United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A2
FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
Commission File Number: 0-7101
INAMED CORPORATION
State of Incorporation: Florida I.R.S. Employer Identification No.: 59-0920629
3800 Howard Hughes Parkway, Suite #900, Las Vegas, Nevada 89109
Telephone Number: (702) 791-3388
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No_____
The aggregate market value of voting stock held by non-affiliates
as of March 28, 1996 was $73,438,836.
On March 28, 1996 there were 7,602,317 shares of Common Stock outstanding.
This document contains 72 pages.
Exhibit index located on page 70.
PART I
ITEM 1. BUSINESS.
General Development of Business
INAMED Corporation ("INAMED") (formerly First American
Corporation) was incorporated under the laws of the state of
Florida on February 6, 1961. In 1985, First American Corporation
acquired all of the outstanding shares of McGhan Medical
Corporation ("MMC") in a stock-for-stock, reverse merger
transaction. The Company changed its name in 1986 from First
American Corporation to INAMED Corporation in order to better
reflect its involvement in the medical field. The name was
chosen to promote the recognition of the concepts "Innovation
and Medicine". MMC now operates as a wholly-owned subsidiary of
INAMED Corporation. MMC entered the medical device business on
August 3, 1984, through the acquisition of assets related to
Minnesota Mining and Manufacturing ("3M") Company's silicone
implant product line.
Specialty Silicone Fabricators, Inc. ("SSF") was a
wholly-owned subsidiary of McGhan Medical Corporation at the time
McGhan Medical was acquired by First American Corporation. As a
result of the acquisition, SSF became a wholly-owned subsidiary
of First American Corporation, and operated as such until it was
divested in August 1993.
Unless otherwise indicated by context, the term
"Company" as used herein refers to INAMED and its subsidiaries.
The purpose of this method of filing as one company is to reflect
consolidation for the sole purpose of reporting in the required
SEC method and is not intended for any other purpose. INAMED
Corporation is the subsidiaries' parent through stock ownership.
INAMED's subsidiaries operate as individual corporations
corresponding to their state corporate filings, and under their
own daily management, to assist INAMED in accomplishing its
corporate objectives.
Since 1985, the Company has incorporated or acquired
several companies, which it has structured as subsidiaries, in
order to strengthen its position as a leading medical products
company. INAMED Development Company ("IDC") was incorporated in
1986 as a wholly-owned subsidiary to pursue research and
development of new medical devices primarily using silicone-based
technology.
In May 1989, the Company acquired 100% of the
outstanding shares of Cox-Uphoff Corporation and subsidiaries
("CUC"), a competitor of MMC in the silicone implant market.
Upon the acquisition, the company name was changed to CUI
Corporation ("CUI") which now operates as a wholly-owned
subsidiary of the Company.
In October 1989, INAMED incorporated its McGhan Limited
subsidiary which has designed and equipped a new medical device
manufacturing plant in Arklow, County Wicklow, Ireland, to
supplement production of the Company's current and future
products. The location in Ireland was selected because it offers
many favorable conditions such as availability of labor at
reasonable rates, availability of attractive grants from the
Industrial Development Authority (IDA), geographic proximity to
INAMED B.V., favorable local tax treatment and membership in the
European Economic Community or EEC. The manufacturing plant in
Ireland was fully operational in 1993, and is capable of
supplying nearly all of the products sold in the international
market. Future new products will be produced by McGhan Limited
for sale internationally with limited support shipments from the
Company's U.S. manufacturing plants. In support of expected
future growing international demand the Company incorporated its
Chamfield Limited subsidiary in 1993 to manufacture raw materials
to be used in McGhan Limited's manufacturing process. Chamfield
Limited's manufacturing facilities, which are not yet fully
operational, are located adjacent to McGhan Limited's facilities.
In November 1989, INAMED incorporated its INAMED B.V.
subsidiary in Breda, the Netherlands, to warehouse and distribute
the Company's products to the European Community, Asia and other
international locations. INAMED B.V. also markets products on a
direct sales basis throughout the Netherlands. In conjunction
with, and to further accomplish its long-range plans, the Company
incorporated INAMED GmbH in Germany and INAMED B.V.B.A. in
Belgium as subsidiaries in December 1989, thereby establishing a
base from which to initiate direct sales of its products in two
additional countries.
In 1991, INAMED concentrated on continued expansion
into the European and international market, increasing production
in its Irish manufacturing facility, continued efficiency and
quality evaluation of its other manufacturing facilities and
continued sales growth. The Company expanded its marketing base
in Europe by incorporating INAMED S.R.L. as a direct marketing
and distribution center for the Company's products in Italy in
May 1991.
In 1991, the Company also incorporated its BioEnterics
Corporation subsidiary in Carpinteria, California. BioEnterics
was incorporated in order to focus on the development, production
and international distribution of high-quality, proprietary
implantable devices and associated instrumentation to the
bariatric and general surgery markets for the treatment of
gastrointestinal disorders and serious obesity.
In 1992, the Company incorporated its Biodermis
Corporation subsidiary in Las Vegas, Nevada, in order to focus on
the development, production and international distribution of
premium products for dermatology, wound care and burn treatment.
In 1992, the Company also incorporated its Medisyn
Technologies Corporation subsidiary to focus on the development
and promotion of the merits of the use of silicone chemistry in
the fields of medical devices, pharmaceuticals and biotechnology.
This subsidiary is located in Las Vegas, Nevada.
The Company also continued development of its
international market base in 1992 by incorporating INAMED Ltd. to
market and distribute the Company's products in the United
Kingdom.
In 1993, the Company incorporated Bioplexus Corporation
in Las Vegas, Nevada, a wholly-owned subsidiary which is a
research and development company that develops, produces and
distributes specialty medical products for use by the General
Surgery Profession.
The Company also incorporated Flowmatrix Corporation in
Las Vegas, Nevada as a wholly-owned subsidiary in 1993.
Flowmatrix manufactures high-quality silicone components and
devices for INAMED's wholly-owned subsidiaries, and produces and
distributes a line of proprietary silicone surgical products
internationally.
The Company continued to expand its international
marketing base in 1993 by incorporating INAMED S.A.R.L. in Paris,
France. The new subsidiary operates as a wholly-owned subsidiary
of INAMED B.V.
In 1993, the Company sold its Specialty Silicone
Fabricators ("SSF") subsidiary and SSF's Innovative Surgical
Products subsidiary to Innovative Specialty Silicone Acquisition
Corporation (ISSAC), a private investment group which included
certain members of Specialty Silicone Fabricators' management.
The transaction was valued at approximately $10.8 million,
including $2.7 million in cash, $5.9 million in structured short-
term and long-term notes, and the retirement of $2.2 million in
intercompany notes due to SSF by the Company's subsidiaries.
Effective January 1994, the Company acquired the assets
of Novamedic, S.A. in Barcelona, Spain. Novamedic, S.A. was a
well-established distributor of medical products in Spain which
further strengthens the Company's presence in the international
market. The new subsidiary was renamed INAMED, S.A. and operates
as a wholly-owned subsidiary of the Company.
The Company has identified Spain, Portugal, South
America, Central America, and Mexico as the LatinoAmerican area.
The incorporation of INAMED do Brazil in 1995 has strengthened
the Company's presence in this area. INAMED do Brazil operates
as a wholly-owned subsidiary of INAMED, S.A.
The Company incorporated its INAMED Japan subsidiary in
Las Vegas, Nevada in 1995. INAMED Japan subsequently acquired
95% of INAMED Medical Group, a Japanese corporation.
Additionally, the Company's McGhan Medical Corporation subsidiary
incorporated its McGhan Medical Asia Pacific subsidiary in 1995.
The formation of INAMED Japan and McGhan Medical Asia Pacific has
enabled the Company to continue its expansion into the Asia-
Pacific Rim market.
Principal Products and Markets
The Company is engaged in the development, manufacture
and marketing of a number of implantable products, including
mammary prostheses, tissue expanders and facial implants for
plastic and reconstructive surgeons as well as custom prostheses
for a variety of surgical applications and procedures.
Mammary prostheses are used for breast reconstruction
and augmentation. As part of its mammary prosthesis product
line, the Company produces different models, shapes and sizes of
mammary implants including but not limited to double-lumen,
saline and gel-filled mammary implants. In addition, the Company
manufactures the Biocell implant which incorporates the Company's
patented low-bleed technology with its textured surface
technology. The resulting implant has an open-cell silicone
surface bio-engineered for a more favorable implant-to-tissue
interface. The Biocell product line has received notably
favorable market acceptance.
The Company is one of the leading world-wide
manufacturers of saline-filled mammary prostheses. Saline
implants are manufactured at two different subsidiaries: McGhan
Medical Corporation and McGhan Limited. These products are made
in various shapes and sizes, and utilize various valve designs.
The surface construction of the finished implants provide the
surgeon the opportunity to select from a smooth silicone, the
BioCell textured surface or the patented MicroCell textured
surface.
The Company has developed and currently manufactures
and markets a line of implantable and intraoperative tissue
expanders. A typical tissue expander may consist of two unequal-
size chambers which are implanted at a site where new tissue can
be generated. After the device is implanted fluid can be
injected into the smaller receiving chamber, or injection port,
which then flows into the larger expanding chamber thus causing
increased pressure under the skin resulting in tissue growth over
a reduced period of time. The expanded tissue can then be used
to cover defects, burns and injury sites or prepare a healthy
site for an implant with the extra tissue available without the
trauma of skin grafting. The Company has further developed its
tissue expander product line by incorporating a patented integral
valve injection area that is located by a magnetic detection
system to enable the doctor to determine location of the
injection port.
The Company manufactures and markets its patented
BioSpan tissue expander product line that utilizes the BioCell
textured surface which allows more precise surgical placement.
The BioSpan tissue expander surface subsequently decreases
capsular contracture and yields greater tissue laxity during
expansion.
The Company produces the BioDimensional system for
breast reconstruction following radical mastectomy procedures.
The BioSpan tissue expanders and BioCell mammary implants used
for this system were designed using a computer-assisted modeling
study to determine the ideal dimensions and also utilized
computer imaging programs to evaluate the expected aesthetic
results. The BioDimensional system matches the specific size
tissue expander to the mammary implant that will be used for the
breast reconstruction procedure.
The Company also manufactures and markets the Ruiz-
Cohen intraoperative expander. The Ruiz-Cohen intraoperative
expander utilizes rapid intraoperative expansion as an effective
means of arterial elongation to provide the additional tissue
needed for end-to-end anastomosis. By eliminating the need for
arterial grafting, patient discomfort is greatly reduced and the
time and associated costs required to complete arterial
anastomosis are minimized. The Company has license agreements
and patents covering this product line, as well as patents
pending for the next generation of the product. Additionally,
the Company has patents and patent applications in eight
countries outside of the United States for the product.
The Company's group of products allows the plastic or
reconstructive surgeon a range of options. If requested, the
Company works with a surgeon to design, to the surgeon's
specifications, a custom implant suited to individual patients'
needs.
The Company manufactures silicone gel sheeting intended
for use in the treatment and control of old and new hypertrophic
or keloid scarring. The products are sold under the tradenames
TopiGel, Epi-Derm, and Derma-Sof.
During 1994 and 1995, the Company's proprietary products accounted
for 100% of net sales. Comparatively, in 1993, silicone implant
products and silicone components accounted for 90% and 10% of net
sales, respectively. The percentage of sales represented by
proprietary products has increased due to the sale of Specialty
Silicone Fabricators in August 1993.
Marketing
In the United States, the Company's implant products
are sold to plastic and reconstructive surgeons, facial and oral
surgeons, outpatient surgery centers and hospitals through the
Company's own staff of direct sales people and independent
distributors. In Canada and Hawaii, the Company is represented
by independent distributors. The Company reinforces its sales
and marketing program through the use of telemarketing which
produces sales by providing follow-up procedures on leads and
distributing product information to potential customers. The
Company also supplements its marketing efforts through its
subsidiaries' appearances at trade shows and advertisements in
trade journals and sales brochures.
The Company has a direct sales and distribution network
in the Netherlands, Belgium, Germany, Italy, France, Spain, the
United Kingdom, Brazil, Japan, and China. The Company's
Netherlands subsidiary markets to and supports independent
distributors in Denmark, Finland, Iceland, Norway, Sweden, and
Switzerland. The Company also sells its products to independent
distributors in Argentina, Australia, India, Korea, New Zealand
and Taiwan. Sales outside the United States and Canada are made
directly to these and other independent distributors and sales
organizations through the Netherlands subsidiary's inventory of
the Company's products. The Company believes its direct sales
efforts and increased support of its international independent
distributors has greatly enhanced overall sales which will
continue throughout calendar 1996.
The Company maintains inventories of finished implant
products in the United States and in the Netherlands to support
and facilitate direct and immediate delivery on a normal basis.
However, a back-order situation may occur from time to time due
to a product's unusually high demand or unusual circumstances
such as regulatory restrictions or new product release. As a
direct result of the regulatory activity by the Food and Drug
Administration ("FDA") in 1991 and 1992, the Company reduced its
inventory levels and wrote off certain inventories impacted by
FDA actions. To comply with FDA regulations, the Company
voluntarily recalled all silicone gel-filled mammary implants
which had previously been sold to its customers but not used. In
1992 the Company wrote off approximately $2.0 million of certain
inventories and intangible assets related to the products covered
by the FDA's request relating to the return of gel-filled
implants and regulations. All the Company's silicone implant
products manufactured or sold in the United States are classified
as medical devices subject to regulation by the FDA, as more
fully described under "Government Regulations."
Competition
The Company's sole significant competitor in the production
and sale of mammary prostheses in the domestic market is Mentor
Corporation. Three other competitors discontinued production of
mammary prostheses in 1992 largely as a result of regulatory
action by the FDA. The Company believes that the principal
factors permitting its products to compete effectively are its
high-quality product consistency, variety of product designs,
management's knowledge of and sensitivity to market demands, and
the Company's ability to identify, develop and/or obtain license
agreements for patented products embodying new technology. In
compliance with certain FDA regulations, the Company is allowed
to sell one type of silicone gel-filled mammary prosthesis to a
limited number of customers in the United States under stringent
guidelines.
Internationally, the Company competes with several
other manufacturers in the production and sale of its mammary
prostheses. Major competitors in Europe include Mentor
Corporation, Silimed, Laboratories Sebbin, L.P.I., Nagor, and
LipoMatrix. However, the Company believes that its extensive
network of marketing and distribution centers throughout Europe
create the strongest presentation of its products in the
international market, as well as the most favorable acceptance by
physicians.
The tissue expander products' competition comes
generally from the same corporations as in the manufacture and
sale of mammary prostheses. Management believes the Company's
implant market position will continue to grow due to its superior
design, strong product features and future additions to its
product lines.
Through August 1993, the Company competed in a highly
diverse field in the sale of silicone components for the health
care industry. These competitors included Dow Corning
Corporation, Furon, Inc., Mox-Med, Inc., SF Medical, Surgical
Technologies, Inc. and Helix Medical. The Company's products,
although not proprietary, received good customer acceptance
through the development of process technology, such as injection
molding of liquid silicone, and the ability to achieve close
tolerances. The Company no longer competes in this market since
the sale of its Specialty Silicone Fabricators subsidiary in
August 1993.
Research and Product Development
A qualified staff of doctorates, scientists, engineers
and technicians, working in material technology and product
design configurations, presently guide the Company's research and
development efforts. The Company is directing its research
toward new and improved products based on scientific advances in
technology and medical knowledge together with qualified input
from the surgical profession. The Company has incurred
approximately $4,392,000, $3,724,000 and $3,074,000 of research
and development expense in the years ended December 31, 1995,
1994 and 1993 respectively.
The Company has introduced the LAP-BANDr Adjustable
Gastric Banding (LAGBr) System to the international market as an
improvement to the earlier adjustable banding design. The LAGB
System is in clinical trials in the United States. The LAGB
System is designed to permit a laparoscopic procedure for severe
obesity. During the operation, which is usually done without any
large incision but under general anesthesia, the adjustable
gastric band is placed around the stomach to constrict the
stomach, forming a stoma between the stomach and a small stomach
pouch above the band. The system utilizes special pouch and
stoma measuring equipment, including an electronic device, and a
special laparoscopic band placement instrument. Unlike "stomach
stapling" or "stomach bypass" procedures, no cutting or stapling
of the stomach is required and, usually, no major incision. The
band is designed to be adjustable postoperatively without
additional surgery. The LAGB System is currently being used for
the long-term treatment of severe obesity throughout Europe, as
well as in Australia, Latin America and the Middle East. The
Company holds a license for the patent and patent pending
applications.
The Company also holds a license for the patent and
patent pending applications for EndoLuminar Illuminated Bougies,
devices designed to transilluminate the esophagus and other
organs of the body for improved visualization during a variety of
laparoscopic and other surgical procedures. These products are
on the market internationally and in the United States. The
Company is currently conducting research into special materials
and manufacturing techniques for providing increased
transillumination and miniaturization for new indications.
The Company holds a license for the U.S. and
international patents for a new device for the treatment of
severe gastroesophageal reflux. This device, with a cuff-like
design and a self-locking mechanism, is designed to improve the
safety and reliability of the laparoscopic treatment of
gastroesophageal reflux. It is anticipated that clinical use of
this device will start during 1996.
The Company's BioEntericsr Intragastric Balloon (BIBr)
is being marketed on a limited basis in Europe for preoperative
weight loss in severely obese patients, and as an aid to weight
reduction in moderately obese patients. The balloon is
endoscopically (non-surgically) placed in the patient's stomach
and inflated with saline. The balloon partially fills the
stomach, inducing weight loss. Severely obese patients have a
higher incidence of surgical and perioperative complications, and
weight loss also facilitates laparoscopic procedures in these
patients.
The Company is also continuing efforts to add to its
existing lines of breast prostheses.
The Company depends on the efforts and accomplishments
of the dedicated staff in its Research and Development groups,
and will continue to support its current and future R & D
projects and activities.
Patents and License Agreements
It is the Company's policy to actively seek patent
protection for its products and/or processes when appropriate.
The Company developed and currently owns patents and trademarks
for both the product and processes used to manufacture low-bleed
mammary prostheses and for the resulting barrier coat mammary
prostheses. Intrashiel is the Company's registered trademark for
the products using this technology. Beginning in 1984, such
patents were granted in the United States, Australia, Canada,
France, the Netherlands, the United Kingdom and West Germany.
Trademarks for this product have been granted in the United
States and France. The Company has license agreements allowing
other companies to manufacture products using the Company's
select technology, such as the Company's patented Intrashiel
process, in exchange for royalty and other agreed to compensation
or benefits.
The Company's other patents include patents relating to
its mammary prostheses, tissue expanders, textured surfaces,
injection ports, and valve systems. The Company also has various
patent assignments or license agreements which grant the Company
the right to manufacture and market certain products.
