of Products. Supplier shall provide at least ninety (90) days written notice to the Distributor regarding any proposed changes, modifications, deletions or additions to be made to the Product(s) and shall consult with the Distributor prior (i) to discontinuing the manufacture, supply or sale of any type of Product, (ii) to making changes in materials or design, or (iii) to adding improvements to any Product. Supplier agrees that prior to implementing any manufacturing changes, it will have received notice from Distributor that such changes have been approved by all relevant Government Agencies. 6.4 Certification, Audits, and Second Supply. The Supplier shall use its commercially reasonable efforts to qualify its manufacturing contractor(s) as ISO certified facilities by *** , and shall obtain the permission of its manufacturing contractor(s) to allow the Distributor to audit the facilities of such manufacturing contractor(s). The Supplier shall use its commercially reasonable efforts to establish (or contract for) a second Product manufacturing capability promptly upon the first sale of a commercial lot of Product. 6.5 Regulatory Assistance. Supplier agrees that it shall provide reasonable assistance to Distributor in order to obtain any and all applicable regulatory approvals required by Government Agencies under the laws and/or regulations of any jurisdiction in order to market the Products within the Territory, including but not limited to, meeting relevant standards and guidelines, preclinical, clinical, and safety approvals required by Government Agencies. Supplier shall promptly inform Distributor of any changes in regulatory or compliance status that might significantly affect the marketing of the Products in the Territory. 6.6 Regulatory Compliance. Upon receipt of a notification by Distributor, relating to an MDR, the Supplier shall notify the Food and Drug Administration within five (5) business days in compliance with 21 CFR Part 803, and/or in accordance with the Medical Device Vigilance System of the European Commission Guidelines, MED DEV 03/93, rev 2. 6.7 Marketing Assistance. Supplier shall, at its own expense, from time to time and at the request of the Distributor, provide the Distributor with information, including but not limited to clinical protocol and data results, and assistance reasonably related to the marketing of Products in the Territory. Supplier shall, at its own expense, make the mutually agreed upon quantities, not to exceed *** units per year, of its promotional materials and demonstration products (not for human use), including in multiple languages as needed, available to the Distributor, for Distributor's use in promoting the Products in the Territory. Supplier's mutual agreement to make the quantities of demonstration product shall not be unreasonably withheld. 6.8 Prelaunch Assistance. The Supplier will, at its own expense, provide such Distributor training, marketing, and clinical support as reasonably requested by the Distributor in order for Distributor to effectively launch the marketing and sales of Products in any country of the Territory. If such training, marketing and clinical support requires Supplier to travel outside - -------------------- ***Confidential treatment requested -7- 8 the Northern California Bay Area, then Distributor shall only pay Supplier's travel and out-of pocket expenses provided that Supplier provides reasonable documentation for such expenses. Such time commitment shall not exceed 35 hours, exclusive of travel time, over the twelve month period after the Effective Date. 6.9 Postlaunch Assistance. The parties anticipate that the Distributor and Drs. Robert Schindler and Corey Maas, founders of the Supplier, will enter into consulting arrangements separately for Supplier's attendance at major national and regional trade shows and educational forums where similar or competitive products are displayed and to present the Products fairly at such shows and workshops. 7. INTELLECTUAL PROPERTY 7.1 Grant of License. (a) The Supplier hereby grants to the Distributor the sole and exclusive, worldwide, fully-paid up license, with the right to sublicense, under the Supplier's Intellectual Property Rights and subject to the rights granted by The Regents, to use such Intellectual Property Rights solely in connection with the sale and other distribution of Products in the Territory. (b) Distributor shall have a first right of refusal to distribute any biocompatible product owned by Supplier for use in soft tissue augmentation and management of facial wrinkles. The Distributor and Supplier agree to negotiate in good faith the terms of such distribution right, including but not limited to any manufacturing obligations, and shall cooperate in the finalization of a definitive agreement within *** after Distributor's notice of acceptance of such distribution right. 7.2 Assistance. The Distributor shall promptly notify the Supplier (i) of any claims or objections that the Distributor's use of the Intellectual Property Rights in connection with the marketing or sale of the Products may or will infringe any third party patent, copyright, trademarks, trade names, or other proprietary rights, and (ii) of any and all third party infringements, imitations, illegal use, or misuse of the Intellectual Property Rights which come to its attention. 7.3 Patent Issuance Fee. In the event and solely upon the occurrence of the issuance of a United States patent claiming Supplier's soft tissue augmentation device described in Schedule A, the Distributor shall pay Supplier the total sum of *** which represents payment for the license fees set forth in Section 4.1 of the Exclusive License Agreement, dated December 1, 1993, between The Regents and the Supplier. Supplier acknowledges that it is solely responsible for paying The Regents any and all license fees pursuant to Section 4.1 of the Exclusive License Agreement. 7.4 University of California. Subsequent to the first quarter in which the Distributor makes sales of the Product, and each quarter thereafter in which the Distributor makes sales of the Products, the Supplier will make the royalty payments due to The Regents pursuant to Section 5 of the Exclusive License Agreement, dated December 1, 1993, between The Regents and the Supplier. Distributor shall pay Supplier the royalty payments due to The Regents pursuant to Section 5 of the Exclusive License Agreement, dated December 1, 1993, between The Regents and the Supplier. If the Distributor's rights become non-exclusive, then royalty payments will be limited to those in Section 5.1 of the Exclusive License Agreement and will not include the minimums in Section 5.5. - -------------------- ***Confidential treatment requested -8- 9 7.5 Trademarks. Nothing in this Agreement will be construed as conferring any right to use in advertising, pubilicity, or other promotional activites any name, trade name, trademark, or other designation of either party hereto by the other (including contraction, abbreviation or simulation of any of the foregoing). Distributor shall solely own and maintain, at its expense, any and all trademarks used in its distribution of the Products in the Territory. Supplier shall not register any such trademark(s) of Distributor in any country of the Territory for its own or third party use. 8. CONFIDENTIAL INFORMATION 8.1 "Confidential Information" shall mean any confidential, secret, or proprietary information relating to the scientific and/or business affairs of either party, regardless of whether such information is specifically designated as confidential, and regardless of whether such information is in written, oral, electronic, or other form. Such Confidential Information may include, but is not limited to, trade secrets, know-how, inventions, technical data or development activities, product and marketing plans, customer and supplier information, and legal and regulatory activities. Each party shall treat as confidential all Confidential Information provided by the other party, shall not use such Confidential Information except as expressly set forth herein or otherwise authorized in writing, shall implement reasonable procedures to prohibit the disclosure, unauthorized duplication, misuse or removal of the Confidential Information and shall not disclose such Confidential Information to any third party. Without limiting the foregoing, each of the parties shall use at least the same procedures and degree of care to prevent the disclosure of Confidential Information as it uses to prevent the disclosure of its own confidential information of like importance, and shall in any event use no less than reasonable procedures and a reasonable degree of care. 8.2 Exceptions. Notwithstanding the above, neither party shall have liability to the other with regard to any Confidential Information that: (a) was generally known and available in the public domain at the time it was disclosed, or becomes generally known and available in the public domain through no fault of the receiver; (b) was known to the receiver at the time of disclosure as shown by the files of the receiver in existence at the time of disclosure; (c) is disclosed with the prior written approval of the discloser; (d) was independently developed by the receiver without any use of the Confidential Information and by employees or other agents of the receiver who have not been exposed to the Confidential Information, provided that the receiver can demonstrate such independent development by documented evidence prepared contemporaneously with such independent development; (e) becomes known to the receiver from a source other than the discloser without breach of this Agreement by the receiver and in a manner which is otherwise not in violation of the discloser's rights; (f) is disclosed pursuant to the order or requirement of a court, administrative agency, or other governmental body; provided, that the receiver shall provide reasonable advance written notice thereof to enable the discloser to seek a protective order or otherwise prevent such disclosure, by asserting the confidential nature of the information sought. -9- 10 8.3 The provisions of this Section 8 shall be in full force and effect for five (5) years after the termination of this Agreement. 9. INDEMNIFICATION AND REPRESENTATION 9.1 Indemnification by the Distributor.The Distributor shall indemnify, defend, and hold the Supplier harmless from and against any and all third party claims relating to and/or arising out of the marketing, distribution and sale of the Products, where and to the extent the damages are alleged to have been caused by the fault of the Distributor, its employees or agents. 9.2 Indemnification by the Supplier. The Supplier shall indemnify, defend, and hold the Distributor harmless from and against any and all third party claims relating to and/or arising out of (i) the manufacture of Products, including but not limited to any product, manufacturing, or labelling defect in the Product, (ii) infringement of third party patent, copyright, trademarks, trade names, or other proprietary rights, and (iii) any failure by Supplier to act in accordance with applicable laws and regulations in the Territory in connection with the Products. 9.3 Representation by the Supplier. The Supplier hereby represents that the Exclusive License Agreement between The Regents and the Supplier, dated December 1, 1993 is in full force and effect, and that the Supplier has the rights to grant Distributor the exclusive distribution rights under such Exclusive License Agreement. The Supplier shall meet any and all obligations under the Exclusive License Agreement to ensure that the License Agreement does not terminate or become non-exclusive. 10. LIMITED WARRANTY AND LIMITATION OF LIABILITY 10.1 Supplier warrants that each Product sold to Distributor hereunder will (i) be free from defects in materials and workmanship, (ii) be in compliance with ISO 9001 standards by *** , (iii) be manufactured, packaged, and labeled in accordance with the then prevailing Product Specifications, and (iv) have a remaining shelf-life at the date of shipment of at least twenty-four (24) months (the "Warranty Period"). If Distributor provides notice to Supplier during the Warranty Period that a Product breaches this warranty, Distributor shall, if requested by Supplier, return such Product to Supplier, or if not so requested, dispose of such Product in accordance with Supplier's instructions. The sole and exclusive remedy in the event of any breach of the foregoing warranty is either (i) for the Distributor to so return or dispose of the defective Products to Supplier (delivery or postage prepaid by Supplier) for replacement in accordance with its standard warranty procedures, or (ii) for a refund of the price paid by the Distributor for the defective Product if the Supplier is unable to replace such defective Products within a reasonable time period or at a commercially reasonable cost. This warranty does not extend to any damage or failure which results from alteration, accident, theft, misuse, abuse, abnormal use, or improper storage or maintenance by Distributor. THE DISTRIBUTOR ACKNOWLEDGES THAT SUPPLIER'S OBLIGATIONS AND LIABILITIES IN RESPECT OF THE PRODUCTS AND THE DISTRIBUTOR'S APPOINTMENT ARE EXHAUSTIVELY DEFINED IN THIS AGREEMENT. THE DISTRIBUTOR AGREES THAT THE EXPRESS OBLIGATIONS AND WARRANTIES MADE BY SUPPLIER UNDER THIS AGREEMENT SHALL BE IN LIEU OF AND TO THE EXCLUSION (TO THE FULLEST EXTENT PERMITTED BY LAW) OF ANY OTHER - -------------------- ***Confidential treatment requested -10- 11 WARRANTY, CONDITION, TERM OR UNDERTAKING OF ANY KIND, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE RELATING TO ANYTHING SUPPLIED UNDER OR IN CONNECTION WITH THIS AGREEMENT INCLUDING (WITHOUT LIMITATION) AS TO CONDITION, MERCHANTABILITY, AND QUALITY. 10.2 Supplier accepts liability without limit for death or personal injury to the extent that it results from the negligence, breach of warranty, or intentional conduct of Supplier and its employees and that it is caused by any Product being defective and unsafe within the meaning of the applicable laws of the Territory. 10.3 EXCLUSION OF CONSEQUENTIAL DAMAGES. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, SUPPLIER SHALL NOT, UNDER ANY CIRCUMSTANCES, BE LIABLE WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHERWISE TO THE DISTRIBUTOR, ITS SALES REPRESENTATIVES, SUBDISTRIBUTORS OR DEALERS, OR ANY OTHER THIRD PARTY INCLUDING ANY PURCHASER OF THE PRODUCTS HEREUNDER, FOR ANY CONSEQUENTIAL, INCIDENTAL OR INDIRECT LOSS, DAMAGES, COST OR EXPENSE OF ANY KIND WHATSOEVER AND HOWSOEVER CAUSED INCLUDING, WITHOUT LIMITATION, FOR ANY LOSS OF PRODUCTION, LOSS OF PROFIT OR CONTRACTS AND LOSS OF GOODWILL ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREUNDER, EVEN IF SUPPLIER HAS BEEN ADVISED OF THEIR POSSIBILITY. 11. DURATION AND TERMINATION 11.1 This Agreement shall become effective on the date first above written and shall continue in effect, subject to termination under Sections 11.2 and 11.3 below, until the earlier of the tenth anniversary of the Effective Date, or the last to expire of any patents claiming the Products. 11.2 Supplier may terminate this Agreement at any time upon written notice in the event that: (a) the Distributor defaults in punctual payments in full of the sums due under this Agreement or under any purchase orders, and such default is not remedied within sixty (60) days after the Distributor has been served with a written notice requiring such remedy; or (b) the Distributor commits a breach of any material provision of this Agreement, and such breach is not cured within sixty (60) days after the Distributor has been served by Supplier with a written notice requiring such cure; or (c) the Distributor becomes insolvent, institutes proceedings in bankruptcy or, under similar insolvency laws, for reorganization, receivership, or dissolution. 11.3 Distributor may terminate this Agreement at any time upon written notice in the event that: (a) the Supplier commits a breach of any material provision of this Agreement, and such breach is not cured within sixty (60) days after the Supplier has been served by Distributor with a written notice requiring such cure; or (b) the Supplier becomes insolvent, institutes proceedings in bankruptcy or, under similar insolvency laws, for reorganization, receivership, or dissolution; or -11- 12 (c) the Supplier is unable to obtain a license to any third party patent that prevents the sale or distribution of the Products in the Territory. 12. CONSEQUENCES OF TERMINATION In the event that this Agreement is terminated, the following consequences shall follow: 12.1 All the Distributor's rights under this Agreement shall cease and no payment whatsoever shall be due to the Distributor for loss of goodwill, anticipated profits or otherwise as a result of such proper termination. The Distributor hereby waives any claim to receive any compensation as a consequence of the proper termination of this Agreement. Supplier is relieved from any obligation to make any further shipments hereunder, and may cancel all of the Distributor's unshipped orders for Products, irrespective of previous written acceptance by Supplier. 12.2 Supplier shall repurchase at the Distributor's cost any remaining inventory of the Distributor, except that if this Agreement is terminated during the Initial Period, then Supplier shall only repurchase at the Distributor's cost any remaining inventory above the minimum number of units of Products set forth in Schedule C. Such repurchase shall occur within thirty (30) days after the termination date. In the event Supplier fails to repurchase such Products, Distributor shall have the right and option to (i) continue to sell its existing inventory of such Products for a reasonable period following termination or expiration, or (ii) deduct any repurchase cost of such Products from any outstanding invoices due and payable pursuant to Section 12.3. 12.3 All charges for Products unpaid at the date of termination shall forthwith become due and payable within thirty (30) days after the termination date. 12.4 The Distributor shall return to Supplier all promotional/sales materials within ninety (90) days. Both parties shall return to the other party all Confidential Information in written, recorded, or other tangible form within ninety (90) days. 12.5 Pursuant to Section 5.3(a), Supplier shall assist with the transfer of and/or assignment to Distributor any regulatory approvals, certificates, registrations, licenses, and permits filed and maintained during the term of this Agreement in the name of Supplier. 13. MISCELLANEOUS PROVISIONS 13.1 Governing Law. The construction, validity and performance of this Agreement and any disputes arising hereunder be governed by the laws of the State of California, exclusive of that body of law relating to choice of law, and by the Uniform Commercial Code, as enacted in the State of California. Any and all disputes, controversies or differences arising hereunder in connection herewith shall be conducted in the English language. 13.2 Notices. Any notice or report pursuant to this Agreement shall be deemed duly given upon receipt if it is in writing and is sent by prepaid registered air mail or express courier addressed to the party at the address set forth at the beginning of this agreement, or to such other address as shall be furnished in writing. 13.3 Failure to Enforce. The failure of either party to enforce at any time the provisions hereof shall not be construed to be a waiver of such provisions nor of the right of such party thereafter to enforce each and every such provision. -12- 13 13.4 Arbitration. The parties agree to submit any dispute they are unable to resolve between them to binding arbitration by a single arbitrator in Santa Clara, California, in accordance with the rules of the American Arbitration Association. 13.5 Force Majeure. Neither party shall be liable to the other party for any delay or omission in the performance of any obligation under this Agreement where the delay or omission is due to any cause or condition beyond the reasonable control of the party obliged to perform, including, but not limited to, strikes or other labor difficulties, acts of God, earthquakes, acts of government (including but not limited to the refusal to issue necessary import or export licenses), war, riots, embargoes, or inability to obtain supplies ("Force Majeure"). If Force Majeure prevents or delays the performance by a party of any obligation under this Agreement, then the party claiming Force Majeure shall promptly notify the other party thereof in writing. In the event that Force Majeure shall continue for a period greater than ninety (90) days, either party may terminate the Agreement. 13.6 Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the matters herein contained, supersedes all prior understandings between the parties with respect to the distribution of the Products, and may from time to time be changed, but only by an instrument in writing signed by both parties. 13.7 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which taken together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COLLAGEN CORPORATION TISSUE TECHNOLOGIES, INC. By: /s/ David Foster By: /s/ Jesse Kramer ---------------- ---------------- Name: David Foster Name: Jesse Kramer ------------ ------------ Title: Vice President and Chief Financial Officer Title: President ------------------------------------------ --------- -13- 14 SCHEDULE A Description of Products and Prices 1.0 Description of Products The Supplier's existing biocompatible tubular E-PTFE product(s) for soft tissue augmentation and management of facial wrinkles, as well as any and all additional and/or improved biocompatible implant product(s) for soft tissue augmentation and management of facial wrinkles made by the Supplier, or by third parties to the Supplier's benefit, during the term of this Agreement. Such product(s), as well as any and all additional and/or improved biocompatible product(s) shall be limited to any product covered by the claims of a patent application or issued patent included in the Intellectual Property Rights. A single unit ("unit(s)") of the first such tubular E-PTFE product shall consist *** , packaged and labeled in a sterile and FDA-approved manner. Future Products will be defined and mutually agreed upon prior to regulatory approval in any given country. 2.0 Purchase Price 2.1 During the Initial Period the Supplier shall sell units of the Product(s) to the Distributor at the agreed upon price of *** . 2.2 Subsequent to the Initial Period, the purchase price for Product(s) shall be based and calculated as *** .