The Company believes its patents are valuable; however,
it has been the Company's experience that the knowledge,
experience and creativity of its product development and
marketing staffs, and trade secret information with respect to
manufacturing processes, materials and product design, have been
equally important in maintaining proprietary product lines.
Staying at the forefront of rapidly advancing medical technology
by being responsive to the needs and concerns of health care
professionals and their patients is the key to the Company's
plans for future business expansion and financial success. As a
condition of employment, the Company requires each of its
employees to execute an agreement relating to confidential
information and patent rights.
Manufacturing and Product Dependability
The Company manufactures its silicone devices under
controlled conditions. The majority of the manufacturing process
is accomplished manually, in conjunction with specialized
equipment for precision measurement, quality control, packaging
and sterilization. Quality control procedures begin with the
Company's suppliers meeting the Company's standards of
compliance. The Company's in-house quality control procedures
begin upon the receipt of raw components and materials and
continue throughout production and final packaging. The Company
maintains quality control and production records of each product
manufactured and encourages the return of any explanted units for
analysis by its personnel. A majority of the Company's silicone
products are supplied to the customer in a sterile condition
requiring quarantine for appropriate periods of time to permit
confirmation of sterility. All of the Company's activities are
subject to FDA regulations and guidelines, and the Company's
products and manufacturing procedures are continually monitored
and/or reviewed by the Food and Drug Administration.
In the Company's continued efforts to develop state-of-
the-art processes that are environmentally responsible, a dry-
heat sterilization process has been developed and is in place in
the Company's manufacturing plants in the United States at McGhan
Medical Corporation and in Ireland at McGhan Limited.
Development of this dry heat packaging and sterilization cycle
was the result of over three years of equipment design,
identification and testing of materials and products, and process
development, replacing a sterilization process that used ethylene
oxide (EtO), as the standard.
The Company had more than one source of supply for all
silicone materials used in the manufacture of its products until
Dow Corning Corporation ("DCC"), a major supplier of medical
grade silicone materials, announced it would discontinue the sale
of implant grade silicone materials as of March 31, 1993. A
majority of the silicone raw materials utilized by the Company
have been purchased from a supplier other than DCC. The Company
has studied the impact of the discontinuation of the supply of
certain raw materials on the Company's ongoing business, and has
established reliable alternate sources of high-quality critical
silicone materials. The Company has experienced increased costs
for its silicone materials, however, the cost increase is not
significant to the overall cost of the finished products.
Limited Warranties
The Company provides a limited warranty to the effect
that it will replace without charge any product that proves
defective with a new product of comparable type.
McGhan Medical Corporation's Product Service Program
(PSP) is designed to provide limited financial assistance to
cover non-reimbursed operating room or surgical expenses due to a
loss of shell integrity for inflatable mammary implants for a
period of five years from the date of implantation; in addition,
a no-charge replacement of the same or similar product is
provided for returned McGhan Medical mammary implant products
covered within the program. The Company reserves the right to
make changes to its warranty policy from time to time within the
confines of its warranty documents.
Government Regulations
All the Company's silicone implant products manufactured or sold
in the United States are classified as medical devices subject to
regulation by the FDA. FDA regulations classify medical devices into
three classes that determine the degree of regulatory control to which
the manufacturer of the device is subject. In general, Class I devices
involve compliance with labeling and record-keeping requirements and are
subject to other general controls. Class II devices are subject to
performance standards in addition to general controls. A notification
must be submitted to the FDA prior to the commercial sale of some
Class I and all Class II products. Class II products are subject to
fewer restrictions than Class III products on their commercial distribution,
such as compliance with general controls and performance standards
relating to one or more aspects of the design, manufacturing, testing
and performance or other characteristics of the product. Tissue expanders
are currently proposed to be classified as Class II devices. The
Company's mammary prostheses, silicone intragastric balloon and
gastric band system are Class III devices. Class III devices require
the FDA's Pre-Market Approval (PMA) or an FDA Investigational Device
Exemption (IDE) before commercial marketing to assure the products'
safety and effectiveness.
On April 10, 1991, the FDA issued a final ruling
requiring all manufacturers of silicone gel filled mammary
prostheses to file a PMA application for their version(s) of the
product(s) within 90 days after the effective date of the
regulation or cease sale and/or distribution of their product(s).
The ruling reflects the FDA's discretion to require PMA's for any
device which predates the 1976 Medical Device Act. This ruling
is also in line with the FDA's stated priorities and Congress'
requirement that all Class III devices be submitted to PMA
review. In anticipation of this ruling, the Company had, for
some time, been gathering the required data, including the
results of laboratory, animal and clinical investigation and
testing. In July 1991 the Company submitted an application to
the FDA in response to the ruling. In November 1991 an FDA
advisory panel voted unanimously to recommend that the Company's
silicone gel-filled breast implants remain on the market while
more safety data was gathered and evaluated by the agency. While
the advisory panel concluded that the original PMA submitted by
the Company's McGhan Medical subsidiary had failed to provide
sufficient data concerning the safety of the implants, the FDA
staff had not provided the panel members with updated and
additional test results that had been submitted to the PMA
application in late September 1991.
In January 1992, FDA Commissioner, David Kessler,
requested that all United States silicone breast implant
manufacturers stop manufacturing and marketing their silicone gel-
filled implants as a voluntary action and that surgeons refrain
from implanting the devices in patients pending further review of
information relating to the safety of the products. The FDA
advisory panel reconvened in February 1992 and, after review of
the new information, recommended that the gel-filled mammary
implants remain available for all patients wishing reconstruction
following mastectomies and/or to correct severe deformities, and,
under strictly controlled clinical studies, be available on a
limited basis to patients wishing augmentation. On April 16,
1992, the FDA announced that silicone gel-filled breast implants
would be available only under controlled clinical studies. Under
an Urgent Need protocol, the products would be available
immediately to patients requiring completion of reconstructive
surgery which was begun prior to the January 1992 moratorium.
All patients are required to sign detailed informed consent forms
prior to surgery under the Urgent Need program. Under an Adjunct
Study Program developed by the FDA, gel-filled implants would
also be available to women desiring them for reconstruction,
including the correction of severe deformities. As of December
31, 1994, the Company has not been a participant in the Adjunct
Study.
In the ongoing process of compliance with the Medical
Device Act, the Company has incurred, and will continue to incur,
substantial costs which relate to laboratory and clinical testing
of new products, data preparation and filing of documents in the
proper outline or format as required by the FDA under the Medical
Device Act.
Further, the FDA has published a schedule which permits
the data required for PMA applications for saline filled implants
to be submitted in phases, beginning with preclinical data that
was due in 1995, and ending with final submission of prospective
clinical data in 1998. The company has received from the FDA an
understanding that the agency will not call for final PMA
applications to be submitted prior to September, 1998. The date
for submission of PMA applications may be further extended by the
FDA. Notwithstanding any such extension, the Company intends to
submit its PMA application for saline filled implants in a timely
fashion and is collecting data which will be necessary for this
application. However, neither the timing of such PMA application
nor its acceptance by the FDA can be assured, irrespective of the
time and money that the Company has expended. Should the
Company's PMA application for saline filled implants not be filed
timely or be denied, it would have a material adverse effect on
the Company's operations and financial position. The Company
will decide on a product by product and subsidiary by subsidiary
basis whether to respond to any future calls for PMA's and
regulatory requirements, requested response or Company action.
The cost of any PMA filings is unknown until the call for a PMA
occurs and the Company has had an opportunity to review the
filing requirements.
There can be no assurance that other products under
development by the Company will be classified as Class I or Class
II products or that additional regulations restricting the sale
of its present or proposed products will not be promulgated by
the FDA. The Company is not aware of any changes to be put in
place by the FDA that would be so restrictive as to remove the
Company from the market place. However, the FDA has
significantly restricted the Company's right to manufacture and
sell gel-filled breast implants in the United States. As a
result, the Company's sales of saline-filled breast implant
products have increased significantly, and are expected to
continue to be the Company's main product line for 1996.
As a manufacturer of medical devices, the Company's
manufacturing processes and facilities are subject to continuing
review by the FDA, responsible state or local agencies such as
the California State Department of Health Services and other
regulatory agencies to insure compliance with good manufacturing
practices and public safety compliance. The Company's
manufacturing plants are also subject to regulation by the local
Air Pollution Control District and by the Environmental
Protection Agency as a user of certain solvents.
Due to the ongoing requirements, FDA reviews, and
changing policies and inspection procedures, the Company, from
time to time, receives inspections from the FDA. Early in 1993,
Dow-Corning, the leading supplier of medical grade silicone
material, announced that it would no longer be supplying medical
grade silicone to medical device manufacturers. On July 6, 1993,
the FDA announced, through the Federal Register, a notice
identifying plans for handling products that did use Dow-Corning
silicone. The notice provided guidance regarding tests required
to demonstrate the equivalence of silicone material from an
alternate supplier and the overall policy relating to regulatory
submissions. As McGhan Medical had certain devices and/or
components produced from Dow-Corning silicone materials, it was
necessary to plan for this material changeover. Since some of
the materials directly or indirectly affected the gel-filled
mammary implant product line, the availability of the materials
hampered the Company's efforts in further validation testing for
its manufacturing processes involving gel-filled mammary
implants. On March 1, 1994, the FDA inspected McGhan Medical to
review its validation processes for the manufacturing of gel-
filled mammary implants. These mammary implants are currently
not marketed because of the FDA moratorium on gel-filled mammary
implants which limited their use for reconstruction and
restricted their use for augmentation. McGhan was limited to
marketing its style 153 gel mammary implant for reconstruction
use only under an Urgent Need basis. No other gel-filled
products have been manufactured by McGhan over the last three
years. The inspection conducted by the FDA was to evaluate
whether McGhan's manufacturing processes were sufficiently
validated to authorize the further manufacturing of both the 153
and other styles of gel-filled mammary implants. At the
conclusion of the inspection, the FDA issued an FD483, list of
observations, which specifically dealt with the inadequacies of
the validation for the shell dipping operations. McGhan responded
to the FD483 by March 11, 1994. Subsequently, the FDA conducted
a follow-up inspection and concluded that McGhan had not
satisfactorily addressed the inadequacies noted in the FD483. As
a result, the FDA issued McGhan a warning letter. McGhan has
responded to the warning letter, is addressing the completion of
the FD483 responses, and expects to achieve compliance. McGhan
continues to market its saline-filled mammary implants and
expects to be inspected by the FDA again specific to saline
manufacturing at the FDA's discretion.
Geographic Segment Data
A description of the Company's net sales, operating
income (loss) and identifiable assets within the following
segments: United States, Europe, Asia Pacific and LatinoAmerica,
is detailed in footnote 12 of the Company's financial statements.
The European classification includes the Netherlands, Belgium,
United Kingdom, Italy, France and Germany. The Asian-Pacific
classification includes Hong Kong, China, Japan, Taiwan,
Singapore, Thailand, The Philippines, Korea, Indonesia, India
Pakistan, New Zealand and Australia. The LatinoAmerican
classification includes Central America, South America, Spain,
and Portugal.
Employees
As of March 31, 1996, the Company employed 833 persons:
11 persons were employees of INAMED Corp., 583 persons were
employed by various operating subsidiaries within the United
States; and 239 persons were employed by the Company in the
Europe, Asia-Pacific, and LatinoAmerica regions performing
production operations, marketing and sales functions.
Except for the manufacturing operation in Ireland, the
employees are not represented by a labor union. The Company
offers its employees competitive benefits and wages comparable
with like employee status for the type of business and the
location/country in which the employment occurs. The Company
considers its employee relations to be good throughout its
operations.
ITEM 2. PROPERTIES.
The Company leases a total of 18,681 square feet of
office and warehouse space in three locations in Las Vegas,
Nevada. The Company's corporate headquarters comprise 4,449
square feet of office space located in a multi-story office
building for a current rental rate of $13,289 per month. The
lease on this space expires July 1, 1998. The Company leases
6,895 square feet of office space in a building adjacent to the
corporate headquarters which it subleases to Medisyn Technologies
Corporation. The current monthly lease rate is $12,066 with the
lease expiring in May 1996. This lease is currently being
renegotiated. The Company leases 7,337 square feet of office
and warehouse space in an industrial complex adjacent to the Las
Vegas Airport. This space is subleased to Flowmatrix
Corporation. The current rental rate is $2,861 with the lease
expiring in August 1996. This lease is currently being
renegotiated.
The Company also leases office and industrial space
which is comprised of three buildings with an aggregate of 33,939
square feet in Carpinteria, California. BioEnterics Corporation
subleases one building totaling 4,900 square feet. INAMED
Development Company occupies 6,900 square feet in the second
building, with the remaining 4,900 being used for storage. The
Company has exercised the option to extend the lease term to May
1996. The current rental rate is $14,657 per month (with cost of
living escalation in June of every year). The third building,
which has 17,239 square feet, is subleased to CUI Corporation.
The current rental rate is $12,857 per month with the lease
expiring in February 1996, and continuing month to month
thereafter.
McGhan Medical Corporation leases manufacturing
facilities in Santa Barbara, California, aggregating 44,800
square feet for $39,947 per month, with cost of living
escalations in July of every year. The lease for these buildings
expires in 1996, with four one-year options to extend. McGhan
Medical Corporation also leases 27,992 square feet of office
space in an adjacent building. The lease term expires in July
1996 with a seven year option to extend. The rent is $32,354 per
month, with cost of living escalations in January of every year.
Additionally, McGhan Medical Corporation leases a total of 27,123
square feet of adjacent office and warehouse space with monthly
rentals aggregating $18,206 and lease terms expiring through
February 1997. In June 1994, McGhan Medical Corporation entered
into a lease for a manufacturing facility aggregating 57,897
square feet with a monthly rental rate of $59,024 (with cost of
living escalation in June of every year) expiring in July 2006.
In March 1995, McGhan Medical Corporation entered into a lease
for office space of 23,697 square feet with a monthly rental
rate of $16,114 expiring in April 2000.
McGhan Limited's and Chamfield Limited's manufacturing
facilities are located in Arklow, County Wicklow, Ireland.
McGhan Limited leases a 28,000 square foot building from the
Ireland IDA at a current annual rate of 84,996 Irish Punts for a
term ending in 2017. Chamfield Limited leases a 23,000 square
foot building at a current annual rental rate of 74,352 Irish
Punts for a term ending in 2029.
INAMED B.V. in the Netherlands leases 1,407 square
meters of office and warehouse space at a quarterly rate of
84,118 Guilders, with cost of living escalation in May of each
year, for a lease term ending in April 2000.
INAMED B.V.B.A. leases 220 square meters of office and
warehouse space in Turnhout, Belgium at a rate of 28,346 Belgian
Francs per month (with a cost of living escalation in September
of each year) with a lease term expiring in November 1998.
INAMED GmbH currently rented 210 square meters of
office and warehouse space at a rate of 7,173 German Marks per
month on a three year lease expiring in January 1996. Starting
December 1995 INAMED GmBH is renting 286 square meters of office
and warehouse space in Dusseldorf, Germany at a rate of 7,150
German Marks per month on a five year lease expiring in December
2000. The lease provides for an automatic yearly extension
thereafter unless the contract is terminated 9 months before
renewal date of the lease.
INAMED S.R.L. leases 460 square meters of office and
warehouse space in Verona, Italy for 4,460,000 Italian Lira per
month with a lease term expiring in August 2000. INAMED S.R.L.
also leases 60 square meters of office space in Rome, Italy for
1,600,000 Italian Lira per month with a lease expiration of
August 2000.
INAMED Ltd. rents 1,550 square feet of office and
warehouse space in Wokingham, United Kingdom under a five year
lease expiring in July 1997. Under the terms of the lease,
payments are made on a quarterly basis. The current rate is
<pound-sterling>5,426 per quarter.
INAMED SARL rents 243 square meters of office and
warehouse space in Paris, France for an annual rent of 345,825
Francs. The lease term is nine years with expiration in December
2004. The first eight months of rent were free, therefore the
first rent was due in August of 1996. Rent is paid in quarterly
installments in advance.
INAMED, S.A. rents 950 square meters of office and
warehouse space in Barcelona, Spain at a monthly rate of 864,438
Pesetas under a lease expiring in February 1998.
INAMED do Brasil rents 345 square meters of office and
warehouse space in Sao Paulo, Brazil at a monthly rate of $2,000
under a lease expiring in May 1998.
McGhan Medical Asia Pacific rents 389 square feet of
office space in Hong Kong at a monthly rate of $7,124 under a
lease expiring in September 1996. The Company intends to
renegotiate this lease prior to its expiration.
INAMED Medical Group (Japan) rents 155 square meters of
office space in Tokyo, Japan at a monthly rate of $3,000 under a
lease which is automatically renewed upon expiration.
The Company believes its facilities and the facilities
of its subsidiaries are generally suitable and adequate to
accommodate its current operations, and suitable facilities are
readily available to accommodate future expansion as necessary.
ITEM 3. LEGAL PROCEEDINGS.
In 1987 the Company acquired two health insurance
subsidiaries. In 1988 the Company sold both subsidiaries. In
1991, the Company was sued for third party resolution in the
amount of $500,000, related to the acquiring company's inability
or failure to meet asset deposit requirements of the Illinois
Director of Insurance. The Company reached settlement with the
Illinois Department of Insurance in February 1993, whereby the
Company paid the third party demand of $500,000 for full release.
In October, 1990, the Company's CUI Corporation
subsidiary brought action against Mr. Robert Uphoff, a former
employee, for violation of a contractual non-compete agreement
entered into with the Company. A settlement was reached in August
of 1992 whereby the Company repurchased common stock acquired by
the former employee in exchange for the resolution of all issues
and legal proceedings and the elimination of any future Company
obligation to the former employee as to the non-compete
agreement. The Company made final payment for the stock under
this settlement in 1994.
During 1992 an action against the Company and two of
its subsidiaries and Donald K. McGhan was filed in California
Superior Court for the County of Santa Barbara (State Court).
The Company, through one of its subsidiaries, filed a lawsuit
against the plaintiff in the United States District Court for the
Central District of California (Federal Court). The State Court
action was filed as a contract dispute over an Exclusive License
Agreement and the Federal Court action was filed over the same
Exclusive License Agreement, but with different issues as subject
matter. The State action was settled in April 1993 and
discharged as an action with the Plaintiff Agreement remaining in
force as written, and the Company's subsidiaries agreed to and
complied with the terms as written in the Agreement. No changes
were made with the outcome that both of the Company's
subsidiaries will comply with the terms of the Agreement, as
written, for the subsidiaries' products over the life of the
patent. The Federal action was terminated by mutual agreement in
1994.
In July, 1992, the County of Santa Barbara, California,
filed a complaint against the Company's McGhan Medical
Corporation subsidiary alleging that MMC supplied false and
inaccurate information regarding xylene emissions to the Air
Pollution Control District and had engaged in a pattern of unfair
business practices by failing to control its emissions. In March
1993, MMC reached a settlement with the County of Santa Barbara
Air Pollution Control District. The parties agreed to a
settlement to avoid prolonged litigation surrounding alleged
emission violations. By entering the agreement, the Company made
no admission of wrongdoing but assented to a one time payment of
$100,000 and installation of emissions control equipment at MMC's
facility. MMC's decision to settle allowed it to allocate the
Company's manpower and funds to the installation of the control
equipment rather than expending these resources on successful
defense against the complaint.
Product Liability
The Company and/or its subsidiaries are defendants in
numerous state and federal court actions and a Federal class
action in the United States District Court, Northern District of
Alabama, Southern Division, under The Honorable Sam C. Pointer,
Jr., Chief Judge U.S. District Court, identified as Breast
Implant Products Liability Litigation, Multiple District
Litigation No. 926, Master File No. CV 92-P-10000-S ("MDL 926").
One of the federal cases, Lindsey, et al., v. Dow Corning Corp.,
et al., Civil Action No. CV 94-11558-S was conditionally
certified as a class action for purposes of settlements ("MDL
Settlement") on behalf of persons having claims against certain
manufacturers of breast implants. The alleged factual basis for
typical lawsuits include allegations that the plaintiffs' breast
implants caused specified ailments including, among others, auto-
immune disease, scleroderma, systemic disorders, joint swelling
and chronic fatigue.
A result of the MDL Settlement was the establishment of
a Claims Administration Office in Houston, Texas, under the
direction of Judge Ann Cochran. Class Members who had breast
implants prior to June 1993 have registered with the Claims
Office. Judge Pointer certified the "Global" Settlement by Final
Order and Judgment on September 1, 1994. Subsequently, a
preliminary review of claims produced projected payouts that were
greater than the amounts the breast implant manufacturers had
agreed to pay. On May 15, 1995, Dow Corning Corp., formerly one
of the manufacturers and a significant contributor to the Global
Settlement fund, filed for federal bankruptcy protection because
of lawsuits over the devices.
On December 29, 1995, the Company entered into an
agreement with the MDL 926 Settlement Class Counsel and certain
other defendants that is now identified as the "Bristol, Baxter,
3M, McGhan & Union Carbide Revised Breast Implant Settlement
Program" ("Revised Settlement"). The Revised Settlement provides
a procedure to resolve claims of current claimants and ongoing
claimants who are registered with the Claims Office.
Due to the nature of the Revised Settlement which
allowed ongoing registrations, "opt-ins", as well as a limited
potential for claimants, during the life of the program, to opt-
out of the Revised Settlement ("opt-outs"), the aggregate dollar
amount to be received by the class of claimants under the Revised
Settlement has not been fully ascertained.
The Revised Settlement is an approved-claims based
settlement. Therefore, to project a range of the potential cost
of the Revised Settlement, the parties utilized a court-sponsored
sample of claimants' registrations and claims filed through the
MDL 926 Settlement Claims Office against all defendants and
assumed approval of 100 percent of the claims as initially
submitted. Although adequate for negotiation purposes, the
sample is unsatisfactory for the purposes of determining an
aggregate dollar liability for accounting purposes because the
processing of current claims is not complete, the process of
ongoing claims will continue for fifteen years, and the
Settlement is subject to opt-ins and opt-outs.
The following is a recap of the certain events
involving the Company's product liability issues relating to
silicone gel breast implants which the Company manufactures and
markets.
The claims in Silicone Gel Breast Implant Products
Liability Litigation MDL 926 are for general and punitive damages
relating to physical and mental injuries allegedly sustained as a
result of silicone gel breast implants produced by the Company.
Although the amount of claims asserted against the Company is not
readily determinable, the Company believes that the stated amount
of claims substantially exceeds provisions made in the Company's
consolidated financial statements. The Company has been a
defendant in substantial litigation related to breast implants
which have adversely affected the liquidity and financial
condition of the Company. This raises substantial doubt about
the Company's ability to continue as a going concern. The
accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern and do
not include any adjustments that might result from this
uncertainty.
On June 25, 1992 the judicial panel on multi-district
litigation in re: Silicone Gel Breast Implant Products Liability
Litigation consolidated all federal breast implant cases for
discovery purposes in Federal District Court for the Northern
District of Alabama under the multi-district litigation rules.
Several U.S.-based manufacturers negotiated a settlement with the
Plaintiffs' Negotiating Committee ("PNC"), and on March 29, 1994
filed a Proposed Non-Mandatory Class Action Settlement in the
Silicone Breast Implant Products Liability (the "Settlement
Agreement") providing for settlement of the claims as to the
class (the "Settlement") as described in the Settlement
Agreement. The Settlement Agreement, upon approval, would have
provided resolution of any existing or future claims, including
claims for injuries not yet known, under any Federal or State
law, from any claimant who received a silicone breast implant
prior to June 1, 1993.
The Company was not originally a party to the
Settlement Agreement. However, on April 8, 1994 the Company and
the PNC reached an agreement which would join the Company into
the Settlement. The agreement reached between the Company and
the PNC added great value to the Settlement by enabling all
plaintiffs and U.S.-based manufacturers to participate in the
Settlement, and facilitating the negotiation of individual
contributions by the Company, Minnesota Mining and Manufacturing
Company ("3M"), and Union Carbide Corporation which total more
than $440 million.
A fairness hearing for the non-mandatory class was held
before Judge Pointer on August 18, 1994. On September 1, 1994,
Judge Pointer gave final approval to the non-mandatory class
action settlement. The deadline for plaintiffs to enter the
Settlement was March 1, 1995.
Under the terms of the Settlement Agreement, the
parties stipulated and agreed that all claims of the Settlement
Class against the Company regarding breast implants and breast
implant materials would be fully and finally settled and resolved
on the terms and conditions set forth in the Settlement
Agreement.
Under the terms of the Settlement Agreement, the
Company would have paid $1 million to the Settlement fund for
each of 25 years starting three years after Settlement approval
by the Court. The Settlement was approved by the court on
September 1, 1994. The Company recorded a pre-tax charge of $9.1
million in October of 1994. The charge represents the present
value (discounted at 8%) of the Company's settlement of $25
million over a payment period of 25 years, $1 million per year
starting three years from the date of Settlement approval.
Under the Settlement, $1.2 billion had been provided
for "current claims" (disease compensation claims). In May 1995,
Judge Pointer completed a preliminary review of current claims
against all Settlement defendants which had been filed as of
September 1994, in compliance with deadlines set by the court.
Judge Pointer determined that based on the preliminary review,
projected amounts of eligible current claims appeared to exceed
the $1.2 billion provided by the Settlement. Discrete
information as to each defendant was not made available by the
court and the Company is not aware of any information from
such findings that would affect the Company's $9.1 million
accrual. The Settlement provided that in the event of such over
subscription, the amounts to be paid to eligible current
claimants would be reduced and claimants would have a right to
"opt-out" of the Settlement at that time.
On October 1, 1995, Judge Pointer finalized details of
a scaled-back breast implant injury settlement involving
defendants Bristol-Myers Squibb, Baxter International, and 3M,
allowing plaintiffs to reject this settlement and file their own
lawsuits if they believe payments are too low. On November 14,
1995, McGhan Medical and Union Carbide were added to this list of
settling defendants to achieve the "Bristol, Baxter, 3M, McGhan &
Union Carbide Revised Settlement Program" (the "Revised
Settlement Program"). With respect to the parties thereto, the
Revised Settlement Program incorporated and superseded the
Settlement. The Revised Settlement Program does not fix the
liability of any defendants, but established fixed benefit
amounts for qualifying claims. The Company's obligations under
the Revised Settlement are cancelable if the Revised Settlement
is disapproved on appeal.
The Company recorded a pre-tax charge of $23.4 million
in the third quarter of 1995. The charge represented the present
value (discounted at 8%) of the maximum additional amount that
the Company then estimated it might be required to contribute to
the Revised Settlement Program - $50 million over a 15-year
period based on a claims-made and processed basis. Due to the
uncertainty of ultimate resolution and acceptance of the Revised
Settlement Program by the registrants, claimants and plaintiffs,
and the lack of information related to the substance of the
claims, the Company reversed this charge at year-end 1995 for the
third quarter of 1995.
At December 31, 1995, the Company's reasonable estimate
of its liability to fund the Revised Settlement Program was a
range between $9.1 million, the original accrual as noted above,
and the discounted present value of the $50 million aggregate the
Company estimated it might have been required to contribute under
the Revised Settlement Program. Again, due to the uncertainty of
the ultimate resolution and acceptance of the Revised Settlement
Program by the registrants, claimants and plaintiffs (which
acceptance and participation is necessary for any contributions
under the Revised Settlement Program) and the limited and
changing information related to the claims, no estimate of the
possible additional loss or range of loss can be made and,
consequently, the financial statements do not reflect any
additional provision for the litigation settlement. However,
preliminary information obtained prior to July 31, 1997,
concerning claims and opt-outs filed under the Revised Settlement
indicates that the range of costs to the Company of its
contributions, while likely to exceed $9.1 million, will be
substantially less than $50 million. This preliminary
information suggests that the cost for current claims, which will
be payable after the conclusion of all appeals relating to the
Revised Settlement, is not likely to exceed $16 million. This
estimate may change as further information is obtained. The
additional cost for ongoing claims payable over the 15-year life
of the program is still unknown, but is capped at approximately
$6 million under the terms of the Revised Settlement.
The Company has entered into a Settlement Agreement
with health care providers pursuant to which the Company is
required to pay, on or before December 17, 1996, or after the
conclusions of any and all disapproved appeals, $1 million into
the MDL Settlement Funds ("the Fund") to be administered by Edgar
C. Gentle, III, Esq. ("the Fund Agent"). The charge for
settlement will be applied against the $9.1 million accrual
previously established by the Company. The Company, in the
spirit of the Revised Settlement Program, also contributed
$600,000 in 1996 and $300,000 in 1997 to the claims
administration management for the settlement.
The Company has opposed the plaintiffs' claims in
these complaints and other similar actions, and continues to deny
any wrongdoing or liability to the plaintiffs of any kind.
However, the extensive burdens and expensive litigation the
Company would continue to incur related to these matters prompted
the Company to work toward and enter into the Settlement which
insures a more satisfactory method of resolving claims of women
who have received the Company's breast implants.
Management's commitment to the Revised Settlement
Program does not alter the Company's need for complete resolution
sought under a mandatory ("non-opt-out") settlement class (the
"Mandatory Class") or other acceptable settlement resolution. In
1994, the Company petitioned the United States District Court,
Northern District of Alabama, Southern Division, for
certification of a Mandatory Class under the provisions of
Federal Rules of Civil Procedure. Since that time, the Company
has been in negotiation with the plaintiffs concerning an updated
mandatory settlement class or other acceptable resolution. On
July 1, 1996, the Company filed an appearance of counsel and
status report on the INAMED Mandatory Class application to the
United States District Court, Northern District of Alabama,
Southern Division, Chief Honorable Judge Samuel C. Pointer, Jr.
There can be no assurance that the Company will receive Mandatory
Class certification or other acceptable settlement resolution.
If the Mandatory Class is not certified, the Company
will continue to be a party to the Revised Settlement Program.
However, if the Company fails to meet its obligations under the
program, parties in the program will be able to reinstate
litigation against the Company. In addition, the Company will
continue to be subject to further potential litigation from
persons who are not provided for in the Revised Settlement
Program and who opt out of the Revised Settlement Program. The
number of such persons and the outcome of any ensuing litigation
are uncertain. Failure of the Mandatory Class to be certified,
absent other acceptable settlement resolution, is expected to
have a material adverse effect on the Company.
The Company was a defendant with 3M in a case involving
three plaintiffs in Houston, Texas, in March 1994, in which the
jury awarded the plaintiffs $15 million in punitive damages and
$12.9 million in damages plus fees and costs. However, the
matter was resolved in March 1995 resulting in no financial
responsibility on the part of the Company.
In connection with 3M's 1984 divestiture of the breast
implant business now operated by the Company's subsidiary, McGhan
Medical Corporation, 3M has a potential claim for contractual
indemnity for 3M's litigation costs arising out of the silicone
breast implant litigation. The potential claim vastly exceeds
the Company's net worth. To date, 3M has not sought to enforce
such an indemnity claim. As part of its efforts to resolve
potential breast implant litigation liability, the Company has
discussed with 3M the possibility of resolving the indemnity
claim as part of the overall efforts for global resolution of the
Company's potential liabilities. Because of the uncertain nature
of such an indemnity claim, the financial statements do not
reflect any additional provision for such a claim.
In October 1995, the Federal District Court for the
Eastern District of Missouri entered a $10 million default
judgment against a subsidiary of the Company arising out of a
Plaintiff's claim that she was injured by certain breast implants
allegedly manufactured by the subsidiary. The Company did not
become aware of the lawsuit until November 1996, due to improper
service. The Plaintiff's attorney waited over one year to notify
the Company that a default judgment had been entered. The
Plaintiff's attorney refused to voluntarily set aside the
judgment, although it is clear from the allegations of the
complaint that the Plaintiff sued the wrong entity, since neither
the named subsidiary, the Company, nor any of its other
subsidiaries manufactured the device. The Company has moved to
have this judgment set aside. The Company has not made any
adjustment in its 1996 financial reports to reflect this
judgment.
The cost of the foregoing litigation has adversely
affected the Company's financial position, results of operations
and cash flows. Management believes that the Company may not
continue as a going concern if its efforts to resolve the breast
implant litigation are not successful. Although management is
optimistic that the Mandatory Class will be approved by the
Court, there can be no assurances that this outcome will be
achieved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS.
The Company's common stock is traded in the over-the-counter market
and was listed on NASDAQ beginning in June 1986.
The Company's common stock also began trading on the Pacific
Stock Exchange on December 1, 1987. On March 28, 1996, the
Company had 869 stockholders of record. The Company's common
stock price at the close of business of March 28, 1996 was $12.
Effective December 20, 1995, the Company has been
granted a temporary exception to the capital and surplus
requirement of the NASDAQ Small Cap Market by the NASDAQ Listing
Qualifications Committee. As part of its conditional listing,
the Company's stock symbol was changed from IMDC to IMDCC. The
fifth character "C" appended to the Company's stock symbol will
remain until such time that the Company is able to evidence
compliance with all NASDAQ listing criteria in a manner deemed
acceptable by the Listing Qualifications Committee. The Company
expects to evidence this compliance in 1996.
The Table below sets forth the high and low bid prices
of the Company's common stock for the periods indicated.
Quotations reflect prices between dealers, do not reflect retail
markups, markdowns or commissions, and may not necessarily
represent actual transactions. No cash dividends have been paid
by the Company during such periods.
High Low
1994
1st Quarter 4-3/4 2-1/2
2nd Quarter 4-1/2 2-3/4
3rd Quarter 3-3/4 2-3/8
4th Quarter 3-1/8 2-3/8
1995
1st Quarter 4-1/4 3
2nd Quarter 4-1/8 3
3rd Quarter 14 3
4th Quarter 12-5/8 8-1/4
The Company has never paid a cash dividend. It is the
present policy of the Company to retain earnings to finance the
growth and development of its business and to fund ultimate
litigation settlements. Therefore, the Company does not
anticipate paying cash dividends on its common stock in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes certain selected
financial data of the Company and should be read in conjunction
with the related Consolidated Financial Statements of the Company
and accompanying Notes to Consolidated Financial Statements.
<TABLE>
Years Ended December 31
1995 1994 1993 1992 1991
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Net sales $81,625,581 80,385,342 74,497,946 64,343,031 42,283,931
Operating income (loss) (9,189,905) 3,578,025 (3,471,507) 611,836(2) (2,792,828)(2)
Gain on sale of subsidiaries -- -- 4,158,541 -- --
Income (loss) before income
tax expense (benefit) (8,575,860) 5,007,103 449,448(1) 435,591(2) (3,655,746)(2)
Income tax expense (benefit) (1,682,799) 2,260,792 4,533,142 1,807,000 (845,000)
___________ ___________ ___________ ___________ ____________
Net income (loss) $(6,893,061) 2,746,311 (4,083,694)(1) (1,371,409)(2) (2,810,746)(2)
=========== =========== =========== =========== ===========
Net income (loss) per share
of common stock $ (0.91) 0.37 (0.52) (0.17) (0.35)
=========== =========== =========== =========== ===========
Weighted average common
shares outstanding 7,544,335 7,410,591 7,850,853 7,873,504 8,099,483
=========== =========== =========== =========== ===========
</TABLE>
(1) Includes a pre-tax charge of $9.1 million under the terms of
the proposed class action settlement.
(2) Includes write-offs of assets for product inventory aggregating
$1,974,423 in 1992 and $4,428,527 in 1991.
<TABLE>
As of December 31
1995 1994 1993 1992 1991
Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C>
Working capital (deficiency) $(6,041,738) 1,087,925 (2,316,741) (1,921,514) 979,462
Total assets 50,384,944 47,810,401 37,857,305 29,092,802 24,681,126
Long term debt, net of
current installments 89,437 50,801 235,170 454,274 509,811
Stockholders' (deficit) equity (1,704,116) 4,478,827 1,347,425 6,545,891 7,965,951
Stockholders' (deficit) equity
per share of common stock $ (0.22) 0.60 0.18 0.82 0.97
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Results of Operations
The Company experienced continued sales growth in 1995
with net sales of $81.6 million. This represented a 1.5%
increase over net sales of $80.4 million during the year ended
December 31, 1994. Net sales for 1994 increased 7.9% over 1993
net sales which totaled $74.5 million. Although revenue is
subject to changes in price or volume, revenue increases during
this period were primarily a result of increased volume.
Domestically, net sales decreased 5.6% in 1995 to $55.9
million from $59.2 million in 1994 and by 1.2 % from $59.9
million in 1993. Domestic net sales in 1995 suffered because
during the first quarter the Company was temporarily unable to
manufacture sufficient amounts of finished goods to meet demand
in the market. The reasons for this decline in output were
twofold. Shortages of raw materials were partly a result of the
Company's restricted cash flow available to pre-purchase raw
materials, and a shortage in certain raw material components was
due to a supplier's inability to manufacture sufficient
quantities of the components to meet the Company's demand. The
Company now sources this rather specialized component from two
suppliers. Another factor was the significant diversion of
productive time, energy and material to FDA-mandated process
validation which led to a decline in yield of finished goods that
was not overcome until the beginning of the second quarter.
Internationally, significant sales growth was achieved
in Europe where net sales were $20.8 million in 1995, an increase
of 13.6% over 1994 net sales of $18.3 million, which in turn
represented an increase of 25.8% over 1993 net sales of $14.6
million. Net sales by Central and South America, Spain and
Portugal as a region, which began in 1994, also experienced
robust sales growth. Net sales reported by this region in 1995
totaled $4.4 million representing an increase of 52.1% over 1994
net sales of $2.9 million. Sales by the Asia Pacific region were
first recorded in 1995 at $0.6 million. Net sales to regions
outside the United States represented 31.5% of total net sales in
1995, 26.3% of total net sales in 1994 and 19.5% of total net
sales in 1993. The Company expects international sales to
represent an increasing percentage of net sales in future years,
since this market is experiencing increasing demand. Management
anticipates the market growth, continued increase of production
capacity, both domestically and internationally, and expansion of
the international sales force will allow an increase in sales
growth throughout 1996.