Year Percentage of net sales to Distributor Percentage of net sales to Supplier - ------------------------------------------------------------------------------------- 4 *** % *** % 5 *** % *** % 6 *** % *** % 7 *** % *** % 8 *** % *** % 9 *** % *** % 10 *** % *** %
- -------------------- ***Confidential treatment requested -14- 15 SCHEDULE B Territory 1.0 Territory. 1.1 The United States of America 1.2 The European Economic Area 1.3 All other countries of the world. -15- 16 SCHEDULE C 1.0 Minimum Purchases In accordance with Sections 4.3 and 5.9 of the Worldwide Medical Product Distribution Agreement, Distributor agrees to the minimum purchase requirements set forth below. 1.1 For the Initial Period:
Year Minimum Purchases in US dollars Minimum Purchases in units (***/unit) - -------------------------------------------------------------------------------------------------- 1 $500,000 *** 2 $750,000 *** 3 $1,250,000 ***
1.2 Subsequent to the Initial Period:
Year Minimum Purchases in US dollars Purchase increase from prior year - --------------------------------------------------------------------------------------------------- 4 $1,437,500 *** % 5 $1,653,125 *** % 6 *** *** % 7 *** *** % 8 *** *** % 9 *** *** % 10 *** *** %
- -------------------- ***Confidential treatment requested -16- 17 SCHEDULE D 1.0 Delivery Sites 1.1 Supplier shall ship Products to Distributor, in accordance with Distributor's instructions included with any purchase order, to the following destinations: (a) Within the United States to: Collagen Corporation 48490 Milmont Drive Fremont, CA 94538 The minimum quantity to be shipped to this destination is: *** units (b) For CE marked products to: Collagen Corporation 48490 Milmont Drive Fremont, CA 94538 OR Other designated site in the European Economic Area (EEA). The minimum quantity to be shipped to these destinations is: *** units (c) For non-CE marked products to all other countries of the world to: A designated site, to be determined, in one or more country other than the United States or EEA. The minimum quantity to be shipped to this destination is: *** units -17- 18 EXHIBIT A University of California License Agreement -18- 19 EXCLUSIVE LICENSE AGREEMENT between THE REGENTS OF THE UNIVERSITY OF CALIFORNIA and TISSUE TECHNOLOGIES, INC. for PERMANENT SOFT TISSUE AUGMENTATION SYSTEM U.C. CASE NO. 93-057-1 20 TABLE OF CONTENTS BACKGROUND................................................................. 1 1. DEFINITIONS........................................................... 2 2. LIFE OF PATENT EXCLUSIVE GRANT........................................ 4 3. SUBLICENSES........................................................... 4 4. LICENSE ISSUE FEE..................................................... 5 5. ROYALTIES............................................................. 6 6. DUE DILIGENCE......................................................... 9 7. PROGRESS AND ROYALTY REPORTS.......................................... 14 8. BOOKS AND RECORDS..................................................... 15 9. LIFE OF THE AGREEMENT................................................. 16 10. TERMINATION BY THE REGENTS............................................ 16 11. TERMINATION BY LICENSEE............................................... 17 12. DISPOSITION OF LICENSED PRODUCTS ON HAND UPON TERMINATION........................................................... 17 13. USE OF NAMES, TRADEMARKS, AND CONFIDENTIALITY......................... 18 14. LIMITED WARRANTY...................................................... 19 15. PATENT PROSECUTION AND MAINTENANCE.................................... 20 16. PATENT MARKING........................................................ 22 17. PATENT INFRINGEMENT................................................... 22 18. INDEMNIFICATION....................................................... 24 19. NOTICES............................................................... 25 20. ASSIGNABILITY......................................................... 26
21 21. LATE PAYMENTS.......................................................... 26 22. WAIVER................................................................. 27 23. FAILURE TO PERFORM..................................................... 27 24. GOVERNING LAWS......................................................... 27 25. FOREIGN GOVERNMENT APPROVAL OR REGISTRATION............................ 27 26. EXPORT CONTROL LAWS.................................................... 28 27. FORCE MAJEURE.......................................................... 28 28. CONFIDENTIAL INFORMATION............................................... 28 29. MISCELLANEOUS.......................................................... 29
22 UC Case No. 93-057-1 EXCLUSIVE LICENSE AGREEMENT for PERMANENT SOFT TISSUE AUGMENTATION SYSTEM THIS LICENSE AGREEMENT, the "Agreement", is made and is effective December 1, 1993, by and between THE REGENTS OF THE UNIVERSITY OF CALIFORNIA, a California corporation having its statewide administrative offices at 300 Lakeside Drive, 22nd Floor, Oakland, California 94612-3550, hereinafter referred to as "The Regents", and TISSUE TECHNOLOGIES, INC. a California corporation having a principal place of business at 1372 Green Street, San Francisco, California 94109, hereinafter referred to as the "Licensee." BACKGROUND Certain inventions, generally characterized as Permanent Soft Tissue Augmentation System, hereinafter collectively referred to as the "Invention," were made in the course of research at the University of California, San Francisco by Drs. Robert Schindler and Corey Maas and are covered by Regents' Patent Rights as defined below. The Licensee entered into a Letter of Intent (U.C. Control No. 93-30-0385) with 1 23 The Regents, effective June 14, 1993 and terminating on December 31, 1993, for the purpose of declaring the mutual intention of the parties to negotiate with each other for an exclusive license on the Invention. The Licensee is a "small business firm" as defined in 15 U.S.C. 632. The Licensee is desirous of obtaining certain rights from The Regents for the commercial development, manufacture, use, and sale of the Invention, and The Regents is willing to grant such rights. The Regents is desirous that the Invention be developed and utilized to the fullest extent so that the benefits can be enjoyed by the general public. Both parties recognize and agree that royalties due hereunder will be paid on both pending patent applications and issued patents. Both parties agree as follows: 1. DEFINITIONS 1.1 "Regents' Patent Rights" means patent rights to any subject matter claimed in or covered by any of the following: pending U.S. Patent Application serial no. 08/090,518, entitled Soft Tissue Augmentation Apparatus, filed July 12, 1993, by Drs. Robert Schindler and Corey Maas and assigned to The Regents; and continuing applications thereof including divisions and substitutions but including continuation-in-part applications only to the extent that the claim was supported in the original disclosure; any patents issuing on said application or continuing applications including reissues; and any corresponding foreign applications or patents. 1.2 "Regents' Proprietary Rights" means information related to the Invention, 2 24 including data, drawings and sketches, designs, test results, Data as defined in Article 28, Confidential Information, and information of a like nature, whether patentable or not, developed by Drs. Robert Schindler and Corey Maas of the University of California San Francisco. 1.3 "Licensed Product" means any material that is either covered by Regents' Patent Rights or Regents' Proprietary Rights or whose manufacture, use, or sale would constitute, but for the license granted to the Licensee pursuant to this Agreement, an infringement of any pending or issued claim within Regents' Patent Rights. 1.4 "Licensed Method" means any method that is covered by Regents' Patent Rights or Regents' Proprietary Rights or whose use or practice would constitute, but for the license granted to the Licensee pursuant to this Agreement, an infringement of any claim within Regents' Patent Rights. 1.5 "Net Sales" means the total of the gross invoice prices of Licensed Products less the sum of the following actual and customary deductions where applicable: cash, trade, or quantity discounts; sales, use, tariff, import/export duties, or other excise taxes imposed upon particular sales; transportation charges and allowances or credits to customers because of rejections or returns. 1.6 "Affiliate" means any corporation or other business entity in which Licensee owns or controls, directly or indirectly, at least fifty percent (50%) of the outstanding stock or other voting rights entitled to elect directors; provided, however, that in any country where the local law shall not permit foreign equity participation of at least 50%, then an "Affiliate" shall include any company in which Licensee shall own or control, directly or indirectly, the maximum percentage of such outstanding stock or voting rights permitted by local law. 3 25 1.7 "Joint Venture" means any entity established pursuant to an agreement between a third party (or parties) and Licensee to carry out a business enterprise. 2. LIFE OF PATENT EXCLUSIVE GRANT 2.1 Subject to the limitations set forth in this Agreement, The Regents hereby grants to Licensee a (worldwide) license under Regents' Patent Rights and Regents' Proprietary Rights to make, have made, use, and sell Licensed Products and to practice the Licensed Method. 2.2 Except as otherwise provided herein, the license granted in section 2.1 shall be exclusive for the life of the Agreement. 2.3 The Regents expressly reserves the right to use the Invention and associated technology for educational and research purposes. 3. SUBLICENSES 3.1 The Regents also grants to Licensee the right to issue sublicenses to third parties to make, have made, use and sell Licensed Products and to practice the Licensed Method provided Licensee has current exclusive rights thereto under this Agreement. To the extent applicable, such sublicenses shall include all of the rights of and obligations due to The Regents that are contained in this Agreement. 3.2 Licensee shall provide The Regents with a copy of each sublicense issued hereunder; collect and guarantee payment of all royalties due The Regents from sublicensees; and summarize and deliver all reports due The Regents from sublicensees. 3.3 Upon termination of this Agreement for any reason, The Regents, at its sole 4 26 APPENDIX A discretion, shall determine whether any or all sublicenses shall be canceled or assigned to The Regents. 4. LICENSE ISSUE FEE 4.1 Licensee agrees to pay to The Regents a License Issue Fee of [ *** ] according to the following schedule: - [ *** ] to be paid within [ *** ] after the execution date of this Agreement - [ *** ] to be paid upon submission of Product Market Approval (PMA) or 510K data to the U.S. Food and Drug Administration (FDA), but no later than [ *** ] - [ *** ] to be paid on [ *** ] and - [ *** ] to be paid upon FDA marketing approval, but no later than [ *** ] 4.2 This license issue fee is non-refundable, non-cancellable, and not an advance against royalties. *** Confidential treatment requested 5 27 5. ROYALTIES 5.1 Licensee shall also pay to The Regents an earned royalty of [ *** ] of the Net Sales of Licensed Products. In the event the last patent application under this Agreement is abandoned and no patent in Regents' Patent Rights has issued, Licensee shall pay to The Regents an earned royalty of [ *** ] in the first full year of commercial sales of Licensed Products covered by Regent's Proprietary Rights following such abandonment, [ *** ] in the second full year of such commercial sales following such abandonment, [ *** ] in the third full year of such commercial sales following such abandonment, [ *** ] in the fourth year of such commercial sales following such abandonment, and no earned royalty in subsequent years. 5.2 For sales of Licensed Products to an Affiliate or Joint Venture from Licensee at a reduced price from that customarily charged to an unrelated third party, the royalty paid to The Regents shall be based on the Net Sales of Licensed Products of the Affiliate or Joint Venture to the Affiliate's or Joint Venture's customers. Where Licensee transfers Licensed Products for end-use to itself or an Affiliate or Joint Venture, such transfer shall be considered a sale at list price, and The Regents shall be entitled to receive a royalty thereon in accordance with this Article 5, (ROYALTIES). Each reference to Licensee herein shall be meant to include its Affiliates and Joint Ventures. 5.3 Paragraphs 1.1, 1.2, 1.3, and 1.4 define Regents' Patent Rights, Licensed Products, and Licensed Methods so that royalties shall be payable on products and methods covered by both pending patent applications and issued patents as well as on products and methods covered by Regents' Proprietary Rights. Earned royalties shall accrue in each country for the ***Confidential treatment requested 6 28 duration of Regents' Patent Rights in that country and shall be payable to The Regents when Licensed Products are invoiced, or if not invoiced, when delivered to a third party. In the event the last patent application under this Agreement in that country is abandoned and no patent in Regents' Patent Rights has issued for that country then Licensee shall pay to The Regents an earned royalty based on sales of Licensed Products covered by The Regents' Proprietary Rights in that country as provided in paragraph 5.1. 5.4 Royalties accruing to The Regents shall be paid to The Regents [ *** ] on or before the following dates [ *** ]: [ *** ] [ *** ] [ *** ] [ *** ] Each such payment will be for royalties which accrued within the Licensee's most recently completed [ *** ]. 5.5 Licensee shall pay to The Regents a minimum annual royalty of [ *** ] and [ *** ] thereafter, beginning with the calendar year [ *** ]. This minimum annual royalty shall be paid to The Regents by [ *** ] of each year and shall be credited against the earned royalty (if any) due and owing for the calendar year in which the minimum payment was made. 5.6 Notwithstanding the minimum royalties stated in paragraph 5.5 (Minimum Royalties), in the event the last patent application under this Agreement is abandoned and no patent in Regents' Patent Rights has issued, Licensee shall pay to The Regents a minimum annual royalty *** confidential treatment requested 7 29 equal to [ *** ] of the minimum royalty stipulated for that year in paragraph 5.5 for the first year of commercial sales following such abandonment, [ *** ] of the minimum royalty stipulated for that year in paragraph 5.5 for the second full year of such commercial sales following such abandonment, [ *** ] of the minimum royalty stipulated for that year in paragraph 5.5 for the third full year of such commercial sales following such abandonment, [ *** ] of the minimum royalty stipulated for that year in paragraph 5.5 for the fourth year of such commercial sales following such abandonment, and no minimum annual royalty in subsequent years. 5.7 All monies due The Regents shall be payable in United States funds collectible at par in San Francisco, California. When Licensed Products are sold for monies other than United States dollars, the earned royalties will first be determined in the foreign currency of the country in which such Licensed Products were sold and then converted into equivalent United States funds. The exchange rate will be that rate quoted in the Wall Street Journal on the last business day of the reporting period. 5.8 Royalties earned with respect to sales occurring in any country outside the United States shall not be reduced by any taxes, fees, or other charges imposed by the government of such country on the remittance of royalty income. The Licensee shall also be responsible for all bank transfer charges. Notwithstanding this, all payments made by the Licensee in fulfillment of The Regents' tax liability in any particular country shall be credited against Earned Royalties, royalties, or fees due The Regents for that country. 5.9 If at any time legal restrictions prevent the prompt remittance of part or all royalties by the Licensee with respect to any country where a Licensed Product is sold, the *** confidential treatment requested 8 30 Licensee shall pay such royalties to The Regents from the Licensee's United States source of funds. 5.10 In the event that any patent or any claim thereof included within the Regents' Patent Rights shall be held invalid in a final decision by a court of competent jurisdiction and last resort and from which no appeal has or can be taken, all obligation to pay royalties based on such patent or claim or any claim patentably indistinct therefrom shall cease as of the date of such final decision. The Licensee shall not, however, be relieved from paying any royalties that accrued before such decision or that are based on another patent or claim not involved in such decision or that are based on the Regents' Proprietary Rights. 6. DUE DILIGENCE 6.1 The Licensee, upon execution of this Agreement, shall diligently proceed with the development, manufacture, and sale of Licensed Products and shall earnestly and diligently endeavor to market the same within a reasonable time after execution of this Agreement and in quantities sufficient to meet the market demands therefor. 6.2 The Licensee shall be entitled to exercise prudent and reasonable business judgment in meeting its due diligence obligations hereunder. 6.3 The Licensee shall endeavor to obtain all necessary governmental approvals for the manufacture, use, and sale of Licensed Products. 6.4 If the Licensee is unable to perform any of the following: 6.4.1 initiate a pilot animal study for the device by [ *** ]; or 6.4.2 complete the pilot animal study for the device and, if it is necessary for *** confidential treatment requested 9 31 government approval, initiate a full animal study for the device by December 31, 1994; or 6.4.3 submit a 510K covering Licensed Products to the United States FDA by [ *** ]; or 6.4.4 initiate human trials on the device and complete the full animal study on the device by [ *** ]; or 6.4.5 market Licensed Products in the United States within [ *** ] of receiving approval of such Licensed Product's 510K or PMA from the U.S. FDA; or 6.4.6 reasonably fill the market demand for Licensed Products following commencement of marketing at any time during the exclusive period of this Agreement; then The Regents shall have the right and option either to terminate this Agreement or to reduce the Licensee's exclusive license to a nonexclusive license. This right, if exercised by The Regents, supersedes the rights granted in Article 2 (GRANT). 6.5 In addition to the obligations set forth above, the Licensee shall spend an aggregate of not less than [ *** ] for the development and commercialization of Licensed Products during the first 3 years of this Agreement according to the following schedule: 1994 [ *** ] 1995 [ *** ] 1996 [ *** ] *** confidential treatment requested 10 32 6.6 Either party to this Agreement may refer a dispute arising under this Article 6 (DUE DILIGENCE) to arbitration. Such referral to arbitration shall be made by so notifying the other party in writing in accordance with the provisions of Article 19 hereto (NOTICES), stating the nature of the dispute to be resolved. Any such arbitration shall be controlled by the provisions of this Article 6. 6.7 Within fifteen (15) business days following such notice, three arbitrators shall be selected by the following process: 6.7.1 Each Party shall designate one individual, not an employee, director, or shareholder of the Party or sublicensee of the Party, to serve as an arbitrator. 6.7.2 These arbitrators shall select a third individual who shall be an attorney experienced in arbitration proceedings to serve as the third arbitrator and to preside in resolution of the dispute. The third arbitrator shall not be an employee, director, or shareholder of either Party or sublicensee of either Party. 6.8 Within five (5) business days after selection, the arbitrators shall meet with the Parties at which time the Parties shall each present in writing the issue to be resolved and a proposed ruling on it. Such writing shall be served on the other Party in advance and shall be limited to no more than twenty (20) pages. 6.9 The following general provisions shall apply to the arbitration proceeding: 6.9.1 No later than thirty (30) days after the appointment of the third arbitrator, the arbitrators shall set a date for a hearing to resolve the issue identified by the Parties. The hearing shall take place no later than one hundred twenty (120) 11 33 days from the original notice to arbitrate. 6.9.2 The arbitrators shall permit the taking of no more than one (1) deposition by each Party, and shall permit, subject to the provisions of a mutually agreeable protective order, the production of only those documents immediately and directly bearing on the issue or issues subject to arbitration and only to the extent necessary for the convenience and use of the arbitrators, and shall not require or permit any other discovery by any means, including, but not limited to, depositions, interrogatories, or production of documents. 6.9.3 No later than ten (10) business days prior to the hearing, each Party may submit a single written brief or memorandum in support of its position which may be no more than twenty (20) pages. Each Party shall be entitled to no more than three (3) hours of hearing to present testimony or documentary evidence. Such time limitation shall include any direct, cross, or rebuttal testimony, but such time limitation shall only be charged against the Party conducting such direct, cross, or rebuttal testimony. It shall be the responsibility of the arbitrators to determine whether each Party has had the three (3) hours to which it is entitled or may, upon good cause shown, have additional time to present its case. 6.9.4 Each Party shall have the right to be represented by counsel. The arbitrators shall have sole discretion with regard to the admissability of evidence. Admissibility will be decided by two-thirds vote. 12 34 6.9.5 Within fifteen (15) days of the conclusion of the hearing, each Party must submit a proposed finding to the arbitrators. 6.10 The arbitrators shall rule on the disputed issue within thirty (30) days following the completion of the testimony of both Parties. Such ruling shall encompass in its entirety the proposed findings of one of the Parties on the disputed issue. The issue shall be resolved upon two-thirds vote of the arbitrators. 6.11 Arbitration shall take place in the location of choice of the party who has not requested arbitration. All hearing costs for a hearing shall be shared equally between the Parties. 6.12 The arbitrators shall be paid reasonable fees plus expenses, which fees and expenses shall be shared equally by the Parties. 6.13 The decision of the arbitrators shall be enforceable but not appealable in any court of competent jurisdiction. 6.14 To exercise either the right to terminate this Agreement or to reduce the license to a nonexclusive license for lack of diligence, The Regents must give the Licensee written notice of the deficiency. The Licensee thereafter has sixty (60) days to cure the deficiency or to request arbitration. If The Regents has not received a written request for arbitration or satisfactory tangible evidence that the deficiency has been cured by the end of the sixty (60)-day period, then The Regents may, at its option, either terminate this Agreement or reduce the Licensee's exclusive license to a nonexclusive license by giving written notice to the Licensee. These notices shall be subject to Article 19 (NOTICES). 13 35 7. PROGRESS AND ROYALTY REPORTS 7.1 [ *** ] and [ *** ] thereafter, the Licensee shall submit to The Regents a progress report covering the Licensee's activities related to the development and testing of all Licensed Products and the obtaining of the governmental approvals necessary for marketing. These progress reports shall be made for each Licensed Product until the first commercial sale of that Licensed Product occurs in the United States. 7.2 The progress reports submitted under section 7.1 should include, but not be limited to, the following topics: - summary of work completed including results of clinical trials - key scientific discoveries - summary of work in progress - current schedule of anticipated events or milestones - market plans for introduction of Licensed Products, and - a summary of resources (dollar value) spent in the reporting period 7.3 The Licensee shall have a continuing responsibility to keep The Regents informed of the large/small entity status (as defined by the United States Patent and Trademark Office) of itself and its sublicensees and Affiliates. 7.4 The Licensee also agrees to report to The Regents in its immediately subsequent progress and royalty report the date of first commercial sale of a Licensed Product in each country. 7.5 After the first commercial sale of a Licensed Product anywhere in the world, the Licensee will make [ *** ] royalty reports to The Regents on or before [ *** ] *** confidential treatment requested 14 36 Each such royalty report will cover the Licensee's most recently completed [ * * * ] and will show: (a) the gross sales and Net Sales of Licensed Products sold by the Licensee during the most recently completed calendar quarter, (b) the number of each type of Licensed Product sold, (c) the royalties, in U.S. dollars, payable hereunder with respect to such sales, (d) the method used to calculate the royalty, and (e) the exchange rates used. 7.6 If no sales of Licensed Products have been made during any reporting period, a statement to this effect shall be required. 8. BOOKS AND RECORDS 8.1 The Licensee shall keep books and records accurately showing all Licensed Products manufactured, used, and/or sold under the terms of this Agreement. Such books and records shall be preserved for at least five (5) years from the date of the royalty payment to which they pertain and shall be open to inspection by representatives or agents of The Regents at reasonable times. 8.2 The fees and expenses of The Regents' representatives performing such an examination shall be borne by The Regents. However, if an error in royalties of more than five percent (5%) of the total royalties due for any year is discovered, then the fees and expenses of these representatives shall be borne by the Licensee. * * * Confidential treatment requested 15 37 9. LIFE OF THE AGREEMENT 9.1 Unless otherwise terminated by operation of law or by acts of the parties in accordance with the terms of this Agreement, this Agreement shall be in force from the effective date recited on page one and shall remain in effect for the life of the last-to-expire patent licensed under this Agreement, or for twenty (20) years from the effective date of this Agreement if no patent issues, or until the last patent application licensed under this Agreement is abandoned and no patent in Regents' Patent Rights ever issues. 9.2 Any termination of this Agreement shall not affect the rights and obligations set forth in the following Articles: Article 8 Books and Records Article 12 Disposition of Licensed Products on Hand Upon Termination Article 13 Use of Names, Trademarks, and Confidentiality Article 18 Indemnification Article 23 Failure to Perform Article 28 Confidential Information 10. TERMINATION BY THE REGENTS 10.1 If the Licensee should violate or fail to perform any term or covenant of this Agreement, then The Regents may give written notice of such default (Notice of Default) to the Licensee. If the Licensee should fail to repair such default within sixty (60) days of the effective date of such notice, The Regents shall have the right to terminate this Agreement and the licenses herein by a second written notice (Notice of Termination) to the Licensee. If a Notice of 16 38 Termination is sent to the Licensee, this Agreement shall automatically terminate on the effective date of such notice. Such termination shall not relieve the Licensee of its obligation to pay any royalty or license fees owing at the time of such termination and shall not impair any accrued right of The Regents. These notices shall be subject to Article 19 (Notices). 11. TERMINATION BY LICENSEE 11.1 The Licensee shall have the right at any time to terminate this Agreement in whole or as to any portion of Regents' Patent Rights by giving notice in writing to The Regents. Such notice of termination shall be subject to Article 19 (Notices), and termination of this Agreement shall be effective ninety (90) days from the effective date of such notice. 11.2 Any termination pursuant to the above paragraph shall not relieve the Licensee of any obligation of liability accrued hereunder prior to such termination or rescind anything done by the Licensee or any payments made to The Regents hereunder prior to the time such termination becomes effective, and such termination shall not affect in any manner any rights of The Regents arising under this Agreement prior to such termination. Any unpaid part of the License Issue Fee of paragraph 4.1 becomes due and payable at the time of termination by Licensee. 12. DISPOSITION OF LICENSED PRODUCTS ON HAND UPON TERMINATION 12.1 Upon termination of this Agreement, the Licensee shall have the privilege of disposing of all previously made or partially made Licensed Products, but no more, within a period of one hundred and twenty (120) days provided, however, that the sale of such Licensed Products 17 39 shall be subject to the terms of this Agreement including, but not limited to, the payment of royalties at the rate and at the time provided herein and the rendering of reports thereon. 13. USE OF NAMES, TRADEMARKS, AND CONFIDENTIALITY 13.1 Nothing contained in this Agreement shall be construed as conferring any right to use in advertising, publicity, or other promotional activities any name, trade name, trademark, or other designation of either party hereto (including contraction, abbreviation, or simulation of any of the foregoing). Unless required by law, the use by the Licensee of the name "The Regents of the University of California" or the use by the Licensee of the name of any campus of the University of California is expressly prohibited. 13.2 Neither The Regents nor Licensee shall be free to release the terms and conditions of this Agreement to third parties unless required by law without the written consent of the other. 13.3 Notwithstanding paragraph 13.2, it is understood that The Regents shall be free to release to the inventors and senior administrative officials employed by The Regents the terms and conditions of this Agreement upon their request. If such release is made, The Regents shall request that such terms and conditions not be disclosed to others. It is further understood that should a third party inquire whether a license to Regents' Patent Rights is available, The Regents may disclose the existence of this Agreement and the Extent of the grant in Article 2 (GRANTS) to such third party, but shall not disclose the name of the Licensee except where The Regents is required to release such information under either the California Public Records Act or other applicable law. 18 40 13.4 Notwithstanding the requirements for confidentiality contained within this Article 13, The Regents hereby authorizes the Licensee to include in any NDA for a Licensed Product a list of patents included within Regents' Patent Rights identifying The Regents as patent owner. 14. LIMITED WARRANTY 14.1 The Regents warrants to the Licensee that it has the lawful right to grant this license. 14.2 This license and the associated Invention are provided WITHOUT WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER WARRANTY, EXPRESSED OR IMPLIED. THE REGENTS MAKES NO REPRESENTATION OR WARRANTY THAT THE LICENSED PRODUCTS OR LICENSED METHODS WILL NOT INFRINGE ANY PATENT OR OTHER PROPRIETARY RIGHT. 