Cost of goods sold were $30.2 million, $26.3 million,
and $23 million for the years ended December 31, 1995, 1994 and
1993 respectively. Cost of goods sold as a percent of net sales
was 37% for the year ended December 31, 1995, compared to 33% for
the year ended December 31, 1994 and 31% for the year ended
December 31, 1993. Management anticipates that the Company may
experience future quarters with higher costs of production as
modifications are made to accommodate changing FDA views and
related regulations.
Marketing expenses were $23.4 million, $19.7 million,
and $16.9 million for the years ended December 31, 1995, 1994 and
1993 respectively. Marketing expenses as a percent of net sales
were 29% for the year ended December 31, 1995, compared to 25%
for the year ended December 31, 1994 and 23% for the year ended
December 31, 1993. The increase in royalty expenses was
commensurate with the increase in sales of licensed product and
represent a significant variable expense. Royalty expenses were
$5.5 million, $4.3 million and $3.4 million for the years ended
December 31, 1995, 1994, and 1993. As was expected, while INAMED
GmbH, INAMED S.R.L., INAMED Ltd. and INAMED SARL have been in the
start-up phases, marketing expenses as a percent of net sales for
their individual distribution networks have been somewhat higher
than the consolidated percentages. Moderating this increase is
the relative stability of other marketing expenses on a Company
wide basis.
General and administrative expenses have increased as
the Company continues to grow. These expenses have increased
from $32.8 million in 1995, to $27.1 million in 1994 and $25.9
million in 1993. Legal fees related to the breast implant
litigation also contributed to the increase. Legal fees related
to breast implant litigation were $1.1 million in 1995, $3.0
million in 1994 and $5.2 million in 1993.
Research and development ("R & D") expenses have
increased to $4.4 million in 1995 from $3.7 million in 1994 and
$3.1 million in 1993, reflecting the Company's continuing
commitment to development of new and advanced medical products.
As a percentage of net sales, this expense has consistently been
between 4.1% and 5.4%. Diversification into other facets of
medical devices within the industry through use of new technology
has always been and remains a goal of the Company. R & D expenses
are planned to increase in 1996, should cash flow be adequate.
The Company is also planning to increase R & D overseas due to
the long time frames required to achieve FDA approval of new
devices in the US.
Additionally, increased costs to obtain FDA PMA
approvals are anticipated in 1996. Beginning in 1989, the
Company began the necessary work to address FDA regulations
related to premarket approval of both saline and silicone gel
filled mammary implants and the Company anticipates continued
investment of employee hours and Company funds throughout
calendar 1996 to facilitate compliance with all FDA regulations
as determined by the PMA study and any new regulations which may
be adopted.
Interest expense was $0.8 million in 1995, $0.6 million
in 1994 and $0.5 million in 1993. The increase in 1995 is due to
interest incurred on outstanding federal and state income tax
liabilities.
Compared with an operating loss of $9.2 million in 1995, the
Company had an operating profit of $3.6 million in 1994 and an
operating loss of $3.5 million in 1993.
While the United States incurred a $7.6 million loss and the
LatinoAmerican region a $2.0 million loss in 1995, the European
and Asia-Pacific regions posted operating incomes of $0.3 million
and $0.1 million respectively for the same period.
Identifiable assets grew to $50.4 million in 1995 from
$47.8 million and $37.9 million in 1994 and 1993, respectively.
Identifiable assets within the United States decreased in 1995 by
$3.3 million to $26 million. Assets increased to $29.3 million
in 1994 from $27.6 million in 1993, an increase of $1.7 million.
European assets continue to increase as operations there are
expanded. Identifiable assets were $18.4 million, $15.9 million,
$10.2 million in 1995, 1994, and 1993 respectively, representing
increases over prior years of $2.5 million and $5.7 million in
1995 and 1994 respectively. LatinoAmerican region established in
1994 with assets at year end of $2.6 million increased by $2.9
million to $5.5 million in 1995. Asia Pacific region established
in 1995 ended the year with $0.6 million in identifiable assets.
The Company had a net loss of $6,893,061 or $.91 per
share in 1995, net income of $2,746,311 or $.37 per share in
1994, and a net loss of $4,083,694 or $.52 per share in 1993.
Increased regulatory and legal costs relating to breast implants
continue to be a significant burden on the Company's bottom-line
profitability. Management believes that resolution of the breast
implant litigation through the Revised Settlement Program and
achievement of provisional certification of the Mandatory
Settlement Class will allow the Company to anticipate and manage
costs associated with the litigation and move the Company forward
toward profitability in the future.
Financial Condition
Liquidity
The current ratio (current assets to current
liabilities) of 0.9 to 1 as of December 31, 1995 is consistent
with the ratio of 1.0 to 1 as of December 31, 1994. The
Company's ratio was negatively affected in 1995 and 1994 by
increased legal costs due to breast implant litigation and by
breast implant returns. In addition, the Company's expansion
both domestically and internationally used significant cash
resources throughout 1995.
For the year ended December 31, 1995 the Company's
current deficit was $6,893,061 which when added to the December
31, 1994 accumulated deficit of $5,732,863 resulted in a total
accumulated deficit as of December 31, 1995 of $12,625,924. At
December 31, 1995, the Company's working capital was negative
$6,041,738. Significant contributors to the negative working
capital included accrued salaries, wages and payroll taxes of
$9.6 million as of December 31, 1995. The reason for the
increase in accrued salaries and wages from 1994 to 1995 is
primarily an increase in payroll tax liabilities which were paid
in January 1996. In addition, accounts payable increased $2.8
million from the prior year.
Significant uses of cash during the years ended
December 31, 1995, 1994 and 1993 respectively include increases
in inventory of $2,539,782, $1,854,374, $6,714,356, purchases of
property and equipment totaling $4,694,592, $2,948,945, and
$4,195,281 and principal repayment of notes payable and long-term
debt of $608,784, $1,117,373, and $3,273,941. In 1995 an
additional significant use of cash was the reduction of income
taxes by $3,147,534.
Significant sources of cash during the years ended
December 31, 1995, 1994, and 1993 respectively include increases
in accounts payable of $2,731,166, $1,610,174, $5,705,716,
accrued salaries, wages, and payroll taxes of $6,094,940,
$2,353,998, $491,366, and increases of notes payable and long-
term debt from financing activities of $493,511, in 1995 and
$1,077,355 in 1994. Payment of related party receivables
resulted in cash inflow of $302,676 in 1995 and $451,516 in 1994.
An increase in related party payables of $788,807 in 1995 and
$420,610 in 1994 also provided significant cash.
The Company's net deferred tax asset totaled $1,765,347
and $2,009,571 as of December 31, 1995 and 1994, respectively.
The net deferred tax asset will effectively reduce tax liability
going forward as allowed by Statement of Financial Accounting
Standards No. 109. Although realization is not assured,
management believes it is more likely than not that the net
deferred tax asset is fully recoverable against taxes previously
paid and thus no further valuation allowance for these amounts is
required. Deferred tax assets other than amounts expected to
cover taxes previously paid require a valuation allowance due to
certain negative evidence which include, but are not limited to,
the uncertainty surrounding settlement of the class action
litigation and cumulative losses resulting in accumulated deficit
and shareholders deficit.
The Company had net operating loss carryovers at its
foreign subsidiaries aggregating approximately $2,260,000 at
December 31, 1995 (based on exchange rates at that date) to be
used by the individual foreign subsidiaries that incurred those
losses. Foreign losses carryover indefinitely in all the
respective countries except France where $119,377 expires in 1999
and $146,366 expires in 2000. Loss carryovers have a positive
effect on future cashflows by decreasing future tax payments.
Breast implant product liability related issues are
expected to draw on the Company's liquidity throughout 1996. The
Company is in the process of negotiating extended payment terms
on these expenses which the Company feels will reduce the adverse
effect on short-term and long-term liquidity. However, there is
no assurance that the extended payment terms will be granted by
the legal firms involved.
The cost of the foregoing litigation has adversely
affected the liquidity of the Company. Management believes that
the Company may not continue as a going concern if Mandatory
Class is not certified and no other acceptable settlement
resolution to the breast implant litigation against the Company
exists. Although management is optimistic that the Mandatory
Class will be approved by the Court, there can be no assurances
that this outcome will be achieved.
In January 1996, the Company completed a private
placement offering by issuing three-year collateralized
convertible, non-callable notes due March 31, 1999 bearing an
interest rate of 11%. The Company received $35 million in
proceeds from the offering to be used for a portion of the
anticipated litigation settlement, for capital investments and
improvements to expand production capacity, and for working
capital purposes. Of the proceeds received from the offering,
$15 million is held in an escrow account to be released upon the
granting and court approval of mandatory class certification.
The Company forecasts that the majority of cash
necessary for US operations will continue to be generated by
operations. The Company currently continues to utilize a
combination of working capital and its overseas credit facility.
The Company is also working to establish a domestic credit
facility to meet periodic short-term cash requirements.
Increased sales activity throughout 1996 is expected to increase
the availability of cash resources. If cash is determined to be
inadequate for the level of activity, the Company may reduce
expenses such as those related to R & D projects. The future of
any affected project would then be uncertain. As cash flow
becomes more available, management may restart projects, or elect
to terminate projects, based on a business decision and on a
project-by-project basis.
The Company intends to seek out a suitable partner in
banking to achieve current and future credit facility needs for
domestic subsidiaries' support. Additionally, the Company
intends to develop other methods to achieve increased working
capital. These methods may be achieved through both the private
and/or public sector. However, there can be no assurance that
such financing will be available at acceptable terms, if at all.
Settlement of the breast implant litigation will greatly enhance
the Company's ability to obtain financing from banks or other
lending institutions.
In June of 1990, the Company established a $4.5 million
financing package for working capital with a major bank that
utilizes the domestic accounts receivable, inventories and
certain other assets as collateral. In December 1990, the line
of credit was increased to $5.3 million. As of December 31,
1995, approximately $328,000 had been drawn on the line of
credit. The weighted average interest rate during 1995 was
11.3%.
The Company's line of credit was due for renewal in
August, 1993. The present bank line was not renewable under
acceptable terms and conditions and was extended through March
31, 1996. On January 24, 1996, the Company paid all amounts due
under the line of credit. The Company believes that it can start
reasonable discussions with lenders for a new credit facility now
that the Company has entered into global settlement agreements.
Although there are no assurances that the Company will be
successful in the engagement of a lender, the Company has made
progress in addressing lender concern surrounding the breast
implant litigation through settlement agreements which include
mandatory class certification. However, there can be no
assurance that such financing will be available at acceptable
terms, if at all.
In April 1994, the Company increased its international
line of credit with a major Dutch bank. The current line is $1.5
million and is collateralized by the accounts receivable,
inventories and certain other assets of INAMED B.V. The line of
credit expires on March 31, 1996. It is currently being
renegotiated and is expected to be renewed. As of December 31,
1995, approximately $0.9 million had been drawn on the line of
credit. The interest rate on the line of credit is 7% per annum.
The Company's international sales subsidiaries achieved
significant sales growth in 1995. In Ireland, grants have been
approved by the Irish Industrial Development Authority (IDA) to
fund portions of the costs of operations of McGhan Limited,
including reimbursement for training expenses, leasehold
improvements and capital equipment. As of December 31, 1995,
McGhan Limited had received grants from the IDA for approximately
$2.7 million and had obtained approval for additional grants from
other funding agencies for approved research and development
programs for up to $1.1 million.
Currently, the Company is not repatriating profits from
its foreign subsidiaries. All funds transferred to the Company
have been repayments of outstanding intercompany loans and
invoices. It has been the Company's practice to retain earnings
at its foreign subsidiaries for purposes of expanding the
Company's foreign operations. Although the Company is currently
not repatriating profits, there are no material restrictions on
its ability to do so.
The Company currently does not enter into hedging
transactions to control foreign exchange rate risks. Because
foreign sales represent increasing percentages of net sales, the
Company anticipates that it will need to more closely monitor the
impact of foreign exchange fluctuations. The Company is
investigating banks with which it might establish a relationship
to address this issue.
Management believes short-term liquidity will improve
as a result of increased sales throughout 1996, due to increased
sales areas and new product introduction decreased litigation
costs as a result of projected global settlement and mandatory
class certification, and efforts by the Company to raise future
funding through a bank line, public, or private offering.
However, no assurances can be given as to the outcome of such
efforts.
The long-term liquidity of the Company is inextricably
intertwined with the Company's efforts and ultimate ability to
successfully resolve the breast implant litigation. Determining
the long term liquidity needs of the Company is not currently
possible because the settlement process has not progressed to the
point where the numbers of current, ongoing, and future claimants
can be determined. Management's primary plan to overcome its
liquidity and financial condition difficulties is to continue to
vigorously defend the products liability litigation to which it
is a party and to seek a prompt and favorable settlement of such
litigation and to supplement its short-term liquidity using a
combination of cash generated from operations and debt and equity
financing. Management firmly believes that such plan is the only
viable plan available to the Company. The Company's counsel and
advisors are in agreement with Management that the extent of the
Company's liability cannot be determined at this time.
Capital Expenditures
Expenditures on property and equipment approximated
$4.7 million in 1995 compared to $2.9 million in 1994.
Additionally, capital lease obligations of approximately $89,000
were incurred during 1995 compared to capital lease obligations
of approximately $21,000 incurred during 1994. The majority of
the expenditures in each year were for building improvements and
equipment to increase production capacity and efficiency. The
Company is working on several development projects, any one of
which may require additional capital resources for completion,
production, and marketing. As of December 31, 1995 no material
commitments for capital expenditures existed.
Significant Fourth Quarter Adjustments
The Company's provision for income taxes was adjusted
to reduce income tax expense by $4,162,607, or 5.1% of net sales
in 1995 and $3,154,493, or 3.9% or net sales in 1994. The Company
is working closely with its advisors to anticipate ongoing tax
responsibility and better reflect income tax liability/benefits
during the year.
The provision for doubtful accounts and returns and
allowances was increased by $1,424,734 or 1.7% of net sales in
1995 and $546,054, or 0.7% of net sales in 1994. The increase
was due to a backlog of product returns developed in the fourth
quarters of 1994 and 1995 as attention was diverted to other
operating issues. Management has implemented a policy mandating
since its implementation in March of 1996 that returns be
processed on a daily basis to ensure a backlog does not develop
again. This policy has been adhered to. Returns are also being
monitored quarterly to determine when provisions need adjustment.
Adjustments to increase compensation expense in the
fourth quarter of 1995 by $891,200 or 1.1% of net sales and
$187,500 or 0.2% of net sales in 1994 were made to reflect
bonuses and payments declared after year end for certain
personnel. Whenever possible, management has instructed
compensation to be accrued in the year the activity occurred.
In the fourth quarter of 1994, provisions for inventory
obsolesce was increased $221,590, or 0.3% or net sales to better
reflect inventory for future sale. The provision for product
liability was also increased in the fourth quarter of 1994 by
$315,721, or 0.4% of net sales to more accurately reflect the
potential impact of the Company's limited product warranty.
Offsetting adjustments were made to reduce rental expense of
$800,000, or 1.0% of net sales, and record royalty income
receivable of $325,301, or 0.4% of net sales.
Impact of Inflation
The Company believes that inflation has had a
negligible effect on operations over the past three years. There
exists the opportunity to offset inflationary increases in the
cost of materials and labor by increases in sales prices and by
improved operating efficiencies.
ITEM 8(a). FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders and Board of Directors
INAMED Corporation:
We have audited the accompanying consolidated balance sheets of
INAMED Corporation and subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of operations,
stockholders' (deficit) equity, and cash flows, for each of the
three years in the period ended December 31, 1995. In connection
with our audits of the consolidated financial statements, we have
also audited the financial statement schedule listed under item
14(a)(2) of this Annual Report on Form 10-K for each of the three
years in the period ended December 31, 1995. These consolidated
financial statements and the financial statement schedule are the
responsibility of the Company' s management. Our responsibility
is to express an opinion on these consolidated financial
statements and the financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatements. 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 consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of INAMED Corporation and subsidiaries as of December
31, 1995 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted
accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set
forth therein.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 14 to the consolidated financial
statements, the Company, through certain subsidiaries, has been a
defendant in substantial litigation related to breast implants
which has adversely affected the liquidity and financial
condition of the Company. This raises substantial doubt about
the Company's ability to continue as a going concern.
Management's plans in this regard are discussed in Note 14 to the
consolidated financial statements, and the consolidated
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Coopers & Lybrand L.L.P.