14.3 IN NO EVENT WILL THE REGENTS BE LIABLE FOR ANY INCIDENTAL, SPECIAL, OR CONSEQUENTIAL DAMAGES RESULTING FROM EXERCISE OF THIS LICENSE OR THE USE OF THE INVENTION OR LICENSED PRODUCTS. 14.4 Nothing in this Agreement shall be construed as: (14.4.1) a warranty or representation by The Regents as to the validity or scope of any Regents' Patent Rights; or (14.4.2) a warranty or representation that anything made, used, sold, or otherwise disposed of under any license granted in this Agreement is 19 41 or will be free from infringement of patents of third parties; or (14.4.3) an obligation to bring or prosecute actions or suits against third parties for patent infringement except as provided in Article 17 (PATENT INFRINGEMENT); or (14.4.4) conferring by implication, estoppel, or otherwise any license or rights under any patents of The Regents other than Regents' Patent Rights as defined herein, regardless of whether such patents are dominant or subordinate to Regent's Patent Rights; or (14.4.5) an obligation to furnish any know-how not provided in Regents' Patent Rights. 15. PATENT PROSECUTION AND MAINTENANCE 15.1 Provided that Licensee has paid billings and rebillings as provided for in paragraph 15.4, The Regents shall diligently prosecute and maintain the United States patents comprising Regents' Patent Rights using counsel of its choice. The Regents' counsel will take instructions only from The Regents. The Regents shall provide the Licensee with copies of all relevant documentation so that the Licensee may be informed and apprised of the continuing prosecution. The Licensee agrees to keep this documentation confidential. 15.2 The Regents shall use all reasonable efforts to amend any patent application to include claims reasonably requested by the Licensee to protect the products contemplated to be sold under this Agreement. 15.3 Licensee shall apply for an extension of the term of any patent included within 20 42 Regents' Patent Rights if appropriate under the Drug Price Competition and Patent Term Restoration Act of 1984 and/or European, Japanese, and other foreign counterparts of this law. The Licensee shall prepare all such documents, and The Regents agrees to execute such documents and to take such additional action as the Licensee may reasonably request in connection therewith. 15.4 The costs of preparing, filing, prosecuting, and maintaining all United States patent applications and/or patents contemplated by this Agreement shall be borne by Licensee. This includes patent prosecution costs for this Invention incurred by The Regents prior to the execution of this Agreement. Such prior costs (approximately $8,611.71 as of September 30, 1993) will be due within thirty (30) days of the execution of this Agreement. Current and future costs for patent prosecution and maintenance will be billed to the Licensee by The Regents as incurred and shall be payable within thirty (30) days of the billing date. 15.5 The Licensee shall have the right to request The Regents to obtain patent protection on the Invention in foreign countries if available and if it so desires. The Licensee must notify The Regents within seven (7) months of the filing of the corresponding United States application of its decision to obtain foreign patents. This notice concerning foreign filing shall be in writing, must identify the countries desired, and reaffirm Licensee's obligation to underwrite the costs thereof. The absence of such a notice from the Licensee to The Regents shall be considered an election not to secure foreign rights. 15.6 The preparation, filing, and prosecuting of all foreign patent applications filed at the Licensee's request, as well as the maintenance of all resulting patents, shall be at the sole expense of the Licensee. Such patents shall be held in the name of the Regents and shall be obtained using counsel of The Regents' choice. 21 43 15.7 The Licensee's obligation to underwrite and to pay patent prosecution costs shall continue for so long as this Agreement remains in effect provided, however, that the Licensee may terminate its obligations with respect to any given patent application or patent upon three (3) months written notice to The Regents. The Regents will use its best efforts to curtail patent costs when such a notice is received from the Licensee. Those costs which cannot be curtailed will be due and owing when rebilled. The Regents may continue prosecution and/or maintenance of such application(s) or patent(s) at its sole discretion and expense provided, however, that the Licensee shall have no further right or licenses thereunder. 15.8 The Regents shall have the right to file, prosecute, or maintain patent applications at its own expense in any country in which the Licensee has not elected to file, prosecute, or maintain patent rights in accordance with this Article 15, and such applications and resultant patents shall not be subject to this Agreement. 16. PATENT MARKING 16.1 The Licensee agrees to mark all Licensed Products made, used, or sold under the terms of this Agreement, or their containers, in accordance with the applicable patent marking laws. 17. PATENT INFRINGEMENT 17.1 In the event that the Licensee shall learn of the substantial infringement of any patent or patent extension licensed under this Agreement, the Licensee shall call The Regents' attention thereto in writing and shall provide The Regents with reasonable evidence of such 22 44 infringement. Both parties to this Agreement agree that during the period and in a jurisdiction where the Licensee has exclusive rights under this Agreement, neither will notify a third party of the infringement of any of Regents' Patent Rights without first obtaining consent of the other party, which consent shall not be unreasonably denied. Both parties shall use their best efforts in cooperation with each other to terminate such infringement without litigation. 17.2 The Licensee may request that The Regents take legal action against the infringement of Regents' Patent Rights. Such request shall be made in writing and shall include reasonable evidence of such infringement and damages to the Licensee. If the infringing activity has not been abated within ninety (90) days following the effective date of such request, The Regents shall have the right to: a) commence suit on its own account or b) refuse to participate in such suit, and The Regents shall give notice of its election in writing to the Licensee by the end of the one-hundredth (100th) day after receiving notice of such request from the Licensee. The Licensee may thereafter bring suit for patent infringement if and only if The Regents elects not to commence suit and if the infringement occurred during the period and in a jurisdiction where the Licensee had exclusive rights under this Agreement. However, in the event the Licensee elects to bring suit in accordance with this paragraph, The Regents may thereafter join such suit at its own expense. 17.3 Such legal action as is decided upon shall be at the expense of the party on account of whom suit is brought and all recoveries recovered thereby shall belong to such party provided, however, that legal action brought jointly by The Regents and the Licensee and fully 23 45 participated in by both shall be at the joint expense of the parties and all recoveries shall be shared jointly by them in proportion to the share of expense paid by each party. 17.4 Each party agrees to cooperate with the other in litigation proceedings instituted hereunder but at the expense of the party on account of whom suit is brought. Such litigation shall be controlled by the party bringing the suit except that The Regents may be represented by counsel of its choice pursuant to The Regents' determination in any suit brought by the Licensee. 18. INDEMNIFICATION 18.1 The Licensee agrees to indemnify, hold harmless, and defend The Regents, their officers, employees, and agents; the sponsors of the research that led to the Invention; and the inventors of the patents and patent applications in Regents' Patent Rights and their employers against any and all claims, suits, losses, damage, costs, fees, and expenses resulting from or arising out of exercise of this license or any sublicense. This indemnification will include, but will not be limited to, any product liability. 18.2 The Licensee, at its sole cost and expense, shall insure its activities in connection with the work under this Agreement, and before Licensee conducts any non-financial commercialization activities concerning the Licensed Products outside of development and trials performed at the University of California by employees of the University of California, Licensee shall obtain, keep in force, and maintain Comprehensive or Commercial Form General Liability Insurance (contractual liability included) or an equivalent program of self-insurance with limits as follows: 24 46 (a) Each Occurrence [ *** ] (b) Products/Completed Operations Aggregate [ *** ] (c) Personal and Advertising Injury [ *** ] (d) General Aggregate (commercial form only) [ *** ] It should be expressly understood, however, that the coverages and limits referred to under the above shall not in any way limit the liability of Licensee. Licensee shall furnish The Regents with certificates of insurance evidencing compliance with all requirements. Such certificates shall: (18.2.1) Provide a thirty (30)-day advance written notice to the University of any modification. (18.2.2) Indicate that The Regents has been endorsed as an additional insured under the coverages referred to under the above. (18.2.3) Include a provision that the coverages will be primary and will not participate with nor will be excess over any valid and collectible insurance or program of self-insurance carried or maintained by The Regents. 18.3 The Regents shall promptly notify Licensee in writing of any claim or suit brought against The Regents in respect of which The Regents intends to invoke the provisions of this Article 18. Licensee will keep The Regents informed on a current basis of its defense of any claims pursuant to this Article 18. 19. NOTICES 19.1 Any notice or payment required to be given to either party shall be deemed to have been properly given and to be effective (a) on the date of delivery if delivered in person or (b) five (5) days after mailing if mailed by first-class certified mail, postage paid, to the respective *** confidential treatment is requested 25 47 addresses given below or to such other address as it shall designate by written notice given to the other party. In the case of the Licensee: TISSUE TECHNOLOGIES INC. 1372 Green Street San Francisco, CA 94109 Attention: Jesse Kramer In the case of The Regents: THE REGENTS OF THE UNIVERSITY OF CALIFORNIA 1320 Harbor Bay Parkway, Suite 150 Alameda, California 94502 Attention: Director, Office of Technology Transfer Referring to: UC Case No. 93-057-1 20. ASSIGNABILITY 20.1 This Agreement is binding upon and shall inure to the benefit of The Regents, its successors, and assigns, but shall be personal to the Licensee and assignable to the Licensee only with the written consent of The Regents, which consent shall not be reasonably withheld. 21. LATE PAYMENTS 21.1 In the event royalty payments or fees or patent cost reimbursements are not received by The Regents when due, the Licensee shall pay to The Regents interest charges at a rate of [ *** ] per annum. Such interest shall be calculated from the date payment was due until actually received by The Regents. *** confidential treatment requested 26 48 22. WAIVER 22.1 It is agreed that no waiver by either party hereto of any breach or default of any of the covenants or agreements herein set forth shall be deemed a waiver as to any subsequent and/or similar breach or default. 23. FAILURE TO PERFORM 23.1 In the event of a failure of performance due under the terms of this Agreement and if it becomes necessary for either party to undertake legal action against the other on account thereof, then the prevailing party shall be entitled to reasonable attorney's fees in addition to costs and necessary disbursements. 24. GOVERNING LAWS 24.1 THIS AGREEMENT SHALL BE INTERPRETED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, but the scope and validity of any patent or patent application shall be governed by the applicable laws of the country of such patent or patent application. 25. FOREIGN GOVERNMENT APPROVAL OR REGISTRATION 25.1 If this Agreement or any associated transaction is required by the law of any nation to be either approved or registered with any governmental agency, the Licensee shall assume all legal obligations to do so. 27 49 26. EXPORT CONTROL LAWS 26.1 The Licensee shall observe all applicable United States and foreign laws with respect to the transfer of Licensed Products and related technical data to foreign countries, including without limitation, the International Traffic in Arms Regulations (ITAR) and the Export Administration Regulations. 27. FORCE MAJEURE 27.1 The parties to this Agreement shall be excused from any performance required hereunder if such performance is rendered impossible or unfeasible due to any catastrophes or other major events beyond their reasonable control, including without limitation, war, riot, and insurrection; laws, proclamations, edicts, ordinances, or regulations; strikes, lock-outs, or other serious labor disputes; and floods, fires, explosions, or other natural disasters. When such events have abated, the parties' respective obligations hereunder shall resume. 28. CONFIDENTIAL INFORMATION 28.1 With regard to confidential information ("Data"), which can be oral or written or both, and can include, but not be limited to, technical information, patent applications, and prosecution documents received from The Regents regarding this Invention, the Licensee agrees not to use the Data except for the sole purpose of performing under the terms of this Agreement; to safeguard Data against disclosure to others with the same degree of care as it exercises with its own data of a similar nature; and not to disclose Data to others (except to its employees, agents, or consultants who are bound to Licensee by a like obligation of confidentiality) without the express 28 50 written permission of The Regents except that Licensee shall not be prevented from using or disclosing any of the Data: (28.1.1) which Licensee can demonstrate by written records was previously known to it; (28.1.2) which is now, or becomes in the future, public knowledge other than through acts or omissions of Licensee; or (28.1.3) which is lawfully obtained by Licensee from sources independent of The Regents. The secrecy obligations of Licensee with respect to Data shall continue for a period ending five (5) years from the termination of this Agreement. 29. MISCELLANEOUS 29.1 The headings of the several sections are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 29.2 This Agreement will not be binding upon the parties until it has been signed below on behalf of each party; in which event, it shall be effective as of the date recited on page one. 29.3 No amendment or modification hereof shall be valid or binding upon the parties unless made in writing and signed on behalf of each party. 29.4 This Agreement embodies the entire understanding of the parties and shall supersede all previous communications, representations, or understandings, either oral or written, 29 51 between the parties relating to the subject matter hereof. The Letter of Intent effective June 14, 1993, UC Control No. 93-30-0385 is hereby terminated. 29.5 In case any of the provisions contained in this Agreement shall be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision hereof, but this Agreement shall be construed as if such invalid or illegal or unenforceable provisions had never been contained herein. IN WITNESS WHEREOF, both The Regents and the Licensee have executed this Agreement in duplicate originals by their respective officers hereunto duly authorized, on the day and year hereinafter written. TISSUE TECHNOLOGIES INC.: THE REGENTS OF THE UNIVERSITY OF CALIFORNIA: By: /s/ Jesse Kramer By: /s/ William T. Davis ------------------------- -------------------------------- Name: Jesse Kramer Name: William T. Davis ----------------------- ------------------------------ Title: President Associate Director ---------------------- Office of Technology Transfer Date: 3/21/94 Date: 3/31/94 ----------------------- ------------------------------ 30 EX-10.84 6 DISTRIBUTION AGREEMENT WITH BIOMATRIX, INC. 1 EXHIBIT 10.84 INTERNATIONAL DISTRIBUTION AGREEMENT THIS AGREEMENT is made as of the 14th day of June 1996 by and between BIOMATRIX, INC., a corporation duly organized and existing under the laws of the State of Delaware, having its principal office at 65 Railroad Avenue, Ridgefield, New Jersey 07657, U.S.A. ("Biomatrix") and COLLAGEN CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware, having its principal office at 2500 Faber Place, Palo Alto, California 94303, U.S.A. (the "Distributor"). WHEREAS, Biomatrix is engaged in the development and manufacture of the Agreement Product (as hereinafter defined); WHEREAS, the Distributor desires to enter into a distribution agreement and be appointed the exclusive distributor (even to Biomatrix) of the Agreement Product and any Improved Agreement Product(s) in the Territory (as such terms are hereinafter defined), and Biomatrix is willing to so appoint the Distributor on the terms and subject to the conditions set forth herein; and WHEREAS, the Distributor desires to purchase from Biomatrix, and Biomatrix desires to sell to the Distributor, the Distributor's orders of the Agreement Product and any Improved Agreement Product(s) in the Territory on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the premises and of the mutual covenants of the parties hereto, it is hereby agreed as follows: 1. DEFINITIONS AND INTERPRETATION. 1.1. In this Agreement, the following words and expressions shall have the following meanings: "Affiliate" shall mean, with respect to any party, any Person which, directly or indirectly, is controlled by, controls or is under common control with such party. For purposes of this definition, the term "control" (including with correlative meanings, the terms "controlled by" and "under common control with") shall mean, with respect to any Person, the direct or indirect ownership of more than fifty percent (50%) of the voting or income interest in such Person or the possession otherwise, directly or indirectly, of the power to direct the management or policies of such Person. "Agreement Product" shall mean the one product made of hylan B and called by Biomatrix Hylaform(R), the specifications for which are set forth on Exhibit A, for use in the correction of wrinkles and depressed scars. 2 "Agreement Product Specifications" shall mean the specifications for the Agreement Product set forth in Exhibit A, as such specifications may be modified or supplemented by Biomatrix from time to time in accordance with Product License Approvals or to reflect any Improved Agreement Product(s). "Agreement Year" shall mean, with respect to a country or Region, as applicable, in the Territory, the twelve (12) month period commencing on the date of first commercial sale of the Agreement Product in such country or Region, as applicable, and each separate successive twelve (12) month period thereafter. "Contract Quarter" shall mean, for sales of Agreement Product in a country or Region, as applicable in the Territory, the period commencing with the Distributor's first commercial sale of the Agreement Product in such country or Region, as applicable, and ending on the first to occur of March 31, June 30, September 30 and December 31, as applicable, and each three (3) month period thereafter throughout the term of this Agreement. "Dermal Tissue Augmentation Products" shall mean biomaterial(s) that are * "Dollars" and "$" shall mean the lawful currency of the United States of America. "Effective Date" shall mean June 17, 1996. "EU Countries" shall mean, collectively, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom. "European Territory" shall mean, collectively, the EU Countries, Switzerland, Norway, Liechtenstein and Iceland. "Formula Price" shall mean an amount equal to * of the Agreement Product by Distributor or an Affiliate of Distributor, calculated on a * basis, provided that if the * the Agreement Product in a Region * , then the Formula Price for such Region shall mean an amount equal to * of the Agreement Product on a * basis by Distributor or an Affiliate of Distributor in such Region. * the Formula Price shall mean an amount equal to * by Distributor or an Affiliate of Distributor, * , for or an * Confidential portions have been omitted and filed separately with the Commission. -2- 3 * , including without limitation * "Improved Agreement Product(s)" shall mean (i) any modification of the Agreement Product (made entirely from hylan B) regarding the formulation of hylan B in the Agreement Product, that is changes of concentration of the polymer or other changes in the Agreement Product Specifications, whether or not requiring new regulatory approval in the EU Countries or in the United States, and (ii) any modifications or changes related to the packaging of the Agreement Product, including the syringe used, mode of application or dosage. "Incremental Royalties" shall mean that term as defined in Section 8.2. "Initial Term" shall mean that term as defined in Section 3.2. "Launch" shall mean, with respect to a country in the Territory, the commencement by Distributor of sales of the Agreement Product in commercial quantities for use in such country. Such Launch shall be made with respect to each country in the Territory in accordance with the dates set forth on Exhibit B. "Minimum Price" shall mean an amount equal to * for each Treatment Syringe, * , then the Minimum Price payable in such Region * Agreement Years immediately following such * shall equal * , and * such * shall equal * for each Treatment Syringe. "Net Retail Sales" shall mean, with respect to sales of a Dermal Tissue Augmentation Product in a country in the Territory, the aggregate gross price invoiced for retail sales of such product during a period in such country to unaffiliated third-party purchasers * It is Biomatrix's understanding that the foregoing definition is consistent with how the Distributor reports its sales in its audited financial statements. "New Products" shall mean * * Confidential portions have been omitted and filed separately with the Commission. -3- 4 "Patents" shall mean Letters Patent or similar statutory rights relating to any Agreement Product and any Improved Agreement Product(s) (including any continuation-in-part, continuation or division thereof or substitute thereof), and patent applications which are pending as of the Effective Date, in each case as set forth in Exhibit C, together with any supplementary or complementary protection certificates therefor if and when such are granted. "Person" shall mean an individual, a corporation, limited liability company, a partnership, a trust, an unincorporated organization or a government or any agency or political subdivision thereof. "Product License Approvals" shall mean those regulatory approvals required for the importation, promotion, marketing and sale of the Agreement Product and any Improved Agreement Product(s) in the Territory (including any reimbursement or pricing approvals). "Region" shall mean any one of the following countries or groups of countries: * "Supply Forecast" shall mean that term as defined in Section 7.3(b). "Territory" shall mean, collectively, the EU Countries, Switzerland, Norway, Liechtenstein, Iceland, Australia, New Zealand, Japan, Israel, Argentina, Brazil, Mexico, Chile, Columbia, Cyprus, Lebanon, Turkey and Canada and any countries added hereto pursuant to Section 2.4. "Trademarks" shall mean (i) the trademark Hylaform(R), the details of which are described in Exhibit C, and (ii) any other trademarks, as may be agreed upon in writing from time to time by the parties hereto for use by the Distributor in connection with the promotion, marketing and sale of the Agreement Product and any Improved Agreement Product(s) under this Agreement. "Treatment Syringe" shall mean a ready-for-injection 1.0cc syringe of the Agreement Product. "United States Consumer Price Index" shall mean the Consumer Price Index, All Items, United States, as published by the Bureau of Labor * Confidential portions have been omitted and filed separately with the Commission. -4- 5 Statistics. 1.2. In this Agreement, unless the context otherwise requires: (a) clause headings are inserted for convenience of reference only and have no legal effect; (b) references to sections, exhibits and schedules are to be construed as references to the sections of, and exhibits and schedules to, this Agreement and references to this Agreement include its exhibits and schedules. (c) references to (or to any specified provision of) this Agreement or any other document shall be construed as references to this Agreement, that provision or that document as in force for the time being and as amended, varied, substituted, supplemented, restated or novated in accordance with the terms thereof or, as the case may be, with the agreement of the relevant parties and (where such consent is, by the terms of this Agreement or the relevant document, required to be obtained as a condition to such amendment being permitted) the prior written consent of Biomatrix; (d) words importing the plural shall include the singular and vice versa; (e) references to a person shall be construed as including references to an individual, firm, consortium, company, corporation, unincorporated body of persons or any State or any agency thereof; and (f) references to statutory provisions shall be construed as references to those provisions as replaced, amended or re-enacted from time to time. 2. APPOINTMENT; BEST EFFORTS; EXCLUSIVITY. 2.1. Appointment. (a) Subject to the terms and conditions hereinafter set forth, Biomatrix hereby appoints the Distributor as its exclusive * (except to the extent set forth in Section 2.3) distributor for the registration (other than in the European Territory), promotion, marketing, sale and distribution within the Territory of the Agreement Product and any Improved Agreement Product(s) supplied by Biomatrix or an Affiliate of Biomatrix to the Distributor pursuant to this Agreement. Such appointment does not include the right to sublicense or appoint subdistributors except to an Affiliate of Distributor or a Subdistributor of Distributor set forth on Exhibit E hereto (each a "Subdistributor") without the approval of Biomatrix; (and only for such time as such an Affiliate remains an Affiliate or Subdistributor of Distributor). * Confidential portions have been omitted and filed separately with the Commission. -5- 6 (b) Except as specifically provided to the contrary herein, the foregoing appointment shall not be construed, by implication or otherwise, (i) to effect any sale of proprietary Biomatrix technology, (ii) to grant any license relating to Biomatrix's proprietary methods of formulating, fabricating and manufacturing the Agreement Product or any Improved Agreement Product(s), or (iii) to grant the Distributor any rights in or to any proprietary technology or Patents or Trademarks of Biomatrix. (c) During the term of this Agreement the Distributor shall neither seek customers for the Agreement Product or any Improved Agreement Product(s) outside the Territory nor establish any branch or maintain any distribution facilities outside the Territory for the registration, promotion, marketing, sale or distribution of the Agreement Product or any Improved Agreement Product(s). (d) * to enter into subdistribution arrangements * hereto and no Subdistributor shall have any further right to sublicense any rights or appoint additional subdistributors. The rights of Subdistributors to maintain a sublicense hereunder shall be subject to the following: (i) Each Subdistributor shall agree with Distributor that its rights to sell the Agreement Product and Improved Agreement Product(s) are subject to the terms of this Agreement, including without limitation Distributor's or Biomatrix's rights to terminate or convert this Agreement into a non-exclusive arrangement; (ii) * (iii) * (iv) Without the prior written consent of Biomatrix, Distributor shall not waive any default or breach of any Subdistributor which would adversely affect Biomatrix; and (v) Upon any termination of this Agreement (or with respect to any country), all subdistributor arrangements shall automatically terminate; provided that Biomatrix may, in its sole discretion, negotiate a license directly with any terminated Subdistributor. 2.2. Acceptance of Obligations; Best Efforts. The Distributor * Confidential portions have been omitted and filed separately with the Commission. -6- 7 hereby accepts the appointment described in Section 2.1 and hereby agrees to use its best efforts at all times during the term hereof to register, promote, market, sell and distribute the Agreement Product and any Improved Agreement Product(s) in the Territory. * 2.3. Conversion to Non-Exclusive Distributorship. In the event that (i) in any Agreement Year after and including the third Agreement Year or (ii) from, after and including the first year of the Distributor acquiring and/or commercializing a New Product pursuant to Section 10.1(b) (and so long as (i) no force majeure condition of the Distributor exists at such time pursuant to Section 20, (ii) Biomatrix has met its supply obligations under Section 7.4 and (iii) Distributor is able to lawfully sell the Agreement Product and any Improved Agreement product(s) in each of the countries within any such Region) the Distributor's (or its Affiliates' or Subdistributors', as applicable) Net Retail Sales of the Agreement Product and any Improved Agreement Product(s) in a Region comprise less than * of its Net Retail Sales of * , including the Agreement Product and any Improved Agreement Product(s), * Upon conversion of Distributor's rights to a non-exclusive distribution arrangement in any Region, Biomatrix shall have the right to distribute the Agreement Product and Improved Agreement Product and/or engage another distributor for such Region. Biomatrix will give Distributor * days notice prior to appointing a third party distributor for such Region. From and after the date of a conversion to a non-exclusive distribution arrangement within a Region, the Distributor shall lose its rights hereunder to register, promote, market, sell and distribute within such Region any Improved Agreement Product(s) commercialized on or after such date. Notwithstanding the foregoing, the Distributor shall retain the exclusive rights in all trademarks under which the Distributor launched the Agreement Product or any Improved Agreement Product(s) in such Region. Upon conversion of Distributor's rights to a non-exclusive distribution arrangement * Confidential portions have been omitted and filed separately with the Commission. -7- 8 in any Region in the European Territory, the arrangements between the parties under this Agreement shall no longer be governed by this Agreement and such Region shall no longer be deemed a part of the Territory, but rather, such Region shall become the subject of a new agreement between the parties upon the same terms and conditions set forth in this Agreement. Upon such conversion to a non-exclusive arrangement, the parties agree to execute such further documents and agreements as are necessary in order to give effect to the provisions of this Section. 2.4. Expansion of Territory. One or more countries may be added to the Territory from time to time after the Effective Date by mutual written agreement of the parties hereto, conditional upon the satisfactory completion of the necessary due diligence in such country and the satisfaction of Biomatrix with the proposed arrangements for the registration, promotion, marketing, sale and distribution of the Agreement Product and any Improved Agreement Product(s) by the Distributor in such country. Biomatrix agrees to discuss the appointment of Distributor or one of its subdistributors prior to appointing a third party distributor of the Agreement Product in any additional country. 