Las Vegas, Nevada
March 28, 1996
<TABLE>
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
Assets 1995 1994
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,807,327 $ 673,951
Trade accounts receivable, net of allowance
for doubtful accounts and returns and
allowances of $6,641,177 in 1995 and
$6,025,827 in 1994 10,470,375 11,319,487
Notes receivable - trade 157,534 1,400,503
Related party notes receivable 385,508 --
Inventories 17,695,847 14,879,570
Prepaid expenses and other current assets 1,825,213 2,548,748
Income tax refund receivable 95,580 462,304
Deferred income taxes 2,014,589 2,648,653
___________ ___________
Total current assets 35,451,973 33,933,216
Property and equipment, at cost:
Machinery and equipment 8,923,564 7,449,622
Furniture and fixtures 3,714,717 2,620,594
Leasehold improvements 7,567,208 5,469,234
___________ ___________
20,205,489 15,539,450
Less, accumulated depreciation and amortization
(9,234,166) (6,819,866)
___________ ___________
Net property and equipment 10,971,323 8,719,584
Notes receivable, net of allowance of
$1,066,958 in 1995 2,047,535 2,215,058
Related party notes receivable -- 688,184
Intangible assets, net 1,658,926 1,956,648
Deferred income taxes -- 48,810
Other assets, at cost 255,187 248,901
___________ ___________
Total assets $50,384,944 $47,810,401
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
Liabilities and Stockholders' (Deficit) Equity 1995 1994
<S> <C> <C>
Current liabilities:
Current installments of long-term debt $ 51,735 $ 176,910
Notes payable to bank 1,273,476 1,795,721
Notes payable 493,511 --
Related party notes payable 1,759,417 970,610
Accounts payable 18,596,800 15,780,050
Accrued liabilities:
Salaries, wages and payroll taxes 9,559,348 3,381,369
Interest 1,609,947 567,365
Self-insurance 1,130,632 1,291,605
Stock option compensation 68,714 68,714
Other 2,200,860 2,462,930
Royalties payable 2,926,388 1,053,888
Income taxes payable 1,812,818 4,960,352
Deferred income taxes 10,065 335,777
___________ ___________
Total current liabilities 41,493,711 32,845,291
Long-term debt, excluding current installments 89,437 50,801
Deferred grant income 1,114,735 931,367
Deferred income taxes 239,177 352,115
Litigation settlement 9,152,000 9,152,000
Commitments and contingencies
Stockholders' (deficit) equity:
Common stock, $.01 par value; authorized
20,000,000 shares; issued and outstanding
7,602,617 in 1995 and 7,466,139 in 1994 76,027 74,662
Additional paid-in capital 9,963,635 9,699,345
Cumulative translation adjustment 882,146 437,683
Accumulated deficit (12,625,924) (5,732,863)
___________ ___________
Stockholders' (deficit) equity (1,704,116) 4,478,827
Total liabilities and stockholders'
(deficit) equity $50,384,944 $47,810,401
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1995, 1994 and 1993
1995 1994 1993
<S> <C> <C> <C>
Net sales $81,625,581 $80,385,342 $74,497,946
Cost of goods sold 30,155,783 26,264,458 22,973,697
___________ ___________ ___________
Gross profit 51,469,798 54,120,884 51,524,249
___________ ___________ ___________
Operating expense:
Marketing 23,434,040 19,719,078 16,865,104
General and administrative 32,833,609 27,099,371 25,904,418
Research and development 4,392,054 3,724,410 3,074,234
Litigation settlement -- -- 9,152,000
___________ ___________ ___________
Total operating expenses 60,659,703 50,542,859 54,995,756
___________ ___________ ___________
Operating income (loss) (9,189,905) 3,578,025 (3,471,507)
___________ ___________ ___________
Other income (expense):
Interest income 770,081 428,704 186,665
Interest expense (833,086) (624,261) (504,734)
Royalty income 351,376 419,675 496,444
Foreign currency transaction
gains (losses) (252,525) 264,473 (786,371)
Miscellaneous income 578,199 940,487 370,410
___________ ___________ ___________
Net other income (expense) 614,045 1,429,078 (237,586)
___________ ___________ ___________
Gain on sale of subsidiaries -- -- 4,158,541
___________ ___________ ___________
Income (loss) before income
tax (benefit) expense (8,575,860) 5,007,103 449,448
___________ ___________ ___________
Income tax (benefit) expense (1,682,799) 2,260,792 4,533,142
___________ ___________ ___________
Net income (loss) $(6,893,061) $ 2,746,311 $(4,083,694)
=========== =========== ===========
Net income (loss) per share of
common stock $ (.91) $ .37 $ (.52)
=========== =========== ===========
Weighted average shares outstanding 7,544,335 7,410,591 7,850,853
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' (Deficit) Equity
Years ended December 31, 1995, 1994 and 1993
Additional Cumulative
Common Stock Paid-in Translation Accumulated Stockholders'
Shares Amount Capital Adjustment Deficit (Deficit)Equity
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1992 7,985,251 $79,853 $10,778,411 $ 83,107 $(4,395,480) $ 6,545,891
Net loss -- -- -- -- (4,083,694) (4,083,694)
Repurchases and retirement
of common stock (587,684) (5,877) (1,038,143) -- -- (1,044,020)
Issuances of common stock 63,000 630 90,720 -- -- 91,350
Translation adjustment -- -- -- (162,102 -- (162,102)
____________________________________________________________________________
Balance December 31, 1993 7,460,567 74,606 9,830,988 (78,995) (8,479,174) 1,347,425
Net income -- -- -- -- 2,746,311 2,746,311
Repurchases and retirement
of common stock (1,240,034) (1,240) (405,447) -- -- (406,687)
Issuances of common stock 129,606 1,296 273,804 -- -- 275,100
Translation adjustment -- -- -- 516,678 -- 516,678
______________________________________________________________________________
Balance December 31, 1994 7,466,139 74,662 9,699,345 437,683 (5,732,863) 4,478,827
Net loss -- -- -- -- (6,893,061) (6,893,061)
Repurchases and retirement
of common stock (322) (3) (1,342) -- -- (1,345)
Issuances of common stock 136,800 1,368 265,342 -- -- 267,000
Translation adjustment -- -- -- 444,463 -- 444,463
______________________________________________________________________________
Balance December 31, 1995 7,602,617 $76,027 $9,963,635 $882,146 $(12,625,924) $(1,704,116)
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
1995 1994 1993
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(6,893,061) $2,746,311 $(4,083,694)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 2,432,554 2,058,642 1,553,829
Amortization of deferred grant income (78,322) (61,442) (41,847)
Amortization of intangible assets 297,722 254,391 249,491
Non-cash stock compensation 29,500 29,000 --
Non-cash compensation to officers/directors 165,000 -- 727,230
Provision for doubtful accounts and returns 1,707,308 884,831 (100,409)
Provision for obsolescence 308,632 450,730 1,854,644
Deferred income taxes 243,430 199,897 595,532
Gain on sale of subsidiaries -- -- (4,158,541)
Litigation settlement -- -- 9,152,000
Write-off of intangible assets -- 46,017 440,000
Changes in current assets and liabilities:
Trade accounts receivable 503,114 (3,634,991) (1,169,119)
Notes receivable 343,534 12,814 (31,751)
Inventories (2,539,782) (1,854,374) (6,714,356)
Prepaid expenses and other
current assets 791,350 (2,091,247) 254,282
Income tax receivable 367,476 (113,304) --
Other assets (6,286) (62,376) 69,090
Accounts payable 2,731,166 1,610,174 5,705,716
Accrued salaries, wages, and payroll taxes 6,094,940 2,353,998 491,366
Accrued interest 1,042,582 342,294 (1,786)
Accrued self-insurance (160,973) (1,631) (666,896)
Other accrued liabilities (284,380) (108,978) (54,661)
Royalties payable 1,872,500 91,526 (269,888)
Income taxes payable (3,147,534) 576,768 2,259,002
___________ ___________ ___________
Net cash provided by
operating activities 5,820,470 3,729,050 6,059,234
=========== =========== ===========
Cash flows from investing activities:
Purchase of property and equipment (4,694,592) (2,948,945) (4,195,281)
Proceeds from sale of property and equipment -- -- 2,725,000
Increase in notes receivable, net of
forgiveness of intercompany payable -- -- (1,973,368)
Acquisition of INAMED, S.A. -- (400,050) --
___________ ___________ ___________
Net cash used in investing activities (4,694,592) (3,348,995) (3,443,649)
___________ ___________ ___________
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
<TABLE>
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
1995 1994 1993
<S> <C> <C>
Cash flows from financing activities:
Increases in notes payable and long-term debt $ 493,511 $ 1,077,355 $ --
Principal repayment of notes payable
and long-term debt (608,784) (1,117,373) (3,273,941)
(Increase) decrease in related party
receivables 302,676 451,516 (458,387)
Increase in related party payables 788,807 420,610 --
Grants received, gross 228,453 157,728 233,529
Proceeds from exercise of stock options 72,500 26,100 --
Repurchase of common stock (1,345) (406,687) (358,124)
Cash overdraft -- -- 331,795
___________ ___________ ___________
Net cash provided by (used in) financing
activities 1,275,818 609,249 (3,525,128)
___________ ___________ ___________
Effect of exchange rate changes on cash (268,320) (315,353) 221,308
___________ ___________ ___________
Net increase (decrease) in cash
and cash equivalents 2,133,376 673,951 (688,235)
Cash and cash equivalents at beginning of year 673,951 -- 688,235
___________ ___________ ___________
Cash and cash equivalents at end of year $ 2,807,327 $ 673,951 $ --
=========== =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest $ 442,314 $ 311,876 $ 506,520
=========== =========== ===========
Income taxes $ 273,947 $ 1,639,755 $ 1,280,000
=========== =========== ===========
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
INAMED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
Supplemental schedule of noncash investing and financing activities:
Year ended December 31, 1995:
In 1995 the Company issued 75,000 shares of common stock and recorded
a corresponding $165,000 reduction of a liability which had been incurred in
connection with the acquisition of INAMED, S.A.
Year ended December 31, 1994:
The 1994 statement of cash flows is presented net of the noncash effects
of the acquisition of INAMED, S.A. In connection with the acquisition of
INAMED, S.A., the Company initially made cash payments of $250,050, recorded
a note payable for future cash payments of $700,000 and recorded a liability
of $385,000 for the future issuance of 175,000 shares of common stock. As of
December 31, 1994, the Company had paid $150,000 on the note payable and had
issued 100,000 shares of common stock.
Year ended December 31, 1993:
In connection with the sale of Specialty Silicone Fabricators, Inc. and
Innovative Surgical Products, Inc., the Company repurchased approximately
461,120 shares of common stock in exchange for a reduction in notes
receivable of $685,916.
See accompanying notes to consolidated financial statements.
(1) Basis of Presentation and Summary of Significant Accounting Policies
The Company
The Company and its subsidiaries are engaged primarily in
the development, manufacture and distribution of implantable
medical devices for the plastic and general surgery fields.
Its primary products include mammary prostheses and tissue
expanders. The Company operates in both domestic and
foreign markets.
Basis of Presentation
The consolidated financial statements include the accounts
of INAMED Corporation and its wholly-owned subsidiaries
(collectively referred to as the Company). All significant
intercompany balances and transactions have been eliminated
in consolidation.
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 and 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 (also see Note 14).
Cash Equivalents
The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents.
Accounts Receivable and Credit Risk
The Company grants credit terms in the normal course of
business to its customers, primarily hospitals, doctors and
distributors. As a part of its ongoing control procedures,
the Company monitors the credit worthiness of its customers.
Bad debts have been minimal. The Company does not normally
require collateral or other security to support credit
sales. An estimated provision for returns and credit losses
has been provided for in the financial statements and has
generally been within management's expectations.
Revenue Recognition
The Company recognizes revenue in accordance with Statement
of Financial Accounting Standards No. 48 "Revenue
Recognition When Right of Return Exists". Revenues are
recorded net of estimated sales returns and allowances when
product is shipped. The Company ships product with the
right of return and has provided an estimate of the
allowance for sales returns based on historical returns and
projected sales. Because management can reasonably estimate
future sales returns, the product sales prices are
substantially fixed, and other reasons the Company
recognizes net sales when the product is shipped. The
estimated allowance for sales returns is based on the historical trend of
returns, year-to-date sales, projected future
sales and other factors.
Inventories
Inventories are stated at the lower of cost (first-in, first-
out) or market (net realizable value). Estimated inventory
obsolescence has been provided for in the financial
statements and has generally been within management's
expectations.
Current Vulnerability Due to Certain Concentrations
The Company has primarily one source of supply for certain
raw materials which are significant to its manufacturing
process. Although there are a limited number of
manufacturers of the particular raw materials, management
believes that other suppliers could provide similar raw
materials on comparable terms. A change in suppliers,
however, could cause a delay in manufacturing and a possible
loss of sales, which would affect operating results
adversely.
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. Significant improvements and
betterments are capitalized while maintenance and repairs
are charged to operations as incurred.
Depreciation of property and equipment is computed using the
straight-line method based on estimated useful lives ranging
from five to ten years. Leasehold improvements are
amortized on the straight-line basis over their estimated
economic useful lives or the lives of the leases, whichever
are shorter.
Intangible and Long-Term Assets
Intangible and long-term assets are stated at cost less
accumulated amortization, and are amortized on a straight-
line basis over their estimated useful lives as follows:
<TABLE>
<S> <C>
Customer lists 5 years
Organization costs 5 years
Patents 17 years
Trademarks and technology 5 years
Goodwill 10-12 years
</TABLE>
The Company classifies as goodwill the cost in excess of
fair value of the net assets acquired in purchase
transactions. The Company periodically evaluates the
realizability of goodwill. Based upon its most recent
analysis, no impairment of goodwill exists at December 31,
1995.
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 No. 121), was
issued and was adopted by the Company for the year ended
December 31, 1995. This statement requires that long-lived
assets and certain identifiable intangible assets to be held
and used be reviewed for impairment whenever events or
changes in circumstances indicate the carrying amount of
such assets may not be recoverable. The carrying value of
long-term assets is periodically reviewed by management, and
impairment losses, if any, are recognized when the expected
non-discounted future operating cash flows derived from such
assets are less than their carrying value. Impairment of
long-lived assets is measured by the difference between the
discounted future cash flows expected to be generated from
the long-lived asset against the fair value of the long-
lived asset. Fair value of long-lived assets is determined
by the amount at which the asset could be bought or sold in
a current transaction between willing parties. The adoption
of SFAS No. 121 did not have any impact on the financial
position, results of operations, or cash flows of the
Company.
Research and Development
Research and development costs are expensed when incurred.
Income Taxes
The Company accounts for its income taxes using the
liability method, under which deferred taxes are determined
based on the differences between the financial statement and
tax bases of assets and liabilities, using enacted tax rates
in effect for the years in which the differences are
expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount
expected to be realized.
Net Income/Loss Per Share
Net income/loss per share is computed using the weighted
average number of shares outstanding, and when dilutive,
common stock equivalents (stock options).
(1) Basis of Presentation and Summary of Significant Accounting
Policies, continued
Foreign Currency Translation
The functional currencies of the Company's foreign
subsidiaries are their local currencies, and accordingly,
the assets and liabilities of these foreign subsidiaries are
translated at the rate of exchange at the balance sheet
date. Revenues and expenses have been translated at the
average rate of exchange in effect during the periods.
Unrealized translation adjustments do not reflect the
results of operations and are reported as a separate
component of stockholders' (deficit) equity, while
transaction gains and losses are reflected in the
consolidated statement of operations. To date, the Company
has not entered into hedging transactions to protect against
changes in foreign currency exchange rates.
Recently Issued Accounting Standard
In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The accounting or disclosure requirements of
this statement are effective for the Company's fiscal year
1996. The Company has not yet determined whether it will
adopt the accounting requirements of this standard or
whether it will elect only the disclosure requirements and
continue to measure compensation expense using Accounting
Principles Board Opinion No. 25.
Reclassification
Certain reclassifications were made to the 1993 and 1994
consolidated financial statements to conform to the 1995
presentation.
(2) Accounts and Notes Receivable
Accounts and notes receivable consist of the following:
<TABLE>
December 31 December 31
1995 1994
<S> <C> <C>
Accounts receivable $17,111,552 $17,345,314
Allowance for doubtful accounts (964,928) (678,942)
Allowance for returns and credits (5,676,249) (5,346,885)
___________ ___________
Net accounts receivable $10,470,375 $11,319,487
___________ ___________
Notes receivable $ 3,114,493 $ 2,215,058
Allowance for doubtful notes (1,066,958) --
___________ ___________
Net notes receivable $ 2,047,535 $ 2,215,058
</TABLE>
Allowances for accounts receivable and notes receivable increased
by $1,682,308 in 1995. Terms under the note receivable are
currently in dispute and, therefore, the Company has established
an estimated provision for credit loss in the allowance for
doubtful notes as of December 31, 1995.
(3) Inventories
Inventories are summarized as follows:
<TABLE>
December 31, 1995 December 31, 1994
<S> <C> <C>
Raw materials $ 2,513,862 $ 2,187,689
Work in progress 3,773,579 3,268,947
Finished goods 12,167,768 9,873,664
___________ ___________
18,455,209 15,330,300
Less allowance for
obsolence (759,362) (450,730)
___________ ___________
$17,695,847 $14,879,570
</TABLE>
(4) Intangible Assets
Intangible assets, at cost, are summarized as follows:
<TABLE>
December 31
1995 1994
<S> <C> <C>
Customer lists $ 125,000 $ 125,000
Organization and acquisition costs 251,539 237,814
Patents, trademarks and technology 2,585,961 2,585,961
Goodwill 1,785,451 1,841,234
Other 337,827 337,827
__________ __________
5,085,778 5,127,836
Less accumulated amortization (3,426,852) (3,171,188)
__________ __________
$1,658,926 $1,956,648
========== ==========
</TABLE>
Effective January 1994, the Company acquired the assets of
Novamedic, S.A. The cost in excess of fair value of the net
assets acquired of $797,294 is classified as goodwill.
(5) Lines of Credit
As of December 31, 1995 and 1994, the Company had
outstanding borrowings in the amount of $328,366 and
$718,366, respectively, under a $5,300,000 revolving line of
credit agreement with a domestic bank which expired August
31, 1993 and was extended through March 31, 1996. The terms
of the agreement required the Company to make monthly
principal payments ($30,000 per month at December 31, 1995)
and monthly interest payments at prime plus 2.5% per annum
(11.0% per annum at December 31, 1995). Interest of
$62,519, $105,417, and $203,186 was paid on the line of
credit in 1995, 1994, and 1993, respectively. The line of
credit is collateralized by the Company's domestic accounts
receivable, inventories and certain other assets. In
September 1994, the company entered into an agreement with
the bank which deleted the financial covenants which had
been part of the original line of credit agreement. In
January 1996, the obligation to the bank was satisfied.
The Company's Dutch subsidiary has a line of credit with a
major Dutch bank, totaling $1,540,000, which is
collateralized by the accounts receivable, inventories and
certain other assets of its Dutch subsidiary. The line of
credit expires on March 31, 1996. As of December 31, 1995
and 1994, approximately $900,000 and $1,100,000,
respectively, had been drawn on the line of credit. The
interest rate on the line of credit is 7% per annum.
The Company's weighted average interest rate on short-term
borrowings was 8.9% and 8.4% in 1995 and 1994, respectively.
The Company is currently seeking alternative lending sources
from other financial institutions. However, no agreements
have been finalized to replace the line of credit.
(6) Long-Term Debt
Long-term debt is summarized as follows:
<TABLE>
December 31,
1995 1994
<S> <C>
Note payable to Department of Commerce, due in
monthly installments of $766, including interest
at 8.9% through January 1995 $ -- $ 760
Capital lease obligations, collateralized by related
equipment, payable in monthly installments
aggregating $8,754, including interest at 6.9%
to 15.8%, expiring through November 1998 141,172 226,951
_________ _________
141,172 227,711
Less, current installments (51,735) (176,910)
_________ _________
$ 89,437 $ 50,801
========= =========
</TABLE>
The aggregate installments of long-term debt as of December
31, 1995 are as follows:
<TABLE>
Year ending December 31:
<S> <C> <C>
1996 $ 51,735
1997 65,993
1998 23,444
________
$141,172
========
</TABLE>
(7) Deferred Grant Income
Deferred grant income represents grants received from the
Irish Industrial Development Authority (IDA) for the
purchase of capital equipment, and is amortized over the
life of the related assets against the related depreciation
expense. Amortization for the years ended December 31, 1995, 1994
and 1993 was approximately $78,000, $61,000, and $42,000, respectively.
In addition, for the years ended December 31, 1994 and 1993,
respectively, approximately $125,000, and $225,000 was
received for training grants. For the year ended December
31, 1993, approximately $41,000 was received for rent
subsidy grants. These amounts have been offset against the
related expenses on the accompanying consolidated statements
of operations.
IDA grants are subject to revocation upon a change of
ownership or liquidation of McGhan Limited. If the grant
were revoked, the Company would be liable on demand from the
IDA for all sums received and deemed to have been received
by the Company in respect to the grant. In the event of
revocation of the grant, the Company would be liable for the
amount of $2,552,362 as of December 31, 1995.
(8) Income Taxes
Income tax (benefit) expense at December 31, is summarized
as follows:
<TABLE>
1995 1994 1993
Current:
<S> <C> <C> <C>
Federal $(2,267,198) $1,577,188 $2,823,052
State (195,969) 310,816 934,374
Foreign 551,893 172,891 241,184
___________ __________ __________
Total $(1,911,274) $2,060,895 $3,998,610
Deferred:
Federal $ 530,419 $ (70,778) $ 353,280
State (157,016) (39,984) 181,252
Foreign (144,928) 310,659 --
___________ __________ __________
Total 228,475 199,897 534,532
$(1,682,799) $2,260,792 $4,533,142
=========== ========== ==========
</TABLE>
For financial reporting purposes, earnings from continued
operations before income taxes includes the following
components:
<TABLE>
Year ended December 31, 1995 1994 1993
Pretax income:
<S> <C> <C> <C>
Domestic $(6,912,125) $ 5,422,396 $ 127,282
Foreign (1,663,735) (415,293) 322,166
___________ __________ __________
Total Pretax Income $(8,575,860) 5,007,103 449,448
</TABLE>
(8) Income Taxes, continued
The primary components of temporary differences which
comprise the Company's net deferred tax assets as of
December 31,1995 and 1994 are as follows:
<TABLE>
December 31, December 31,
1995 1994
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 576,350 $ 203,113
Allowance for returns 2,895,564 2,102,447
Inventory reserves 90,090 36,159
Inventory capitalization 481,456 458,583
Accrued liabilities 599,605 666,117
Net operating losses 1,103,248 510,032
State taxes 2,554 165,114
Intangible assets 168,151 161,296
Litigation settlement 3,651,648 3,651,648
Tax credits 145,748 --
Other 8,322 16,023
___________ ___________
Deferred tax assets 9,722,736 7,970,532
Valuation allowance (7,377,074) (5,000,080)
Deferred tax assets 2,345,662 2,970,452
Deferred tax liabilities:
Depreciation and amortization (46,456) (33,210)
Installment sale (358,584) (592,645)
Other foreign (175,275) (335,026)
___________ ___________
Deferred tax liability (580,315) (960,881)
Net deferred tax asset $ 1,765,347 $ 2,009,571
=========== ===========
</TABLE>
Although realization is not assured, management believes it
is more likely than not that the net deferred tax asset is
fully recoverable against taxes previously paid and thus no
further valuation allowance for these amounts is required.
(8) Income Taxes, continued
The difference between actual tax expense (benefit) and the
"expected" tax expense (benefit) computed by applying the Federal corporate
tax rate of 34% for the years ended December 31, 1995, 1994 and
1993 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
"Expected" tax expense (benefit) $(2,915,792) $1,702,415 $ 152,812
Litigation settlement -- -- 3,111,680
Tax effect of nondeductible expenses 51,084 43,974 18,196
Goodwill amortization 49,924 61,525 18,615
Research tax credits (1,099,596) (188,223) (46,851)
Foreign taxes 406,965 483,550 241,184
State franchise tax (benefit), net of
Federal tax benefits (268,488) 175,944 736,313
Losses of foreign operations (48,256) (290,522) (170,116)
Change in valuation allowance of
deferred tax assets 1,948,830 -- --
Tax penalties 276,708 150,726 415,658
Other (84,178) 121,403 55,651
___________ ___________ __________
$(1,682,799) $ 2,260,792 $4,533,142
</TABLE>
The Company had net operating loss carryovers at the foreign
companies aggregating approximately $2,260,000 at December
31, 1995 (based on exchange rates at that date), to be used
by the individual foreign companies that incurred the
losses. These net operating loss carryovers have various
expiration dates. As of December 31, 1995, the Company had
a net operating loss carryover of approximately $2,400,000
for California franchise tax purposes. These loss
carryovers expire in 2000.
(9) Royalties
The Company has entered into various license agreements
whereby the Company has obtained the right to produce, use
and sell patented technology. The Company pays royalties
ranging from 5% to 10% of the related net sales, depending
upon sales levels. Royalty expense under these agreements
was approximately $5,511,000, $4,326,000, and
$3,352,000, for the years ended December 31, 1995, 1994 and
1993, respectively, and is included in marketing expense.
The license agreements expire at the expiration of the
related patents.
(10) Stockholders' Equity
The Company has adopted several incentive and non-statutory
stock option plans. Under the terms of the plans, 610,345
shares of common stock are reserved for issuance to key
employees at prices generally not less than the market value
of the stock at the date the options are granted, unless
previously approved by the Board of Directors.
Activity under these plans for the years ended December 31,
1995, 1994 and 1993 is as follows:
<TABLE>
1995 1994 1993
<S> <C> <C> <C>
Options outstanding at beginning of year 202,500 247,854 222,054
Granted -- -- 100,000
Exercised (50,000) (18,000) (63,000)
Expired or canceled (6,000) (27,354) (11,200)
_______ _______ _______
Options outstanding at end of year 146,500 202,500 247,854
======= ======= =======
Options exercisable at end of year 94,000 122,500 126,604
======= ======= =======
</TABLE>
The exercise price of all options outstanding under the
stock option plans range from $1.45 to $2.49 per share. All
options exercised in 1993, 1994 and 1995 were exercised at a
price of $1.45. At December 31, 1995, there were 114,754
shares available for future grant under these plans. Under
certain plans, the Company granted options at $1.45, which
was below the fair market value of the common stock at the
date of grant. Accordingly, the Company is amortizing the
difference between the fair market value and the exercise
price of the related outstanding options over the vesting
period of the options. Stock option compensation expense
for the years ended December 31, 1995, 1994 and 1993
aggregated $9,000, $10,000, and $38,000, respectively.
In 1984, McGhan Medical Corporation adopted an incentive
stock option plan (the 1984 plan). Under the terms of the
plan, 100,000 shares of its common stock were reserved for
issuance to key employees at prices not less than the market
value of the stock at the date the option is granted. In
1985, INAMED Corporation agreed to substitute options to
purchase its shares (on a two-for-one basis) for those of
McGhan Medical Corporation. The 1993 options granted was
restated from 20,000 to 100,000 to reflect 80,000 options
which were actually granted in 1993 but due to internal
reporting error were not recorded until 1995. When the
options were originally granted in 1993, the fair market
value of the stock was below the stock option exercise price
of $1.45 and therefore no compensation expense was recorded.
In 1986, the Company adopted an incentive and nonstatutory
stock option plan (the 1986 plan). Under the terms of the
plan, 300,000 shares of common stock have been reserved for
issuance to key employees. No options were granted under
this plan during 1995.
In 1987, the Company also adopted an incentive stock award
plan. Under the terms of this plan, 300,000 shares of
common stock were reserved for issuance to employees at the
discretion of the Board of Directors. The Directors
awarded 11,800 shares in 1995 and 11,600 shares in 1994 with
aggregate values of $29,500 and $29,000, respectively. No
shares were awarded in 1993. At December 31, 1995, there
were 119,612 shares available for future grant under this
plan.
In 1993 the Company adopted a Non-employee Director Stock
Option Plan which authorized the Company to issue up to
150,000 shares of common stock to directors who are not
employees of or consultants to the Company and who are thus
not eligible to receive stock option grants under the
Company's stock option plans. Pursuant to the Plan, each
non-employee director is automatically granted an option to
purchase 5,000 shares of common stock on the date of his or
her initial appointment or election as a director, and an
option to purchase an additional 5,000 shares of common
stock on each anniversary of his or her initial grant date
on which he or she is still serving as a director. The
exercise price per share is the fair market value per share
on the date of grant. As of December 31, 1995 no options
were granted under this plan.
(11) Foreign Sales Information
Net sales to customers in foreign countries for the years
ended December 31, 1995, 1994 and 1993 represented the
following percentages of net sales:
<TABLE>
1995 1994 1993
<S> <C> <C> <C>
Europe 22.3% 21.5% 14.3%
Asia - Pacific 3.5 2.7 3.1
LatinoAmerica 5.4 1.4
1.4
Other 0.3 0.7 0.7
31.5% 26.3% 19.5%
</TABLE>
(The Europe classification above includes Netherlands, Belgium,
United Kingdom, Italy, France and Germany. The Asian-Pacific
classification includes Hong Kong, China, Japan, Taiwan, Singapore,
Thailand, The Philippines, Korea, Indonesia, India Pakistan, New
Zealand and Australia. The LatinoAmerican classification above
includes Central America, South America, Spain, and Portugal.)
(12) Geographic Segment Data
The following table shows net sales, operating income (loss)
and identifiable assets by geographic segment for the years
ended December 31, 1995, 1994, and 1993:
<TABLE>
1995 1994 1993
<S> <C> <C> <C>
Net sales:
United States $ 55,881,262 59,196,401 59,943,525
Europe 20,803,402 18,310,708 14,554,421
Asia Pacific 562,894 -- --
LatinoAmerica 4,378,023 2,878,233 --
____________ __________ __________
$ 81,625,581 80,385,342 74,497,946
Operating income (loss):
United States $ (7,601,277) 4,717,154 (4,304,047)
Europe 349,049 (909,840) 832,540
Asia Pacific 105,533 -- --
LatinoAmerica (2,043,210) (229,289) --
____________ __________ __________
$ (9,189,905) 3,578,025 (3,471,507)
Identifiable assets:
United States $ 25,976,480 29,337,456 27,618,672
Europe 18,351,644 15,899,258 10,238,633
Asia Pacific 593,423 -- --
LatinoAmerica 5,463,397 2,573,687 --
____________ __________ __________
$ 50,384,944 47,810,401 37,857,305
</TABLE>
(13) Related Party Transactions
Included in assets is an unsecured note receivable from
Michael D. Farney, Chief Executive Officer and Chief
Financial Officer of the Company. This receivable
approximated $386,000 and $688,000 as of December 31, 1995
and 1994, respectively. The note bears interest at 9.5% per
annum and is due in June 1996. The note is primarily for
various personal activities. On March 4, 1996, the officer
paid the balance of the note in full.
Included in liabilities are notes payable to McGhan
Management Corporation, a Nevada Corporation and Donald K.
McGhan, Chairman and President of the Company. Mr. McGhan
and his wife are the majority shareholders of McGhan
Management Corporation and Mr. McGhan is President and
Chairman of that Corporation. These payables approximated
$1,209,000 and $421,000 as of December 31, 1995 and 1994,
respectively. The notes bear interest at prime plus 2% per
annum (10.5% per annum at December 31, 1995) and are due
June 30, 1996, or on demand. The Company paid the balance
of these notes in full on January 25, 1996. Also included
in liabilities is a note payable of approximately $550,000
to an officer of INAMED, S.A. in connection with the
Company's acquisition of this subsidiary. Final payment on
this note was made on February 6, 1996.
During 1992, the Company entered into a rental arrangement
with an Star America Corporation, a Nevada Corporation of
which Michael D. Farney, Chief Executive Officer and Chief
Financial Officer of the Company is the only Director and
Officer for rental of a Beachcraft BE2000 Starship to
provide air transportation for corporate purposes. The
minimum rental through December 31, 1993 was $95,000 per
month. In January 1994 this rent was renegotiated to a
month-to-month arrangement with a monthly rent of $74,000
during 1994. Rent expense for 1995, 1994 and 1993 was
$900,000, $888,000, and $1,260,000, respectively. In
February 1995, the Company received a credit voucher from
Star America Corporation for $800,000. This amount
represented payments made during 1994 in excess of actual
rent agreement and has been included in other current assets
at December 31, 1994. At December 31, 1995, the credit
voucher had an outstanding balance of $107,670. This
balance was paid to the Company on March 11, 1996. The
rental arrangement with Star America Corp. was terminated
effective December 31, 1995.
(14) Employee Benefit Plans
Effective January 1, 1990, the Company adopted a 401(k)
Defined Contribution Plan for all US employees. After six
months of service, employees become eligible to participate
in the Plan. Participants may contribute to the plan up to
20% of their compensation annually, subject to the
limitations in the Internal Revenue Code. The Company can
match contributions equal to 10% of each participant's
contribution, limited to 5% of the participant's
compensation. The participants are 100% vested in their own
contributions and vesting in the Company's contributions is
based on years of credited service. Participants become
100% vested after five years of credited service.
Participants may invest elective contributions amongst funds
selected by the Company and the Trustee(s) of the plan. The
Trustee(s) and the Company may choose the investment options
for any employer nonelective contribution. The Company's
contributions to the plan amounted to $0, $0, and $96,519
for the years ended December 31, 1995, 1994, and 1993,
respectively.
Effective January 1, 1990, a certain subsidiary adopted a
Defined Benefit Plan for all employees. After one year of
service, employees become eligible to participate in the
plan. Employees in active employment on January 1, 1990
were immediately eligible. Plan benefits, including pension
upon retirement at the age of 65 or complete disability, are
based on an employee's years of service and average
compensation prior to retirement. The pension plan is
financed by premiums which are paid by the employer and the
employees. The premium is based on financing a pension of
70% of the salary per person. Participants share in the
cost of the plan by making contributions of 3% to 5% of the
pension basis. The funding policy is to pay the accrued
pension contribution currently. The premiums, paid to the
external pension management company, are invested 80% in
government bonds and 20% in stocks listed on the Amsterdam Exchange.
The return on investments for the pension management company in 1995
was approximately 24%. Administrative costs paid by the Company were
approximately $19,100 in 1995, $12,900 in 1994 and $11,600 in 1993.
Contributions to the defined benefit pension plan approximated $75,000,
$49,000, and $55,000 for the years ended December 31,1995, 1994, and 1993,
respectively.
Effective February 1, 1990, a certain subsidiary adopted a
Defined Contribution Plan for all non-production employees.
Upon commencement of service, these employees become
eligible to participate in the plan and may contribute to
the plan up to 5% of their compensation. The Company's
matching contribution is equal to 200% of the participant's
contribution. The employee is immediately and fully vested
in the Company's contribution. The Company's contributions
to the plan approximated $198,000, $144,000, and $77,000 for
the years ended December 31, 1995, 1994, and 1993,
respectively.
Effective January 1, 1991, a certain subsidiary adopted a
Defined Benefit Plan for all employees. After one year of
service, employees become eligible to participate in the
plan. Plan benefits, including pension upon retirement or
complete disability, are based on an employee's years of
service and average compensation prior to retirement. The
pension plan is financed by premiums which are paid by the
employer and the employee. The premium is based on 8% of
the current salary. Participants share in the cost of the
plan by making contributions of 2% to 3% of the pension
basis. The funding policy is to pay the accrued pension
contribution currently. The premiums are paid to an
external pension management company which invests the
premiums in government bonds. The pension management company
guarantees a return of 5% per year on investments.
Administrative costs paid to the pension management company
are approximately 20% of contributions made each year.
Contributions to the defined benefit pension plan
approximated $17,000, $14,000, and $15,000 for the years
ended December 31, 1995, 1994, and 1993, respectively.
Effective February 1, 1991, a certain subsidiary adopted a
Defined Benefit Plan for all employees. After one year of
service, employees become eligible to participate in the
plan. Plan benefits, including additional pension upon
retirement at age 65 or complete disability, are based on an
employee's years of service and average compensation prior
to retirement. Participants do not share in the cost of the
plan. The funding policy is to pay the accrued pension
contribution currently. The premiums, paid to the external
pension management company, are invested 52% in government
bonds, 13% in stocks, 25% in mortgages and 10% in buildings.
The Company pays the administrative costs to the pension
management company which totaled $2,155 in 1995, $1,344 in
1994 and $897 in 1993. The Company's contributions to the
plan approximated $24,000, $10,000, and $12,000 for the
years ended December 31, 1995, 1994, and 1993, respectively.
Effective July 1, 1992, a certain subsidiary adopted a
Defined Contribution Plan for all employees. After six
months of service, employees become eligible to participate
in the plan. They may contribute to the plan up to 5% of
their compensation. The Company's matching contribution is
equal to 100% of the participant's contribution. The
employee is immediately and fully vested in the Company's
contribution however, the pension can only be drawn upon
retirement or complete disability. All premiums are paid to
an external pension company which invests the accumulated
funds in government bonds. The return on investments has
been approximately 8% each year. The Company pays
administrative costs to the pension management company which
totaled $320 in 1995, $307 in 1994 and $300 in 1993. The
Company's contributions to the plan approximated $9,000,
$7,000, and $6,000 for the years ended December 31, 1995,
1994 and 1993, respectively.
Effective July 1, 1993, a certain subsidiary adopted a
Defined Benefit Plan for all employees. After one year of
service, employees become eligible to participate in the
plan. Plan benefits, including pension upon retirement at
age 65 or complete disability, are based on an employee's
years of service and average compensation prior to
retirement. Participants do not share in the cost of the
plan. The funding policy is to pay the accrued pension
contribution currently. The Company's yearly contribution
per employee is equal to one month of an employee's salary.
The premiums are paid to an external pension management
company which invests 70% of the accumulated funds in
government bonds and 30% in buildings and stocks. The
pension management company's return on investment has been
approximately 11% each year. The Company has paid
administrative costs of $3,000, $2,413 and $708 for the
years ended December 31, 1995, 1994 and 1993 respectively.
The Company's contributions to the plan approximated $15,000
and $12,000 for the years ended December 31, 1995 and 1994,
respectively.
Effective January 1, 1995, a certain subsidiary adopted a
Defined Benefit Plan for all employees. After one year of
service, employees become eligible to participate in the
plan. Plan benefits, including a pension upon retirement at
age 65 or complete disability, are based on an employee's
years of service and average compensation prior to
retirement. The Company contributes 7% of the employees'
fixed salaries. Participants do not share in the cost of the
plan. The premiums are paid to an external pension
management company and are invested in government bonds,
loans, real-estate and French and international stocks. The
pension management company's return on investment in 1995
was 6%. The Company paid administrative costs of an
insignificant amount in 1995 to the pension management
company. The Company's contributions to the plan
approximated $15,000 for the year ended December 31, 1995.
Effective January 1, 1995, a certain subsidiary adopted a
Defined Contribution Plan for non-production employees.
Upon commencement of service, these employees become
eligible to participate in the plan. They may contribute to
the plan up to 5% of their compensation. The Company's
matching contribution is equal to 10% of the participant's
contribution. The employee is immediately and fully vested
in the Company's contribution. The Company's contribution
to the plan approximated $17,000 for the year ended December
31, 1995.