3. TERM AND TERMINATION. 3.1. Effective Date. This Agreement shall take effect as of the Effective Date. 3.2. Term. (a) Unless this Agreement is sooner terminated, in its entirety or as to a country or Region in the Territory in accordance with the provisions of this Agreement, the term of the appointment hereunder for a country in the Territory shall commence on the first day of the first Agreement Year for such country and shall end on the last day of the * Agreement Year for such country (the "Initial Term"). (b) Unless this Agreement is sooner terminated, in its entirety or as to any Region in the Territory in accordance with the provisions of this Agreement, the appointment of the Distributor hereunder as exclusive distributor of the Agreement Product for each Region in the Territory shall be renewable by the Distributor, at its option, upon written notice to Biomatrix received at least * prior to the end of the Initial Term for such Region, for an additional consecutive term of * following the date of expiration of the Initial Term for such Region, provided that the Distributor shall only be entitled to exercise such renewal option with respect to any Region if as of the date of expiration of the Initial Term for such Region the Distributor is not in material breach of any of its obligations under this Agreement with respect to any Region (it being understood that any payment default by Distributor under this Agreement will be deemed a default as to the entire Territory). Thereafter, the appointment of the Distributor as exclusive distributor of the Agreement Product for such Region shall be * Confidential portions have been omitted and filed separately with the Commission. -8- 9 renewable upon the expiration of such additional * term, upon written notice to Biomatrix received at least * prior to the end of such term for such Region, for one additional consecutive renewal term of * , provided that, as of the date of expiration of the first renewal term for such Region, the Distributor is not in material breach of any of its obligations under this Agreement with respect to any Region (it being understood that any payment default by Distributor under this Agreement will be deemed a default as to the entire Territory). For the avoidance of any doubt, the Distributor's rights with respect to any Improved Agreement Product(s) commercialized after the * of the Effective Date shall terminate upon the * of the Effective Date. Subject to the terms of this Agreement, Distributor shall have the right to continue to sell the Agreement Product and any Improved Agreement Products it is then currently selling. (c) This Agreement may be terminated with respect to any country in the Territory by either party, by written notice to the other party, in the event that (i) a mutual decision not to Launch the Agreement Product in such country is reached or (ii) a Launch is not commenced with respect to such country within * after the time period set forth on Exhibit B. (d) In the event that in any Agreement Year commencing with the * Agreement Year (and so long as (i) no force majeure condition of the Distributor exists at such time pursuant to Section 20, (ii) Biomatrix has met its supply obligations under Section 7.4, and (iii) Distributor is able to lawfully sell the Agreement product and any Improved Agreement Product(s) in each of the countries within any such Region), the Distributor's (and its Affiliates' or Subdistributors', as applicable) Net Retail Sales of the Agreement Product and any Improved Agreement Product(s) in any Region comprise less than * in such Region of all Dermal Tissue Augmentation Products, including the Agreement Product and any Improved Agreement Product(s), the Distributor's distribution rights (including, without limitation, its right to use the Trademarks) under this Agreement for the Agreement Product and any Improved Agreement Product(s) in such Region shall terminate upon * after the end of the applicable Agreement Year, to Distributor from Biomatrix; * By way of example, if Distributor's Net Retail Sales of all Dermal Tissue Augmentation Products in a Region in a given Agreement Year were * , and Distributor's Net Retail Sales of the Agreement Product in such Region in such Agreement Year were $500, *; * Confidential portions have been omitted and filed separately with the Commission. -9- 10 further provided that with respect to any such Region, at Biomatrix's election, Biomatrix may * Upon any such termination of the Distributor's distribution rights in a Region, the Distributor's obligation to pay any royalties pursuant to Sections 8.1 and 8.2 for any sales in such Region after such termination shall cease, but the Distributor shall remain obligated to pay all such royalties for sales in such Region accrued prior to such termination. (e) If the Distributor's rights to distribute the Agreement Product and any Improved Agreement Product(s) in any country in the European Territory shall terminate solely pursuant to subsection (d) above, Biomatrix agrees to sell the Agreement Product and any Improved Agreement Product(s) developed before the date of such termination to the Distributor a * for the period of time equal to the period that would have remained in the Initial Term in such country had the Distributor's distribution rights not terminated. 3.3. Inventory. (a) Upon termination of this Agreement for any reason, Biomatrix shall have the right (but not the obligation) to repurchase all or part of the inventory of the Agreement Product and any Improved Agreement Product(s) held by the Distributor or its Affiliates or Subdistributors. (b) The price for inventory to be repurchased by Biomatrix pursuant to Section 3.3(a) above shall be the landed cost thereof actually paid by the Distributor to Biomatrix. With respect to any quantities not repurchased by Biomatrix, the Distributor shall have the right to sell such inventory of the Agreement Product and any Improved Agreement Product(s), in its usual and customary manner, in the ordinary course of business, for a period of six (6) months following termination of this Agreement and notwithstanding such termination the terms and conditions of this Agreement shall apply to such sales. 3.4. Insolvency. This Agreement may be immediately terminated as to the entire Territory by either party, upon giving written notice to the other party, in the event that the other party shall become insolvent or be declared bankrupt by a court of competent jurisdiction or shall be the subject of any reorganization (other than a corporate reorganization effected in the ordinary course of business and not arising out of any insolvency) or winding up, receivership or dissolution, bankruptcy or liquidation proceeding, or any * Confidential portions have been omitted and filed separately with the Commission. -10- 11 proceeding or action similar to one or more of the above, in which case termination shall be effective upon such written notice. The failure of either party to give notice of termination upon obtaining knowledge of any such event shall not be interpreted as a waiver of such party's rights under this Section 3.4, and such party reserves the right to exercise any such rights at any time after the occurrence of any such event. 3.5. Breach. This Agreement may be terminated as to the entire Territory by either party if the other party shall breach any of its payment obligations hereunder or with respect to any Region if Distributor (or its Affiliates or Subdistributors, as applicable) shall commit a material breach of any of its warranties, covenants, conditions, obligations or agreements contained herein with respect to such Region, provided that such breach shall continue for a period of thirty (30) days after written notice thereof and provided further that such termination shall be immediately effective upon further written notice to that effect to the breaching party after its failure to cure such breach within such applicable notice period. For avoidance of doubt, the parties agree that if a Launch is not reached with respect to a country within thirty days after the time period set forth on Exhibit B, then either party may terminate this Agreement with respect to such country (provided that such failure to reach a Launch is not caused by a force majeure condition of the Distributor or Biomatrix's failure to meet its supply obligations under Section 7.4). 3.6. Certain Rights Upon Termination. Upon termination of this Agreement for any reason whatsoever, Biomatrix shall have the following rights, or if such termination is as to a country in the Territory in accordance with the provisions of this Agreement, Biomatrix shall have the following rights in such country: (a) Biomatrix shall have the unrestricted right to review, access, use and permit others to review, access and use, either directly or by cross-reference or incorporation or otherwise, all information, data, investigations, preclinical and clinical protocols, marketing information disseminated by Distributor publicly to customers and patients and all information required to be provided to Biomatrix by law, information relating to laboratory, animal and human studies, and related regulatory approvals pertaining to the Agreement Product or any Improved Agreement Product(s) (the "Information") which are possessed or controlled by the Distributor or any of its Affiliates or Subdistributors, or to which the Distributor or any of its Affiliates or Subdistributors has a right to review, access or use. The Distributor unconditionally agrees promptly to take any action and to execute and deliver to Biomatrix any documents or instruments reasonably requested by Biomatrix to permit Biomatrix to make full use of such unrestricted right. (b) Further, Biomatrix shall have exclusive ownership rights to the Trademarks and to all other product specific logos, slogans and other intangibles used by the Distributor solely in association with the independent sale of the Agreement Product and any Improved Agreement Product(s) (including all registrations relating thereto) possessed or controlled by the Distributor -11- 12 or any of its Affiliates or Subdistributors, and the Distributor unconditionally agrees, subject to the provisions of Section 3.3(b), (i) immediately upon termination to cease using the Trademarks and any such logos, slogans, and marketing rights of Biomatrix or any imitations thereof and (ii) immediately to execute and deliver to Biomatrix any documents or instruments reasonably requested by Biomatrix to give full effect to the provisions of this Section 3.6; provided, however, if the Distributor maintains a license to distribute the Agreement Product(s) in (a) two Regions, (b) one Region in the European Territory or (c) in the United States, then Distributor shall retain the exclusive rights in the Trademarks in the entire Territory. (c) In addition, the Distributor unconditionally agrees, subject to the provisions of Section 3.3(b), that it shall, upon the request of Biomatrix, immediately inform all relevant regulatory authorities that the Distributor (or its Affiliate or Subdistributor) is no longer a distributor of the Agreement Product or the Improved Agreement Product(s) and shall take all action and execute and deliver all documents and instruments necessary in order to transfer to the fullest extent permitted under applicable law all registrations and Product License Approvals, or applications therefor, for the Agreement Product or any Improved Agreement Product(s) to Biomatrix or any Person nominated by Biomatrix. 3.7. Effects of Termination. (a) Upon termination of this Agreement for any reason, the Distributor shall immediately discontinue making any representations regarding its status as a distributor for Biomatrix and shall immediately cease conducting any activities with respect to the marketing, promotion, sale or distribution of the Agreement Product and any Improved Agreement Product(s), provided, however, that the Distributor shall be permitted to sell inventory not repurchased by Biomatrix in accordance with Section 3.3. (b) Termination of this Agreement shall not affect obligations of either party that may have accrued prior to the effective date of termination. Subject to Clause 3.8 below, termination of this Agreement shall be in addition to, and shall not be exclusive of or prejudicial to, any other grounds for termination or rights or remedies at law or in equity which either party may have on account of any default of the other party. 3.8. Waiver. The Distributor (for itself and on behalf of its Affiliates and Subdistributors) hereby waives, to the extent it is able to do so under the law of every country in the Territory and other applicable law, any statutory rights it may have or acquire in respect of the termination of the relationship established hereby pursuant to the terms hereof, and agrees that the rights available to it hereunder in the event of such termination are adequate and reflect the agreement of the parties. The Distributor shall not have any right to claim any indemnity for goodwill or lost profits or any damages arising from the rightful termination of this Agreement in accordance with the terms hereof. -12- 13 4. PAYMENTS. All payments hereunder shall be made in Dollars. Payments to Biomatrix shall be wired to an account designated by Biomatrix and the costs of any such remittance shall be borne by the Distributor. All amounts (except for the Minimum Price, which shall be denominated in Dollars) denominated in another currency shall be converted to Dollars using the average month-end rates of exchange for the relevant period as published in The Wall Street Journal (or, if The Wall Street Journal shall no longer publish such exchange rates, as determined by a method that is mutually agreed upon in writing by the parties). 5. WITHHOLDING. All payments to be made by the Distributor under this Agreement shall be made in full, free and clear of and without any deduction of or withholding for or on account of any taxes levied in any country of the Territory or elsewhere; provided that if the Distributor shall be required by law to make any deduction or withholding from any payment to Biomatrix then: (a) the Distributor shall ensure that such deduction or withholding does not exceed the minimum legal liability therefor; and (b) not later than five (5) days before each deduction or withholding of any taxes, the Distributor shall forward to Biomatrix such documentary evidence as may be required by Biomatrix in respect of the proposed deduction, withholding or payment; and (c) prior to any deduction or withholding the parties shall attempt in good faith to agree upon revised mutually acceptable pricing and/or payment terms. 6. TRADEMARKS; AGREEMENT PRODUCT MARKING; PROMOTIONAL INFORMATION. 6.1. Trademarks. Subject to the provisions of Section 3.6, Biomatrix hereby licenses to the Distributor the right to use, and hereby requires solely in association with the independent sale by the Distributor of the Agreement Product and any Improved Agreement Products the use of, the Trademarks in the Territory during the term of this Agreement. The Distributor warrants that it shall not use any of the Trademarks at any time outside the Territory or use any of the Trademarks for any products other than the Agreement Product and any Improved Agreement Product(s) within the Territory. The Distributor shall not use a trademark or other mark (other than a Trademark) in connection with its distribution of the Agreement Product and any Improved Agreement Products unless and until it has been agreed upon in writing by each of the parties and become a Trademark as defined herein. Biomatrix shall prosecute, maintain and defend the Trademarks throughout the Term of this Agreement in all countries in the Territory in which the Distributor, any of its Affiliates or any Subdistributor is selling the Agreement Product and/or any Improved Agreement Product. The parties shall execute a short form Trademark assignment agreement to the extent that it is necessary to record the Trademark license under this Section 6.1 in any country whose laws require any such registration. -13- 14 6.2. Termination of Right to Use Trademarks. Subject to the sell-out right of Section 3.3(b) and except as otherwise provided in Section 3.6, upon termination of this Agreement, the license to use the Trademarks in the Territory shall terminate, and the Distributor unconditionally agrees promptly to take all necessary action and execute and deliver to Biomatrix all necessary documents and instruments to remove the Distributor as a registered user and/or a recorded licensee of the Trademarks. In the event that the Distributor fails promptly upon written request by Biomatrix to comply with any of its agreements in the preceding sentence of this Section 6.2, the Distributor hereby irrevocably consents to Biomatrix's taking any action necessary to give effect to such agreements. 6.3. Notice. Each party hereto agrees promptly to notify the other in writing of any infringements or imitations of the Trademarks by third parties which may come to its attention. 6.4. Labelling and Promotional Materials; Approved Use of Product. (a) The Distributor shall provide Biomatrix with labelling masters, instructions, specifications and copies of all marketing, labelling and promotional material it intends to use relating to the Agreement Product and any Improved Agreement Product(s). All such labelling, packaging and promotional material shall be consistent with the relevant Product License Approvals and all labelling and packaging materials shall be reviewed by Biomatrix and shall be subject to its written approval prior to use, such approval not to be unreasonably withheld. Biomatrix shall communicate its acceptance or rejection of such labelling, packaging and any major promotional materials that include claims or items impacting regulatory approvals within * of its receipt thereof and if no such communication is received by Distributor from Biomatrix within such * Biomatrix shall be deemed to have accepted. Distributor shall provide Biomatrix with all major promotional materials for launches and subsequent promotions within a reasonable time prior to their use in order to allow Biomatrix to comment on such materials. Distributor shall provide Biomatrix with copies of all other promotional materials at or prior to their use. (b) The Distributor agrees that its (and its Affiliates' and Subdistributors') promotion, marketing, sale and distribution of the Agreement Product and any Improved Agreement Product(s) in the Territory, and the promotional materials and labelling used in connection therewith, shall be strictly in accordance with the approved use of the Agreement Product and any Improved Agreement Product(s) as specified in the Product License Approvals and as further provided in this Agreement. Specifically, for purposes of this Agreement, the Distributor (and its Affiliates and Subdistributors) agrees * , or unless agreed to in writing by Biomatrix. * Confidential portions have been omitted and filed separately with the Commission. -14- 15 6.5. Legend. Subject to applicable laws and regulations in the Territory, all relevant packaging and promotional material for the Agreement Product and any Improved Agreement Product(s) used or sold by the Distributor (and its Affiliates and Subdistributors) shall contain (i) all applicable markings needed to keep the Trademarks enforceable throughout the Territory as reasonably specified by Biomatrix to the Distributor and (ii) a legend which shall be displayed in a reasonably conspicuous manner on all packaging of such Agreement Product and any Improved Agreement Product(s) containing the corporate identification logo of Biomatrix and indicating that such product has been developed and manufactured by Biomatrix, Inc., and its affiliates, 65 Railroad Avenue, Ridgefield, New Jersey, 07657 U.S.A. 6.6. Promotional Support. Biomatrix and the Distributor (and its Affiliates and Subdistributors) shall provide to each other on an ongoing basis and without charge (to the extent not prevented by law or contract from doing so) all medical information relating to the Agreement Product and any Improved Agreement Product(s) (including summary data from studies, clinical trials and the like as well as information regarding adverse events associated with the use of the Agreement Product), the proceedings of all symposia on the Agreement Product and any Improved Agreement Product(s) and all promotional information that is available to such party relating to the Agreement Product and any Improved Agreement Product(s). In addition, Biomatrix and the Distributor (and its Affiliates and Subdistributors) shall provide each other with access to such primary data and information in its possession as the other may reasonably request regarding the results of the studies contained in such summary data referred to above. 6.7. Joint Coordinating Committee. Upon the execution of this Agreement, Biomatrix and the Distributor shall establish a joint coordinating committee (the "Committee") to review all matters relating to product labelling, product claims, regulatory matters or clinical trials. The Committee shall consist of an equal number, not to * , of voting representatives from each of Biomatrix and the Distributor and shall meet * . In the event of a dispute between representatives of Biomatrix and the Distributor on the Committee, a senior representative of each such party shall be appointed to resolve such dispute, and in the event such senior representatives are unable to resolve the matter, Biomatrix's view shall prevail over the Distributor's. 6.8. Recalls of the Agreement Product. (a) If either party in good faith determines that a recall of the Agreement Product in any country in the Territory is warranted, such party shall immediately notify the other party in writing and shall advise such other party of the reasons underlying its determination that a recall is warranted. The parties shall consult with each other as to any action to be taken in regard to such a recall, but in any event if after consultations either party * Confidential portions have been omitted and filed separately with the Commission. -15- 16 in good faith still believes that such a recall should be undertaken, the parties shall cooperate in carrying out such recall. (b) Except as otherwise provided in (c) below, in the event of a recall of the Agreement Product, Biomatrix shall correct any deficiency relating to its manufacturing, packaging, testing, labelling, storing or handling of the Agreement Product for which it is responsible, if applicable, and shall at its cost replace the Agreement Product recalled. (c) Biomatrix shall reimburse Distributor for all direct costs and expenses (including without limitation shipping, quality control testing and notification costs) incurred by Distributor and its Affiliates as a result of any recall, except where such recall (i) is the result of the failure of Distributor or its Affiliates or Subdistributors to comply with their obligations under this Agreement and/or (ii) was opposed by Biomatrix and proved to be unwarranted, in which case Distributor shall reimburse Biomatrix for all direct costs and expenses (including without limitation shipping, quality control testing and notification costs) incurred by Biomatrix and its Affiliates as a result of such recall. 6.9. Product Vigilance System. The Distributor shall be responsible for maintaining medical device vigilance systems, as established for the Agreement Product by Biomatrix, and shall promptly provide Biomatrix with notice of all product complaints, including medical complaints. Biomatrix shall be solely responsible for processing, analyzing and, if necessary, reporting medical complaints to regulatory authorities. The Distributor shall provide all necessary support to Biomatrix for carrying out such activities. 7. SUPPLY OF AGREEMENT PRODUCT. 7.1. General; Fee. (a) Biomatrix agrees to sell the Agreement Product and any Improved Agreement Product(s) to the Distributor, on the terms and subject to the conditions set forth herein, for resale by the Distributor within the Territory, and the Distributor shall obtain the Agreement Product and any Improved Agreement Product(s) for resale in the Territory only from Biomatrix or its Affiliates. Biomatrix shall not sell the Agreement Product or any Improved Agreement Product(s) itself or supply or license the manufacture of the Agreement Product or any Improved Agreement Product(s) to any third party for resale within the Territory, provided that Biomatrix's obligations under this sentence shall be subject to (i) applicable law, including without limitation EU competition law and, in particular, EEC Regulation 1983/83 (as amended or succeeded) and (ii) the provisions of this Agreement, including Section 2.3. (b) * Confidential portions have been omitted and filed separately with the Commission. -16- 17 * the Distributor shall pay to Biomatrix a fee in the amount of five million Dollars (US$5,000,000) in cash or by wire transfer on the execution of this Agreement by the parties hereto. Such fee shall not be refundable in whole or part. 7.2. Price; Adjustment; Reports; Payment. (a) The parties shall attempt in good faith to agree in writing, prior to the Launch in each country, upon mutually acceptable supply pricing for the Distributor's purchase of the Agreement Product and any Improved Agreement Product(s), but such pricing in any event shall not be less than the greater of (i) the Minimum Price, or (ii) the Formula Price, except as provided in subsection (b) below. The parties shall attempt in good faith to agree in writing upon mutually acceptable minimum pricing for the Agreement Product in sizes other than the 1.0cc Treatment Syringe and for any Improved Agreement Product(s). For any syringe with a fill volume of greater than one cc(1cc), the Minimum Price shall be the amount calculated as * plus the dollar amount which equals * of such product with a larger fill volume * of the one cc(1cc) syringe. In the event that Biomatrix's actual incremental Cost of Goods Sold exceeds such dollar amount, the Minimum Price shall be the amount calculated as * . Subject to the general commercial availability of appropriate syringes for the Agreement Product, the * for a one and one-half (1.5)cc syringe, * for a two (2.0)cc syringe, and * for a two and one-half (2.5)cc syringe. (b) If Biomatrix has appointed a new distributor for a country in the Territory pursuant to Section 2.3 and the Distributor has the right to distribute the Agreement Product and any Improved Agreement Product(s) in such country, the supply pricing for the Distributor's purchase of the Agreement Product and any Improved Agreement Product(s) for resale in such country * (c) The price initially payable by the Distributor to Biomatrix for each unit of the Agreement Product during each month of each Agreement Year shall be the Minimum Price applicable to sales in such country (subject to adjustment at the close of each applicable Contract Quarter and Agreement Year in accordance with Section 7.2(e) below). (d) Within * after the end of each month of each Agreement Year for each country in the Territory, the Formula Price for the Agreement Product in such country shall be calculated, and, to the extent that such Formula Price exceeds the applicable Minimum Price for such Agreement Year * Confidential portions have been omitted and filed separately with the Commission. -17- 18 for such country, an adjustment resulting from the * with respect to all units of the Agreement Product sold by the Distributor (and its Affiliates and Subdistributors) in such country during such monthly period, such payment to be made * after the end of the month following such monthly period. (e) Within * after the end of each Contract Quarter and Agreement Year for each country, the Formula Price for the Agreement Product in such country shall be calculated and an adjustment resulting from the * as appropriate, to the other party with respect to all units of the Agreement Product sold by the Distributor in such country during such Contract Quarter and Agreement Year, such payment to be made within * after the end of such * period following the end of such Contract Quarter and Agreement Year. The price calculated annually in this manner shall be the final price payable for all units of the Agreement Product sold by the Distributor, any Affiliates or Subdistributors of Distributor during such Agreement Year. For the avoidance of doubt, the aggregate amount payable by Distributor for the Agreement Product(s) and any Improved Agreement Product(s) in any country for any Agreement Year shall in no event be lower than the Minimum Price multiplied by the total units sold in such Agreement Year in such country. (f) Within * following the end of each calendar month in each Agreement Year, the Distributor shall submit to Biomatrix written reports detailing the units and value of the Distributor's, Affiliates' and Subdistributors' Net Retail Sales and aggregate number of units sold of the Agreement Product and any Improved Agreement Product(s) in each country in the Territory during the immediately preceding calendar month. (g) Within * following the end of each Agreement Year, the Distributor shall submit to Biomatrix written reports detailing the Distributor's and its Affiliates' and Subdistributors' sales of the Agreement Product and any Improved Agreement Product(s) during the immediately preceding Agreement Year, which reports shall contain the Net Retail Sales of the Agreement Product and any Improved Agreement Product(s) in each country in the Territory, and the aggregate number of units of the Agreement Product and any Improved Agreement Product(s) sold in each country in the Territory during the applicable Agreement Year. (h) All purchases of the Agreement Product and any Improved Agreement Product(s) hereunder shall be billed and paid in Dollars within * after the later of the date of delivery or the date of the Distributor's receipt of the invoice for each shipment of same to the Distributor. * Confidential portions have been omitted and filed separately with the Commission. -18- 19 7.3. Sales and Supply Forecasts; Accounts. (a) Exhibit D, which shall be supplied by the Distributor within * of the Effective Date, sets forth a sales forecast of units of the Agreement Product in the Territory for the first year after the Effective Date. (b) Within * after the end of each month, the Distributor shall provide to Biomatrix an updated rolling twelve (12) month monthly supply forecast for all unit sizes of the Agreement Product in the Territory. Each such supply forecast described in this subsection (b) is referred to herein as a "Supply Forecast"; provided, that updated Supply Forecasts shall not vary (whether up or down) from the immediately preceding Supply Forecast by more than * with respect to each month covered by such preceding Supply Forecast. (c) The Distributor shall maintain, and shall require its Affiliates and Subdistributors to maintain, books of account with respect to sales of the Agreement Product in the Territory by it and its Affiliates and Subdistributors. Biomatrix shall have the right, not more than once during each calendar year, to have an independent accountant selected and retained by Biomatrix (reasonably acceptable to the Distributor, provided that any "big six" accounting firm shall be deemed reasonable) to inspect and examine such books of the Distributor, its Affiliates and Subdistributors during regular business hours for the purpose of verifying the statements of the aggregate Net Retail Sales of all Dermal Tissue Augmentation Products for all purposes hereunder, including verification of Formula Price and the royalties described in Section 8. The cost of each such audit shall be borne by Biomatrix unless a material error is discovered in the course of such audit, in which case the cost shall be borne by the Distributor. For purposes of this Section 7.3(d), a material error shall be defined as an understatement of five percent (5%) or more of the aggregate amount owed to Biomatrix with respect to sales of Dermal Tissue Augmentation Products in a country in the Territory. Any additional payments required as a result of such inspection and examination shall be immediately paid to Biomatrix and shall bear interest from the date such amount would otherwise have been paid until the date of actual payment at the rate per annum set forth in Section 20. Such independent accounting firm shall conduct such inspections and examinations under conditions of confidentiality. 7.4. Shipment and Delivery; Packaging. (a) Biomatrix or an Affiliate of Biomatrix shall arrange for shipment to the Distributor of the Agreement Product and any Improved Agreement Product(s) ordered by the Distributor * . The Distributor shall pay all customs duties, sales taxes and other governmental charges relating to the Agreement Product and any Improved Agreement Product(s), and shall be solely responsible for clearing such products through customs throughout the * Confidential portions have been omitted and filed separately with the Commission. -19- 20 Territory. (b) The Distributor shall submit a firm purchase order setting forth the quantities, delivery date and shipping instructions with respect to each shipment of the Agreement Product and any Improved Agreement Product(s), such purchase orders to be received by Biomatrix at least * prior to the requested delivery date; provided that the Distributor shall not submit any purchase order for fewer than * units of the Agreement Product or the Improved Agreement Product(s) (although multiple delivery sites for purchase orders shall be allowed). Biomatrix shall use commercially reasonable efforts but shall have no obligation to supply Distributor with quantities of the Agreement Product(s) and Improved Agreement Product(s) in excess of the amounts in the then current Supply Forecast for the relevant monthly period. For avoidance of doubt, so long as Biomatrix supplies Distributor with quantities of the Agreement Product and Improved Agreement Product(s) as set forth in the Supply Forecast, then Biomatrix shall not be deemed to be in default under this section or any other provision of this Agreement relating to Biomatrix's supply obligations. In addition to the foregoing, within * , in consideration for which units the Distributor shall pay to Biomatrix a price of * per unit. (c) Biomatrix agrees that with respect to languages for packaging for the European Territory three separate forms of packaging shall be made available, as applicable, as follows: (i) Northern Europe - English, Dutch, French, German and Italian; (ii) Southern Europe - English, Italian, Spanish, Portuguese and Greek; and (iii) Scandinavia - English, Swedish, Norwegian, Danish and Finnish. (d) Each unit of the Agreement Product and any Improved Agreement Products shipped to the Distributor shall have, as of the time of delivery, a remaining shelf life of no less than * less than the maximum shelf life for such product, as approved by the United States Food and Drug Administration. Biomatrix shall continually use its best efforts at all times during the term hereof to lengthen to * the shelf life of the Agreement Product and any Improved Agreement Products to the extent supported by stability data. Biomatrix' "best efforts" in this section shall mean that Biomatrix shall use such methods, exercise such degree of effort and diligence, and adhere to such standards as are commercially reasonable. 7.5. Title. Legal title to all quantities of the Agreement Product * Confidential portions have been omitted and filed separately with the Commission. -20- 21 and any Improved Agreement Product(s) sold hereunder shall remain in Biomatrix until delivery of the Agreement Product and any Improved Agreement Product(s) to Distributor or its agent and acceptance thereof and upon such delivery and acceptance the title to such Agreement Product and any Improved Agreement Product(s) shall, without further action, be transferred to and vested in the Distributor. 7.6. Risk of Loss. Biomatrix shall bear all risk of loss of, or damage to, all units of the Agreement Product and any Improved Agreement Product(s) to the extent the same is in its possession or the possession of its Affiliates, nominees or agents. The Distributor shall bear all risk of loss of, or damage to, all units of the Agreement Product and any Improved Agreement Product(s) after delivery to a common carrier for shipment to the Distributor in accordance with Section 7.4. 7.7. Acceptance, * . All units of the Agreement Product and Improved Agreement Products delivered to Distributor pursuant to this Agreement shall be * , the specifications listed in Exhibit A. Any non-conformity which arises after acceptance by Distributor directly associated with product specification shall be the responsibility of Biomatrix unless such non-conformity is due to improper storage conditions subsequent to delivery of the Agreement Product. All other non-conformities of the Agreement Product shall be the responsibility of the Distributor. Biomatrix and the Distributor agree to consult with each other in order to resolve the discrepancy between each other's determinations. If such consultation does not resolve the discrepancy, the parties agree to nominate a reputable independent laboratory, acceptable to both parties, that shall carry out tests on representative samples taken from such shipment, and the results of such tests shall be binding on the parties. Biomatrix shall at its expense replace any such shipment to the extent that it does not conform to the Agreement Product Specifications. All defective units of the Agreement Product or any Improved Agreement Product(s) shall be returned to Biomatrix at the address set forth in Section 23 of this Agreement, accompanied or preceded by a reasonably detailed statement of the claimed defect or non- conformity and proof of date of purchase, and packed and shipped according to instructions provided by Biomatrix. The shipping costs of any such returned units shall be borne by Biomatrix, unless such units are determined not to be defective under the terms of this Agreement, in which case such shipping costs shall be borne * Confidential portions have been omitted and filed separately with the Commission. -21- 22 by the Distributor. 7.8. Purchase Orders. The provisions of this Agreement shall prevail over any inconsistent statement or provisions contained in any document related to this Agreement passing between the parties hereto including, but not limited to, any purchase order, acknowledgment, confirmation or notice. 7.9. Limited Warranty; Limitation on Liability. Biomatrix represents and warrants that the Agreement Product and any Improved Agreement Product(s) supplied to the Distributor hereunder shall: (a) conform to the Agreement Product Specifications; and (b) be manufactured, labelled, packaged and tested (while in the possession or control of Biomatrix) in accordance with the applicable Product License Approvals therefor and all applicable laws and regulations in the Territory relating to the manufacture, labelling, packaging and testing of the Agreement Product, and shall be manufactured for use for the indications specified in the applicable Product License Approvals therefor. THE FOREGOING WARRANTY IS THE SOLE AND EXCLUSIVE WARRANTY GIVEN BY BIOMATRIX WITH RESPECT TO THE AGREEMENT PRODUCT, AND BIOMATRIX GIVES AND MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, OTHER THAN THE FOREGOING. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, NO IMPLIED WARRANTY OF MERCHANTABILITY, NO IMPLIED WARRANTY OF FITNESS FOR ANY PARTICULAR PURPOSE, AND NO IMPLIED WARRANTY ARISING BY USAGE OF TRADE, COURSE OF DEALING OR COURSE OF PERFORMANCE IS GIVEN OR MADE BY BIOMATRIX OR SHALL ARISE BY OR IN CONNECTION WITH ANY SALE OR PROVISION OF THE AGREEMENT PRODUCT BY BIOMATRIX, OR THE DISTRIBUTOR'S (OR ITS AFFILIATES' OR SUBDISTRIBUTORS') USE OR SALE OF THE AGREEMENT PRODUCT, OR BIOMATRIX'S AND/OR THE DISTRIBUTOR'S (OR ITS AFFILIATES' OR SUBDISTRIBUTORS') CONDUCT IN RELATION THERETO OR TO EACH OTHER. NO REPRESENTATIVE OF BIOMATRIX IS AUTHORIZED TO GIVE OR MAKE ANY OTHER REPRESENTATION OR WARRANTY OR TO MODIFY THE FOREGOING WARRANTY IN ANY WAY. The limited warranty set forth in this Section 7.9 does not apply to any non-conformity of the Agreement Product or any Improved Agreement Product(s) resulting from (a) repair or alteration by any party other than Biomatrix or its Affiliates, (b) misuse, negligence, abuse, accident, mishandling or storage in an improper environment by any party other than Biomatrix or its Affiliates, or (c) use, handling, storage or maintenance other -22- 23 than in accordance with instructions and recommendations provided by Biomatrix or its Affiliates. Biomatrix's obligation with respect to units of the Agreement Product and any Improved Agreement Product(s) which do not meet the warranty contained herein is limited to replacement of such units of the Agreement Product or Improved Agreement Product(s) as applicable, provided that such units are returned to Biomatrix accompanied by a reasonably detailed statement of the claimed defect or non-conformity and proof of date of purchase, and packed and shipped according to instructions provided by Biomatrix, and only if, upon examination by Biomatrix, such units of the Agreement Product or the Improved Agreement Product(s) are determined to have been defective under the terms of this Agreement. BIOMATRIX'S LIABILITY, AND THE EXCLUSIVE REMEDY, IN CONNECTION WITH THE SALE OR USE OF THE AGREEMENT PRODUCT AND ANY IMPROVED AGREEMENT PRODUCT(S) (WHETHER BASED ON CONTRACT, NEGLIGENCE, BREACH OF WARRANTY, STRICT LIABILITY OR ANY OTHER LEGAL THEORY), SHALL BE STRICTLY LIMITED TO BIOMATRIX'S OBLIGATIONS AS SPECIFICALLY AND EXPRESSLY PROVIDED IN THIS SECTION 7.9 AND IN SECTION 9 BELOW. EXCEPT AS SPECIFICALLY PROVIDED IN THIS SECTION 7.9 AND IN SECTION 9 BELOW, BIOMATRIX SHALL HAVE NO LIABILITY, OBLIGATION OR RESPONSIBILITY OF ANY KIND, IN ANY WAY OR TO ANY EXTENT, FOR ANY DAMAGES, LOSSES, COSTS, EXPENSES OR LIABILITIES FOR ANY REPRESENTATION OR WARRANTY OF ANY KIND WITH RESPECT TO THE AGREEMENT PRODUCT AND ANY IMPROVED AGREEMENT PRODUCT(S) OR THE PERFORMANCE THEREOF, OR ARISING IN ANY WAY IN CONNECTION WITH THE PURCHASE OR USE OR INABILITY TO USE THE AGREEMENT PRODUCT OR ANY IMPROVED AGREEMENT PRODUCT(S), EVEN IF BIOMATRIX HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN NO EVENT WHATSOEVER SHALL BIOMATRIX HAVE ANY LIABILITY, OBLIGATION OR RESPONSIBILITY FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY DAMAGES ARISING IN ANY WAY IN CONNECTION WITH THE AGREEMENT PRODUCT OR ANY IMPROVED AGREEMENT PRODUCT(S) OR THEIR SALE OR USE. 8. ROYALTY PAYMENTS BY DISTRIBUTOR. 8.1. Royalties for Sales of Dermal Tissue Augmentation Products. The Distributor shall pay to Biomatrix a royalty of * of the Net Retail Sales by the Distributor and its Affiliates and Subdistributors of all Dermal Tissue Augmentation Products (other than sales of the Agreement Product and any Improved Agreement Product(s)) in all countries in the Territory on a country-by-country basis, including any countries that are added to the Territory after the Effective Date, -23- 24 * . Such royalty shall commence with respect to each country in the Territory at the earlier of (a) the Launch of the Agreement Product in such country or (b) the Launch date for such country set forth on Exhibit B; provided that if a Launch is delayed due to Biomatrix's failure to meet its supply obligations under Section 7.4, due to a force majeure condition of Distributor or if the Distributor is not able to lawfully sell the Agreement product in such country, such royalty with respect to any such country shall not commence until Biomatrix meets its supply obligations, Distributor is able to lawfully sell the Agreement Product in such country, or until such force majeure condition ceases. Such royalty shall be paid by not later than * after the end of each Contract Quarter. 8.2. Incremental Royalties. The Distributor shall pay to Biomatrix the following annual royalties (the "Incremental Royalties") on the Distributor's and its Affiliates' and Subdistributors' total incremental increases in Net Retail Sales of all Dermal Tissue Augmentation Products (including the Agreement Product and any Improved Agreement Product(s)), in each country in the Territory based on the incremental increases, if any, in Net Retail Sales of all Dermal Tissue Augmentation Products in such country in each Agreement Year over a base year amount comprised of Net Retail Sales of Dermal Tissue Augmentation Products in the twelve (12) months immediately preceding the first commercial sale of either the Agreement Product or any Improved Agreement Product(s) in such country: Increase in Total Royalty on Total Sales Over Base Incremental Sales Year Amount * The Distributor's obligation to pay the Incremental Royalties shall cease with respect to a country in the Territory in the event that the Distributor's rights to sell, distribute, market and promote the Agreement Product and any Improved Agreement Product have become non-exclusive with respect to such country pursuant to Section 2.3 or have terminated pursuant to Section 3.2(d). The Incremental Royalty shall be paid by not later than * after the end of each Agreement Year. For the avoidance of doubt, if the Distributor had no sales of any Dermal Tissue Augmentation Products in a country prior to the first commercial sale of either the Agreement Product or any Improved Agreement Product in such country, the Distributor shall be obligated to pay a * * Confidential portions have been omitted and filed separately with the Commission. -24- 25 royalty on Net Retail Sales of all Dermal Tissue Augmentation products sold after such first commercial sale. 9. INDEMNIFICATION; CONFIDENTIALITY; PUBLIC ANNOUNCEMENT 9.1. Indemnification from the Distributor. Subject to the provisions of Section 9.3, the Distributor shall defend, indemnify and hold Biomatrix and its Affiliates and their respective directors, officers, agents and employees harmless from and against any and all liabilities, claims, damages and expenses (including without limitation actual court costs and reasonable attorneys' fees regardless of outcome) resulting from claims of third parties or arising out of: * provided, however, that upon Biomatrix being advised of any assertions of any such third party claims or suits or upon the bringing or filing of such claims or suits by any third party against Biomatrix, Biomatrix will promptly notify the Distributor thereof and Biomatrix may, at its option, permit the Distributor's attorneys to handle and control the defense of such claims or suits at the Distributor's cost and Biomatrix will co-operate with the Distributor in the defense thereof. The parties agree that there shall be no settlements, whether agreed to in court or out of court, without the prior written consent of the indemnifying party. 9.2. Indemnification from Biomatrix. Subject to the provisions of Section 9.3, Biomatrix shall defend, indemnify and hold the Distributor and its Affiliates and their respective directors, officers, agents and employees harmless from and against any and all liabilities, claims, damages and expenses (including without limitation actual court costs and reasonable attorneys' fees regardless of outcome) resulting from claims of third parties arising out of: * provided, however, that upon the Distributor being advised of any assertions of any such third party claims or suits or upon the bringing or filing of such * Confidential portions have been omitted and filed separately with the Commission. -25- 26 claims or suits by any third party against the Distributor, the Distributor will promptly notify Biomatrix thereof and, at Biomatrix's cost, permit Biomatrix's attorneys to handle and control the defense of such claims or suits and will co-operate with Biomatrix in the defense thereof. The parties agree that there shall be no settlements, whether agreed to in court or out of court, without the prior written consent of the indemnifying party. 9.3. Limitation on Liability. NOTWITHSTANDING ANY PROVISION TO THE CONTRARY IN SECTIONS 9.1 AND 9.2 ABOVE, OR ANY OTHER PROVISION OF THIS AGREEMENT, IN NO EVENT (INCLUDING THE FAULT, NEGLIGENCE OR STRICT LIABILITY OF EITHER PARTY) SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY DAMAGES OTHER THAN TO THE EXTENT NECESSARY TO REIMBURSE SUCH OTHER PARTY FOR DAMAGES ACTUALLY PAID TO A NON-AFFILIATED THIRD PARTY, PROVIDED THAT SUCH DAMAGES ARE OTHERWISE COVERED BY THE PROVISIONS OF SECTION 9.1 OR SECTION 9.2, AS THE CASE MAY BE. 9.4. Confidential Information. All information acquired by either party (the "Recipient") from the other party or any of its Affiliates (the "Discloser") during the term of this Agreement or prior to the Effective Date, relating directly or indirectly to the present or potential business, operations, corporate, technical or financial situation of the Discloser, or to manufacturing know-how, patents, data, test results, techniques, processes, procedures, raw materials, dealer, supplier and customer lists, pre-clinical and clinical protocols or any improvements thereof of the Discloser ("Confidential Information") is confidential, and shall be held in trust by the Recipient for the exclusive benefit of the Discloser. Unless otherwise agreed to in writing by the Discloser, the Recipient shall not at any time, either during or subsequent to the term of this Agreement, use for itself (other than in accordance with the terms of this Agreement) or any other Person, or disclose or divulge to any Person, other than to those of its employees and advisors and Affiliates who require the same for the purposes hereof and who are bound by the same obligations of confidentiality, non-disclosure and non-use as set forth herein, any Confidential Information or any other confidential or proprietary information of the Discloser of which the Recipient may acquire knowledge; provided, however, that the confidentiality, non-disclosure and non-use provisions contained in this Section 9.4 shall not apply to any information or data to the extent that the Recipient: (a) shall demonstrate by clear and convincing evidence that such information or data is known generally to persons in the trade through no act * Confidential portions have been omitted and filed separately with the Commission. -26- 27 or omission of the Recipient or any of its Affiliates; (b) is required by any government authority to disclose such information or data, including without limitation for the purposes of obtaining and maintaining any Product License Approvals under this Agreement; or (c) shall demonstrate by its written records was disclosed to or created by it or its Affiliates on a non-confidential basis from a source other than the Discloser or its Affiliates and that such disclosure or creation did not constitute a breach of any applicable confidentiality obligations. Confidential Information shall be immediately returned to the Discloser upon termination of this Agreement, along with any copies, reproductions, digests, abstracts or the like of all or any part thereof in the Recipient's possession or under the Recipient's control, and upon such return any computer entries or the like relating thereto shall, to the extent legally permissible, be destroyed. Such return (and destruction) will not affect the Recipient's obligations hereunder which shall survive indefinitely. Notwithstanding anything herein to the contrary, the provisions of this Section 9.4 shall be subject to Biomatrix's rights under Section 3.6. 9.5. Public Announcement. Except as shall be necessary for governmental notification purposes or to comply with applicable laws and regulations, and except as otherwise agreed to by the parties hereto in writing, the parties agree to keep the existence of this Agreement, and the transactions contemplated hereby, strictly confidential. In the event that a party must file this document or otherwise disclose any of its subject matter pursuant to public filing requirements, such party shall seek confidential treatment of those portions of the Agreement as the parties shall mutually agree upon; provided, however, that the Distributor must provide written notice to Biomatrix no later than June 30, 1996 of those portions of the Agreement for which the Distributor requests confidential treatment. The parties shall agree upon the text of an initial public announcement relating to the transactions contemplated by this Agreement as soon as possible. Any subsequent public announcements regarding this Agreement or the transactions contemplated herein shall also be agreed upon in writing between the parties prior to any release thereof. 10. NEW PRODUCTS. 10.1. * , Distributor shall not commercialize nor begin the commercialization process with respect to or acquire any New Product anywhere in the Territory or the United States, either independently or in conjunction with one or more third parties, unless and until the following conditions have been satisfied: (a) Distributor has made a commercially reasonable written offer to Biomatrix to participate with Distributor in the development and commercialization of such New Product; and (b) Biomatrix has failed to accept such written offer within * -27- 28 of its receipt of such offer. In the event that Biomatrix fails to accept any written offer made by Distributor pursuant to this Section 10.1 within * of Biomatrix's receipt thereof, then Distributor, subject to the terms of this Agreement, shall have the right to independently or with other parties develop and/or commercialize any New Product to which such written offer relates; provided, however, that any such New Product does not infringe upon any of the intellectual property rights of Biomatrix. Distributor shall not be required to make the written offer to Biomatrix set forth in Section 10.1(a) above only in the event and to the extent that it is prevented from doing so due to patented proprietary rights of a third party. (c) At all times during the term of this Agreement, Distributor shall notify Biomatrix in writing within * of each occurrence of one or more of the following: (i) Distributor's entering into an agreement with one or more third parties with regard to the development, acquisition and/or commercialization of any New Product, and Distributor shall provide to Biomatrix notice of such agreement and any and all agreements relating thereto and a non-confidential summary of such agreements; or (ii) Distributor's commencing a clinical trial (either alone or in conjunction with a third party) with respect to any New Product, together with notice of the commencement of such clinical trial and a list of all countries where such clinical trial will take place; or (iii) Distributor's filing of an application (either alone or in conjunction with a third party) for marketing approval with the United States Food and Drug Administration or an equivalent regulatory agency in any country with respect to any New Product stating in which countries any such filings have been made. 10.2. * * Confidential portions have been omitted and filed separately with the Commission. -28- 29 10.3. Nothing in this Section 10 shall be construed, by implication or otherwise, (i) to effect any sale or license of proprietary Biomatrix technology (including any New Products), (ii) to grant any license relating to Biomatrix's proprietary methods of formulating, fabricating and manufacturing the Agreement Product, Improved Agreement Products or New Products, or (iii) to grant Distributor any rights in or to any proprietary technology or Patents or Trademarks of Biomatrix. 11. REPRESENTATIONS OF BIOMATRIX. Biomatrix represents, warrants and covenants as follows: 11.1. It is a corporation duly organized and validly existing under the laws of the State of Delaware with the full power to conduct its affairs as currently conducted and contemplated hereunder. All necessary action has been taken to enable it to execute and deliver this Agreement and perform its obligations hereunder. 11.2. This Agreement is a valid and binding obligation of Biomatrix enforceable in accordance with its terms. Biomatrix has the unencumbered right to enter into this Agreement and to fulfill its duties hereunder. It is not and will not become a party to any agreement in conflict herewith. Accordingly, Biomatrix has the right to appoint the Distributor as the exclusive distributor of the Agreement Product in the Territory in accordance with the terms of this Agreement and such appointment will not constitute a breach of any existing contractual or other arrangements between Biomatrix and any Affiliated or non-Affiliated third party, nor shall it infringe the rights of any Affiliated or non-Affiliated third party. 11.3. No approval, consent, order, authorization or license by, giving notice to or taking any other action with respect to, any governmental or regulatory authority is required in connection with the execution and delivery of this Agreement by Biomatrix and the performance by Biomatrix of its obligations hereunder. 12. REPRESENTATIONS OF THE DISTRIBUTOR. The Distributor represents, warrants and covenants as follows: 12.1. It is a corporation duly organized and validly existing under the laws of Delaware with full power to conduct its affairs as currently conducted and contemplated hereunder. All necessary action has been taken to enable it to execute and deliver this Agreement and perform its obligations hereunder. 12.2. This Agreement is the Distributor's valid and binding obligation enforceable in accordance with its terms. The Distributor has the * Confidential portions have been omitted and filed separately with the Commission. -29- 30 unencumbered right to enter into this Agreement and to fulfill its obligations hereunder. It is not and will not become a party to any agreement in conflict herewith. Accordingly, the Distributor has the right to act as the exclusive distributor of the Agreement Product in the Territory in accordance with the terms of this Agreement and the performance of its obligations hereunder will not constitute a breach of any existing contractual or other arrangements between the Distributor and any Affiliated or non-Affiliated third party, nor shall it infringe the rights of any Affiliated or non-Affiliated third party. 12.3. No approval, consent, order, authorization or license by, giving notice to or taking any other action with respect to any governmental or regulatory authority is required in connection with the execution and delivery of this Agreement by the Distributor and the performance by the Distributor of its obligations hereunder. 13. INSURANCE. Each party hereto shall (a) obtain and maintain such insurance policies as are adequate to cover its respective obligations hereunder and which are consistent with normal business practices of prudent companies similarly situated and (b) provide the other party, upon request, with certificates of insurance confirming the existence of such insurance policies. 14. INFRINGEMENT. Each of the Distributor and Biomatrix will promptly notify the other party in writing of any infringement of a Patent or Trademark or unauthorized disclosure or use of any Confidential Information, of which it becomes aware in the Territory. Biomatrix shall have the exclusive right at its own cost to take all legal action in the Territory it deems necessary or advisable to eliminate or minimize the consequences of such infringement of a Patent or Trademark in the Territory. For the purpose of taking any such legal action, Biomatrix shall have the right, subject to the Distributor's consent which consent shall not be unreasonably withheld or delayed, to use the name of the Distributor as plaintiff, either solely or jointly in accordance with the applicable rules of procedure; provided that Biomatrix shall give the Distributor prior notice of such use of the Distributor's name. The Distributor shall promptly furnish Biomatrix with whatever written authority may be required in order to enable Biomatrix to use the Distributor's name in connection with any such legal action, and shall otherwise cooperate fully and promptly with Biomatrix in connection with any such action. All proceeds realized upon any judgment or settlement regarding such action shall belong to Biomatrix. 15. REGULATORY ACTIVITIES; CLINICAL TRIALS AND MARKETING STUDIES. 15.1. General. (a) Biomatrix shall be responsible for maintaining at its cost the Product License Approvals required for the marketing and sale of the Agreement Product and any Improved Agreement Product(s) in the European Territory throughout the term of this Agreement. The Distributor shall use its best efforts to obtain and maintain at its cost any Product License Approvals and to -30- 31 conduct at its cost any clinical trials required for the marketing and sale of the Agreement Product and any Improved Agreement Product(s) in each country in the Territory, except for the European Territory, throughout the term of this Agreement. "Best efforts" in this context shall mean such that Distributor shall generally use the same methods, exercise the same degree of effort and diligence, and adhere to the same standards as Distributor and its Affiliates would apply to their own actively promoted pharmaceutical products in the Territory, and shall be as are commercially reasonable. (b) Biomatrix shall assist the Distributor in submitting applications for Product License Approvals, provided that (i) Biomatrix shall be entitled generally to oversee the strategy and content of regulatory approval applications (in their original form whether in English or any other language) and (ii) the content of all such applications shall be subject to Biomatrix's prior written approval, such approval or disapproval to be given by Biomatrix within * of its receipt thereof. The timing of such applications shall be mutually agreed in writing by the parties. Biomatrix shall hold in its name all regulatory approvals required for the marketing and sale of the Agreement Product and any Improved Agreement Product(s) in the Territory, except to the extent that applicable law requires that such regulatory approvals be held in the name of the Distributor. (c) The Distributor and Biomatrix shall provide reasonable advice and assistance to each other as may be necessary to obtain and maintain Product License Approvals. (d) Except to the extent necessary to give effect to the provisions of Section 3.3(b), the Product License Approvals relating to the Agreement Product and any Improved Agreement Product(s) in the Territory in the name of the Distributor or any of its Affiliates shall be transferred to Biomatrix immediately upon termination of the Agreement. (e) During the term of this Agreement, each party shall immediately notify the other in writing in the event that such party becomes aware of any failure of the Agreement Product and any Improved Agreement Product(s) to comply with any of the requirements therefor specified in any Product License Approvals. (f) Each of the Distributor and Biomatrix shall keep the other advised of regulatory interactions, activities and correspondence and the registration status of the Agreement Product and any Improved Agreement Product(s) on at least a quarterly basis, and any matters requiring immediate attention shall be communicated as soon as practicable. 