(15) Litigation
The Company and/or its subsidiaries are defendants in
numerous state and federal court actions and a Federal class
action in the United States District Court, Northern
District of Alabama, Southern Division, under The Honorable
Sam C. Pointer, Jr., Chief Judge U.S. District Court,
identified as Breast Implant Products Liability Litigation,
Multiple District Litigation No. 926, Master File No. CV 92-
P-10000-S ("MDL 926"). One of the federal cases, Lindsey,
et al., v. Dow Corning Corp., et al., Civil Action No. CV 94-
11558-S was conditionally certified as a class action for
purposes of settlements ("MDL Settlement") on behalf of
persons having claims against certain manufacturers of
breast implants. The alleged factual basis for typical
lawsuits include allegations that the plaintiffs' breast
implants caused specified ailments including, among others,
auto-immune disease, scleroderma, systemic disorders, joint
swelling and chronic fatigue.
A result of the MDL Settlement was the establishment of a
Claims Administration Office in Houston, Texas, under the
direction of Judge Ann Cochran. Class Members who had
breast implants prior to June 1993 have registered with the
Claims Office. Judge Pointer certified the "Global"
Settlement by Final Order and Judgment on September 1, 1994.
Subsequently, a preliminary review of claims produced
projected payouts that were greater than the amounts the
breast implant manufacturers had agreed to pay. On May 15,
1995, Dow Corning Corp., formerly one of the manufacturers
and a significant contributor to the Global Settlement fund,
filed for federal bankruptcy protection because of lawsuits
over the devices.
On December 29, 1995, the Company entered into an agreement
with the MDL 926 Settlement Class Counsel and certain other
defendants that is now identified as the "Bristol, Baxter,
3M, McGhan & Union Carbide Revised Breast Implant Settlement
Program" ("Revised Settlement"). The Revised Settlement
provides a procedure to resolve claims of current claimants
and ongoing claimants who are registered with the Claims
Office.
Due to the nature of the Revised Settlement which allowed
ongoing registrations, "opt-ins", as well as a limited
potential for claimants, during the life of the program, to
opt-out of the Revised Settlement ("opt-outs"), the
aggregate dollar amount to be received by the class of
claimants under the Revised Settlement has not been fully
ascertained.
The Revised Settlement is an approved-claims based
settlement. Therefore, to project a range of the potential
cost of the Revised Settlement, the parties utilized a court-
sponsored sample of claimants' registrations and claims
filed through the MDL 926 Settlement Claims Office against
all defendants and assumed approval of 100 percent of the
claims as initially submitted. Although adequate for
negotiation purposes, the sample is unsatisfactory for the
purposes of determining an aggregate dollar liability for
accounting purposes because the processing of current claims
is not complete, the process of ongoing claims will continue
for fifteen years, and the Settlement is subject to opt-ins
and opt-outs.
The following is a recap of the certain events involving the
Company's product liability issues relating to silicone gel
breast implants which the Company manufactures and markets.
The claims in Silicone Gel Breast Implant Products Liability
Litigation MDL 926 are for general and punitive damages
relating to physical and mental injuries allegedly sustained
as a result of silicone gel breast implants produced by the
Company. Although the amount of claims asserted against the
Company is not readily determinable, the Company believes
that the stated amount of claims substantially exceeds
provisions made in the Company's consolidated financial
statements. The Company has been a defendant in substantial
litigation related to breast implants which have adversely
affected the liquidity and financial condition of the
Company. This raises substantial doubt about the Company's
ability to continue as a going concern. The accompanying
consolidated financial statements have been prepared
assuming that the Company will continue as a going concern
and do not include any adjustments that might result from
this uncertainty.
On June 25, 1992 the judicial panel on multi-district
litigation in re: Silicone Gel Breast Implant Products
Liability Litigation consolidated all federal breast implant
cases for discovery purposes in Federal District Court for
the Northern District of Alabama under the multi-district
litigation rules. Several U.S.-based manufacturers
negotiated a settlement with the Plaintiffs' Negotiating
Committee ("PNC"), and on March 29, 1994 filed a Proposed
Non-Mandatory Class Action Settlement in the Silicone Breast
Implant Products Liability (the "Settlement Agreement")
providing for settlement of the claims as to the class (the
"Settlement") as described in the Settlement Agreement. The
Settlement Agreement, upon approval, would have provided
resolution of any existing or future claims, including
claims for injuries not yet known, under any Federal or
State law, from any claimant who received a silicone breast
implant prior to June 1, 1993.
The Company was not originally a party to the Settlement
Agreement. However, on April 8, 1994 the Company and the
PNC reached an agreement which would join the Company into
the Settlement. The agreement reached between the Company
and the PNC added great value to the Settlement by enabling
all plaintiffs and U.S.-based manufacturers to participate
in the Settlement, and facilitating the negotiation of
individual contributions by the Company, Minnesota Mining
and Manufacturing Company ("3M"), and Union Carbide
Corporation which total more than $440 million.
A fairness hearing for the non-mandatory class was held
before Judge Pointer on August 18, 1994. On September 1,
1994, Judge Pointer gave final approval to the non-mandatory
class action settlement. The deadline for plaintiffs to
enter the Settlement was March 1, 1995.
Under the terms of the Settlement Agreement, the parties
stipulated and agreed that all claims of the Settlement
Class against the Company regarding breast implants and
breast implant materials would be fully and finally settled
and resolved on the terms and conditions set forth in the
Settlement Agreement.
Under the terms of the Settlement Agreement, the Company
would have paid $1 million to the Settlement fund for each
of 25 years starting three years after Settlement approval
by the Court. The Settlement was approved by the court on
September 1, 1994. The Company recorded a pre-tax charge of
$9.1 million in October of 1994. The charge represents the
present value (discounted at 8%) of the Company's settlement
of $25 million over a payment period of 25 years, $1 million
per year starting three years from the date of Settlement
approval.
Under the Settlement, $1.2 billion had been provided for
"current claims" (disease compensation claims). In May
1995, Judge Pointer completed a preliminary review of
current claims against all Settlement defendants which had
been filed as of September 1994, in compliance with
deadlines set by the court. Judge Pointer determined that
based on the preliminary review, projected amounts of
eligible current claims appeared to exceed the $1.2 billion
provided by the Settlement. Discrete information as to each
defendant was not made available by the court and the
Company is not aware of any information from such
findings that would affect the Company's $9.1 million
accrual. The Settlement provided that in the event of such
over subscription, the amounts to be paid to eligible current claimants would
be reduced and claimants would have a right to "opt-out" of the Settlement
at that time.
On October 1, 1995, Judge Pointer finalized details of a
scaled-back breast implant injury settlement involving
defendants Bristol-Myers Squibb, Baxter International, and
3M, allowing plaintiffs to reject this settlement and file
their own lawsuits if they believe payments are too low. On
November 14, 1995, McGhan Medical and Union Carbide were
added to this list of settling defendants to achieve the
"Bristol, Baxter, 3M, McGhan & Union Carbide Revised
Settlement Program" (the "Revised Settlement Program").
With respect to the parties thereto, the Revised Settlement
Program incorporated and superseded the Settlement. The
Revised Settlement Program does not fix the liability of any
defendants, but established fixed benefit amounts for
qualifying claims. The Company's obligations under the
Revised Settlement are cancelable if the Revised Settlement
is disapproved on appeal.
The Company recorded a pre-tax charge of $23.4 million in
the third quarter of 1995. The charge represented the
present value (discounted at 8%) of the maximum additional
amount that the Company then estimated it might be required
to contribute to the Revised Settlement Program - $50
million over a 15-year period based on a claims-made and
processed basis. Due to the uncertainty of ultimate
resolution and acceptance of the Revised Settlement Program
by the registrants, claimants and plaintiffs, and the lack
of information related to the substance of the claims, the
Company reversed this charge at year-end 1995 for the third
quarter of 1995.
At December 31, 1995, the Company's reasonable estimate of its liability to
fund the Revised Settlement Program was a range between $9.1 million, the
original accrual as noted above, and the discounted present value of the
$50 million aggregate the Company estimated it might have been required
to contribute under the Revised Settlement Program. Again, due to the
uncertainty of the ultimate resolution and acceptance of the Revised
Settlement Program by the registrants, claimants and plaintiffs (which
acceptance and participation is necessary for any contributions under the
Revised Settlement Program) and the limited and changing information related
to the claims, no estimate of the possible additional loss or range of loss
can be made and, consequently, the financial statements do not reflect any
additional provision for the litigation settlement. However, preliminary
information obtained prior to July 31, 1997, concerning claims and opt-outs
filed under the Revised Settlement indicates that the range of costs to the
Company of its contributions, while likely to exceed $9.1 million, will be
substantially less than $50 million. This preliminary information suggests
that the cost for current claims, which will be payable after the conclusion
of all appeals relating to the Revised Settlement, is not likely to exceed
$16 million. This estimate may change as further information is obtained.
The additional cost for ongoing claims payable over the 15-year life of the
program is still unknown, but is capped at approximately $6 million under
the terms of the Revised Settlement.
The Company has entered into a Settlement Agreement with
health care providers pursuant to which the Company is
required to pay, on or before December 17, 1996, or after
the conclusions of any and all disapproved appeals, $1
million into the MDL Settlement Funds ("the Fund") to be
administered by Edgar C. Gentle, III, Esq. ("the Fund
Agent"). The charge for settlement will be applied against
the $9.1 million accrual previously established by the
Company. The Company, in the spirit of the Revised
Settlement Program, also contributed $600,000 in 1996 and
$300,000 in 1997 to the claims administration management for
the settlement.
The Company has opposed the plaintiffs' claims in these
complaints and other similar actions, and continues to deny
any wrongdoing or liability to the plaintiffs of any kind.
However, the extensive burdens and expensive litigation the
Company would continue to incur related to these matters
prompted the Company to work toward and enter into the
Settlement which insures a more satisfactory method of
resolving claims of women who have received the Company's
breast implants.
Management's commitment to the Revised Settlement Program
does not alter the Company's need for complete resolution
sought under a mandatory ("non-opt-out") settlement class
(the "Mandatory Class") or other acceptable settlement
resolution. In 1994, the Company petitioned the United
States District Court, Northern District of Alabama,
Southern Division, for certification of a Mandatory Class
under the provisions of Federal Rules of Civil Procedure.
Since that time, the Company has been in negotiation with
the plaintiffs concerning an updated mandatory settlement
class or other acceptable resolution. On July 1, 1996, the
Company filed an appearance of counsel and status report on
the INAMED Mandatory Class application to the United States
District Court, Northern District of Alabama, Southern
Division, Chief Honorable Judge Samuel C. Pointer, Jr.
There can be no assurance that the Company will receive
Mandatory Class certification or other acceptable settlement
resolution.
If the Mandatory Class is not certified, the Company will
continue to be a party to the Revised Settlement Program.
However, if the Company fails to meet its obligations under the program,
parties in the program will be able to reinstate litigation
against the Company. In addition, the Company will continue to
be subject to further potential litigation from persons who are not
provided for in the Revised Settlement Program and who opt out of the Revised
Settlement Program. The number of such persons and the
outcome of any ensuing litigation is uncertain. Failure of
the Mandatory Class to be certified, absent other acceptable
settlement resolution, is expected to have a material
adverse effect on the Company.
The Company was a defendant with 3M in a case involving
three plaintiffs in Houston, Texas, in March 1994, in which
the jury awarded the plaintiffs $15 million in punitive
damages and $12.9 million in damages plus fees and costs.
However, the matter was resolved in March 1995 resulting in
no financial responsibility on the part of the Company.
In connection with 3M's 1984 divestiture of the breast
implant business now operated by the Company's subsidiary,
McGhan Medical Corporation, 3M has a potential claim for
contractual indemnity for 3M's litigation costs arising out
of the silicone breast implant litigation. The potential
claim vastly exceeds the Company's net worth. To date, 3M
has not sought to enforce such an indemnity claim. As part
of its efforts to resolve potential breast implant
litigation liability, the Company has discussed with 3M the
possibility of resolving the indemnity claim as part of the
overall efforts for global resolution of the Company's
potential liabilities. Because of the uncertain nature of
such an indemnity claim, the financial statements do not
reflect any additional provision for such a claim.
In October 1995, the Federal District Court for the Eastern
District of Missouri entered a $10 million default judgment
against a subsidiary of the Company arising out of a
Plaintiff's claim that she was injured by certain breast
implants allegedly manufactured by the subsidiary. The
Company did not become aware of the lawsuit until November
1996, due to improper service. The Plaintiff's attorney
waited over one year to notify the Company that a default
judgment had been entered. The Plaintiff's attorney
refused to voluntarily set aside the judgment, although it
is clear from the allegations of the complaint that the
Plaintiff sued the wrong entity, since neither the named
subsidiary, the Company, nor any of its other subsidiaries
manufactured the device. The Company has moved to have this
judgment set aside. The Company has not made any adjustment
in its 1995 financial reports to reflect this judgment.
The Company does not have product liability insurance and
therefore recovery from an insurance carrier for any
settlements paid is not possible.
(16) Commitments and Contingencies
The Company leases facilities under operating leases. The
leases are generally on an all-net basis, whereby the
Company pays taxes, maintenance and insurance. Leases that
expire are expected to be renewed or replaced by leases on
other properties. Rent expense for the years ended December
31, 1995, 1994 and 1993 aggregated $4,927,677, $4,913,327,
and $4,040,430, respectively.
Minimum lease commitments under all noncancelable leases as
of December 31, 1995 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1996 $ 3,068,534
1997 1,831,633
1998 1,548,876
1999 1,291,402
2000 1,086,974
Thereafter 9,899,150
___________
$18,726,569
===========
</TABLE>
(17) Sale of Subsidiaries
As of August 31, 1993, the Company announced the sale of its
wholly-owned subsidiary, Specialty Silicone Fabricators,
Inc. (SSF), a manufacturer of silicone components for the
medical device industry with production facilities in Paso
Robles, California. The sale included SSF's wholly-owned
subsidiary, Innovative Surgical Products, Inc. located in
Santa Ana, California, which assembles, packages and
sterilizes products for other medical device companies. The
Company received total consideration of approximately $10.8
million from the buyer, Innovative Specialty Silicone
Acquisition Corporation (ISSAC), a private investment group
which included certain members of SSF's management.
The consideration consisted of $2.7 million in cash, the
forgiveness of $2.2 million in intercompany notes due to
SSF, and $5.9 million in structured notes. The notes
include a note in the amount of $2,425,000 due on February
25, 1995 with interest of 10% per annum and a note in the
amount of $3,466,198 due on August 31, 2003, accruing
interest quarterly at a rate of prime plus 2% as quoted at
the beginning of the quarter, not to exceed 11%. The notes
have been reflected on the balance sheet net of a discount
of $643,663 and settlement of certain intercompany amounts
totaling approximately $957,000. The short-term notes due
February 25, 1995 were settled in full. The notes are
collateralized by all of the assets of ISSAC. The Company
has filed a UCC1 and its position is subordinated only to
that of ISSAC's primary lender.
At December 31, 1995, the current portion due from ISSAC
under the terms of the note agreement is in dispute. The
Company has classified all current amounts due as long-term
and an estimated provision for credit loss has been provided
for in the financial statements.
(18) Subsequent Event
In January 1996, the Company completed a private placement
offering by issuing three-year secured convertible, non-
callable notes due March 31, 1999 bearing an interest rate
of 11%. The Company received $35 million in proceeds from
the offering to be used for the anticipated litigation
settlement, for capital investments and improvements to
expand production capacity, and for working capital
purposes. Of the proceeds received from the offering, $15
million is held in an escrow account to be released upon the
granting and court approval of mandatory class
certification. At December 31, 1995 proceeds of
approximately $500,000 were received and classified as a
current liability. The notes are collateralized by all the
assets of the Company.
The notes become convertible into shares of common stock at
the option of the note- holders on April 22, 1996. The
conversion rate is one share of common stock for each $10
principal amount of notes. Alternatively, the notes may
automatically convert into shares of common stock upon the
occurrence of certain events in connection with the
certification of the Company's Mandatory Class.
Under the terms of the note agreement, the Company may
obtain up to $5 million in structured debt or make an equity
offering without restriction. However, the terms of the
note agreement restrict the Company's ability to make a debt
offering.
(19) Quarterly Summary of Operations (Unaudited)
The following is a summary of selected quarterly financial data for 1995
and 1994:
<TABLE>
Quarter
First Second Third Fourth
<S> <C> <C> <C> <C>
Net Sales:
1995 21,744,875 24,112,600 18,279,111 17,488,995
1994 16,896,056 21,978,104 20,911,167 20,600,015
Gross Profit:
1995 15,410,563 16,431,581 11,439,933 8,187,721
1994 10,476,412 14,664,187 14,085,793 14,894,492
Net Income (loss):
1995 1,140,496 2,744,448 (2,592,588) (8,185,417)
1994 1,271,942 1,710,309 438,890 (674,830)
Net Income (loss)
per share:
1995 .15 .36 (.34) (1.08)
1994 .17 .23 .06 (.09)
===================================================================
</TABLE>
Significant Fourth Quarter Adjustments, 1995
During the fourth quarter of the year ended December 31,
1995, significant adjustments to the results of operations
were as follows:
<TABLE>
<S> <C>
Provision for income taxes $(4,162,607)
Provision for doubtful accounts and
returns and allowances 1,424,734
Compensation expense 891,200
</TABLE>
Significant Fourth Quarter Adjustments, 1994
During the fourth quarter of the year ended December 31,
1994, significant adjustments to the results of operations
were as follows:
<TABLE>
<S> <C>
Provision for income taxes $(3,154,493)
Provision for doubtful accounts and
returns and allowances 546,054
Provision for inventory obsolescence 221,590
Provision for product liability 315,721
Rental expense (800,000)
Royalty income (325,301)
Compensation expens 187,500
</TABLE>
The Company's provision for income taxes was adjusted to reduce
income tax expense in 1994 and 1995. The Company is working
closely with its tax advisors to anticipate ongoing tax
responsibility and better reflect income tax liability/benefits
during the year.
The provision for doubtful accounts, returns and allowances was
increased due to a backlog of returns that developed in the
fourth quarters of 1994 and 1995 as attention was diverted to
other operating issues.
Adjustments to increase compensation expense were made in 1994
and 1995 to reflect bonuses and compensation payments declared
after year end for certain personnel.
Other significant adjustments in 1994 include the following:
provisions for inventory obsolescence was increased based on
inventory testing of products available for future sale,
provision for product liability was increased to more accurately
reflect the potential impact of the Company's limited product
warranty, offsetting adjustments to reduce rental expense based
on the receipt of a credit memo from the vendor after year end,
and to record royalty income receivable based on the licensee's
remittance of royalty payments for the fourth quarter of 1994.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND DISCLOSURE.
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names of the
directors and executive officers of the Company, together
with their ages and positions. There are no family
relationships among these directors and officers.