15.2. Clinical Trials and Marketing Studies. (a) The Distributor shall be responsible at its own cost for conducting and managing any clinical trials which the Distributor or Biomatrix may be required to undertake in order to obtain Product License Approvals in the Territory, except in the European Territory. The protocols for any such -31- 32 clinical trials will be developed jointly by Biomatrix and the Distributor, and Biomatrix shall have the right to audit the performance of any clinical studies performed by or on behalf of the Distributor in respect of the Agreement Product and any Improved Agreement Product(s). The Distributor shall provide Biomatrix with the results of all such clinical trials, and Biomatrix and its Affiliates shall be free to use the results of such clinical trials. (b) The parties agree that if any marketing-related studies are deemed necessary, such studies will not delay the Launch in any country in the European Territory. The protocols for any marketing-related studies requested by the Distributor will be developed jointly by Biomatrix and the Distributor, and the Distributor will be responsible for conducting and managing such studies at its own expense. Biomatrix shall have the right to audit the performance of any marketing-related studies performed by or on behalf of the Distributor. The results of such studies will not be published or publicized in any way without the prior written approval of Biomatrix. 16. FURTHER ASSURANCES. The parties hereto agree to execute such further or other documents and assurances as are necessary from time to time in order to give effect to the provisions of this Agreement. 17. ASSIGNMENT. The rights and obligations of the parties hereto shall inure to the benefit of and shall be binding upon the authorized successors and permitted assigns of each party. Neither party may assign its rights or obligations under this Agreement or may designate another person to perform all or part of its obligations under this Agreement, or to have all or part of its rights and benefits under this Agreement without the prior written consent of the other party, except to an Affiliate or to a successor of the business, by merger or otherwise, to which this Agreement relates, provided that in the case of an assignment to an Affiliate the assigning party shall promptly notify the other party in writing of such assignment and shall remain liable (both directly and as guarantor) with respect to all obligations so assigned. In the event of any assignment or in the event that an Affiliate of either party shall exercise rights and/or perform obligations hereunder pursuant to the terms of this Agreement, the assignee or Affiliate, as the case may be, shall specifically assume and be bound by the provisions of the Agreement by executing and agreeing to an assumption agreement satisfactory to the other party hereto. 18. GOVERNING LAW; ARBITRATION; INJUNCTIVE RELIEF. (a) This Agreement shall be governed by and construed in accordance with the internal and substantive laws of the State of New York, United States of America. The parties hereby agree that the United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement or any other document contemplated hereby. In the event of any dispute touching or concerning this Agreement, the parties hereby agree to * Confidential portions have been omitted and filed separately with the Commission. -32- 33 submit such dispute to their respective presidents by notice delivered in accordance with the provisions of Section 23, and if within thirty (30) days, or such other period as is agreed upon in writing by the parties hereto, following such reference the dispute remains unresolved, to submit the dispute for arbitration in Boston, Massachusetts under the Rules of the American Arbitration Association in effect on the date of this Agreement (the "Rules") by arbitrators appointed in accordance with said Rules. Any decision of such arbitrators shall be written and shall be final and binding upon the parties. In any arbitration pursuant to this Section the award shall be rendered by a majority of three (3) arbitrators, one (1) of whom shall be appointed by each party and the third of whom shall be appointed by mutual agreement of the two (2) party-appointed arbitrators. In the event of failure of a party to appoint an arbitrator within thirty (30) days after commencement of the arbitration proceeding or in the event of failure of the two (2) party-appointed arbitrators to agree upon the appointment of the third arbitrator within sixty (60) days after commencement of the arbitration proceeding, such arbitrator shall be appointed by the American Arbitration Association in accordance with the Rules. The arbitrators shall apply the governing law set forth in this Section. Judgment upon an award rendered by the arbitrators may be entered in any court having jurisdiction thereof. (b) Each of the parties hereto acknowledges and agrees that damages will not be an adequate remedy for any material breach or violation of this Agreement if such material breach or violation would cause immediate and irreparable harm (an "Irreparable Breach"). Accordingly, notwithstanding the provisions of Section 18(a) to the contrary, in the event of a threatened or ongoing Irreparable Breach, each party hereto shall be entitled to seek, in any state or federal court in the State of New York, equitable relief of a kind appropriate in light of the nature of the ongoing threatened Irreparable Breach, which relief may include, without limitation, specific performance or injunctive relief; provided, however, that if the party bringing such action is unsuccessful in obtaining the relief sought, the moving party shall pay the non-moving party's reasonable costs, including attorney's fees, incurred in connection with defending such action. Such remedies shall not be the parties' exclusive remedies, but shall be in addition to all other remedies provided in this Agreement. 19. SEVERABILITY. In the event that any provision of this Agreement shall be held by a court of competent jurisdiction or by any governmental body to be invalid or unenforceable, such provision shall be deemed severable and the remaining parts and provisions of this Agreement shall remain in full force and effect. 20. FORCE MAJEURE. Each of the parties shall be excused from the performance of its obligations hereunder in the event such performance is prevented by force majeure, and such excuse shall continue as long as the condition constituting such force majeure continues. For the purpose of this Agreement, force majeure is defined as contingencies beyond the reasonable control of either party, including, without limitation, acts of God, judicial or regulatory action, war, civil commotion, destruction of production -33- 34 facilities or materials by fire, earthquake or storm and labor disturbances (whether or not any such labor disturbance is within the power of the affected party to settle). 21. INTEREST. Any overdue amounts payable by either party hereunder shall bear interest compounded monthly at the prime lending rate for Dollars published from time to time in The Wall Street Journal plus * per annum, or, if lower, the highest rate permissible by applicable law, from the due date until the date of payment. 22. NO PARTNERSHIP OR AGENCY. This Agreement and the relations hereby established by and between Biomatrix and the Distributor do not constitute a partnership, joint venture, agency or contract of employment between them. 23. NOTICES. All communications in connection with this Agreement shall be in writing and sent by postage prepaid first class mail, courier, or telefax, and if relating to default, late payment or termination, by certified mail, return receipt requested, telefax or courier, addressed to each party at the address set forth at the beginning of this Agreement, in the case of Biomatrix, Attn: Chief Executive Officer, with a copy to: Justin P. Morreale, Esq., Bingham, Dana & Gould LLP, 150 Federal Street, Boston, Massachusetts 02110, U.S.A., and in the case of the Distributor, Attn: President, with a copy to Kimberlie L. Cerrone, Esq., Venture Law Group, 2800 Sand Hill Road, Menlo Park, California 94025, or to such other address as the addressee shall last have designated by notice to the communicating party. The date of giving any notice shall be the date of its actual receipt. 24. EU REGULATIONS. It is the intention of the parties hereto that this Agreement shall at all times qualify for the exemption from the provisions of Article 85(1) of the Treaty of Rome dated 25 March, 1957, as amended, which either (a) is available under EEC Regulation Number 1983/83, or (b) may subsequently be available under any successor regulation or regulations thereto. In the event that any provision of this Agreement is deemed to violate the conditions for qualifying for the exemption, set out in whichever of those regulations may be in effect at the relevant time, or if any such regulation is amended after the date of this Agreement so as to cause this Agreement to fail to qualify for the exemption, the parties hereto agree that they will, as soon as it is practicable to do so, enter into good faith negotiations to amend this Agreement as necessary in order to re-qualify for the exemption or to notify the Agreement. If those negotiations are not successfully concluded within a reasonable time (not to exceed ninety (90) days, or such other period as is agreed upon in writing by the parties hereto, after the relevant regulation is amended), either party may terminate this Agreement upon written notice to the other party. 25. SURVIVAL. The provisions of Sections 3.3, 3.6, 3.7, 3.8, 6.2, 9.1, 9.2, 9.3, 9.4 and 9.5 of this Agreement shall survive the termination or expiration of this Agreement (as the case may be) and shall remain in full force and effect. The provisions of this Agreement that do not survive termination or expiration hereof (as the case may be) shall, nonetheless, be controlling on, and shall be used in construing and interpreting -34- 35 the rights and obligations of the parties hereto with regard to, any dispute, controversy or claim which may arise under, out of, or in connection with this Agreement. 26. MISCELLANEOUS. This Agreement sets forth the entire agreement between the parties with respect to the transactions and arrangements contemplated hereby and supersedes all prior oral or written arrangements. This Agreement may be modified or amended only by a written instrument executed and delivered by both parties. None of the provisions of this Agreement shall be deemed to have been waived by any act or acquiescence on the part of either party except by an instrument in writing signed and delivered by the party executing the waiver. This Agreement may be executed in several identical counterparts, each of which shall be an original, but all of which constitute one instrument, and in making proof of this Agreement it shall not be necessary to produce or account for more than one such counterpart. * Confidential portions have been omitted and filed separately with the Commission. [The remainder of this page is intentionally left blank.] -35- 36 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. COLLAGEN CORPORATION By: /s/ Howard D. Palefsky ------------------------------ Name: Howard D. Palefsky Title: Chairman & CEO BIOMATRIX, INC. By: /s/ Endre A. Balazs ------------------------------ Name: Endre A. Balazs Title: CEO -36- 37 EXHIBITS Exhibit A - Agreement Product Specification and Approval Documents Exhibit B - Launch Schedule Exhibit C - Patents and Trademarks Exhibit D - Sales Forecasts Exhibit E - Subdistributors -37- 38 EXHIBIT A Agreement Product Specification and Approval Documents * * Confidential portions have been omitted and filed separately with the Commission. -38- 39 EXHIBIT B Launch Schedule Country: Date of Launch ------- -------------- 1. Australia * 2. Austria * 3. Belgium * 4. Denmark * 5. Finland * 6. France * 7. Germany * 8. Greece * 9. Iceland * 10. Ireland * 11. Italy * 12. Japan * 13. Liechtenstein * 14. Luxembourg * 15. The Netherlands * 16. New Zealand * 17. Norway * * Confidential portions have been omitted and filed separately with the Commission. -39- 40 18. Portugal * 19. Spain * 20. Sweden * 21. Switzerland * 22. United Kingdom * 23. Israel * 24. Argentina * 25. Brazil * 26. Mexico * 27. Canada * 28. Chile * * Confidential portions have been omitted and filed separately with the Commission. -40- 41 EXHIBIT C Patents and Trademarks Patents (1) * (1) All numbers given are for issued patents except * , and * (2) This * has been allowed and will issue in the next few months under the same number. * * Trademark - Hylaform** Country and Status Ser Nos. or Reg. Nos. * Legend: * - ------------------------ * Confidential portions have been omitted and filed separately with the Commission. ** Filed in International Classes 5 and 10 Legend: -41- 42 EXHIBIT D Sales Forecasts(1) (Units) First Agreement Year (1) The parties acknowledge that in the event of the addition of other syringe sizes this forecast is subject to adjustment to incorporate such new sizes. * Confidential portions have been omitted and filed separately with the Commission. -42- 43 EXHIBIT E Collagen Subdistributors Country Subdistributor ------- -------------- Argentina New Pharma S.A. Brazil Magistral Chile Prater Laboratorios Mexico Bard Mexico SA Israel T.C. Technocare Ltd. Japan Lederle (Japan) K.K. Ltd. Columbia Consumed Cyprus Charitonos Enterprises Lebanon Pharmed S.A.L. Turkey Assos Pharmaceuticals 44 UNITED STATES DISTRIBUTION AGREEMENT THIS AGREEMENT is made as of the 14th day of June 1996 by and between BIOMATRIX, NC., a corporation duly organized and existing under the laws of the State of Delaware, having its principal office at 65 Railroad Avenue, Ridgefield, New Jersey 07657, U.S.A. ("Biomatrix") and COLLAGEN CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware, having its principal office at 2500 Faber Place, Palo Alto, California 94303, U.S.A. (the "Distributor"). WHEREAS, Biomatrix is engaged in the development and manufacture of the Agreement Product (as hereinafter defined); WHEREAS, the Distributor desires to enter into a distribution agreement and be appointed the exclusive distributor (even to Biomatrix) of the Agreement Product and any Improved Agreement Product(s) in the Territory (as such terms are hereinafter defined), and Biomatrix is willing to so appoint the Distributor on the terms and subject to the conditions set forth herein; and WHEREAS, the Distributor desires to purchase from Biomatrix, and Biomatrix desires to sell to the Distributor, the Distributor's orders of the Agreement Product and any Improved Agreement Product(s) in the Territory on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the premises and of the mutual covenants of the parties hereto, it is hereby agreed as follows: 1. DEFINITIONS AND INTERPRETATION. 1.1. In this Agreement, the following words and expressions shall have the following meanings: "Affiliate" shall mean, with respect to any party, any Person which, directly or indirectly, is controlled by, controls or is under common control with such party. For purposes of this definition, the term "control" (including with correlative meanings, the terms "controlled by" and "under common control with") shall mean, with respect to any Person, the direct or indirect ownership of more than fifty percent (50%) of the voting or income interest in such Person or the possession otherwise, directly or indirectly, of the power to direct the management or policies of such Person. "Agreement Product" shall mean the one product made of hylan B and called by Biomatrix Hylaform(R), the specifications for which are set forth on Exhibit A, for use in the correction of wrinkles and depressed scars. "Agreement Product Specifications" shall mean the specifications for the Agreement Product set forth in Exhibit A, as such specifications may be modified or supplemented by Biomatrix from time to time in accordance with Product License Approvals or to reflect any Improved Agreement Product(s). "Agreement Year" shall mean the twelve (12) month period commencing on the date of first commercial sale of the Agreement Product in the United States and each separate successive twelve (12) month period thereafter. "Contract Quarter" shall mean, for sales of Agreement Product, the period commencing with the Distributor's first commercial sale of the Agreement Product in the United States and ending on the first to occur 45 of March 31, June 30, September 30 and December 31, as applicable, and each three (3) month period thereafter throughout the term of this Agreement. "Dermal Tissue Augmentation Products" shall mean biomaterial(s) that are * "Dollars" and "$" shall mean the lawful currency of the United States of America. "Effective Date" shall mean June 17, 1996. "EU Countries" shall mean, collectively, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom. "European Territory" shall mean, collectively, the EU Countries, Switzerland, Norway, Liechtenstein and Iceland. "Formula Price" shall mean an amount equal to * of the Product, provided that if the * the Agreement Product in the Territory * , then the Formula Price shall mean an amount equal to * of the Agreement Product * . "Improved Agreement Product(s)" shall mean (i) any modification of the Agreement Product (made entirely from hylan B) regarding the formulation of hylan B in the Agreement Product, that is changes of concentration of the polymer or other changes in the Agreement Product Specifications, whether or not requiring new regulatory approval in the EU Countries or in the United States, and (ii) any modifications or changes related to the packaging of the Agreement Product, including the syringe used, mode of application or dosage. "Incremental Royalties" shall mean that term as defined in Section 8.2. "Initial Term" shall mean that term as defined in Section 3.2. "International Agreement" means the Distribution Agreement between Biomatrix and Distributor, dated as of the date hereof, relating to the sale of the Agreement Product in the EU Countries, Switzerland, Norway, Liechtenstein, Iceland, Australia, New Zealand, Canada, Israel, Argentina, Mexico, Chile and Brazil. * Confidential portions have been omitted and filed separately with the Commission. -2- 46 "International Territory" shall mean, collectively, the EU Countries, Switzerland, Norway, Liechtenstein, Iceland, Australia, New Zealand and Japan, Israel, Argentina, Brazil, Chile, Mexico and Canada. "Launch" shall mean the commencement by the Distributor of sales of the Agreement Product in commercial quantities in the Territory for use in the Territory. "Minimum Price" shall mean an amount equal to * for each Treatment Syringe, * , then the Minimum Price payable * Agreement Years immediately following such * shall equal * , and * Agreement Years following such * shall equal * for each Treatment Syringe. "Net Retail Sales" shall mean, with respect to sales of a Dermal Tissue Augmentation Product in the Territory, the aggregate gross price invoiced for retail sales of such product during a period in such country to unaffiliated third-party purchasers * It is Biomatrix's understanding that the foregoing definition is consistent with how the Distributor reports its sales in its audited financial statements. "New Products" shall mean * "Patents" shall mean Letters Patent or similar statutory rights relating to any Agreement Product and any Improved Agreement Product(s) (including any continuation-in-part, continuation or division thereof or substitute thereof), and patent applications which are pending as of the Effective Date, in each case as set forth in Exhibit C, together with any supplementary or complementary protection certificates therefor if and when such are granted. "Person" shall mean an individual, a corporation, limited liability company, a partnership, a trust, an unincorporated organization or a * Confidential portions have been omitted and filed separately with the Commission. -3- 47 government or any agency or political subdivision thereof. "Region" shall mean any one of the following countries or groups of countries: * "Supply Forecast" shall mean that term as defined in Section 7.3(b). "Territory" shall mean the United States. "Trademarks" shall mean (i) the trademark Hylaform(R), the details of which are described in Exhibit C, and (ii) any other trademarks, as may be agreed upon in writing from time to time by the parties hereto for use by the Distributor in connection with the promotion, marketing and sale of the Agreement Product and any Improved Agreement Product(s) under this Agreement. "Treatment Syringe" shall mean a ready-for-injection 1.0cc syringe of the Agreement Product. "United States Consumer Price Index" shall mean the Consumer Price Index, All Items, United States, as published by the Bureau of Labor Statistics. 1.2. In this Agreement, unless the context otherwise requires: (a) clause headings are inserted for convenience of reference only and have no legal effect; (b) references to sections, exhibits and schedules are to be construed as references to the sections of, and exhibits and schedules to, this Agreement and references to this Agreement include its exhibits and schedules. (c) references to (or to any specified provision of) this Agreement or any other document shall be construed as references to this Agreement, that provision or that document as in force for the time being and as amended, varied, substituted, supplemented, restated or novated in accordance with the terms thereof or, as the case may be, with the agreement of the relevant parties and (where such consent is, by the terms of this Agreement or the relevant document, required to be obtained as a condition to such amendment being permitted) the prior written consent of Biomatrix; (d) words importing the plural shall include the singular and vice versa; (e) references to a person shall be construed as including * Confidential portions have been omitted and filed separately with the Commission. -4- 48 references to an individual, firm, consortium, company, corporation, unincorporated body of persons or any State or any agency thereof; and (f) references to statutory provisions shall be construed as references to those provisions as replaced, amended or re-enacted from time to time. 2. APPOINTMENT; BEST EFFORTS; EXCLUSIVITY. 2.1. Appointment. (a) Subject to the terms and conditions hereinafter set forth, Biomatrix hereby appoints the Distributor as its exclusive * (except to the extent set forth in Section 2.3) distributor for the promotion, marketing, sale and distribution within the Territory of the Agreement Product and any Improved Agreement Product(s) supplied by Biomatrix or an Affiliate of Biomatrix to the Distributor pursuant to this Agreement. Such appointment does not include the right to sublicense or appoint subdistributors except to an Affiliate of Distributor without the approval of Biomatrix; (and only for such time as such an Affiliate remains an Affiliate of Distributor). (b) Except as specifically provided to the contrary herein, the foregoing appointment shall not be construed, by implication or otherwise, (i) to effect any sale of proprietary Biomatrix technology, (ii) to grant any license relating to Biomatrix's proprietary methods of formulating, fabricating and manufacturing the Agreement Product or any Improved Agreement Product(s), or (iii) to grant the Distributor any rights in or to any proprietary technology or Patents or Trademarks of Biomatrix. 2.2. Acceptance of Obligations; Best Efforts. The Distributor hereby accepts the appointment described in Section 2.1 and hereby agrees to use its best efforts at all times during the term hereof to promote, market, sell and distribute the Agreement Product and any Improved Agreement Product(s) in the Territory. * 2.3. Conversion to Non-Exclusive Distributorship. In the event that (i) in any Agreement Year after and including the third Agreement Year or (ii) from, after and including the first year of the Distributor acquiring and/or commercializing a New Product pursuant to Section 10.1(b) (and so long as (i) no force majeure condition of Distributor exists at such time pursuant to Section 20, (ii) Biomatrix has met its supply obligations under Section 7.4 and (iii) Distributor is able to lawfully sell the Agreement Product and any * Confidential portions have been omitted and filed separately with the Commission. -5- 49 Improved Agreement Product(s) in the Territory) the Distributor's Net Retail Sales of the Agreement Product and any Improved Agreement Product(s) in the Territory, comprise less than * of its Net Retail Sales of * , including the Agreement Product and any Improved Agreement Product(s), * , within * after receipt of any such notice from Biomatrix, a shortfall of * with respect to the Territory for an Agreement Year by * Biomatrix shall have the right to distribute the Agreement Product and Improved Agreement Product and/or engage another distributor for the Territory. From and after the date of a conversion to a non-exclusive distribution arrangement within the Territory, the Distributor shall lose its rights hereunder to promote, market, sell and distribute within the Territory any Improved Agreement Product(s) commercialized on or after such date. Notwithstanding the foregoing, the Distributor shall retain the exclusive right to use all trademarks under which the Distributor launched the Agreement Product or any Improved Agreement Product(s) in the Territory. 3. TERM AND TERMINATION. 3.1. Effective Date. This Agreement shall take effect as of the Effective Date. 3.2. Term. (a) Unless this Agreement is sooner terminated in accordance with the provisions of this Agreement, the term of the appointment hereunder for shall commence on the first day of the first Agreement Year and shall end on the last day of the * Agreement Year (the "Initial Term"). (b) Unless this Agreement is sooner terminated in accordance with the provisions of this Agreement, the appointment of the Distributor hereunder as exclusive distributor of the Agreement Product shall be renewable by the Distributor, at its option, upon written notice to Biomatrix received at least * prior to the end of the Initial Term, for an additional consecutive term of * following the date of expiration of the Initial Term, * Confidential portions have been omitted and filed separately with the Commission. -6- 50 provided that the Distributor shall only be entitled to exercise such renewal option if as of the date of expiration of the Initial Term the Distributor is not in material breach of any of its obligations under this Agreement. Thereafter, the appointment of the Distributor as exclusive distributor of the Agreement Product shall be renewable upon the expiration of such additional * term, upon written notice to Biomatrix received at least * prior to the end of such term for one additional consecutive renewal term of * , provided that, as of the date of expiration of the first renewal term, the Distributor is not in material breach of any of its obligations under this Agreement. For the avoidance of any doubt, Distributor's rights with respect to any Improved Agreement Product(s) commercialized after the * of the Effective Date shall terminate upon the * of the Effective Date. Subject to the terms of this Agreement, Distributor shall have the right to continue to sell the Agreement Product and any Improved Agreement Products it is then currently selling. (c) This Agreement may be terminated by either party, by written notice to the other party, in the event that (i) a mutual decision not to Launch the Agreement Product in such country is reached or (ii) a Launch is not commenced within the time period set forth on Exhibit B. (d) In the event that in any Agreement Year after and including the * Agreement Year (and so long as (i) no force majeure condition of Distributor exists at such time pursuant to Section 20, (ii) Biomatrix has met its supply obligations under Section 7.4, and (iii) Distributor is able to lawfully sell the Agreement Product and any Improved Agreement Product(s) in the Territory), the Distributor's Net Retail Sales of the Agreement Product and any Improved Agreement Product(s) in the Territory comprise less than * in the Territory of all Dermal Tissue Augmentation Products, including the Agreement Product and any Improved Agreement Product(s), the Distributor's distribution rights (including, without limitation, its right to use the Trademarks) under this Agreement for the Agreement Product and any Improved Agreement Product(s) in the Territory shall terminate upon * after the end of the applicable Agreement Year, at the election of Biomatrix; * Upon any such termination of the Distributor's distribution rights in the Territory, the Distributor's obligation to pay any royalties pursuant to Sections 8.1 and 8.2 for any sales in the Territory after such termination * Confidential portions have been omitted and filed separately with the Commission. -7- 51 shall cease, but the Distributor shall remain obligated to pay all such royalties for sales in the Territory accrued prior to such termination. (e) Notwithstanding any other provision of this Agreement to the contrary, Biomatrix may terminate this Agreement at any time prior to receipt of the Approved Letter (as defined hereafter) from the U.S. Food and Drug Administration if Distributor is in material breach of the International Agreement, which material breach has not been cured within thirty (30) days after written notice of such breach is received by Distributor. The parties expressly agree that Distributor's failure to meet or adhere to the launch schedule for the Agreement Product for each country as set forth in the International Agreement shall be deemed a material breach of the International Agreement except to the extent that Distributor's failure to meet such launch schedule is due to (i) Biomatrix's failure to meet its supply obligations under the International Agreement, (ii) a force majeure condition of the Distributor, or (iii) it being unlawful for the Distributor to sell the Agreement Product or any Improved Agreement Product in the Territory, provided that such unlawfulness is not the result of any act or failure to act of the Distributor. (f) Notwithstanding any other provision in this Agreement to the contrary, the Distributor may terminate this Agreement upon notice to Biomatrix of the Distributor's decision not to pay the fee called for in Section 7.1(b). 3.3. Inventory. (a) Upon termination of this Agreement for any reason, Biomatrix shall have the right (but not the obligation) to repurchase all or part of the inventory of the Agreement Product and any Improved Agreement Product(s) held by the Distributor or its Affiliates. (b) The price for inventory to be repurchased by Biomatrix pursuant to Section 3.3(a) above shall be the landed cost thereof actually paid by the Distributor to Biomatrix. With respect to any quantities not repurchased by Biomatrix, the Distributor shall have the right to sell such inventory of the Agreement Product and any Improved Agreement Product(s), in its usual and customary manner, in the ordinary course of business, for a period of six (6) months following termination of this Agreement and notwithstanding such termination the terms and conditions of this Agreement shall apply to such sales. 3.4. Insolvency. This Agreement may be immediately terminated by either party, upon giving written notice to the other party, in the event that the other party shall become insolvent or be declared bankrupt by a court of competent jurisdiction or shall be the subject of any reorganization (other than a corporate reorganization effected in the ordinary course of business and not arising out of any insolvency) or winding up, receivership or dissolution, bankruptcy or liquidation proceeding, or any proceeding or action similar to -8- 52 one or more of the above, in which case termination shall be effective upon such written notice. The failure of either party to give notice of termination upon obtaining knowledge of any such event shall not be interpreted as a waiver of such party's rights under this Section 3.4, and such party reserves the right to exercise any such rights at any time after the occurrence of any such event. 3.5. Breach. This Agreement may be terminated by either party if the other party shall breach any of its payment obligations hereunder or if Distributor shall commit a material breach of any of its warranties, covenants, conditions, obligations or agreements contained herein, provided that such breach shall continue for a period of thirty (30) days (ten (10) days in the event that such breach is the failure of the Distributor to pay the fee called for in Section 7.1(b)) after written notice thereof and provided further that such termination shall be immediately effective upon further written notice to that effect to the breaching party after its failure to cure such breach within such applicable notice period. For avoidance of doubt, the parties agree that if a Launch is not reached within thirty days after the time period set forth on Exhibit B, then either party may terminate this Agreement (provided that such failure to reach a Launch is not due to (i) a force majeure condition of the Distributor, (ii) Biomatrix's failure to meet its supply obligations under Section 7.4, or (iii) it being unlawful for the Distributor to sell the Agreement Product or any Improved Agreement Product in the Territory, provided that such unlawfulness is not the result of any act or failure to act of the Distributor). 3.6. Certain Rights Upon Termination. Upon termination of this Agreement for any reason whatsoever, Biomatrix shall have the following rights: (a) Biomatrix shall have the unrestricted right to review, access, use and permit others to review, access and use, either directly or by cross-reference or incorporation or otherwise, all information, data, investigations, preclinical and clinical protocols, marketing information disseminated by Distributor publicly to customers and patients and all information required to be provided to Biomatrix by law, information relating to laboratory, animal and human studies, and related regulatory approvals pertaining to the Agreement Product or any Improved Agreement Product(s) (the "Information") which are possessed or controlled by the Distributor or any of its Affiliates, or to which the Distributor or any of its Affiliates has a right to review, access or use. The Distributor unconditionally agrees promptly to take any action and to execute and deliver to Biomatrix any documents or instruments reasonably requested by Biomatrix to permit Biomatrix to make full use of such unrestricted right. (b) Further, Biomatrix shall have exclusive ownership rights to the Trademarks and to all other product specific logos, slogans and other intangibles used by the Distributor solely in association with the independent sale of the Agreement Product and any Improved Agreement Product(s) (including all registrations relating thereto) possessed or controlled by the Distributor or any of its Affiliates, and the Distributor unconditionally agrees, subject -9- 53 to the provisions of Section 3.3(b), (i) immediately upon termination to cease using the Trademarks and any such logos, slogans, and marketing rights of Biomatrix or any imitations thereof and (ii) immediately to execute and deliver to Biomatrix any documents or instruments reasonably requested by Biomatrix to give full effect to the provisions of this Section 3.6. (c) In addition, the Distributor unconditionally agrees, subject to the provisions of Section 3.3(b), that it shall, upon the request of Biomatrix, immediately inform all relevant regulatory authorities that the Distributor is no longer a distributor of the Agreement Product or the Improved Agreement Product(s) and shall take all action and execute and deliver all documents and instruments necessary in order to transfer to the fullest extent permitted under applicable law all registrations and Product License Approvals, or applications therefor, for the Agreement Product or any Improved Agreement Product(s) to Biomatrix or any Person nominated by Biomatrix. 3.7. Effects of Termination. (a) Upon termination of this Agreement for any reason, the Distributor shall immediately discontinue making any representations regarding its status as a distributor for Biomatrix and shall immediately cease conducting any activities with respect to the marketing, promotion, sale or distribution of the Agreement Product and any Improved Agreement Product(s), provided, however, that the Distributor shall be permitted to sell inventory not repurchased by Biomatrix in accordance with Section 3.3. (b) Termination of this Agreement shall not affect obligations of either party that may have accrued prior to the effective date of termination. Subject to Clause 3.8 below, termination of this Agreement shall be in addition to, and shall not be exclusive of or prejudicial to, any other grounds for termination or rights or remedies at law or in equity which either party may have on account of any default of the other party. 3.8. Waiver. The Distributor hereby waives, to the extent it is able to do so under the laws of the United States and other applicable law, any statutory rights it may have or acquire in respect of the termination of the relationship established hereby pursuant to the terms hereof, and agrees that the rights available to it hereunder in the event of such termination are adequate and reflect the agreement of the parties. The Distributor shall not have any right to claim any indemnity for goodwill or lost profits or any damages arising from the rightful termination of this Agreement in accordance with the terms hereof. 4. PAYMENTS. All payments hereunder shall be made in Dollars. Payments to Biomatrix shall be wired to an account designated by Biomatrix and the costs of any such remittance shall be borne by the Distributor. 5. WITHHOLDING. All payments to be made by the Distributor under this Agreement shall be made in full, free and clear of and without any deduction of or withholding for or on account of any taxes levied in any -10- 54 country of the Territory or elsewhere; provided that if the Distributor shall be required by law to make any deduction or withholding from any payment to Biomatrix then: (a) the Distributor shall ensure that such deduction or withholding does not exceed the minimum legal liability therefor; and (b) not later than five (5) days before each deduction or withholding of any taxes, the Distributor shall forward to Biomatrix such documentary evidence as may be required by Biomatrix in respect of the proposed deduction, withholding or payment; and (c) prior to any deduction or withholding the parties shall attempt in good faith to agree upon revised mutually acceptable pricing and/or payment terms. 6. TRADEMARKS; AGREEMENT PRODUCT MARKING; PROMOTIONAL INFORMATION. 6.1. Trademarks. Subject to the provisions of Section 3.6, Biomatrix hereby licenses to the Distributor the right to use, and hereby requires solely in association with the independent sale by the Distributor of the Agreement Product and any Improved Agreement Products the use of, the Trademarks in the Territory during the term of this Agreement. The Distributor warrants that it shall not use any of the Trademarks at any time outside the Territory or use any of the Trademarks for any products other than the Agreement Product and any Improved Agreement Product(s) within the Territory. The Distributor shall not use a trademark or other mark (other than a Trademark) in connection with its distribution of the Agreement Product and any Improved Agreement Products unless and until it has been agreed upon in writing by each of the parties and become a Trademark as defined herein. Biomatrix shall prosecute, maintain and defend the Trademarks throughout the Term of this Agreement in the Territory. The parties shall execute a short form Trademark assignment agreement to the extent that it is necessary to record the Trademark license under this Section 6.1. 6.2. Termination of Right to Use Trademarks. Subject to the sell-out right of Section 3.3(b) and except as otherwise provided in Section 3.6, upon termination of this Agreement, the license to use the Trademarks in the Territory shall terminate, and the Distributor unconditionally agrees promptly to take all necessary action and execute and deliver to Biomatrix all necessary documents and instruments to remove the Distributor as a registered user and/or a recorded licensee of the Trademarks. In the event that the Distributor fails promptly upon written request by Biomatrix to comply with any of its agreements in the preceding sentence of this Section 6.2, the Distributor hereby irrevocably consents to Biomatrix's taking any action necessary to give effect to such agreements. -11- 55 6.3. Notice. Each party hereto agrees promptly to notify the other in writing of any infringements or imitations of the Trademarks by third parties which may come to its attention. 6.4. Labelling and Promotional Materials; Approved Use of Product. (a) The Distributor shall provide Biomatrix with labelling masters, instructions, specifications and copies of all marketing, labelling and promotional material it intends to use relating to the Agreement Product and any Improved Agreement Product(s). All such labelling, packaging and promotional material shall be consistent with the relevant Product License Approvals and all labelling and packaging materials shall be reviewed by Biomatrix and shall be subject to its written approval prior to use, such approval not to be unreasonably withheld. Biomatrix shall communicate its acceptance or rejection of such labelling packaging and any major promotional materials that include claims or items impacting regulatory approvals within * of its receipt thereof and if no such communication is received by Distributor from Biomtrix within such * Biomatrix shall be deemed to have accepted. Distributor shall provide Biomatrix with all other major promotional materials for launches and subsequent promotions within a reasonable time prior to their use in order to allow Biomatrix to comment on such materials. Distributor shall provide Biomatrix with copies of all other promotional materials at or prior to their use. (b) The Distributor agrees that its promotion, marketing, sale and distribution of the Agreement Product and any Improved Agreement Product(s) in the Territory, and the promotional materials and labelling used in connection therewith, shall be strictly in accordance with the approved use of the Agreement Product and any Improved Agreement Product(s) as specified in the Product License Approvals and as further provided in this Agreement. Specifically, for purposes of this Agreement, the Distributor agrees * , or unless agreed to in writing by Biomatrix. 6.5. Legend. Subject to applicable laws and regulations in the Territory, all relevant packaging and promotional material for the Agreement Product and any Improved Agreement Product(s) used or sold by the Distributor shall contain (i) all applicable markings needed to keep the Trademarks enforceable throughout the Territory as reasonably specified by Biomatrix to the Distributor and (ii) a legend which shall be displayed in a reasonably conspicuous manner on all packaging of such Agreement Product and any Improved Agreement Product(s) containing the corporate identification logo of Biomatrix and indicating that such product has been developed and manufactured by Biomatrix, Inc., and its affiliates, 65 Railroad Avenue, Ridgefield, New Jersey, 07657 U.S.A. * Confidential portions have been omitted and filed separately with the Commission. -12- 56 6.6. Promotional Support. Biomatrix and the Distributor shall provide to each other on an ongoing basis and without charge (to the extent not prevented by law or contract from doing so) all medical information relating to the Agreement Product and any Improved Agreement Product(s) (including summary data from studies, clinical trials and the like as well as information regarding adverse events associated with the use of the Agreement Product), the proceedings of all symposia on the Agreement Product and any Improved Agreement Product(s) and all promotional information that is available to such party relating to the Agreement Product and any Improved Agreement Product(s). In addition, Biomatrix and the Distributor shall provide each other with access to such primary data and information in its possession as the other may reasonably request regarding the results of the studies contained in such summary data referred to above. 6.7. Joint Coordinating Committee. Upon the execution of this Agreement, Biomatrix and the Distributor shall establish a joint coordinating committee (the "Committee") to review all matters relating to product labelling, product claims, regulatory matters or clinical trials. The Committee shall consist of an equal number, not to * , of voting representatives from each of Biomatrix and the Distributor and shall meet * . In the event of a dispute between representatives of Biomatrix and the Distributor on the Committee, a senior representative of each such party shall be appointed to resolve such dispute, and in the event such senior representatives are unable to resolve the matter, Biomatrix's view shall prevail over the Distributor's. 6.8. Recalls of the Agreement Product. (a) If either party in good faith determines that a recall of the Agreement Product in the Territory is warranted, such party shall immediately notify the other party in writing and shall advise such other party of the reasons underlying its determination that a recall is warranted. The parties shall consult with each other as to any action to be taken in regard to such a recall, but in any event if after consultations either party in good faith still believes that such a recall should be undertaken, the parties shall cooperate in carrying out such recall. (b) Except as otherwise provided in (c) below, in the event of a recall of the Agreement Product, Biomatrix shall correct any deficiency relating to its manufacturing, packaging, testing, labelling, storing or handling of the Agreement Product for which it is responsible, if applicable, and shall at its cost replace the Agreement Product recalled. (c) Biomatrix shall reimburse Distributor for all direct costs and expenses (including without limitation shipping, quality control * Confidential portions have been omitted and filed separately with the Commission. -13- 57 testing and notification costs) incurred by Distributor and its Affiliates as a result of any recall, except where such recall (i) is the result of the failure of Distributor or its Affiliates to comply with their obligations under this Agreement and/or (ii) was opposed by Biomatrix and proved to be unwarranted, in which case Distributor shall reimburse Biomatrix for all direct costs and expenses (including without limitation shipping, quality control testing and notification costs) incurred by Biomatrix and its Affiliates as a result of such recall. 6.9. Product Vigilance System. The Distributor shall be responsible for maintaining medical device vigilance systems, as established for the Agreement Product by Biomatrix, and shall promptly provide Biomatrix with notice of all product complaints, including medical complaints. Biomatrix shall be solely responsible for processing, analyzing and, if necessary, reporting medical complaints to regulatory authorities. The Distributor shall provide all necessary support to Biomatrix for carrying out such activities. 7. SUPPLY OF AGREEMENT PRODUCT. 7.1. General; Fee. (a) Biomatrix agrees to sell the Agreement Product and any Improved Agreement Product(s) to the Distributor, on the terms and subject to the conditions set forth herein, for resale by the Distributor within the Territory, and the Distributor shall obtain the Agreement Product and any Improved Agreement Product(s) for resale in the Territory only from Biomatrix or its Affiliates. Biomatrix shall not sell the Agreement Product or any Improved Agreement Product(s) itself or supply or license the manufacture of the Agreement Product or any Improved Agreement Product(s) to any third party for resale within the Territory, provided that Biomatrix's obligations under this sentence shall be subject to (i) applicable law and (ii) the provisions of this Agreement, including Section 2.3. (b) * 7.2. Price; Adjustment; Reports; Payment. (a) The parties shall attempt in good faith to agree in writing, prior to the Launch in each country, upon mutually acceptable supply pricing for the Distributor's purchase of the Agreement Product and any Improved Agreement Product(s), but such pricing in any event shall not be less than the greater of (i) the Minimum Price, or (ii) the Formula Price, except as provided in subsection (b) below. The parties shall attempt in good faith to agree in -14- 58 writing upon mutually acceptable minimum pricing for the Agreement Product in sizes other than the 1.0cc Treatment Syringe and for any Improved Agreement Product(s). For any syringe with a fill volume of greater than one cc (1cc), the Minimum Price shall be the amount calculated as * plus the dollar amount which equals * of such product with a larger fill volume * of the one cc (1cc) syringe. In the event that Biomatrix's actual incremental Cost of Goods Sold exceeds such dollar amount, the Minimum Price shall be the amount calculated as * . Subject to the general commercial availability of appropriate syringes for the Agreement Product, the * for a one and one-half (1.5)cc syringe, * for a two (2.0)cc syringe, and * for a two and one-half (2.5)cc syringe. (b) If Biomatrix has appointed a new distributor in the Territory pursuant to Section 2.3 and the Distributor has the right to distribute the Agreement Product and any Improved Agreement Product(s) in the Territory, the supply pricing for the Distributor's purchase of the Agreement Product and any Improved Agreement Product(s) for resale in the Territory * (c) The price initially payable by the Distributor to Biomatrix for each unit of the Agreement Product during each month of each Agreement Year shall be the Minimum Price (subject to adjustment at the close of each applicable Contract Quarter and Agreement Year in accordance with Section 7.2(e) below). (d) Within * after the end of each month of each Agreement Year, the Formula Price for the Agreement Product shall be calculated, and, to the extent that such Formula Price exceeds the applicable Minimum Price for such Agreement Year, an adjustment resulting from the * with respect to all units of the Agreement Product sold by the Distributor in the Territory during such monthly period, such payment to be made * after the end of the month following such monthly period. (e) Within * after the end of each Contract Quarter and Agreement Year, the Formula Price for the Agreement Product shall be calculated and an adjustment resulting from the * , as appropriate, to the other party with respect to all units of the Agreement Product sold by the Distributor in the Territory during such Contract * Confidential portions have been omitted and filed separately with the Commission. -15- 59 Quarter and Agreement Year, such payment to be made within * after the end of such * period following the end of such Contract Quarter and Agreement Year. The price calculated annually in this manner shall be the final price payable for all units of the Agreement Product sold by the Distributor or any Affiliate during such Agreement Year. For the avoidance of doubt, the aggregate amount payable by Distributor for the Agreement Product(s) and any Improved Agreement Product(s) for any Agreement Year shall in no event be lower than the Minimum Price multiplied by the total units sold in such Agreement Year in the Territory. (f) Within * following the end of each calendar month in each Agreement Year, the Distributor shall submit to Biomatrix written reports detailing the units and value of the Distributor's and its Affiliates' Net Retail Sales and aggregate number of units sold of the Agreement Product and any Improved Agreement Product(s) in the Territory during the immediately preceding calendar month. (g) Within * following the end of each Agreement Year, the Distributor shall submit to Biomatrix written reports detailing the Distributor's and its Affiliates' sales of the Agreement Product and any Improved Agreement Product(s) during the immediately preceding Agreement Year, which reports shall contain the Net Retail Sales of the Agreement Product and any Improved Agreement Product(s) in the Territory, and the aggregate number of units of the Agreement Product and any Improved Agreement Product(s) sold in the Territory during the applicable Agreement Year. (h) All purchases of the Agreement Product and any Improved Agreement Product(s) hereunder shall be billed and paid in Dollars within * after the later of the date of delivery or the date of the Distributor's receipt of the invoice for each shipment of same to the Distributor. 7.3. Sales and Supply Forecasts; Accounts. (a) Exhibit D, which shall be supplied by the Distributor within * of the Distributor's receipt of notice from Biomatrix of * , shall set forth a sales forecast of units of the Agreement Product in the Territory for the first Agreement Year. (b) Within * after the end of each month of each Agreement Year in the Territory, the Distributor shall provide to Biomatrix an updated rolling twelve (12) month monthly supply forecast for all unit sizes of the Agreement Product. Each such supply forecast described in this subsection (b) is referred to herein as a "Supply Forecast"; provided, that updated Supply Forecasts shall not vary (whether up or down) from the immediately preceding Supply Forecast by more than * with respect to each month covered by such preceding Supply Forecast. * Confidential portions have been omitted and filed separately with the Commission. -16- 60 (c) The Distributor shall maintain books of account with respect to its sales of the Agreement Product in the Territory. Biomatrix shall have the right, not more than once during each calendar year, to have an independent accountant selected and retained by Biomatrix (reasonably acceptable to Distributor, provided that any "big six" accounting firm shall be deemed reasonable) to inspect and examine such books of the Distributor during regular business hours for the purpose of verifying the statements of the aggregate Net Retail Sales of all Dermal Tissue Augmentation Products for all purposes hereunder, including verification of Formula Price and the royalties described in Section 8. The cost of each such audit shall be borne by Biomatrix unless a material error is discovered in the course of such audit, in which case the cost shall be borne by the Distributor. For purposes of this Section 7.3(d), a material error shall be defined as an understatement of five percent (5%) or more of the aggregate amount owed to Biomatrix with respect to sales of Dermal Tissue Augmentation Products in the Territory. Any additional payments required as a result of such inspection and examination shall be immediately paid to Biomatrix and shall bear interest from the date such amount would otherwise have been paid until the date of actual payment at the rate per annum set forth in Section 20. Such independent accounting firm shall conduct such inspections and examinations under conditions of confidentiality. 7.4. Shipment and Delivery; Packaging; Shelf Life. (a) Biomatrix or an Affiliate of Biomatrix shall arrange for shipment to the Distributor of the Agreement Product and any Improved Agreement Product(s) ordered by the Distributor * . The Distributor shall pay all customs duties, sales taxes and other governmental charges relating to the Agreement Product and any Improved Agreement Product(s), and shall be solely responsible for clearing such products through customs throughout the Territory. (b) The Distributor shall submit a firm purchase order setting forth the quantities, delivery date and shipping instructions with respect to each shipment of the Agreement Product and any Improved Agreement Product(s), such purchase orders to be received by Biomatrix at least * prior to the requested delivery date; provided that the Distributor shall not submit any purchase order for fewer than * units of the Agreement Product or the Improved Agreement Product(s) (although multiple delivery site for purchase orders shall be allowed). Biomatrix shall have no obligation to supply Distributor with quantities of the Agreement Product(s) and Improved Agreement Product(s) in excess of the amounts in the then current Supply Forecast for the relevant monthly period. * Confidential portions have been omitted and filed separately with the Commission. -17- 61 (c) Each unit of the Agreement Product and any Improved Agreement Products shipped to the Distributor shall have, as of the time of delivery, a remaining shelf life of no less than * less than the maximum shelf life for such product, as approved by the U.S. Food and Drug Administration. Biomatrix shall continually use its best efforts at all times during the term hereof to lengthen to * the shelf life of the Agreement Product and any Improved Agreement Products to the extent supported by stability data. Biomatrix' "best efforts" in this section shall mean that Biomatrix shall use such methods, exercise such degree of effort and diligence, and adhere to such standards as are commercially reasonable. 7.5. Title. Legal title to all quantities of the Agreement Product and any Improved Agreement Product(s) sold hereunder shall remain in Biomatrix until delivery of the Agreement Product and any Improved Agreement Product(s) to Distributor or its agent and acceptance thereof, and upon such delivery and acceptance the title to such Agreement Product and any Improved Agreement Product(s) shall, without further action, be transferred to and vested in the Distributor. 7.6. Risk of Loss. Biomatrix shall bear all risk of loss of, or damage to, all units of the Agreement Product and any Improved Agreement Product(s) to the extent the same is in its possession or the possession of its Affiliates, nominees or agents. The Distributor shall bear all risk of loss of, or damage to, all units of the Agreement Product and any Improved Agreement Product(s) after delivery to a common carrier for shipment to the Distributor in accordance with Section 7.4. 7.7. Acceptance. * All units of the Agreement Product and Improved Agreement Products delivered to Distributor pursuant to this Agreement shall be * the specification listed in Exhibit A. Any non-conformity which arises after acceptance by Distributor directly associated with Product specification shall be the responsibility of Biomatrix unless such non-conformity is due to improper storage conditions subsequent to delivery of the Agreement Product. All other non-conformities of the Agreement Product shall be the responsibility of the Distributor. Biomatrix and the Distributor agree to consult with each other in order to resolve the discrepancy between each other's determinations. If such consultation does not resolve the discrepancy, the parties agree to nominate a reputable independent laboratory, acceptable to both parties, that shall carry out tests on representative samples taken from such shipment, and * Confidential portions have been omitted and filed separately with the Commission. -18- 62 the results of such tests shall be binding on the parties. Biomatrix shall at its expense replace any such shipment to the extent that it does not conform to the Agreement Product Specifications. All defective units of the Agreement Product or any Improved Agreement Product(s) shall be returned to Biomatrix at the address set forth in Section 23 of this Agreement, accompanied or preceded by a reasonably detailed statement of the claimed defect or non-conformity and proof of date of purchase, and packed and shipped according to instructions provided by Biomatrix. The shipping costs of any such returned units shall be borne by Biomatrix, unless such units are determined not to be defective under the terms of this Agreement, in which case such shipping costs shall be borne by the Distributor. 7.8. Purchase Orders. The provisions of this Agreement shall prevail over any inconsistent statement or provisions contained in any document related to this Agreement passing between the parties hereto including, but not limited to, any purchase order, acknowledgment, confirmation or notice. 7.9. Limited Warranty; Limitation on Liability. Biomatrix represents and warrants that the Agreement Product and any Improved Agreement Product(s) supplied to the Distributor hereunder shall: (a) conform to the Agreement Product Specifications; and (b) be manufactured, labelled, packaged and tested (while in the possession or control of Biomatrix) in accordance with the applicable Product License Approvals therefor and all applicable laws and regulations in the Territory relating to the manufacture, labelling, packaging and testing of the Agreement Product, and shall be manufactured for use for the indications specified in the applicable Product License Approvals therefor. THE FOREGOING WARRANTY IS THE SOLE AND EXCLUSIVE WARRANTY GIVEN BY BIOMATRIX WITH RESPECT TO THE AGREEMENT PRODUCT, AND BIOMATRIX GIVES AND MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, OTHER THAN THE FOREGOING. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, NO IMPLIED WARRANTY OF MERCHANTABILITY, NO IMPLIED WARRANTY OF FITNESS FOR ANY PARTICULAR PURPOSE, AND NO IMPLIED WARRANTY ARISING BY USAGE OF TRADE, COURSE OF DEALING OR COURSE OF PERFORMANCE IS GIVEN OR MADE BY BIOMATRIX OR SHALL ARISE BY OR IN -19- 63 CONNECTION WITH ANY SALE OR PROVISION OF THE AGREEMENT PRODUCT BY BIOMATRIX, OR THE DISTRIBUTOR'S (OR ITS AFFILIATES') USE OR SALE OF THE AGREEMENT PRODUCT, OR BIOMATRIX'S AND/OR THE DISTRIBUTOR'S (OR ITS AFFILIATES') CONDUCT IN RELATION THERETO OR TO EACH OTHER. NO REPRESENTATIVE OF BIOMATRIX IS AUTHORIZED TO GIVE OR MAKE ANY OTHER REPRESENTATION OR WARRANTY OR TO MODIFY THE FOREGOING WARRANTY IN ANY WAY. The limited warranty set forth in this Section 7.9 does not apply to any non-conformity of the Agreement Product or any Improved Agreement Product(s) resulting from (a) repair or alteration by any party other than Biomatrix or its Affiliates, (b) misuse, negligence, abuse, accident, mishandling or storage in an improper environment by any party other than Biomatrix or its Affiliates, or (c) use, handling, storage or maintenance other than in accordance with instructions and recommendations provided by Biomatrix or its Affiliates. Biomatrix's obligation with respect to units of the Agreement Product and any Improved Agreement Product(s) which do not meet the warranty contained herein is limited to replacement of such units of the Agreement Product or Improved Agreement Product(s) as applicable, provided that such units are returned to Biomatrix accompanied by a reasonably detailed statement of the claimed defect or non-conformity and proof of purchase, and packed and shipped according to instructions provided by Biomatrix, and only if, upon examination by Biomatrix, such units of the Agreement Product or the Improved Agreement Product(s) are determined to have been defective under the terms of this Agreement. BIOMATRIX'S LIABILITY, AND THE EXCLUSIVE REMEDY, IN CONNECTION WITH THE SALE OR USE OF THE AGREEMENT PRODUCT AND ANY IMPROVED AGREEMENT PRODUCT(S) (WHETHER BASED ON CONTRACT, NEGLIGENCE, BREACH OF WARRANTY, STRICT LIABILITY OR ANY OTHER LEGAL THEORY), SHALL BE STRICTLY LIMITED TO BIOMATRIX'S OBLIGATIONS AS SPECIFICALLY AND EXPRESSLY PROVIDED IN THIS SECTION 7.9 AND IN SECTION 9 BELOW. EXCEPT AS SPECIFICALLY PROVIDED IN THIS SECTION 7.9 AND IN SECTION 9 BELOW, BIOMATRIX SHALL HAVE NO LIABILITY, OBLIGATION OR RESPONSIBILITY OF ANY KIND, IN ANY WAY OR TO ANY EXTENT, FOR ANY DAMAGES, LOSSES, COSTS, EXPENSES OR LIABILITIES FOR ANY REPRESENTATION OR WARRANTY OF ANY KIND WITH RESPECT TO THE AGREEMENT PRODUCT AND ANY IMPROVED AGREEMENT PRODUCT(S) OR THE PERFORMANCE THEREOF, OR ARISING IN ANY WAY IN CONNECTION WITH THE PURCHASE OR USE OR -20- 64 INABILITY TO USE THE AGREEMENT PRODUCT OR ANY IMPROVED AGREEMENT PRODUCT(S), EVEN IF BIOMATRIX HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN NO EVENT WHATSOEVER SHALL BIOMATRIX HAVE ANY LIABILITY, OBLIGATION OR RESPONSIBILITY FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY DAMAGES ARISING IN ANY WAY IN CONNECTION WITH THE AGREEMENT PRODUCT OR ANY IMPROVED AGREEMENT PRODUCT(S) OR THEIR SALE OR USE. 8. ROYALTY PAYMENTS BY DISTRIBUTOR. 