Name Age Position
Donald K. McGhan 62 Chairman of the Board
and President
Michael D. Farney 52 Chief Executive Officer, Chief Financial
Officer, Treasurer and Secretary
Donald K. McGhan
Mr. McGhan has served as Chairman of the Board of
INAMED since October 1985 and President of INAMED since January
1987. He served as Chief Executive Officer of INAMED from April
1987 until June 1992. He is also Chairman of the Board of McGhan
Medical Corporation, INAMED Development Company, BioEnterics
Corporation, Biodermis Corporation, Bioplexus Corporation,
Flowmatrix Corporation, Medisyn Technologies Corporation, McGhan
Limited, INAMED B.V., INAMED B.V.B.A., INAMED GmbH., INAMED
S.R.L., INAMED Ltd., INAMED, S.A., INAMED SARL, INAMED Japan,
and INAMED Medical Group (Japan).
Michael D. Farney
Mr. Farney has served as Chief Financial Officer and
Treasurer of INAMED since April 1987. He was appointed Chief
Executive Officer and Secretary of INAMED Corporation in 1992.
He also serves as Chief Executive Officer and Chief Financial
Officer of McGhan Medical Corporation, INAMED Development
Company, BioEnterics Corporation, Biodermis Corporation,
Bioplexus Corporation, Flowmatrix Corporation, Medisyn
Technologies Corporation, McGhan Limited, INAMED B.V., INAMED
B.V.B.A., INAMED GmbH., INAMED S.R.L., INAMED Ltd., INAMED,
S.A., and INAMED SARL. He is also a Director of INAMED Japan and
INAMED Medical Group (Japan).
ITEM 11. EXECUTIVE COMPENSATION.
The Company has no standing Compensation Committee of the Board of Directors.
The Company believes that executive compensation should
be closely related to the value delivered to shareholders. This
belief has been adhered to by developing incentive pay programs
which provide competitive compensation and reflect Company
performance. Both short-term and long-term incentive
compensation are based on Company performance and the value
received by shareholders.
Compensation Philosophy
In designing its compensation program, the Company
follows its belief that compensation should reflect the value
created for shareholders while supporting the Company's strategic
business goals. In doing so, the compensation programs reflect
the following themes:
Compensation should encourage increased stockholder value.
Compensation programs should support the short and long-term strategic
business goals and objectives of the Company.
Compensation programs should reflect and promote the Company's values,
and reward individuals for outstanding contributions toward business goals.
Compensation programs should enable the Company to attract and retain
highly qualified professionals.
Compensation Make-Up and Measurement
The Company's executive compensation is based on three
components, base salary, short-term incentives and long-term
incentives, each of which is intended to serve the overall
compensation philosophy.
Base Salary
The Company's salary levels are intended to be
consistent with competitive pay practices and level of
responsibility, with salary increases reflecting competitive
trends, the overall financial performance of the Company, general
economic conditions as well as a number of factors relating to
the particular individual, including the performance of the
individual executive, and level of experience, ability and
knowledge of the job.
Short-Term Incentives
At the start of each fiscal year, target levels of pre-
tax profits and revenue growth are established by senior
management of the Company during the budgeting process and
approved by the Board of Directors. An incentive award
opportunity is established for each employee based on the
employee's level of responsibility, potential contribution, the
success of the Company and competitive conditions. Generally,
approximately 25% of an executive's potential bonus relates to
his or her achievement of personal objectives and 75% relates to
the Company's achievement of its pre-tax profit and revenue
goals.
The employee's actual award is determined at the end of
the fiscal year based on the Company's achievement of its pre-tax
profit and revenue goals and an assessment of the employee's
individual performance, including achievement of personal
objectives. This ensures that individual awards reflect an
individual's specific contributions to the success of the
Company.
Long-Term Incentives
Stock options are granted from time to time to reward
key employees' contributions. The grant of options is based
primarily on a key employee's potential contribution to the
Company's growth and profitability. Options are granted at an in-
the-money option price of $1.45 per share, and will increase in
value if the Company's stock price increases above that price.
An in-the-money option is an option which has an exercise price
for the common stock which is lower than the fair market value of
the common stock on a specified date. Generally, grants of
options vest over seven years and employees must be employed by
the Company for such options to vest.
Employment, Severance, and Change of Control Agreements
The Company has entered into employment agreements with
a number of key personnel for various contract periods. Each of
the contracts grants the Board of Directors of the Company the
right to increase the employee's base salary and provides for
other specified forms of compensation. Summaries of the
employment agreements with the executive officers are as follows:
Position: President
Duties: The Employee shall perform all duties assigned to him by
the Corporation and shall observe and comply with the
Corporation's rules and regulations.
Place of Employment: INAMED Corporation, 3800 Howard Hughes
Parkway, Las Vegas, NV 89109.
Term: Previous Employment Agreement expired January 1, 1993. The
second amendment to that agreement extended it to July 1, 1994.
No further amendments.
Termination: Can occur at any time in accordance with applicable
employment laws since there is no employment agreement in place.
Termination for cause being lack of loyalty, trustworthiness, and
businesslike conduct; dishonesty; incompetence; willful
misconduct; breach of fiduciary duty involving personal profit;
intentional failure to perform stated duties; willful violation
of any law, rule or regulation or a material breach of any
provision of agreement between the employee and the Corporation.
Termination can also occur due to death of the employee or a
disability lasting 3 consecutive months that would not allow the
employee to perform his assigned duties and responsibilities.
Compensation: The employee's annual salary shall be $275,000,
payable monthly, with applicable federal and state and local
taxes withheld. The amount of any bonus shall be determined by
the Board of Directors of the Corporation.
Position: Chief Executive Officer
Duties: The Employee shall perform all duties assigned to him by
the Corporation and shall observe and comply with the
Corporation's rules and regulations.
Place of Employment: INAMED Corporation, 3800 Howard Hughes
Parkway, Las Vegas, NV 89109.
Term: Previous Employment Agreement expired January 1, 1993. The
second amendment to that agreement extended it to July 1, 1994.
No further amendments.
Termination: Can occur at any time in accordance with applicable
employment laws since there is no employment agreement in place.
Termination for cause being lack of loyalty, trustworthiness, and
businesslike conduct; dishonesty; incompetence; willful
misconduct; breach of fiduciary duty involving personal profit;
intentional failure to perform stated duties; willful violation
of any law, rule or regulation or a material breach of any
provision of agreement between the employee and the Corporation.
Termination can also occur due to death of the employee or a
disability lasting 3 consecutive months that would not allow the
employee to perform his assigned duties and responsibilities.
Compensation: The employee's annual salary shall be $225,000,
payable monthly, with applicable federal and state and local
taxes withheld. The amount of any bonus shall be determined by
the Board of Directors of the Corporation.
Stock Option Plans
In 1984, McGhan Medical Corporation adopted an
incentive stock option plan (the 1984 plan). Under the terms of
the plan, 100,000 shares of its common stock were reserved for
issuance to key employees at prices not less than the market
value of the stock at the date the option is granted. In 1985,
INAMED Corporation agreed to substitute options to purchase its
shares (on a two-for-one basis) for those of McGhan Medical
Corporation. No options were granted under this plan during
1995.
In 1986, the Company adopted an incentive and
nonstatutory stock option plan (the 1986 plan). Under the terms
of the plan, 300,000 shares of common stock have been reserved
for issuance to key employees. No options were granted under
this plan during 1995.
Stock Award Plan
In 1987, the Board of Directors adopted a stock award
plan (the 1987 plan) whereby 300,000 shares of the Company's
common stock were reserved for issuance to selected employees of
the Company. The plan was adopted to further the Company's
growth, development and financial success by providing additional
incentives to employees by rewarding them for their performance
and providing them the opportunity to become owners of common
stock of the Company, and thus to benefit directly from its
growth, development and financial success. Shares are awarded
under the plan to employees as selected by a committee appointed by
the Board of Directors to administer the plan. Stock awards totaling
180,388 have been granted as of December 31, 1995.
Stock Appreciation Rights Plan
The Company has approved a stock appreciation rights
(SAR) plan whereby key employees may be issued cash or common
stock based on the increase in the stock value. The plan was
adopted in 1988 by the Board of Directors. As of December 31,
1992, 500,000 shares had been granted under the SAR. At December
31, 1995 and during the year then ended, there were no SARs which
were outstanding.
Summary Compensation Table
The following table sets forth information with respect to the
compensation of the Company's executive officers for services in
all capacities to the Company in 1993, 1994, 1995 and 1996:
<TABLE>
Long-Term
Compen-
sation
Annual Compensation
Stock
Other Options/ All
Annual SARs Other
Name and Compen- Granted Compen
Principal Position Year Salary Bonus sation (in shares) sation(2)
<S> <C> <C> <C> <C> <C> <C> <C>
Donald K. McGhan 1996 $ 6,427 -- -- -- 32,994
Chairman and 1995 299,676 -- -- -- --
President 1994 253,187 -- -- -- --
1993 276,104 510,100 -- -- 1,745
Michael D. Farney 1996 225,000 -- -- -- 19,302
Chief Executive 1995 245,165 714,227 -- -- --
Officer, Chief 1994 207,354 -- -- -- --
Financial Officer 1993 226,104 405,900 -- -- 1,745
and Secretary
Gerald L. Ehrens(1) 1996 -- -- -- -- --
Chief Operating 1995 -- -- -- -- --
Chief Operating 1994 141,795 -- -- -- --
Officer 1993 201,104 121,689 -- -- 1,745
</TABLE>
_________________
(1) Mr. Ehrens commenced employment with the Company on May 1, 1992, and
terminated employment with the Company in September of 1994.
(2) During 1993, the Company made matching contributions to the employee
savings plan under Section 401(k) of the Internal Revenue Code in the following
amounts: Mr. McGhan, $1,745; Mr. Farney, $1,745; Mr. Ehrens, $1,745. During
1996 the Company paid for automobile allowance and group term insurance.
Table of Stock Option Exercises in 1995 and Year-End Option Values
Not applicable.
COMPARISON OF TOTAL SHAREHOLDER RETURN
The following graph sets forth the Company's total
shareholder return as compared to the NASDAQ Market
Index and the Standard & Poor's Medical Products and
Supplies Index over the period from December 31, 1990
until December 31, 1995. The total shareholder return
assumes $100 invested at December 31, 1990 in the
Company's Common Stock, the NASDAQ Market Index and the
Standard & Poor's Medical Products and Supplies Index.
It also assumes reinvestment of all dividends.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth information as to the
shares of common stock owned as of March 28, 1996, by (i) each
person who, insofar as the Company has been able to ascertain,
beneficially owned more than five percent of the outstanding
common stock of the Company, (ii) each director, and (iii) all
the directors and officers as a group. Unless otherwise
indicated in the footnotes following the table and subject to
community property laws where applicable, the person(s) as to
whom the information is given had sole voting and investment
power over the shares of common stock shown as beneficially
owned.
<TABLE>
<S> <C> <C>
Name of Beneficial
Owner or Identity Number Percent
of Group(1) of Shares of Class
Donald K. McGhan 1,138,129(2) 15.0%
Michael D. Farney 344,285 4.5%
All officers and directors as a group. 1,482,414 19.5%
</TABLE>
(1) Unless otherwise noted, the business address of all individuals listed
in the table is 3800 Howard Hughes Parkway, Suite 900, Las Vegas, Nevada 89109.
(2) Includes 207,310 shares of common stock owned by Shirley M. McGhan, the
wife of Donald K. McGhan, as to which Mr. McGhan disclaims beneficial
ownership; 107,935 shares owned by a corporation of which Mr. McGhan is the
president; and 187,280 shares owned by a limited partnership of which Mr.
McGhan is the general partner.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Included in assets is a note receivable from the
Company's Chief Financial Officer, Michael D. Farney. The total
amount of this receivable approximated $386,000 and $688,000 as
of December 31, 1995 and 1994, respectively. The note bears
interest ranging from 8% to 10% per annum and is due in June,
1996. On March 4, 1996, the officer paid the balance of the note
in full.
Included in liabilities are notes payable to The
Company's Chairman and President, Donald K. McGhan and to a
corporation of which Donald K. McGhan is the chief executive
officer. These payables approximated $1,209,000 and $421,000 as
of December 31, 1995 and 1994, respectively. The notes bear
interest at prime plus 2% per annum (10.5% per annum at December
31, 1995) and are due June 30, 1996, or on demand. The Company
paid these notes in full on January 25, 1996. Also included in
liabilities is a note payable of $550,000 to Pedro Ramirez, an
officer of INAMED, S.A. in connection with the Company's
acquisition of this subsidiary. Final re-payment on this note
was made on February 6, 1996.
During 1995, the Company incurred fees in the amount of
$900,000, or $75,000 per month, for services rendered by an
entity controlled by The Company's Chief Executive Officer,
Michael D. Farney. In February 1995, the Company received a
credit voucher from this entity for $800,000. This amount
represented payments made during 1994 in excess of actual rent
and was included in other current assets at December 31, 1994.
At December 31, 1995, the credit voucher had an outstanding
balance of $107,670. This balance was paid to the Company on
March 11, 1996. The lease arrangement was terminated effective
December 31, 1995.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a)(1) Consolidated Financial Statements: Page(s)
Report of Independent Accountants 31
Consolidated Balance Sheets as of
December 31, 1995, and 1994 32-31
Consolidated Statements of Operations for the
years ended December 31, 1995, 1994 and 1993 34
Consolidated Statements of Stockholders'
Equity for the years ended December 31,
1995, 1994, and 1993 35
Consolidated Statements of Cash Flows for the
years ended December 31, 1995, 1994 and 1993 36-38
Notes to Consolidated Financial Statements 39-62
(a)(2) Consolidated Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts 71
All other schedules are omitted because the required information
is not present or is not present in amounts sufficient to require submission
of the schedule or because the information required is given in the consolidated
financial statements or notes thereto.
(a)(3) Exhibits:
3.1 Registrant's Articles of Incorporation
3.2 Registrant's Bylaws
10.1 Stock Option Plan, together with form of Incentive
Stock Option Agreement and Nonstatutory Stock Option
Agreement
10.2 Stock Award Plan
10.3 Non-Employee Directors' Stock Option Plan
21 Registrant's Subsidiaries
27 Financial Data Schedule
23.1 Consent of Independent Accountants
(b) Reports on Form 8-K:
None
<TABLE>
<CAPTION>
Schedule II
INAMED CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1995, 1994 and 1993
Beginning
of period End of
Description balance Additions Deductions Period Balance
<S> <C> <C> <C> <C>
Year ended December 31, 1995
Allowance for returns 5,346,885 329,364 -- 5,676,249
Allowance for doubtful
accounts 678,942 376,182 90,196 964,928
Allowance for obsolescence 450,730 600,847 292,215 759,362
Valuation allowance for
deferred tax assets 5,000,080 2,376,994 -- 7,377,074
Self-insurance accrual 1,291,605 9,000 169,973 1,130,632
Allowance for doubtful
notes -- 1,066,958 -- 1,066,958
Year ended December 31, 1994:
Allowance for returns 4,807,675 585,885 46,675 5,346,885
Allowance for doubtful
accounts 333,321 454,380 108,759 678,942
Allowance for obsolescence -- 450,730 -- 450,730
Valuation allowance for
deferred tax assets 5,606,666 -- 606,586 5,000,080
Self-insurance accrual 1,293,236 -- 1,631 1,291,605
Year ended December 31, 1993:
Allowance for returns 5,033,218 494,736 720,279 4,807,675
Allowance for doubtful
accounts 208,187 272,771 147,637 333,321
Valuation allowance for
deferred tax assets -- 5,606,666 -- 5,606,666
Self-insurance accrual 1,960,132 157,000 823,896 1,293,236
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INAMED CORPORATION
By /s/ Donald K. McGhan
Donald K. McGhan
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of Registrant in the capacities and on the
dates indicated:
/s/ Donald K. McGhan
Donald K. McGhan
Chairman of the Board and
Chief Executive Officer
SEPTEMBER 8, 1997
Exhibit 21
SUBSIDIARIES OF INAMED CORPORATION
State/Country of
Name Incorporation
BIODERMIS CORPORATION Nevada
BIODERMIS LTD. Ireland
BIOENTERICS CORPORATION California
BIOENTERICS LATIN AMERICA S.A. de C.V. Mexico
BIOENTERICS LTD. Ireland
BIOPLEXUS CORPORATION Nevada
BIOPLEXUS LTD. Ireland
CHAMFIELD LTD. Ireland
CUI CORPORATION California
FLOWMATRIX CORPORATION Nevada
INAMED B.V. The Netherlands
INAMED B.V.B.A. Belgium
INAMED DEVELOPMENT COMPANY California
INAMED do BRASIL, LTDA Brazil
INAMED GmbH Germany
INAMED LTD. United Kingdom
INAMED JAPAN Nevada
INAMED MEDICAL GROUP Japan
INAMED, S.A. Spain
INAMED S.A.R.L. France
INAMED S.R.L. Italy
McGHAN LTD. Ireland
McGHAN MEDICAL CORPORATION California
McGHAN MEDICAL ASIA PACIFIC Hong Kong
McGHAN MEDICAL MEXICO, S.A. de C.V. Mexico
MEDISYN TECHNOLOGIES CORPORATION Nevada
MEDISYN TECHNOLOGIES LTD. Ireland
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the
registration statement of INAMED Corporation on Form S-3 filed
on March 29, 1996 (File No.33- ) of our report dated
March 28, 1996, on our audits of the consolidated financial
statements and consolidated financial statement schedule of
INAMED Corporation as of December 31, 1995 and 1994, and for
the years ended December 31, 1995, 1994, and 1993, which report
is included in this Annual Report on Form 10-K.
/s/Coopers & Lybrand L.L.P.
Las Vegas, Nevada
March 28, 1996
DOCUMENT TYPE EX-27
DOCUMENT DESCRIPTION FINANCIAL DATA SCHEDULE
PERIOD TYPE 12 MONTHS
FISCAL YEAR END DECEMBER 31, 1995
PERIOD START JANUARY 1, 195
PERIOD END DECEMBER 31, 1995
CASH 2,807,327
SECURITIES 0
RECEIVABLES 17,111,552
ALLOWANCES 6,641,177
INVENTORY 17,695,847
CURRENT ASSETS 35,451,973
PP&E 20,205,489
DEPRECIATION 9,234,166
TOTAL ASSETS 50,384,944
CURRENT LIABILITIES 41,493,711
BONDS 0
PREFERRED - MANDATORY 0
PREFERRED 0
COMMON 10,039,662
OTHER SE (11,743,778)
TOTAL LIABILITIES AND EQUITY 50,384,944
SALES 81,625,581
TLTAL REVENUE 81,625,581
CGS 30,155,783
TOTAL COSTS 90,815,486
OTHER EXPENSES 0
LOSS PROVISION 0
INTEREST EXPENSE 833,086
INCOME - PRETAX (8,575,860)
INCOME TAX (1,682,799)
INCOME -CONTINUING (6,893,061)
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET INCOME (6,893,061)
EPS - PRIMARY (0.91)
EPS - DILUTES (0.91)