8.1. Royalties for Sales of Dermal Tissue Augmentation Products. The Distributor shall pay to Biomatrix a royalty of * of the Net Retail Sales by the Distributor and its Affiliates of all Dermal Tissue Augmentation Products (other than sales of the Agreement Product and any Improved Agreement Product(s)) in the Territory, including any countries that are added to the Territory after the Effective Date, * . Such royalty shall commence at the earlier of (a) Launch of the Agreement Product in the Territory or (b) the Launch date set forth on Exhibit B; provided that if a the Launch is delayed due to Biomatrix's failure to meet its supply obligations under Section 7.4, due to a force majeure condition of Distributor or if Distributor is not able to lawfully sell the Agreement Product in the Territory, such royalty shall not commence until Biomatrix meets its supply obligations, until Distributor is able to sell the Agreement Product in the Territory, or until such force majeure condition ceases. Such royalty shall be paid by not later than * after the end of each Contract Quarter. 8.2. Incremental Royalties. The Distributor shall pay to Biomatrix the following annual royalties (the "Incremental Royalties") on the Distributor's and its Affiliates' total incremental increases in Net Retail Sales of all Dermal Tissue Augmentation Products (including the Agreement Product and any Improved Agreement Product(s)), in the Territory based on the incremental increases, if any, in Net Retail Sales of all Dermal Tissue Augmentation Products in each Agreement Year over a base year amount comprised of Net Retail Sales of Dermal Tissue Augmentation Products in the twelve (12) months immediately preceding the first commercial sale of either the Agreement Product or any Improved Agreement Product(s): Increase in Total Royalty on Total Sales Over Base Incremental Sales Year Amount * Confidential portions have been omitted and filed separately with the Commission. -21- 65 * The Distributor's obligation to pay the Incremental Royalties shall cease in the event that the Distributor's rights to sell, distribute, market and promote the Agreement Product and any Improved Agreement Product have become non-exclusive pursuant to Section 2.3 or have terminated pursuant to Section 3.2(d). The Incremental Royalty shall be paid by not later than * after the end of each Agreement Year. For the avoidance of doubt, if the Distributor had no sales of any Dermal Tissue Augmentation Products prior to the first commercial sale of either the Agreement Product or any Improved Agreement Product, the Distributor shall be obligated to pay a * royalty on Net Retail Sales of all Dermal Tissue Augmentation products sold after such first commercial sale. 9. INDEMNIFICATION; CONFIDENTIALITY; PUBLIC ANNOUNCEMENT 9.1. Indemnification from the Distributor. Subject to the provisions of Section 9.3, the Distributor shall defend, indemnify and hold Biomatrix and its Affiliates and their respective directors, officers, agents and employees harmless from and against any and all liabilities, claims, damages and expenses (including without limitation actual court costs and reasonable attorneys' fees regardless of outcome) resulting from claims of third parties or arising out of: * provided, however, that upon Biomatrix being advised of any assertions of any such third party claims or suits or upon the bringing or filing of such claims or suits by any third party against Biomatrix, Biomatrix will promptly notify the Distributor thereof * . The parties agree that there shall be no settlements, whether agreed to in court or out of court, without the prior written consent of the indemnifying party. * Confidential portions have been omitted and filed separately with the Commission. -22- 66 9.2. Indemnification from Biomatrix. Subject to the provisions of Section 9.3, Biomatrix shall defend, indemnify and hold the Distributor and its Affiliates and their respective directors, officers, agents and employees harmless from and against any and all liabilities, claims, damages and expenses (including without limitation actual court costs and reasonable attorneys' fees regardless of outcome) resulting from claims of third parties arising out of: * provided, however, that upon the Distributor being advised of any assertions of any such third party claims or suits or upon the bringing or filing of such claims or suits by any third party against the Distributor, the Distributor will promptly notify Biomatrix thereof * The parties agree that there shall be no settlements, whether agreed to in court or out of court, without the prior written consent of the indemnifying party. 9.3. Limitation on Liability. NOTWITHSTANDING ANY PROVISION TO THE CONTRARY IN SECTIONS 9.1 AND 9.2 ABOVE, OR ANY OTHER PROVISION OF THIS AGREEMENT, IN NO EVENT (INCLUDING THE FAULT, NEGLIGENCE OR STRICT LIABILITY OF EITHER PARTY) SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY DAMAGES OTHER THAN TO THE EXTENT NECESSARY TO REIMBURSE SUCH OTHER PARTY FOR DAMAGES ACTUALLY PAID TO A NON-AFFILIATED THIRD PARTY, PROVIDED THAT SUCH DAMAGES ARE OTHERWISE COVERED BY THE PROVISIONS OF SECTION 9.1 OR SECTION 9.2, AS THE CASE MAY BE. 9.4. Confidential Information. All information acquired by either party (the "Recipient") from the other party or any of its Affiliates (the "Discloser") during the term of this Agreement or prior to the Effective Date, relating directly or indirectly to the present or potential business, operations, corporate, technical or financial situation of the Discloser, or to manufacturing know-how, patents, data, test results, techniques, processes, procedures, raw materials, dealer, supplier and customer lists, pre-clinical and clinical protocols or any improvements thereof of the Discloser ("Confidential Information") is confidential, and shall be held in trust by the * Confidential portions have been omitted and filed separately with the Commission. -23- 67 Recipient for the exclusive benefit of the Discloser. Unless otherwise agreed to in writing by the Discloser, the Recipient shall not at any time, either during or subsequent to the term of this Agreement, use for itself (other than in accordance with the terms of this Agreement) or any other Person, or disclose or divulge to any Person, other than to those of its employees and advisors and Affiliates who require the same for the purposes hereof and who are bound by the same obligations of confidentiality, non-disclosure and non-use as set forth herein, any Confidential Information or any other confidential or proprietary information of the Discloser of which the Recipient may acquire knowledge; provided, however, that the confidentiality, non-disclosure and non-use provisions contained in this Section 9.4 shall not apply to any information or data to the extent that the Recipient: (a) shall demonstrate by clear and convincing evidence that such information or data is known generally to persons in the trade through no act or omission of the Recipient or any of its Affiliates; (b) is required by any government authority to disclose such information or data, including without limitation for the purposes of obtaining and maintaining any Product License Approvals under this Agreement; or (c) shall demonstrate by its written records was disclosed to or created by it or its Affiliates on a non-confidential basis from a source other than the Discloser or its Affiliates and that such disclosure or creation did not constitute a breach of any applicable confidentiality obligations. Confidential Information shall be immediately returned to the Discloser upon termination of this Agreement, along with any copies, reproductions, digests, abstracts or the like of all or any part thereof in the Recipient's possession or under the Recipient's control, and upon such return any computer entries or the like relating thereto shall, to the extent legally permissible, be destroyed. Such return (and destruction) will not affect the Recipient's obligations hereunder which shall survive indefinitely. Notwithstanding anything herein to the contrary, the provisions of this Section 9.4 shall be subject to Biomatrix's rights under Section 3.6. 9.5. Public Announcement. Except as shall be necessary for governmental notification purposes or to comply with applicable laws and regulations, and except as otherwise agreed to by the parties hereto in writing, the parties agree to keep the existence of this Agreement, and the transactions contemplated hereby, strictly confidential. In the event that a party must file this document or otherwise disclose any of its subject matter pursuant to public filing requirements, such party shall seek confidential treatment of those portions of the Agreement as the parties shall mutually agree upon; provided, however, that the Distributor must provide written notice to Biomatrix no later than June 30, 1996 of those portions of the Agreement for which the Distributor requests confidential treatment. The parties shall agree upon the text of an initial public announcement relating to the transactions contemplated by this Agreement as soon as possible. Any subsequent public announcements regarding this Agreement or the transactions contemplated herein -24- 68 shall also be agreed upon in writing between the parties prior to any release thereof. 10. NEW PRODUCTS. 10.1. * , Distributor shall not commercialize nor begin the commercialization process with respect to or acquire any New Product anywhere in the International Territory or the United States, either independently or in conjunction with one or more third parties, unless and until the following conditions have been satisfied: (a) Distributor has made a commercially reasonable written offer to Biomatrix to participate with Distributor in the development and commercialization of such New Product; and (b) Biomatrix has failed to accept such written offer within * of its receipt of such offer. In the event that Biomatrix fails to accept any written offer made by Distributor pursuant to this Section 10.1 within * of Biomatrix's receipt thereof, then Distributor, subject to the terms of this Agreement, shall have the right to independently or with other parties develop and/or commercialize any New Product to which such written offer relates; provided, however, that any such New Product does not infringe upon any intellectual property rights of Biomatrix. Distributor shall not be required to make the written offer to Biomatrix set forth in Section 10.1(a) above only to the extent that it is prevented from doing so due to the patented proprietary rights of a third party. (c) At all times during the term of this Agreement, Distributor shall notify Biomatrix in writing within * of each occurrence of one or more of the following: (i) Distributor's entering into an agreement with one or more third parties with regard to the development, acquisition and/or commercialization of any New Product, and Distributor shall provide to Biomatrix notice of such agreement and any and all agreements relating thereto and a non-confidential summary of such agreements; or (ii) Distributor's commencing a clinical trial (either alone or in conjunction with a third party) with respect to any New Product, together with a notice of the commencement of such clinical trial and a list of all countries where such clinical trials will take * Confidential portions have been omitted and filed separately with the Commission. -25- 69 place; or (iii) Distributor's filing of an application (either alone or in conjunction with a third party) for marketing approval with the United States Food and Drug Administration or an equivalent regulatory agency in any country with respect to any New Product stating in which countries any such filings have been made. 10.2. * 10.3. Nothing in this Section 10 shall be construed, by implication or otherwise, (i) to effect any sale or license of proprietary Biomatrix technology (including any New Products), (ii) to grant any license relating to Biomatrix's proprietary methods of formulating , fabricating and manufacturing the Agreement Product, Improved Agreement Products or New Products, or (iii) to grant Distributor any rights in or to any proprietary technology or Patents or Trademarks of Biomatrix. 11. REPRESENTATIONS OF BIOMATRIX. Biomatrix represents, warrants and covenants as follows: 11.1. It is a corporation duly organized and validly existing under the laws of the State of Delaware with the full power to conduct its affairs as currently conducted and contemplated hereunder. All necessary action has been taken to enable it to execute and deliver this Agreement and perform its obligations hereunder. 11.2. This Agreement is a valid and binding obligation of Biomatrix enforceable in accordance with its terms. Biomatrix has the unencumbered right to enter into this Agreement and to fulfill its duties hereunder. It is not and will not become a party to any agreement in conflict herewith. Accordingly, Biomatrix has the right to appoint the Distributor as the exclusive distributor of the Agreement Product in the Territory in accordance * Confidential portions have been omitted and filed separately with the Commission. -26- 70 with the terms of this Agreement and such appointment will not constitute a breach of any existing contractual or other arrangements between Biomatrix and any Affiliated or non-Affiliated third party, nor shall it infringe the rights of any Affiliated or non-Affiliated third party. 11.3. No approval, consent, order, authorization or license by, giving notice to or taking any other action with respect to, any governmental or regulatory authority is required in connection with the execution and delivery of this Agreement by Biomatrix and the performance by Biomatrix of its obligations hereunder. 12. REPRESENTATIONS OF THE DISTRIBUTOR. The Distributor represents, warrants and covenants as follows: 12.1. It is a corporation duly organized and validly existing under the laws of Delaware with full power to conduct its affairs as currently conducted and contemplated hereunder. All necessary action has been taken to enable it to execute and deliver this Agreement and perform its obligations hereunder. 12.2. This Agreement is the Distributor's valid and binding obligation enforceable in accordance with its terms. The Distributor has the unencumbered right to enter into this Agreement and to fulfill its obligations hereunder. It is not and will not become a party to any agreement in conflict herewith. Accordingly, the Distributor has the right to act as the exclusive distributor of the Agreement Product in the Territory in accordance with the terms of this Agreement and the performance of its obligations hereunder will not constitute a breach of any existing contractual or other arrangements between the Distributor and any Affiliated or non-Affiliated third party, nor shall it infringe the rights of any Affiliated or non-Affiliated third party. 12.3. No approval, consent, order, authorization or license by, giving notice to or taking any other action with respect to any governmental or regulatory authority is required in connection with the execution and delivery of this Agreement by the Distributor and the performance by the Distributor of its obligations hereunder. 13. INSURANCE. Each party hereto shall (a) obtain and maintain such insurance policies as are adequate to cover its respective obligations hereunder and which are consistent with normal business practices of prudent companies similarly situated and (b) provide the other party, upon request, with certificates of insurance confirming the existence of such insurance policies. 14. INFRINGEMENT. Each of the Distributor and Biomatrix will promptly notify the other party in writing of any infringement of a Patent or -27- 71 Trademark or unauthorized disclosure or use of any Confidential Information, of which it becomes aware in the Territory. Biomatrix shall have the exclusive right at its own cost to take all legal action in the Territory it deems necessary or advisable to eliminate or minimize the consequences of such infringement of a Patent or Trademark in the Territory. For the purpose of taking any such legal action, Biomatrix shall have the right, subject to the Distributor's consent which consent shall not be unreasonably withheld or delayed, to use the name of the Distributor as plaintiff, either solely or jointly in accordance with the applicable rules of procedure; provided that Biomatrix shall give the Distributor prior notice of such use of the Distributor's name. The Distributor shall promptly furnish Biomatrix with whatever written authority may be required in order to enable Biomatrix to use the Distributor's name in connection with any such legal action, and shall otherwise cooperate fully and promptly with Biomatrix in connection with any such action. All proceeds realized upon any judgment or settlement regarding such action shall belong to Biomatrix. 15. REGULATORY ACTIVITIES; CLINICAL TRIALS AND MARKETING STUDIES. 15.1. General. (a) Biomatrix shall be responsible for maintaining at its cost the Product License Approvals required for the marketing and sale of the Agreement Product and any Improved Agreement Product(s) in the Territory throughout the term of this Agreement. (b) Biomatrix shall hold in its name all regulatory approvals required for the marketing and sale of the Agreement Product and any Improved Agreement Product(s) in the Territory. (c) The Distributor and Biomatrix shall provide reasonable advice and assistance to each other as may be necessary to obtain and maintain Product License Approvals. (d) During the term of this Agreement, each party shall immediately notify the other in writing in the event that such party becomes aware of any failure of the Agreement Product and any Improved Agreement Product(s) to comply with any of the requirements therefor specified in any Product License Approvals. (e) Each of the Distributor and Biomatrix shall keep the other advised of regulatory interactions, activities and correspondence relating to the Agreement Product and any Improved Agreement Product(s) on at least a quarterly basis, and any matters requiring immediate attention shall be communicated as soon as practicable. Notwithstanding the foregoing, within * , Biomatrix shall deliver * to the Distributor. 15.2. Marketing Studies. The parties agree that if any marketing-related studies are deemed necessary, such studies will not delay the Launch in the Territory. The protocols for any marketing-related studies -28- 72 requested by the Distributor will be developed jointly by Biomatrix and the Distributor, and the Distributor will be responsible for conducting and managing such studies at its own expense. Biomatrix shall have the right to audit the performance of any marketing-related studies performed by or on behalf of the Distributor. The results of such studies will not be published or publicized in any way without the prior written approval of Biomatrix. 16. FURTHER ASSURANCES. The parties hereto agree to execute such further or other documents and assurances as are necessary from time to time in order to give effect to the provisions of this Agreement. 17. ASSIGNMENT. The rights and obligations of the parties hereto shall inure to the benefit of and shall be binding upon the authorized successors and permitted assigns of each party. Neither party may assign its rights or obligations under this Agreement or may designate another person to perform all or part of its obligations under this Agreement, or to have all or part of its rights and benefits under this Agreement without the prior written consent of the other party, except to an Affiliate or to a successor of the business, by merger or otherwise, to which this Agreement relates, provided that in the case of an assignment to an Affiliate the assigning party shall promptly notify the other party in writing of such assignment and shall remain liable (both directly and as guarantor) with respect to all obligations so assigned. In the event of any assignment or in the event that an Affiliate of either party shall exercise rights and/or perform obligations hereunder pursuant to the terms of this Agreement, the assignee or Affiliate, as the case may be, shall specifically assume and be bound by the provisions of the Agreement by executing and agreeing to an assumption agreement satisfactory to the other party hereto. 18. GOVERNING LAW; ARBITRATION; INJUNCTIVE RELIEF. (a) This Agreement shall be governed by and construed in accordance with the internal and substantive laws of the State of New York, United States of America. The parties hereby agree that the United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement or any other document contemplated hereby. In the event of any dispute touching or concerning this Agreement, the parties hereby agree to submit such dispute to their respective presidents by notice delivered in accordance with the provisions of Section 23, and if within * , or such other period as is agreed upon in writing by the parties hereto, following such reference the dispute remains unresolved, to submit the dispute for arbitration in Boston, Massachusetts under the Rules of the American Arbitration Association in effect on the date of this Agreement (the "Rules") by arbitrators appointed in accordance with said Rules. Any decision of such arbitrators shall be written and shall be final and binding upon the parties. In any arbitration pursuant to this Section the award shall be rendered by a * Confidential portions have been omitted and filed separately with the Commission. -29- 73 majority of three (3) arbitrators, one (1) of whom shall be appointed by each party and the third of whom shall be appointed by mutual agreement of the two (2) party-appointed arbitrators. In the event of failure of a party to appoint an arbitrator within thirty (30) days after commencement of the arbitration proceeding or in the event of failure of the two (2) party-appointed arbitrators to agree upon the appointment of the third arbitrator within sixty (60) days after commencement of the arbitration proceeding, such arbitrator shall be appointed by the American Arbitration Association in accordance with the Rules. The arbitrators shall apply the governing law set forth in this Section. Judgment upon an award rendered by the arbitrators may be entered in any court having jurisdiction thereof. (b) Each of the parties hereto acknowledges and agrees that damages will not be an adequate remedy for any material breach or violation of this Agreement if such material breach or violation would cause immediate and irreparable harm (an "Irreparable Breach"). Accordingly, notwithstanding the provisions of Section 18(a) to the contrary, in the event of a threatened or ongoing Irreparable Breach, each party hereto shall be entitled to seek, in any state or federal court in the State of New York, equitable relief of a kind appropriate in light of the nature of the ongoing threatened Irreparable Breach, which relief may include, without limitation, specific performance or injunctive relief; provided, however, that if the party bringing such action is unsuccessful in obtaining the relief sought, the moving party shall pay the non-moving party's reasonable costs, including attorney's fees, incurred in connection with defending such action. Such remedies shall not be the parties' exclusive remedies, but shall be in addition to all other remedies provided in this Agreement. 19. SEVERABILITY. In the event that any provision of this Agreement shall be held by a court of competent jurisdiction or by any governmental body to be invalid or unenforceable, such provision shall be deemed severable and the remaining parts and provisions of this Agreement shall remain in full force and effect. 20. FORCE MAJEURE. Each of the parties shall be excused from the performance of its obligations hereunder in the event such performance is prevented by force majeure, and such excuse shall continue as long as the condition constituting such force majeure continues. For the purpose of this Agreement, force majeure is defined as contingencies beyond the reasonable control of either party, including, without limitation, acts of God, judicial or regulatory action, war, civil commotion, destruction of production facilities or materials by fire, earthquake or storm and labor disturbances (whether or not any such labor disturbance is within the power of the affected party to settle). * Confidential portions have been omitted and filed separately with the Commission. -30- 74 21. INTEREST. Any overdue amounts payable by either party hereunder shall bear interest compounded monthly at the prime lending rate for Dollars published from time to time in The Wall Street Journal plus * per annum, or, if lower, the highest rate permissible by applicable law, from the due date until the date of payment. 22. NO PARTNERSHIP OR AGENCY. This Agreement and the relations hereby established by and between Biomatrix and the Distributor do not constitute a partnership, joint venture, agency or contract of employment between them. 23. NOTICES. All communications in connection with this Agreement shall be in writing and sent by postage prepaid first class mail, courier, or telefax, and if relating to default, late payment or termination, by certified mail, return receipt requested, telefax or courier, addressed to each party at the address set forth at the beginning of this Agreement, in the case of Biomatrix, Attn: Chief Executive Officer, with a copy to: Justin P. Morreale, Esq., Bingham, Dana & Gould LLP, 150 Federal Street, Boston, Massachusetts 02110, U.S.A., and in the case of the Distributor, Attn: President, with a copy to Kimberlie L. Cerrone, Esq., Venture Law Group, 2800 Sand Hill Road, Menlo Park, California 94025, or to such other address as the addressee shall last have designated by notice to the communicating party. The date of giving any notice shall be the date of its actual receipt. 24. SURVIVAL. The provisions of Sections 3.3, 3.6, 3.7, 3.8, 6.2, 9.1, 9.2, 9.3, 9.4 and 9.5 of this Agreement shall survive the termination or expiration of this Agreement (as the case may be) and shall remain in full force and effect. The provisions of this Agreement that do not survive termination or expiration hereof (as the case may be) shall, nonetheless, be controlling on, and shall be used in construing and interpreting the rights and obligations of the parties hereto with regard to, any dispute, controversy or claim which may arise under, out of, or in connection with this Agreement. 25. MISCELLANEOUS. This Agreement sets forth the entire agreement between the parties with respect to the transactions and arrangements contemplated hereby and supersedes all prior oral or written arrangements. This Agreement may be modified or amended only by a written instrument executed and delivered by both parties. None of the provisions of this Agreement shall be deemed to have been waived by any act or acquiescence on the part of either party except by an instrument in writing signed and delivered by the party executing the waiver. This Agreement may be executed in several identical counterparts, each of which shall be an original, but all of which constitute one instrument, and in making proof of this Agreement it shall not be necessary to produce or account for more than one such counterpart. [The remainder of this page is intentionnaly left blank.] * Confidential portions have been omitted and filed separately with the Commission. -31- 75 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. COLLAGEN CORPORATION By: /s/ Howard D. Palefsky ---------------------------------------- Name: Howard D. Palefsky Title: Chairman and CEO BIOMATRIX, INC. By: /s/Endre A. Balazs ---------------------------------------- Name: Endre A. Balazs Title: CEO -32- 76 EXHIBITS Exhibit A - Agreement Product Specification and Approval Documents Exhibit B - Launch Schedule Exhibit C - Patents and Trademarks Exhibit D - Sales Forecasts -33- 77 EXHIBIT A Agreement Product Specification and Approval Documents TESTS PROCEDURES SPECIFICATIONS * * Confidential portions have been omitted and filed separately with the Commission. -34- 78 EXHIBIT B Launch Schedule Date of Launch United States * * Confidential portions have been omitted and filed separately with the Commission. -35- 79 EXHIBIT C Patents and Trademarks Patents * Trademarks * * Confidential portions have been omitted and filed separately with the Commission. -36- 80 EXHIBIT D Sales Forecasts(1) (Units) First Agreement Year (1) The parties acknowledge that in the event of the addition of other syringe sizes this forecast is subject to adjustment to incorporate such new sizes. EX-11.1 7 STATEMENT RE COMPUTATION OF PER SHARE INCOME 1 EXHIBIT 11.1 COLLAGEN CORPORATION Statement Regarding Weighted Average Common and Common Equivalent Shares Used in Computation of Per Share Income
Years Ended June 30, 1996 1995 1994 ===================================================================================== (In thousands, except per share amounts) Net income $26,652 $ 8,760 $ 4,920 ======= ======= ======= Primary Common Stock 8,915 9,270 9,592 Stock Options (treasury stock method) 160 190 304 ------- ------- ------- Weighted average number of common and common equivalent shares outstanding 9,075 9,460 9,896 ======= ======= ======= Earnings per share - primary $ 2.94 $ .93 $ .50 ======= ======= ======= Fully Diluted Common Stock 8,915 9,270 9,586 Stock Options (treasury stock method) 189 211 321 ------- ------- ------- Weighted average number of common and common equivalent shares outstanding 9,104 9,481 9,907 ======= ======= ======= Earnings per share - fully diluted NA* NA* NA* ======= ======= =======
- -------- * Not applicable - dilution less than 3%. * Not applicable - dilution less than 3%. EX-21.1 8 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 COLLAGEN CORPORATION Subsidiaries* of Collagen Corporation The Registrant owns the following percentages of the outstanding voting securities of the following corporations, which are included in the Registrant's consolidated financial statements (other than Target Therapeutics, Inc. which was accounted for under the cost method for the last seven months of fiscal 1996 and was accounted for under the equity method for the first five months of fiscal 1996, fiscal 1995 and fiscal 1994.)
Percent Ownership of Outstanding Voting Securities @ August 25, Jurisdiction of Name 1996 Incorporation - ---------------------------------------------------------------------------------------------------------------- Cohesion Corporation 81% California Target Therapeutics, Inc. 10% Delaware 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. 51% Spain Collagen, S.A. 100% Switzerland LipoMatrix, Incorporated 100% Switzerland Collagen (U.K) Ltd. 100% United Kingdom Collagen International Sales Corporation 100% Virgin Islands
- -------- * Excludes certain subsidiaries, which, considered in the aggregate as a single subsidiary, did not constitute a significant subsidiary as of June 30, 1996. EX-23.1 9 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 and 33-80038), pertaining to the 1984 Incentive Stock Option Plan, 1985 Employee Stock Purchase Plan, 1990 Directors' Stock Option Plan and 1994 Stock Option Plan of Collagen Corporation of our report dated August 2, 1996, with respect to the consolidated financial statements and schedule of Collagen Corporation included in this Annual Report (Form 10-K) for the year ended June 30, 1996. /s/ ERNST & YOUNG LLP Palo Alto, California September 25, 1996 EX-27.1 10 FINANCIAL DATA SCHEDULE
5 0000021686 COLLAGEN CORPORATION 12-MOS JUN-30-1996 JUL-01-1995 JUN-30-1996 21,676 0 9,883 375 9,563 55,934 38,969 23,822 163,007 28,360 0 0 0 106 102,895 163,007 68,730 70,730 19,312 19,312 69,010 0 296 64,455 37,985 26,652 0 0 0 26,652 2.94 2.94
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